Could an increase in the demand for money counteract the effect of an increase in the money supply? For example, if there were an increase in the supply of apples by ten and, simultaneously, an increase in the demand for ten apples, this would be completely absorbed. In other words, after individuals have satisfied their demand for ten apples, zero apples would be left.Following this logic, it would appear that the increase in the supply of money could be nullified by an equivalent increase in the demand for money. Henceforth, for the economy to stay in stable condition, it is important that the increase in the demand for money is matched by the similar increase in the supply. Consequently, if the increase in the demand for money is not met by the increase in the corresponding supply, this

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Many assume an individual’s valuation scale, which is in his head, determines his choices. The decision to buy or not to buy a particular good is subjective valuation. Since the buying of goods is not linked to any particular goal, this buying is of a random nature. From this it may appear that subjective valuations are of an arbitrary nature. But is this the case?According to Murray Rothbard, valuations do not exist independently. Valuations are not even primarily about the “things” valued. Valuation is the outcome of the mind valuing things. It is a relation between the mind and things. According to Carl Menger, an individual ranks goods in accordance to the importance of serving a given subjective goal. Various ends that an individual finds important in a moment are valued in a

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Many economists wrongly assume economic activity is accurately presented as a circular flow of money. Spending by one individual becomes part of the earnings of another individual; spending by another individual becomes part of the first individual’s earnings.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

For most commentators, a “stable price level” is the key for economic stability. For instance, let us say that there is a relative increase in consumer demand for potatoes versus tomatoes. This relative increase is depicted, all things being equal, by the relative increase in the price of potatoes. To be successful, businesses must pay attention to consumer demand. Failing to do so is likely to lead to losses. Hence, by paying attention to relative changes in prices, producers are likely to increase the production of potatoes versus tomatoes.According to many economists, if the “price level” is not “stable,” then the visibility of the relative price changes becomes blurred and, consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make

For most commentators, a “stable price level” is the key for economic stability. For instance, let us say that there is a relative increase in consumer demand for potatoes versus tomatoes. This relative increase is depicted, all things being equal, by the relative increase in the price of potatoes. To be successful, businesses must pay attention to consumer demand. Failing to do so is likely to lead to losses. Hence, by paying attention to relative changes in prices, producers are likely to increase the production of potatoes versus tomatoes.According to many economists, if the “price level” is not “stable,” then the visibility of the relative price changes becomes blurred and, consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

According to the Austrian Business Cycle Theory (ABCT), the artificial increase in the money supply via central bank expansionary monetary policy lowers the market interest rate. This, in turn, causes the market interest rate to deviate from the natural rate, determined by the market. Consequently, this leads to the boom-bust cycle. Understanding this, on the gold standard, where money is gold and—assuming that there is no central bank—an increase in the supply of gold will also result in the lowering of the market interest rates.This would cause a deviation of the market interest rates from the previous interest rate. Consequently, this is going to set in motion a boom-bust cycle. This means that even on the gold standard, without the central bank, we could still have boom-bust cycles.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Popular understandings of economics often attempt to incorporate the methodology of natural sciences as the supposed key to economics. Some economic experts are of the view that the methods employed by the natural sciences, such as advanced mathematics, are important tools for the assessments of historical data to establish the state of an economy.

Assumptions that some economists are employing in their theories appear to be detached from the real world. For example, in order to explain the economic crisis in Japan, Paul Krugman employed a theory based on the assumptions that people are identical and live forever. Whilst admitting that these assumptions are not realistic, Krugman nonetheless is of the view that somehow his theory could be useful in offering solutions to the economic crisis in Japan. Thus, Krugman wrote,The purpose of this paper is to demonstrate possibilities and clarify thinking, rather than to be realistic…. In this model individuals are identical and live forever, so that there are no realistic complications involving distribution within or between generations; output is simply given.If Krugman’s theory is not

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

On September 18, 2024 the Federal Reserve (“Fed”) lowered its policy interest rate target by 0.5 percent to 5 percent. Most commentators, including the Fed chairman Jerome Powell, hold that the lowering of the policy rate is going to strengthen the economy. This way of thinking is based on the view that the lowering of interest rates is going to strengthen the demand for goods and services. As a result, this would strengthen the production of goods and services (i.e., generate economic growth). Supposedly, an increase in the demand precedes an increase in the supply—sets in motion economic production.But is this the case?Why supply precedes demand? In the market economy, producers do not produce everything for their own consumption. Part of their production is used to exchange for the

