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By Steven Baker MP, on 19 August 10
 Following his introduction to Mises, Dr Eamonn Butler has released his latest book, Austrian Economics – A Primer. I recommend it strongly if you want to grasp the fundamentals of the Austrian School of Economics as quickly as possible: at just 118 pages, this pamphlet can be tackled in one sitting.
With Keynesian-inspired policies which ‘spend your way out of recession’ clearly not working, the Austrian School provides a better explanation for recent events than more ‘mainstream’ thinking, whether Keynesian or Monetarist.
Over the course of the book, Eamonn explains the Austrian view of the importance of human agency, values and knowledge in shaping the markets, that is social cooperation. Vitally, it explains the origin of the present cycle of boom and bust: the government’s cheap credit policies, which encouraged people to borrow and discouraged saving, creating an artificial boom that inevitably ended.
For many years, the Austrian School of Economics has been sidelined, but it’s great to see that it is now rising in popularity as people become increasingly critical of the way governments and central banks have handled the economy.
Butler’s systematic and simple yet comprehensive primer is a great addition to a stable which also includes The Austrian School: Market Order and Entrepreneurial Creativity by Jesus Huerta de Soto. While Huerta de Soto’s first-class book is perhaps aimed at a more technical audience, Butler has made the Austrian School highly approachable. A strength shared by both works is to be measured and inclusive where “Austrians” can be confrontational.
Eamonn has made a superb job of outlining this important school of thought and his book should prove a great success. You can buy it here.
By Steven Baker MP, on 21 April 10
 Today, the IEA publish Dr Eamonn Butler’s Ludwig von Mises Primer:
Ludwig von Mises was one of the greatest economists and political scientists of the twentieth century. He revolutionised the understanding of money, inflation and recessions; comprehensively refuted the arguments for socialism; and provided a devastating critique of the methodologies of mainstream economics. His contributions to the Austrian School laid the intellectual groundwork for thinkers such as F. A. Hayek, Murray Rothbard and Israel Kirzner.
In Ludwig von Mises – A Primer, Eamonn Butler provides a comprehensive yet accessible overview of Mises’ outstanding achievements. At a time of economic crisis, this monograph makes it clear that Mises’ work is highly relevant today. Indeed, while mainstream economics has been found wanting, the latest recession appears to have been entirely consistent with his analysis. Furthermore, the poor performance of state health and education services can be explained by Mises’ Austrian theories. Nevertheless, Mises remains neglected by the economics profession, policymakers and academics. This readable primer explains why his work should be at the core of economic thinking.
With a foreword by yours truly, of course I highly recommend it. Buy or download the book here.
By Steven Baker MP, on 15 February 10
 Dowd, Alchemists of Loss We are delighted to announce a forthcoming book by Cobden Centre Senior Fellow Professor Kevin Dowd and US-based journalist and former investment banker Martin Hutchinson: The Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System. The book contains some delightfully simple insights into a complex subject. For example:
The credit default swap sneaked up on everybody, becoming a $62 trillion market, without anyone outside the business knowing much about it. As the Bear Stearns, Lehman and AIG debacles revealed, these instruments also involved highly non-transparent credit risks of their own. As a holder of a CDS you don’t know whether your counterparty has issued only a few of your CDS, in which case you’ll probably get paid in a bankruptcy, or whether he has issued fifty times the outstanding debt you’re trying to hedge, in which case you’re unlikely to get paid.
And moreover:
Financial engineering’s benefit to the global economy is highly questionable and the proliferation of financially-engineered products of recent years has brought few benefits and led to huge losses for society at large. As we have seen, one quarter’s bad losses in late 2008 wiped out all the accumulated financial engineering profits of the last quarter century and saddled taxpayers with a bill for hundreds of billions, if not more.
Prof. Dowd has kindly agreed to pre-release two chapters through The Cobden Centre:
From Chapter 16:
Alert readers will have already picked up some of the advice we would give investors and clients of financial institutions:
- take a longer-term perspective and return to investment rather than speculation;
- do not seek to ‘enhance’ yields, because this always exposes investors to hidden costs and risks, whilst firms seeking finance should resist cutting corners on their financing costs, for the same reason; thus, both parties should be realistic in their expectations;
- avoid frequent trading, focus on static over dynamic strategies, buy and hold over activist portfolio management;
- pay more attention to costs and hidden charges, and work on the assumption that higher charges are usually a good signal of a bad deal;
- distrust commission-based salespeople;
- if you use derivatives, be clear why and use them only for risk management and not speculation;
- avoid complicated opaque products; and
- do not take liquidity for granted and ensure that your liquidity is protected in a crisis.
