Posts
There are at least two excellent economics lessons to be derived from the Hayek quote below.
1. Ludwig von Mises (and others, of course, such as George Reisman) always stressed that economic knowledge is accumulated over the millennia and can be considered in the same way as the accumulation of physical capital. We all are heirs to the discovery of fire and the invention of the wheel, for example.
2. There are many stages to the production process. Each economic actor needs to master only his specific stage by producing goods and services desired by the next stage of production. No one needs to master or can master all stages of production. The coordinating mechanism is the interest rate, also known as the rate of return, for each stage of production.
Thus, the old adages of "tend to your own knitting" and "mind your own business" take on added respect. We also see the folly of interest interventions by central banks. These interventions thwart the coordinating process relating to the stages of production. Thusly, businesses are encouraged to invest for the sake of investing per se and not for the sake of meeting real market demands.
The Latest from Cafe Hayek
Quotation of the Day…
Posted: 21 Jul 2012 04:38 AM PDT
… is from pages 149-150 of the 1979 Liberty Fund edition of Hayek’s 1952 study, The Counter-Revolution of Science (footnote excluded):
We flatter ourselves undeservedly if we represent human civilization as entirely the product of conscious reason or as the product of human design, or when we assume that it is necessarily in our power deliberately to re-create or to maintain what we have built without knowing what we are doing. Though our civilization is the result of a cumulation of individual knowledge, it is not by the explicit or conscious combination of all this knowledge in any individual brain, but by its embodiment in symbols which we use without understanding them, in habits and institutions, tools and concepts, that man in society is constantly able to profit from a body of knowledge either he nor any other man completely possesses. Many of the greatest things that man has achieved are the result not of consciously directed thought, and still less the product of a deliberately coordinated effort of many individuals, but of a process in which the individual plays a part which he can never fully understand. They are greater than any individual precisely because they result from the combination of knowledge more extensive than a single mind can master.
Sunday, July 22, 2012
Thursday, July 19, 2012
An International Economic Policy for a Free People
The Only International Economic Policy that a Country Needs:
"Mind your own business and set a good example"
By Patrick Barron
The international economic scene is dominated by state interventions at all levels. Daily we read of disputes over exchange rate manipulation, protectionist tariffs followed by retaliatory tariffs, highly regulated free trade blocs that erect trade barriers to non-bloc nations, bilateral trade agreements, and more. For instance, Great Britain is a member of the European Union (EU) but not of the European Monetary Union (EMU), meaning that it abides by all the regulations and pays all the assessments to remain a member of the EU in order to trade freely with the other members of the twenty-seven country EU. But it does not use the common currency, the euro, which is used by only seventeen of the EU members. British industry chafes at the many seemingly meaningless and bizarre regulations that raise the cost of British goods, just so Britain can trade freely within the EU. Some regulations are so onerous that some British manufactures will be put out of business. The pro-EU faction in Britain, such as the leadership of the three main parties--the Conservatives, Labour, and the Liberal Democrats--, recognizes the damage but proposes to lobby for special exemptions on a case by case basis. The anti-EU faction, led by the United Kingdom Independent Party (UKIP), wants Britain out of the EU entirely, arguing that the cost of membership is too great and that the loss of sovereignty is unconstitutional. The same debate can be seen within every EU nation to some degree.
By now everyone is aware of the euro debt crisis; that is, that many members of the EMU are massively in debt. Lower borrowing costs and the ability of members to monetize their debts through the European Central Bank (ECB) by way of their captive national central banks created incentives that proved too powerful for governments to resist, so they embarked on profligate spending programs at the governmental level and enjoyed, briefly, a property boom that has come crashing down. Their way out of this mess is unclear. Some economists propose raising taxes and cutting programs, commonly called "austerity". Others have called for these countries to leave the EMU, reinstate their own national currencies, and devalue against the euro, supposedly to restore "competitiveness". Others have called for outright default on their euro-denominated debt.
The common assumption behind any discussion of these debates and crises is that a country cannot stand alone in the world and needs to negotiate trade and monetary terms with its trading partners, who may require the country to adopt measures that are antithetical to its interests. Is this really the case? Is it possible for a nation to free itself from all international agreements, manage its own currency as its sees fit, and trade robustly with the rest of the world?
No Country Can Cause Economic Harm to Another Without The Other's Consent
In order to accept the wisdom of international non-interventionism in economic affairs, one must understand that no country (or bloc of countries, such as the EU) can harm another economically without that country's consent, meaning tacit compliance. In other words, a country can adopt its own trading and currency policies and need not be influenced or harmed by the actions of any other country. But first of all, we need to understand the definition of "harm".
In his book No Harm: Ethical Principles for a Free Market, Dr. T. Patrick Burke explains that harm consists only in physical harm or the threat of physical harm. It is not characterized by discrimination or a demand for special trading terms. The most common example of real, physical harm is war. War destroys the assets of others. Likewise, blockades cause real harm, because the blockaded nation is threatened by the destruction of its outgoing or incoming goods. Because it does not choose to fight to break the blockade or is powerless to do so does not mean that it is not harmed. However, a refusal of one country to allow its citizens to trade with another--for example, the EU's recent restriction upon its members that prevents them from importing Iranian oil--does not harm Iran. An internal example would be for a person to refuse to trade with a local merchant, due to some personal disagreement. That merchant is not harmed by the trade the he does not enjoy. Dr. Burke explains that the victim of discrimination is left in the same position as before the act of discrimination and that no nation or individual can claim to be entitled to the trade of another.