Individuals are often presented as if a value scale is hard-wired in their heads. Allegedly, this value scale remains the same all the time. As a result, this value scale supposedly instructs individuals in the selection of goods. Were that the case, then it makes sense to attempt to extract this value scale either by means of questionnaires or various psychological tests. Once the value scale is extracted, social scientists could establish how to allocate scarce resources in the most efficient way.According to Murray Rothbard, there can be no valuation without things to be valued. Value is established once an individual’s mind has interacted with a particular entity. The evaluation process then establishes for what end, or purpose, a particular entity could be of use. On this Carl Menger

Why are individuals willing to pay higher prices for some goods relative to other goods? The common reply to this appeals to the laws of supply and demand. But what is behind these laws? To provide a further answer to this question economists refer to the law of diminishing marginal utility. Mainstream economics explains this law in terms of the satisfaction that one derives from consuming a particular good. For instance, an individual may derive vast satisfaction from consuming one cone of ice cream. The satisfaction he will derive from consuming a second cone might also be large but not as large as the satisfaction derived from the first cone. The satisfaction from the consumption of a third cone is likely to diminish further, and so on.From this, mainstream economics concludes that the

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Most experts agree that, through the manipulation of the short-term interest rates, the central bank can also determine the direction of the long-term interest rates. Some popular thinking alleges that the long-term interest rates are the average of the present and the expected short-term interest rates. Hence, it would appear that the central bank is the key in determining the interest rates. But is this valid?Individual time preferences and interest ratesAccording to thinkers such as Carl Menger and Ludwig von Mises, interest is the outcome of the fact that individuals assign a premium to present goods against identical goods in the future (i.e., time preference). The preference is not the result of capricious behavior but because life in the future is not possible without sustaining it

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Many incorrectly assume that the overall economy’s output increases by a multiple of the increase in expenditure by government, consumers, and businesses. For instance, if out of an additional dollar received individuals spend $0.90 and save $0.10, then if consumers spending were to increase by $100 million, it is held that the overall output in the economy is going to increase by the tenfold of the increase in consumers’ expenditure (i.e. by $1 billion). The following example provides the reasoning behind this way of thinking.Because of the increase in consumers’ expenditure by $100 million, retailers’ income increases by $100 million. Retailers, in response to the increase in their income, likewise spend 90% of the $100 million (i.e., they raise expenditure on goods by $90 million). The

Many economists incorrectly assume a growing economy also requires a growing money stock, assuming that economic growth gives rise to a greater demand for money. It is held that failing to increase money to facilitate increased trade will lead to a decline in prices of goods and services, destabilizing the economy and leading to an economic downturn.Some commentators believe that the lack of a flexible mechanism coordinating demand versus the money supply is the major reason why the gold standard leads to instability. The idea is that, relative to the growing demand for money because of growing economies, the supply of gold does not grow fast enough. Thus, to prevent economic shocks from imbalances between the demand and the supply of money, the Fed must make sure that supply and demand

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Some have argued that new technological ideas, unlike material inputs and labor, are not in themselves scarce. Consequently, it is further argued that new ideas for more efficient processes and new products can make continuous economic growth possible. So-called experts, however, are of the view that in a fully competitive environment, firms are likely to be concerned that competitors are going to copy any innovations they introduce. Therefore, it is alleged that firms are likely to become reluctant to make costly investments in research and development.To deal with this problem, “experts” believe that it is necessary to introduce policies, such as subsidies, for research and development. Hence, it is concluded that government policies play a critical role in promoting technological

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

It is widely held that financial asset markets always fully reflect all available and relevant information, and that adjustment to new information is virtually instantaneous. This way of thinking is also known as the Efficient Market Hypothesis (EMH), and is closely linked with the Rational Expectations Hypothesis (REH), which postulates that market participants are at least as good at price forecasting as is any model that a financial market scholar can come up with, given the available information.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

To gain insight into the state of an economy, most economists rely on a common statistic named the Gross Domestic Product (GDP). The GDP looks at the value of final goods and services produced during a particular period, usually a quarter or a year.Using this measurement statistic assumes that what drives the economy is not the production of goods and services, but rather consumption. In GDP, what matters is the demand for final goods and services. Since consumer outlays are the largest part of the overall demand, it is commonly held that consumer demand is the key productive factor in the economy. Because the supply of goods is taken for granted, this framework ignores the various stages of production that precede the emergence of final goods.Usage of GDP assumes goods emerge because of