Besides this motherhood and apple pie stuff, investors should also be careful of correlation-based investment and risk management strategies, which work well when not needed but are apt to break down when they are. This is not to suggest that they should give up on diversification. People understood diversification long before Modern Portfolio Theory, but they tended to practice it differently and more wisely. Diversification was assessed by committees of experienced practitioners, who took a long-term view and relied on their judgment rather than unreliable correlation estimates – a far cry from modern practices of modern fund management, with its obsession with short-term performance assessment
Investors should demand transparency. Perhaps the most sobering lesson we have learned since the subprime crisis broke is the benefit of transparency in business dealings. Time after time, when a fiasco has occurred, a key contributing factors has lack of transparency. Subprime mortgages, CDOs and credit default swaps were all financial innovations that relied crucially on nobody asking too many questions. So too with the vast Madoff Ponzi scheme, involving some of the most sophisticated investors in the world, which rested on the same fatal human omission.
Download Chapter 16 to read on.
From Chapter 17:
The restoration of a rational and stable financial system inevitably requires major reform on a number of fronts. History gives much guidance here and also a role model: the period we should seek to emulate is the nineteenth century. Then money was sound, the dominant currency of the time, the pound, was literally as good as gold, while financial institutions were conservative and generally stable, and an altogether healthier financial ethos reigned.
It is very common these days to sneer at the gold standard: after all, it was Keynes who once dismissed it as “a relic from a barbarous age”. We would suggest, on the contrary, that a gold standard or some suitably 21st Century commodity equivalent would be highly desirable, and put an end to the disastrous century-long experiment with fiat money and its attendant miseries of inflation and monetary instability. The fact that Keynes opposed the gold standard is a further reason to support it.
The nineteenth century model would also entail major reforms to financial institutions and the regulatory system: greater liability and greater responsibility, the repeal of deposit insurance and investor protection legislation and the abolition of the big financial regulatory bodies such as the SEC and FSA. And by nineteenth century standards, we really mean early nineteenth century standards, those that pertained to the period before the Bank Charter Act of 1844 and the Companies Act of 1862, when liability was very real.
As for the banking system, we would suggest that the role model is Scotland pre-1845, when the Scottish banking system was virtually free of state control, unhindered by a central bank, and equally admired and envied across the world – and copied by countries such as Canada and Australia. In all three countries, free banking systems operated highly successful for very long periods of time. Indeed, the Canadian system was widely admired in the United States – and many US reformers in the late nineteenth century saw it as their ideal. The Canadian system was highly stable – apart from the failures of two small Alberta banks in 1985, its last notable bank failure was that of the Home Bank of Canada back in 1923. There were no Canadian bank failures in the 1930s and, even after the establishment of the Bank of Canada in 1934, many still regard the Canadian banking system as the best in the world.
Our first choice environment would be one with a commodity standard, free banking (no central bank) and financial laissez-faire, restrictions on the use of the “limited liability” corporate form and the most limited government. Even if we don’t return all the way to these early nineteenth century standards (and we can imagine the opposition!), we should still move as much as possible in that direction, though we would not advocate the reintroduction of the notorious debtors’ prisons immortalized in the fiction of Charles Dickens! However, our proposed reforms herein are adapted to the “second best world” (if it’s actually that; it may be about thousandth best of all the ‘parallel universe’ possibilities) in which we live, with relatively large government, a fiat currency and a central bank.
The most important institutional policy that must be solved is that of an excessively expansionary monetary policy. Simply making the monetary authority “independent” does not achieve this if the monetary authority retains its interactions with politicians and the financial community, both of which want loose money. The ideal to aim at is a hard money Fed, a Paul Volcker Fed.
Download Chapter 17 to read on.
You can also pre-order Alchemists of Loss at Amazon.