In fact the discriminating nation or person causes himself some extra cost and, therefore, harms only himself. Consider that an individual most likely must travel further, pay more for goods, or purchase inferior goods that he refuses to buy from his local merchant with whom he is feuding. At the nation-state level the European Union harms its own citizens, for they must pay more for oil, buy inferior oil, or suffer some kind of inconvenience. Otherwise, why would they have purchased Iranian oil in the first place? One could even go so far as to say that the EU wages war against its own citizens and not against Iran, for, undoubtedly, there are police sanctions that the EU would employ against its members for violating the Iranian trade prohibition that must rest upon the threat of violence.
Interventions Harm only Those Who Impose Them
I will continue to use the EU case as illustrative of my thesis that a nation cannot be harmed except by its own consent. The EU has adopted many onerous regulations upon trade in goods and services with which its members must comply as a condition of EU membership. The EU has erected trade barriers for many goods and services against non-EU members. For example, the EU prohibits the importation of most agricultural products from Africa. Either there is an outright prohibition against importing African foodstuffs or the African nations cannot comply with complex and onerous regulations such as the prohibition against genetically engineered food. A country that wishes to trade with the EU either complies with EU demands or must find buyers elsewhere.
This practice does not fall into the Burkean definition of harm as regards Africa. It does, though, constitute harm to citizens of the EU. African countries are left in the same position as before; remember, no one and no nation has an entitlement to the trade of others. But we must assume that the EU prohibits African foodstuffs, because its citizens would have purchased them in the absence of the prohibition; otherwise, the prohibition would not be necessary. Therefore, the EU regulations and/or prohibitions against the importation of African foodstuffs harms only EU citizens themselves. The African nations are perfectly free to pursue sales elsewhere in the world, although it is true that their standard of living would have been higher without the EU regulations and prohibitions.
The same is true of currency interventions. America has complained for some time that China intervenes in its own currency markets to hold down the value of the yuan in order to increase export sales. The U.S. position wrongly claims that it is harmed, because domestic companies lose sales to cheaper Chinese goods. But this is wrong. Viewed from the standpoint of justice, domestic companies do not have an entitlement to domestic sales. And viewed from a practical standpoint, America enjoys an outright subsidy from China. China sells the US goods below cost and causes its own citizens to suffer higher prices; i.e., higher Chinese domestic prices are caused by its currency intervention that gives American importers more yuan than the free market rate, which is based upon purchasing power parity. As I explained in a previous essay, currency interventions to spur exports are paid by the exporting country's own citizens in the form of higher domestic prices. Should America foolishly prohibit the importation of Chinese goods, either by quotas or tariffs, it would cause harm only to its own citizens, who would be forced to pay higher prices, in addition to other economic dislocations.
Conclusion
The "only international economic policy that a country needs", (returning to the title of this essay), is to mind its own business and set a good example to the rest of the world. A just economic policy for a free and prosperous nation would be based upon the twin pillars of unilateral free trade and non-intervention into its own markets. This means a complete elimination of domestic regulations that attempt to set quality and safety standards, for the market will do that by itself, and complete abdication of manufacture and management of money. It does not need to join a trade bloc or negotiate trade terms with other nations. If a trade bloc such as the EU sets import standards different from one's own domestic standards, each exporting company can decide for itself if the rewards for meeting the importing bloc's standards warrant the extra cost. It is not an issue for the exporting nation's government to decide. Furthermore, the exporting nation does not have to concern itself about importing from a country or bloc of countries that refuses to accept the exporting nation's goods in return. After purchasing goods from the protectionist nation or bloc of nations, that nation's currency with find its way back into its economy in the form of export demand from some other nation that accepted the currency in payment for some other good or service or it will receive a capital investment. If the currency never finds its way back to the nation that adopted unilateral free trade and is held indefinitely in the coffers of some foreign bank or central bank, that nation has simply been on the receiving end of a gift. An analogy would be that of a friend or neighbor who sells you something and then never cashes your check.
Prosperous nations have always been great trading nations, for they benefit from the expansion of specialization to a wider and wider extent. Robust trade depends upon freedom to trade with the world under mutually agreeable terms of those participating in the trade, not upon governments. All trade, especially international trade, depends upon an internationally accepted medium of exchange. The most accepted mediums of exchange throughout the world are gold and silver. This acceptance is not based upon government coercion but upon market acceptance. Those wise statesmen who wish to see their nations prosper will adopt unilateral free trade, laissez faire capitalism, and sound money. International cooperation among governments is not required; the market (meaning the people) will do the rest.
"Mind your own business and set a good example"
By Patrick Barron
The international economic scene is dominated by state interventions at all levels. Daily we read of disputes over exchange rate manipulation, protectionist tariffs followed by retaliatory tariffs, highly regulated free trade blocs that erect trade barriers to non-bloc nations, bilateral trade agreements, and more. For instance, Great Britain is a member of the European Union (EU) but not of the European Monetary Union (EMU), meaning that it abides by all the regulations and pays all the assessments to remain a member of the EU in order to trade freely with the other members of the twenty-seven country EU. But it does not use the common currency, the euro, which is used by only seventeen of the EU members. British industry chafes at the many seemingly meaningless and bizarre regulations that raise the cost of British goods, just so Britain can trade freely within the EU. Some regulations are so onerous that some British manufactures will be put out of business. The pro-EU faction in Britain, such as the leadership of the three main parties--the Conservatives, Labour, and the Liberal Democrats--, recognizes the damage but proposes to lobby for special exemptions on a case by case basis. The anti-EU faction, led by the United Kingdom Independent Party (UKIP), wants Britain out of the EU entirely, arguing that the cost of membership is too great and that the loss of sovereignty is unconstitutional. The same debate can be seen within every EU nation to some degree.