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

According to some “experts,” there is an urgent need to remove cash from the economy. It is held that cash provides support to the “shadow economy” and permits tax evasion. Another justification for its removal is that, in times of economic shocks, which push the economy into a recession, the run for cash exacerbates the downturn—it becomes a factor contributing to economic instability. Moreover, it is argued that, in the modern world, most transactions can be settled by means of electronic funds transfer. Money in the modern world is allegedly an abstraction.The emergence of moneyMoney emerged because barter could not support the market economy. A butcher, who wanted to exchange his meat for fruit, might not be able to find a fruit farmer who wanted his meat, while the fruit farmer who

According to some commentators, to counter inflation interest rates in the US must increase to a level that effectively restrains the economy. It is held that this increase in interest rates does not have to cause a recession if Fed’s policy makers could orchestrate a “soft landing.” The economy is portrayed as a spaceship that occasionally deviates from a path of “stable” economic growth and “stable” prices. All that is required to fix the problem is for the central bank to give a suitable “push” to the economy (i.e., the spaceship) to bring it back to the right growth path.Thus, if the economy falls into a recession, the central bank is expected to bring it onto the “stable” growth path by artificially lowering interest rates. Conversely, if the economy appears to be “overheated,” the

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Many commentators consider the spread between the long-term interest rate and the short-term interest rate as an important indicator to establish the future course of economic activity. An increase in the spread is seen as pointing toward good economic times ahead. Conversely, a declining spread raises the likelihood of an economic recession.Historically, in the U.S., the differential between the yield on the 10-year T-bill and the federal funds rate was leading the yearly growth rate of industrial production by 12 months (see Figure 1).Figure 1: Year-over-year U.S. industrial production versus 12-month yield curve lag (%)Source: Federal Reserve Bank of St. Louis (FRED)A popular explanation for the determination of the shape of the yield spread is provided by expectations theory. According

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Monopolies are believed to undermine individuals’ well-being, including being the cause of large increases in the prices of goods and services. According to Jean Tirole, the 2014 Nobel winner in economics, monopolies undermine the efficient functioning of the market economy by influencing the prices and the quantity of products, making consumers worse off.
Thus, monopolies supposedly cause market conditions to deviate from the ideal state of “perfect competition.” Effective enforcement of government regulations, then, is needed to control monopolies. Tirole has devised methods to strengthen the regulation of industries dominated by a few large firms.
The ‘perfect competition’ model
In the world of perfect competition, the following features characterize a market:
There are many buyers and

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

The leading monetarist, Milton Friedman, blamed the Federal Reserve System’s policies for causing the Great Depression of the 1930s. According to Friedman, the Fed failed to pump enough reserves into the banking system to prevent a collapse of the money stock. Because of this, Friedman held that M1, which stood at $26.34 billion on March 1930, fell to $19.00 billion by April 1933—a decline of 27.9 percent.Figure 1: US M1 money supply, 1930–33Source: Data from FRED.According to Friedman, as a result of the collapse in the money stock, economic growth followed suit. Year-over-year industrial production by July 1932 fell by over 31 percent (see chart). Also, year over year, the consumer price index plunged. By October 1932, the Consumer Price Index had declined by 10.7 percent.Figure 2:

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

In the late 1960s Edmund Phelps and Milton Friedman challenged the popular view that there can be a sustainable trade-off between inflation and unemployment. In fact, over time, according to PF, loose central bank policies set the platform for lower economic growth and a higher rate of inflation, or stagflation.PF’s Explanation of StagflationStarting from a situation of equality between the current and the expected rate of inflation, the central bank decides to boost the rate of economic growth by raising the growth rate of money supply. As a result, a greater supply of money enters the economy and each individual now has more money at his disposal.Because of this increase, every individual believes he has become wealthier. This raises the demand for goods and services, which in turn sets

Many economic commentators believe increasing the quantity of money can revive an economy. This is based on the view that with more money in their pockets, people will spend more and others follow suit, as they hold that money is a mere means of payments.Money, however, is not the means of payments but rather a medium of exchange. It only enables one producer to exchange his product for the product of another producer. According to Murray Rothbard, “Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.” The means of payments are always goods and services, which pay for other goods and services. Money simply facilitates these payments as a medium of

In order to make the data “talk,” economists utilize a range of statistical methods that vary from highly complex models to a simple display of historical data. It is generally believed that one can organize historical data through quantitative methods into a useful body of information, which in turn can serve as the basis for assessing the economy.Now, it has been observed that declines in the unemployment rate are associated with a general rise in the prices of goods and services. Should we then conclude that decreases in the unemployment rate trigger price inflation? To confuse the issue further, it has also been observed that price inflation is well-correlated with changes in money supply.What are we to make out of all this? How are we to decide which is the right theory? According to