Further Reading
- Huerta de Soto, Money, Bank Credit and Economic Cycles
- Baxendale, A day of reckoning: how to end the banking crisis now
- What is wrong with banking, part 1: the legal nature of banking contracts
- Frank Whitson Fetter, Development of British Monetary Orthodoxy 1797 – 1875
- F. A. Hayek, Denationalisation of Money: The Argument Refined
- Gordon Kerr, How To Destroy the British Banking System and Bailing out the Banks – Glaring Evidence of Moral Hazard
- James Tyler, My Journey to Austrianism via the City, Money is not working and How to avoid future encounters with financial meltdown
- Irving Fisher, 100% Money, 1935
By Dr Tim Evans, on 10 February 10
Eamonn Butler publishes another great book: The Alternative Manifesto: A 12-Step Programme to Remake Britain.
I really admire Eamonn Butler of the Adam Smith Institute – www.adamsmith.org. One of the nicest gents in the world of ideas, I also respect his boundless energy when it comes to the production of fascinating and thought providing books.
His latest offering is no exception. With good chapters on the economy, bureaucracy, regulation and what he terms the bully state, I urge you to buy a copy.
By Dr Tim Evans, on 29 January 10
Yesterday evening, James Tyler and I spent a pleasurable time speaking to, answering questions from, and then socialising with, students at Warwick University. It was a good gathering with some twenty people present. With students coming from different courses and levels of study, James and I were particularly impressed by the quality of debate and the sheer enthusiasm of those present.
As a departing gift, James and I gave our hosts a dozen copes of the Adam Smith Institute’s excellent recent publication A Beginners Guide to Liberty. Containing an excellent collection of highly engaging essays, this book also includes a chapter by the Cobden Centre’s Founding Fellow, Dr. Anthony J. Evans. His ‘Banking, inflation and recessions’ is highly recommended.
You can download your free copy here.
By Steven Baker MP, on 12 January 10
Irving Fisher’s “100% Money” is remarkable in the context of our present credit crunch. While The Cobden Centre pursues copyright permission to scan and distribute this book, we offer this summary of the preface, foreword and first chapter, which outline Fisher’s proposal.
100% Money
Designed to keep checking banks 100% liquid; to prevent inflation and deflation; largely to cure or prevent depressions; and to wipe out much of the National Debt.
By
Irving Fisher, LL.D.
Professor Emeritus of Economics
Yale University
Irving Fisher (1867-1947) was an important American neoclassical economist who found his “debt-deflation” analysis of the Great Depression was overlooked in favour of Keynesianism. His theories have made a comeback since the 1980s and several important concepts are named after him. He laid the foundations of monetarism.
Fisher’s “100% Money” proposal was to raise reserve requirements against checking deposits to 100%. That is, to keep money on deposit at the bank safe and ready for withdrawal. This was startling in 1935 but, then as now, it represented a return to ancient principle.
Continue reading “Irving Fisher, 100% Money, 1935″
By Steven Baker MP, on 17 December 09
Via FT.com / US / Economy & Fed – Fed signals pullback in liquidity supports, we learn:
The Federal Reserve on Wednesday upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010.
And consequently:
Stocks eased slightly after the Fed statement, while the yield curve in the bond market steepened.
Which brings us on to Roger Koppl’s Big Players and the Economic Theory of Expectations.
I am indebted to Cobden Centre supporter Bruno Prior for introducing me to Koppl’s work which extends the tradition of Ludwig von Mises, Friedrich Hayek and others, unusually, applying empirical methods to demonstrate the application of the theory.
Koppl demonstrates, with extensive reference to other scholars, that investment and all other economic actions depend on “subjective” expectations. He then presents a theory of expectations which assumes people interpret their situations in unpredictable ways. This theory includes a theory of “Big Players”:
Big Players are privileged actors who disrupt markets. A Big Player has three defining characteristics. He is big in the sense that his actions influence the market under study. He is insensitive to the discipline of profit and loss. He is arbitrary in the sense that his actions depend on discretion rather than any set of rules. Big Players have power and use it.
We learn that Big Players reduce the reliability of expectations, thereby disrupting markets. They encourage herding and produce perverse effects on entrepreneurship: traders must pay attention to the Big Player and not the fundamentals.
And so we find today, for example, the markets moving in response to the Fed not the realities of the economy…
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