By now everyone is aware of the euro debt crisis; that is, that many members of the EMU are massively in debt. Lower borrowing costs and the ability of members to monetize their debts through the European Central Bank (ECB) by way of their captive national central banks created incentives that proved too powerful for governments to resist, so they embarked on profligate spending programs at the governmental level and enjoyed, briefly, a property boom that has come crashing down. Their way out of this mess is unclear. Some economists propose raising taxes and cutting programs, commonly called "austerity". Others have called for these countries to leave the EMU, reinstate their own national currencies, and devalue against the euro, supposedly to restore "competitiveness". Others have called for outright default on their euro-denominated debt.
The common assumption behind any discussion of these debates and crises is that a country cannot stand alone in the world and needs to negotiate trade and monetary terms with its trading partners, who may require the country to adopt measures that are antithetical to its interests. Is this really the case? Is it possible for a nation to free itself from all international agreements, manage its own currency as its sees fit, and trade robustly with the rest of the world?
No Country Can Cause Economic Harm to Another Without The Other's Consent
In order to accept the wisdom of international non-interventionism in economic affairs, one must understand that no country (or bloc of countries, such as the EU) can harm another economically without that country's consent, meaning tacit compliance. In other words, a country can adopt its own trading and currency policies and need not be influenced or harmed by the actions of any other country. But first of all, we need to understand the definition of "harm".
In his book No Harm: Ethical Principles for a Free Market, Dr. T. Patrick Burke explains that harm consists only in physical harm or the threat of physical harm. It is not characterized by discrimination or a demand for special trading terms. The most common example of real, physical harm is war. War destroys the assets of others. Likewise, blockades cause real harm, because the blockaded nation is threatened by the destruction of its outgoing or incoming goods. Because it does not choose to fight to break the blockade or is powerless to do so does not mean that it is not harmed. However, a refusal of one country to allow its citizens to trade with another--for example, the EU's recent restriction upon its members that prevents them from importing Iranian oil--does not harm Iran. An internal example would be for a person to refuse to trade with a local merchant, due to some personal disagreement. That merchant is not harmed by the trade the he does not enjoy. Dr. Burke explains that the victim of discrimination is left in the same position as before the act of discrimination and that no nation or individual can claim to be entitled to the trade of another.
In fact the discriminating nation or person causes himself some extra cost and, therefore, harms only himself. Consider that an individual most likely must travel further, pay more for goods, or purchase inferior goods that he refuses to buy from his local merchant with whom he is feuding. At the nation-state level the European Union harms its own citizens, for they must pay more for oil, buy inferior oil, or suffer some kind of inconvenience. Otherwise, why would they have purchased Iranian oil in the first place? One could even go so far as to say that the EU wages war against its own citizens and not against Iran, for, undoubtedly, there are police sanctions that the EU would employ against its members for violating the Iranian trade prohibition that must rest upon the threat of violence.
Interventions Harm only Those Who Impose Them
I will continue to use the EU case as illustrative of my thesis that a nation cannot be harmed except by its own consent. The EU has adopted many onerous regulations upon trade in goods and services with which its members must comply as a condition of EU membership. The EU has erected trade barriers for many goods and services against non-EU members. For example, the EU prohibits the importation of most agricultural products from Africa. Either there is an outright prohibition against importing African foodstuffs or the African nations cannot comply with complex and onerous regulations such as the prohibition against genetically engineered food. A country that wishes to trade with the EU either complies with EU demands or must find buyers elsewhere.
This practice does not fall into the Burkean definition of harm as regards Africa. It does, though, constitute harm to citizens of the EU. African countries are left in the same position as before; remember, no one and no nation has an entitlement to the trade of others. But we must assume that the EU prohibits African foodstuffs, because its citizens would have purchased them in the absence of the prohibition; otherwise, the prohibition would not be necessary. Therefore, the EU regulations and/or prohibitions against the importation of African foodstuffs harms only EU citizens themselves. The African nations are perfectly free to pursue sales elsewhere in the world, although it is true that their standard of living would have been higher without the EU regulations and prohibitions.
The same is true of currency interventions. America has complained for some time that China intervenes in its own currency markets to hold down the value of the yuan in order to increase export sales. The U.S. position wrongly claims that it is harmed, because domestic companies lose sales to cheaper Chinese goods. But this is wrong. Viewed from the standpoint of justice, domestic companies do not have an entitlement to domestic sales. And viewed from a practical standpoint, America enjoys an outright subsidy from China. China sells the US goods below cost and causes its own citizens to suffer higher prices; i.e., higher Chinese domestic prices are caused by its currency intervention that gives American importers more yuan than the free market rate, which is based upon purchasing power parity. As I explained in a previous essay, currency interventions to spur exports are paid by the exporting country's own citizens in the form of higher domestic prices. Should America foolishly prohibit the importation of Chinese goods, either by quotas or tariffs, it would cause harm only to its own citizens, who would be forced to pay higher prices, in addition to other economic dislocations.