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Why does the dollar bill in our pocket have value? The value of money is established, according to some experts, because the government in power says so. For other commentators, the value of money is on account of social convention.The Difference between Money and Other GoodsDemand for a good arises from its perceived benefit. For instance, individuals demand food because of the nourishment it offers them. With regard to money, individuals demand it not for direct use in consumption but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services. Money is demanded because the benefit it offers is its purchasing power.Consequently, for something to be accepted as money it

Popular thinking says that lending is banking activity. Banks are believed to be responsible for the expansion of credit. However, is this the case?The Meaning of CreditFor instance, take a farmer, Joe, who produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he decides to lend for one year to a farmer named Bob. The unconsumed one kilogram of potatoes that he agrees to lend is his real savings.Note that the precondition of lending is that there must be real savings first. Lending must be fully backed up by real savings.By lending one kilogram of potatoes to Bob, Joe agrees to give up for one year his ownership over these potatoes. In return, Bob provides Joe with a written promise that after one year he will repay 1.1 kilograms of potatoes.

Popular thinking says that lending is banking activity. Banks are believed to be responsible for the expansion of credit. However, is this the case?The Meaning of CreditFor instance, take a farmer, Joe, who produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he decides to lend for one year to a farmer named Bob. The unconsumed one kilogram of potatoes that he agrees to lend is his real savings.Note that the precondition of lending is that there must be real savings first. Lending must be fully backed up by real savings.By lending one kilogram of potatoes to Bob, Joe agrees to give up for one year his ownership over these potatoes. In return, Bob provides Joe with a written promise that after one year he will repay 1.1 kilograms of potatoes.

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

In our modern political culture, many people claim that profits are the outcome of some individuals exploiting other individuals. Hence, anyone who is seen trying to make profits is regarded as an enemy of society and must be stopped before inflicting damage. According to Henry Hazlitt, “The indignation shown by many people today at the mention of the very word profits indicates how little understanding there is of the vital function that profits play in our economy.”Furthermore, Hazlitt held,In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor

Mainstream economists believe our knowledge of the world of economics is elusive, so the criteria for choosing a theory should be its predictive power. If the theory “predicts,” it is regarded as a valid framework to assess the economy. Once a theory fails in that role, the search for a new theory begins.For instance, an economist believes that consumer outlays on goods and services are determined by disposable income. Once this view is validated by statistical methods, it is used to assess the future direction of consumer spending. If the theory fails to produce accurate forecasts, it is either replaced or modified by adding some other explanatory variables. This way of thinking implies that our knowledge of the world of economics is elusive.Since we cannot establish “how things really

The price or the rate of exchange of one good in terms of another is the amount of the other good divided by the amount of the first good. In the money economy, price will be the amount of money divided by the amount of the first good.Suppose two transactions were conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction one shirt is exchanged for $40. The price or the rate of exchange in the first transaction is $1,000 per TV set. The price in the second transaction is $40 per shirt. Could we then establish the average price paid in these two transactions?In order to calculate the average price, we must add these two ratios and divide them by two. However, $1,000 per TV set cannot be added to $40 per shirt, implying that it is not possible to

Some economists believe that the increase in the minimum wage will boost unemployment, while other economists think otherwise. Hence, they believe that raising the minimum wage would raise the living standards of workers.For example, in a study conducted in the 1990s, economists David Card and Alan Krueger examined a minimum-wage rise in New Jersey by comparing fast-food restaurants there and in an adjacent part of Pennsylvania, finding no impact on employment. Other economists, however, found that the increase in minimum wages increased employment. Given the contradictory results, is there an alternative approach to decide whether an increase in the minimum wage will result in an increase or reduction in employment?Can Historical Data Inform Us on How the Economy Works?Note that the

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In an article in the New York Times on March 27, 2018, Paul Krugman argues that economists who believe increases in money supply cause inflation are wrong. According to Krugman, the key factor that sets inflation in motion is unemployment. While a decline in the unemployment rate is associated with an increase in the rate of inflation, an upsurge in the unemployment rate is associated with a decline in the rate of inflation.Krugman believes inflation is about general increases in the prices of goods and services, which we suggest is a flawed definition. To ascertain what inflation really is, we must establish how this phenomenon emerged, tracing it back to its historical origin.The Essence of InflationInflation is an act of embezzlement. Historically, inflation originated when a country’s

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Mises Institute is a tax-exempt 501(c)(3) nonprofit organization. Contributions are tax-deductible to the full extent the law allows. Tax ID# 52-1263436

Some economists believe that the balance of payments is what determines currency exchange rates. In fact, exchange rates are always about the purchasing power of some currencies relative to others.
Original Article: Does the Balance of Payments Determine Exchange Rates?