Conclusion
The "only international economic policy that a country needs", (returning to the title of this essay), is to mind its own business and set a good example to the rest of the world. A just economic policy for a free and prosperous nation would be based upon the twin pillars of unilateral free trade and non-intervention into its own markets. This means a complete elimination of domestic regulations that attempt to set quality and safety standards, for the market will do that by itself, and complete abdication of manufacture and management of money. It does not need to join a trade bloc or negotiate trade terms with other nations. If a trade bloc such as the EU sets import standards different from one's own domestic standards, each exporting company can decide for itself if the rewards for meeting the importing bloc's standards warrant the extra cost. It is not an issue for the exporting nation's government to decide. Furthermore, the exporting nation does not have to concern itself about importing from a country or bloc of countries that refuses to accept the exporting nation's goods in return. After purchasing goods from the protectionist nation or bloc of nations, that nation's currency with find its way back into its economy in the form of export demand from some other nation that accepted the currency in payment for some other good or service or it will receive a capital investment. If the currency never finds its way back to the nation that adopted unilateral free trade and is held indefinitely in the coffers of some foreign bank or central bank, that nation has simply been on the receiving end of a gift. An analogy would be that of a friend or neighbor who sells you something and then never cashes your check.
Prosperous nations have always been great trading nations, for they benefit from the expansion of specialization to a wider and wider extent. Robust trade depends upon freedom to trade with the world under mutually agreeable terms of those participating in the trade, not upon governments. All trade, especially international trade, depends upon an internationally accepted medium of exchange. The most accepted mediums of exchange throughout the world are gold and silver. This acceptance is not based upon government coercion but upon market acceptance. Those wise statesmen who wish to see their nations prosper will adopt unilateral free trade, laissez faire capitalism, and sound money. International cooperation among governments is not required; the market (meaning the people) will do the rest.
Wednesday, June 6, 2012
My Letter to National Review Magazine re: The Real Cause of the Euro Debt Crisis
From: patrickbarron@msn.com
To: submissions@nationalreview.com
Subject: The Real Cause of the Euro Debt Crisis
Date: Wed, 6 Jun 2012 10:58:32 -0400
Dear Sirs:
In his essay "Four Kinds of Dreadful", John O'Sullivan discusses the possible outcomes of the Greek debt crisis (which really is a euro debt crisis). It is important that readers understand the cause of the crisis. Mr. O'Sullivan repeats some common misconceptions about that cause when he states that:
"Its original design was flawed because it sought to include too many countries with too-diverse economic characters and histories, too-different levels of unemployment, and so on." He later states that "Above all, the euro zone did not include...transnational labor mobility; and transnational monetary transfers." And finally, that "a single currency required a single budget, a single treasury, and a single fiscal policy."
None of these reasons is the cause of the crisis. First of all, there is nothing to prevent people with different characters, etc. from adopting a common currency. Here in the US we have many people with different characters, different levels of productivity, etc. all using the dollar. There may indeed be cultural barriers to labor mobility, but several nations with different cultures have adopted the dollar as their national currency. Finally, all fifty states of the union use the dollar, without requiring that they meld their budgets, treasuries, and fiscal policies.
The real cause of the euro debt crisis has been explained by Dr. Philipp Bagus of King Juan Carlos University in his book, The Tragedy of the Euro. Dr. Bagus explains that the European System of Central Banks did not eliminate national central banks. These national central banks buy their respective country's sovereign debt and use that debt as collateral for euro loans at the European Central bank. The result is predictable. All seventeen members of the European Monetary Union have the ability to monetize their government's sovereign debt and force monetary inflation on the rest of the members. It is similar to having seventeen counterfeiters trying to outdo one another. First debt soared, and now inflation is being felt even in the more responsible nations such as Germany, because all use the euro.
There is no solution to this problem, as the euro is currently constructed. Fiscal treaties to prevent the inevitable money printing will be ignored, since there is no enforcement mechanism. Furthermore, there never will be an enforcement mechanism, because the seventeen members are sovereign nations with electorates that must be mollified. The euro was doomed from the day it was born.
Patrick Barron
To: submissions@nationalreview.com
Subject: The Real Cause of the Euro Debt Crisis
Date: Wed, 6 Jun 2012 10:58:32 -0400
Dear Sirs:
In his essay "Four Kinds of Dreadful", John O'Sullivan discusses the possible outcomes of the Greek debt crisis (which really is a euro debt crisis). It is important that readers understand the cause of the crisis. Mr. O'Sullivan repeats some common misconceptions about that cause when he states that:
"Its original design was flawed because it sought to include too many countries with too-diverse economic characters and histories, too-different levels of unemployment, and so on." He later states that "Above all, the euro zone did not include...transnational labor mobility; and transnational monetary transfers." And finally, that "a single currency required a single budget, a single treasury, and a single fiscal policy."
None of these reasons is the cause of the crisis. First of all, there is nothing to prevent people with different characters, etc. from adopting a common currency. Here in the US we have many people with different characters, different levels of productivity, etc. all using the dollar. There may indeed be cultural barriers to labor mobility, but several nations with different cultures have adopted the dollar as their national currency. Finally, all fifty states of the union use the dollar, without requiring that they meld their budgets, treasuries, and fiscal policies.
The real cause of the euro debt crisis has been explained by Dr. Philipp Bagus of King Juan Carlos University in his book, The Tragedy of the Euro. Dr. Bagus explains that the European System of Central Banks did not eliminate national central banks. These national central banks buy their respective country's sovereign debt and use that debt as collateral for euro loans at the European Central bank. The result is predictable. All seventeen members of the European Monetary Union have the ability to monetize their government's sovereign debt and force monetary inflation on the rest of the members. It is similar to having seventeen counterfeiters trying to outdo one another. First debt soared, and now inflation is being felt even in the more responsible nations such as Germany, because all use the euro.
There is no solution to this problem, as the euro is currently constructed. Fiscal treaties to prevent the inevitable money printing will be ignored, since there is no enforcement mechanism. Furthermore, there never will be an enforcement mechanism, because the seventeen members are sovereign nations with electorates that must be mollified. The euro was doomed from the day it was born.
Patrick Barron
Wednesday, May 30, 2012
My Article as a Mises Daily, titled "Value in Devaluation?"
Value in Devaluation?
Mises Daily:Monday, May 28, 2012 by Patrick Barron
http://mises.org/daily/6043/Value-in-Devaluation
The euro is in trouble. That is not news. What is news is that people with deep pockets are willing to pay for economists to provide a solution. Lord Wolfson has offered a £250,000 prize for the best way a country can exit the European Monetary Union (EMU). Five finalists for the prize were announced in March. The winner will be announced in June.
None of the five finalists — Neil Record, Jens Nordvig, Jonathan Tepper, Catherine Dobbs, and Roger Bootle — advocates a return to sound money; all assume that new, national fiat currencies will float; and all assume that unproductive countries will benefit from devalued new currencies. The theory is that a devalued currency will spur export-driven economic growth. Furthermore, they have little confidence that economic reforms — which they all, by the way, do recommend — will be achieved in the near term and see devaluation as a quicker alternative. But will this work? First a word about devaluation itself.
Devaluing against Gold
Historically, devaluation of a currency referred to its relationship to gold. Gold could not be expanded in any appreciable amounts very quickly. It had to be dug up, minted, and placed into circulation at some expense over a long period of time. Coin clipping and substituting a base metal for some percentage of the gold in coins were early means of money debasement. Later, paper currencies could be expanded as quickly and as cheaply as the mint could run paper through its presses, but even this pales in comparison to these electronic times in which money can be expanded to any amount desired at the click of a mouse. Devaluations occurred, of course, even when governments admitted that gold was money. Notable examples are the Swiss devaluation in 1936, detailed so succinctly by Mises in Human Action, and America's shocking 69 percent devaluation in 1934. Both of these, and others like them, were considered shameful and self-serving acts. Devaluation was tantamount to an admission of fraud. The country's central bank had printed and circulated more units of currency than it could redeem at the currency-to-gold price it had promised its trading partners. This, of course, had disastrous effects on everyone who held contractual promises to be paid in gold.
Devaluing against Other Fiat Currencies
The devaluation advocated by many economists today is quite different in one regard. There is no commodity reserve — gold or silver, for example — against which the nation's currency is to be devalued. Modern devaluation advocates refer to the currency's value, or exchange ratio, in relation to all other fiat currencies. The exchange value between currencies is governed by purchasing-power parity, which is the simple comparison of the price levels of two countries as expressed in local currency. Nevertheless, the mechanism for devaluing is still the same as that which occurred under gold: inflation of the fiat-money supply. For example, the central bank could give foreign buyers more local currency with which to buy local goods. This increased supply of local currency eventually works its way through the economy, raising all prices. Economists refer to this process as "importing inflation." The devaluation advocates attempt to convince their countrymen that what was once a shameful act is now a positive good. For example, the Swiss are trying to lower the value of their currency in relation to all others.
What of the proposition that taking positive steps to devalue one's own currency against all others, if it can be achieved, will actually help a country become more competitive? What have others said on this subject?
Insights from Immanuel Kant, Frederic Bastiat, and Henry Hazlitt
A policy of currency devaluation can be judged by whether or not it satisfies Immanuel Kant's "categorical imperative," which asks whether the action will benefit all men, at all places, and at all times. Certainly a devaluation will benefit exporters, who can expect to make more sales. Their foreign customers get more local currency in exchange for their own. Exports increase. The exporter's position is one that is best examined by considering Frederic Bastiat's brilliant essay "That Which Is Seen, and That Which Is Not Seen" and "The Lesson" found in Henry Hazlitt's Economics in One Lesson.
At the instance of exchanging his money for more local currency, the foreign buyer will indeed be inclined to purchase more of the goods from the country that devalued. This we can see, and most pundits consider it a good thing. The exporter's increased sales can be measured. This is seen. But what about the importer's lost sales? Importers can expect the opposite. The local currency will buy less, and they can expect sales to fall due to the necessity of raising prices to reflect the reduced purchasing power of their local currency. How can one measure sales that never happened? This is Bastiat's unseen.
And this is merely the beginning.
Hazlitt would tell us to look at the longer-term effects of Bastiat's insight. What is seen is that exporters get first use of the newly created money and buy replacement factors of production at current prices. The increased profits from the higher sales enrich them, because they are the early receivers of the money. But how about those who get the money much later, such as wholesalers, or not at all, such as retirees?
Over time the new money causes all prices to rise, even the exporter's factors of production. The benefits to the exporter of the monetary intervention have slowly evaporated. The costs of his factors of production have risen. His sales start to fall back to preintervention levels. What can he do except lobby the government for another shot of monetary expansion to give his customers even more local currency with which to buy his products?
Monetary Expansion Creates the Boom-Bust Cycle
But even this increase in overall prices and their redistributive effects is not the entire story. The increase in the nation's money supply will cause the boom-bust business cycle. The boom phase has been misinterpreted by the Wolfson Prize finalists, who see historical evidence in the beneficial effects of devaluation. For example, Jonathan Tepper writes that "in August 1998, Russia defaulted on its sovereign debt and devalued its currency. The expected catastrophe didn't happen." Later he writes, "Argentina was forced to default and devalue in late 2001 and early 2002. Despite dire predictions, the economy did extraordinarily well." But these are merely the expected and temporary appearances of the boom phase caused by monetary expansion. Not only does the bankrupt nation shed itself of its debt and get to keep its ill-gotten gains; its expansionist monetary policy touches off a speculative boom. Neither Russia nor Argentina have built sustainable, capitalist economies.
The Exporter as Wealth-Transfer Agent
It should be clear that there is no net benefit to the country that drives down the purchasing power of its currency through monetary expansion. The only reason the exporter makes more sales is that the buyer of the exporter's goods gets a lower price. This lower price was not the result of manufacturing efficiencies, but of a subsidy — a transfer of wealth — from some in the exporting country to the foreign purchaser of the goods. With each successive monetary expansion, wealth is funneled to the exporter, his employees, and others who get the money early in the expansion phase. All others are harmed. In effect, the exporter's sales have been subsidized by his fellow citizens who are the late receivers of the new money. The exporter is the unseen means by which the transfer is effected. The nation as a whole is worse off; it is not more competitive.
Delaying Real Reform in a Fruitless "Race to the Bottom"
Politicians and their professional economist supporters are doing their fellow citizens an injustice by pursuing devaluation as a quick and easy means to improve national competitiveness. The source of real competitive advantage is through liberal reform of economic policies that reward industriousness in a people, protect their property and even that of foreigners from confiscatory taxation, and encourage savings. Over time the country's capital base in relation to its population will increase — an increase in capital per capita, as economists say — raising real prosperity through increased worker productivity. But instead of forthrightly pursuing economic reform, which one must admit will be difficult, politicians and their professional-economist supporters are fomenting a "race to the bottom," by which each country tries to boost exports via competitive devaluations against all others. The nation's capital base will slowly dwindle through the backdoor export subsidy made possible through monetary debasement.
The Moral Hazard of the Welfare State
There is nothing preventing any member of the EMU from becoming more competitive right now. All that is required is a willingness to lower prices. As the common medium of exchange, the euro reveals uncompetitive economic structures. So why do those countries wishing to become more competitive refrain from lowering prices? The answer is the welfare state. In an unhampered market economy, there is no structural unemployment. All who wish to work can do so, because there is never a dearth of work to be done. But the welfare state removes the cost of pricing one's labor or one's goods and services too high. One might say that the welfare state underpins structural rigidities in an economy, such as labor laws, licensing, etc., by removing the cost of market interventions. Devaluation does not address this underlying problem; therefore, devaluation will not cure a country's lack of competitiveness.
Conclusion
Devaluation means monetary expansion. The new money must enter the economy somewhere — payments to exporters, for example. The ensuing bubble is misinterpreted as a sign of the success of devaluation. But the bubble is accompanied by the well-known deleterious effects of a rising price level, income redistribution, and malinvestment. As the prices for exporters' factors of production rise and the benefits of devaluation fade away, there will be calls for more money expansion. If more than one country pursues this policy, there ensues a disastrous race to the bottom.
The solution is sound money. Sound money reveals bad economic policy and forces each country to live within its means. Governments will come under pressure to liberalize their economies and shed themselves of the parasitic destroyers of wealth. Devaluation retards this process.
Patrick Barron is a private consultant in the banking industry. He teaches in the Graduate School of Banking at the University of Wisconsin, Madison, and teaches Austrian economics at the University of Iowa, in Iowa City, where he lives with his wife of 40 years. Read his blog. Send him mail. See Patrick Barron's article archives.
Mises Daily:Monday, May 28, 2012 by Patrick Barron
http://mises.org/daily/6043/Value-in-Devaluation
The euro is in trouble. That is not news. What is news is that people with deep pockets are willing to pay for economists to provide a solution. Lord Wolfson has offered a £250,000 prize for the best way a country can exit the European Monetary Union (EMU). Five finalists for the prize were announced in March. The winner will be announced in June.
None of the five finalists — Neil Record, Jens Nordvig, Jonathan Tepper, Catherine Dobbs, and Roger Bootle — advocates a return to sound money; all assume that new, national fiat currencies will float; and all assume that unproductive countries will benefit from devalued new currencies. The theory is that a devalued currency will spur export-driven economic growth. Furthermore, they have little confidence that economic reforms — which they all, by the way, do recommend — will be achieved in the near term and see devaluation as a quicker alternative. But will this work? First a word about devaluation itself.
Devaluing against Gold
Historically, devaluation of a currency referred to its relationship to gold. Gold could not be expanded in any appreciable amounts very quickly. It had to be dug up, minted, and placed into circulation at some expense over a long period of time. Coin clipping and substituting a base metal for some percentage of the gold in coins were early means of money debasement. Later, paper currencies could be expanded as quickly and as cheaply as the mint could run paper through its presses, but even this pales in comparison to these electronic times in which money can be expanded to any amount desired at the click of a mouse. Devaluations occurred, of course, even when governments admitted that gold was money. Notable examples are the Swiss devaluation in 1936, detailed so succinctly by Mises in Human Action, and America's shocking 69 percent devaluation in 1934. Both of these, and others like them, were considered shameful and self-serving acts. Devaluation was tantamount to an admission of fraud. The country's central bank had printed and circulated more units of currency than it could redeem at the currency-to-gold price it had promised its trading partners. This, of course, had disastrous effects on everyone who held contractual promises to be paid in gold.
Devaluing against Other Fiat Currencies
The devaluation advocated by many economists today is quite different in one regard. There is no commodity reserve — gold or silver, for example — against which the nation's currency is to be devalued. Modern devaluation advocates refer to the currency's value, or exchange ratio, in relation to all other fiat currencies. The exchange value between currencies is governed by purchasing-power parity, which is the simple comparison of the price levels of two countries as expressed in local currency. Nevertheless, the mechanism for devaluing is still the same as that which occurred under gold: inflation of the fiat-money supply. For example, the central bank could give foreign buyers more local currency with which to buy local goods. This increased supply of local currency eventually works its way through the economy, raising all prices. Economists refer to this process as "importing inflation." The devaluation advocates attempt to convince their countrymen that what was once a shameful act is now a positive good. For example, the Swiss are trying to lower the value of their currency in relation to all others.
What of the proposition that taking positive steps to devalue one's own currency against all others, if it can be achieved, will actually help a country become more competitive? What have others said on this subject?
Insights from Immanuel Kant, Frederic Bastiat, and Henry Hazlitt
A policy of currency devaluation can be judged by whether or not it satisfies Immanuel Kant's "categorical imperative," which asks whether the action will benefit all men, at all places, and at all times. Certainly a devaluation will benefit exporters, who can expect to make more sales. Their foreign customers get more local currency in exchange for their own. Exports increase. The exporter's position is one that is best examined by considering Frederic Bastiat's brilliant essay "That Which Is Seen, and That Which Is Not Seen" and "The Lesson" found in Henry Hazlitt's Economics in One Lesson.
At the instance of exchanging his money for more local currency, the foreign buyer will indeed be inclined to purchase more of the goods from the country that devalued. This we can see, and most pundits consider it a good thing. The exporter's increased sales can be measured. This is seen. But what about the importer's lost sales? Importers can expect the opposite. The local currency will buy less, and they can expect sales to fall due to the necessity of raising prices to reflect the reduced purchasing power of their local currency. How can one measure sales that never happened? This is Bastiat's unseen.
And this is merely the beginning.
Hazlitt would tell us to look at the longer-term effects of Bastiat's insight. What is seen is that exporters get first use of the newly created money and buy replacement factors of production at current prices. The increased profits from the higher sales enrich them, because they are the early receivers of the money. But how about those who get the money much later, such as wholesalers, or not at all, such as retirees?
Over time the new money causes all prices to rise, even the exporter's factors of production. The benefits to the exporter of the monetary intervention have slowly evaporated. The costs of his factors of production have risen. His sales start to fall back to preintervention levels. What can he do except lobby the government for another shot of monetary expansion to give his customers even more local currency with which to buy his products?
Monetary Expansion Creates the Boom-Bust Cycle
But even this increase in overall prices and their redistributive effects is not the entire story. The increase in the nation's money supply will cause the boom-bust business cycle. The boom phase has been misinterpreted by the Wolfson Prize finalists, who see historical evidence in the beneficial effects of devaluation. For example, Jonathan Tepper writes that "in August 1998, Russia defaulted on its sovereign debt and devalued its currency. The expected catastrophe didn't happen." Later he writes, "Argentina was forced to default and devalue in late 2001 and early 2002. Despite dire predictions, the economy did extraordinarily well." But these are merely the expected and temporary appearances of the boom phase caused by monetary expansion. Not only does the bankrupt nation shed itself of its debt and get to keep its ill-gotten gains; its expansionist monetary policy touches off a speculative boom. Neither Russia nor Argentina have built sustainable, capitalist economies.
The Exporter as Wealth-Transfer Agent
It should be clear that there is no net benefit to the country that drives down the purchasing power of its currency through monetary expansion. The only reason the exporter makes more sales is that the buyer of the exporter's goods gets a lower price. This lower price was not the result of manufacturing efficiencies, but of a subsidy — a transfer of wealth — from some in the exporting country to the foreign purchaser of the goods. With each successive monetary expansion, wealth is funneled to the exporter, his employees, and others who get the money early in the expansion phase. All others are harmed. In effect, the exporter's sales have been subsidized by his fellow citizens who are the late receivers of the new money. The exporter is the unseen means by which the transfer is effected. The nation as a whole is worse off; it is not more competitive.
Delaying Real Reform in a Fruitless "Race to the Bottom"
Politicians and their professional economist supporters are doing their fellow citizens an injustice by pursuing devaluation as a quick and easy means to improve national competitiveness. The source of real competitive advantage is through liberal reform of economic policies that reward industriousness in a people, protect their property and even that of foreigners from confiscatory taxation, and encourage savings. Over time the country's capital base in relation to its population will increase — an increase in capital per capita, as economists say — raising real prosperity through increased worker productivity. But instead of forthrightly pursuing economic reform, which one must admit will be difficult, politicians and their professional-economist supporters are fomenting a "race to the bottom," by which each country tries to boost exports via competitive devaluations against all others. The nation's capital base will slowly dwindle through the backdoor export subsidy made possible through monetary debasement.
The Moral Hazard of the Welfare State
There is nothing preventing any member of the EMU from becoming more competitive right now. All that is required is a willingness to lower prices. As the common medium of exchange, the euro reveals uncompetitive economic structures. So why do those countries wishing to become more competitive refrain from lowering prices? The answer is the welfare state. In an unhampered market economy, there is no structural unemployment. All who wish to work can do so, because there is never a dearth of work to be done. But the welfare state removes the cost of pricing one's labor or one's goods and services too high. One might say that the welfare state underpins structural rigidities in an economy, such as labor laws, licensing, etc., by removing the cost of market interventions. Devaluation does not address this underlying problem; therefore, devaluation will not cure a country's lack of competitiveness.
Conclusion
Devaluation means monetary expansion. The new money must enter the economy somewhere — payments to exporters, for example. The ensuing bubble is misinterpreted as a sign of the success of devaluation. But the bubble is accompanied by the well-known deleterious effects of a rising price level, income redistribution, and malinvestment. As the prices for exporters' factors of production rise and the benefits of devaluation fade away, there will be calls for more money expansion. If more than one country pursues this policy, there ensues a disastrous race to the bottom.
The solution is sound money. Sound money reveals bad economic policy and forces each country to live within its means. Governments will come under pressure to liberalize their economies and shed themselves of the parasitic destroyers of wealth. Devaluation retards this process.
Patrick Barron is a private consultant in the banking industry. He teaches in the Graduate School of Banking at the University of Wisconsin, Madison, and teaches Austrian economics at the University of Iowa, in Iowa City, where he lives with his wife of 40 years. Read his blog. Send him mail. See Patrick Barron's article archives.
Tuesday, May 8, 2012
My letter to the NY Times re: The Futility of the Volcker Rule
From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: The Futility of the Volcker Rule
Date: Tue, 8 May 2012 20:49:02 -0400
Re: Progress Is Seen in Advancing a Final Volcker Rule
Dear Sirs:
The proposed Volcker Rule to restrict so-called risky trading by banks is futile. It was central bank credit expansion that caused the banks to misallocate credit, and the same dynamic is at work once again. Zero interest rates insure more malinvestment into different areas not prohibited by the Volcker Rule. The money must go somewhere! Since credit expansion helps the government fund its trillion and a half dollar annual budget deficit, it dare not allow interest rates to reflect the true state of the market. Therefore, through propagandistic exercises such as this, it tries to maintain the fiction that it can adopt rules that will prevent the inevitable malinvestment that accompanies such expansion. This is impossible.
Patrick Barron
To: letters@nytimes.com
Subject: The Futility of the Volcker Rule
Date: Tue, 8 May 2012 20:49:02 -0400
Re: Progress Is Seen in Advancing a Final Volcker Rule
Dear Sirs:
The proposed Volcker Rule to restrict so-called risky trading by banks is futile. It was central bank credit expansion that caused the banks to misallocate credit, and the same dynamic is at work once again. Zero interest rates insure more malinvestment into different areas not prohibited by the Volcker Rule. The money must go somewhere! Since credit expansion helps the government fund its trillion and a half dollar annual budget deficit, it dare not allow interest rates to reflect the true state of the market. Therefore, through propagandistic exercises such as this, it tries to maintain the fiction that it can adopt rules that will prevent the inevitable malinvestment that accompanies such expansion. This is impossible.
Patrick Barron
Thursday, May 3, 2012
My Letter to the NY Times re: Look Who's Calling Murdoch Unfit
Re: Panel in Hacking Case Finds Murdoch Unfit as News Titan
Dear Sirs:
I'm no fan of Rupert Murdoch, but I was struck by the absurdity of a government panel believing itself fit to judge his fitness to run his own company. Is this decision not the perogative of Mr. Murdoch's board of directors or, dare I say the word, the "consumers" of his product? If Mr. Murdoch has broken laws, then charge him. If he has violated personal privacy, then sue him. But stop this preposterous charade of publicity-seeking politicians and incompetent government bureaucrats as judges of his fitness to run his own private business.
Patrick Barron
Thursday, April 19, 2012
My letter to the NY Times re: Listen to Germany, Not to America
From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: Listen to Germany, Not to America
Date: Thu, 19 Apr 2012 13:01:27 -0400
Re: Debate Grows As Europe Fears Return Of a Crisis
Dear Sirs:
High borrowing costs for the "struggling Southern European countries" is NOT the root cause of the crisis. The root cause of the crisis is spending, more specifically spending that is funded by too much debt. Borrowing costs merely reflect creditor uncertainty that debts will be repaid in money of the same purchasing power as lent. So, if too much spending is the problem, how can increased spending, as recommended by the Americans, possibly be the answer? Fortunately there is a country that understands basic economics--Germany. Germany's finance minister, Wolfgang Schauble, recommends further spending cuts and changes in labor markets as the path to recovery. He is right. No nation can live beyond its means forever, and no nation can spend its way to prosperity. Europe needs increased savings, not spending, to rebuild its capital base that was squandered by government policies to create bubble economies based on money manipulation and fiscal interventions. These measures have failed spectacularly. If Wolfgang Schauble ever needs a job, I propose that he apply for Timothy Geithner's.
Patrick Barron
To: letters@nytimes.com
Subject: Listen to Germany, Not to America
Date: Thu, 19 Apr 2012 13:01:27 -0400
Re: Debate Grows As Europe Fears Return Of a Crisis
Dear Sirs:
High borrowing costs for the "struggling Southern European countries" is NOT the root cause of the crisis. The root cause of the crisis is spending, more specifically spending that is funded by too much debt. Borrowing costs merely reflect creditor uncertainty that debts will be repaid in money of the same purchasing power as lent. So, if too much spending is the problem, how can increased spending, as recommended by the Americans, possibly be the answer? Fortunately there is a country that understands basic economics--Germany. Germany's finance minister, Wolfgang Schauble, recommends further spending cuts and changes in labor markets as the path to recovery. He is right. No nation can live beyond its means forever, and no nation can spend its way to prosperity. Europe needs increased savings, not spending, to rebuild its capital base that was squandered by government policies to create bubble economies based on money manipulation and fiscal interventions. These measures have failed spectacularly. If Wolfgang Schauble ever needs a job, I propose that he apply for Timothy Geithner's.
Patrick Barron
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