According to behavioral economics (BE), emotions play an important role in an individual’s decision-making process. For example, if consumers become more optimistic regarding the future, then this is going to send a message to businesses regarding investment decisions. According to BE followers, whether consumers are generally patient or impatient determines whether or not they are inclined to spend or save today.
Behavioral economists emphasize the importance of personality. An emphatic person is regarded more likely to make altruistic choices. Impulsive people are more likely to be impatient and not so good at saving up for their retirement. Venturesome people are more likely to take risks—they will be more likely to gamble.
If emotions are an important factor in the decision-making

It is a common belief that a key factor in determining the currency exchange rate is the balance of payments. An increase in imports increases the demand for foreign currency. To obtain the foreign currency, importers buy it using domestic currency, which strengthens the exchange rate of the foreign currency against domestic money. Conversely, an increase in exports, in which exporters exchange their foreign currency earnings for domestic currency, increases the value of the domestic currency exchange rate against the foreign currency.
In this way of thinking, exporters determine the supply of foreign currency while importers determine the demand for it. Hence, the interaction between supply and demand establishes a foreign currency exchange rate.
Following this logic, one can conclude

Most mainstream economists believe the application of quantitative methods on historical data can explain the state of the economy. Others such as Ludwig von Mises held that the data utilized by economists is a historical display, which by itself cannot provide the facts of economics. Ludwig von Mises wrote, “Experience of economic history is always the experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment.”
To make sense of historical data, economists must have a theory that stands on its own and does not originate from the data itself. Even economists who call themselves “practical” must employ a theory to make sense of historical data. Even seeking correlations between the various pieces of historical data is

Government efforts to expand “aggregate demand” involve new spending and money creation. In reality, these activities destroy wealth in the name of expanding it.
Original Article: Does Government Spending and Money Expansion Create New Wealth or Destroy It?

When the economy goes into a recession, most economic commentators believe that the government and the central bank should take steps to counter the rise in unemployment. Some economists believe that lowering unemployment can be achieved without any cost, given that the unemployed workers are idle. According to Paul Krugman, “If you put 100,000 Americans to work right now digging ditches, it is not as if you are taking those 100,000 workers away from other good things they might be doing. You are putting them to work when they would have been doing nothing.”
But how will such a policy be funded? Who pays the unemployed for digging ditches? It seems that Krugman believes that funding can be easily generated by the central bank via money printing.
Now, funding is not about money as such but

When an economy suffers a recession, some factors of production, such as labor, become unemployed. Keynesians believe that expanding credit and fiat money will bring back full employment. That’s not how an economy works.
Original Article: Can an Easy Money Policy Increase Employment of "Idle Resources"?

Many economists claim that economic growth is driven by increases in the total demand for goods and services, additionally claiming that overall output increases by a multiple of the increase in expenditures by government, consumers, and businesses. Thus, it is not surprising that most economic commentators believe that a fiscal and monetary stimulus will strengthen total demand, preventing the US economy from falling into a recession.
These economists believe that increasing government spending and central bank monetary pumping will increase production of goods and services and strengthen total demand. This means that demand creates supply. However, is this the case?
Why Supply Precedes Demand
In the market economy, producers do not produce solely for their own consumption. Some of their

While the creator of modern portfolio theory was awarded a Nobel Prize, that doesn’t mean the theory isn’t flawed. In fact, it explains very little about investments.
Original Article: Modern Portfolio Theory Is Mistaken: Diversification Is Not Investment

Whenever an economy falls into a recession, many economists point out that the economic slump means there will be idle capital and labor. Resources that could be employed are now unemployed because the economic slump has softened aggregate demand for goods and services.
So-called experts believe the government must increase the overall demand in the economy since stronger demand will permit idle resources to be employed again. Hence, many economists recommend that the central bank adopt an easy monetary stance to strengthen aggregate demand.
It appears to be quite simple: boost expenditure on goods and services and this, in turn, will strengthen the overall output in the economy by the multiple of the expenditure, thanks to the Keynesian multiplier. According to Ludwig von Mises,
Here,

According to modern portfolio theory (MPT), financial asset prices always fully reflect all available and relevant information, and any adjustment to new information is virtually instantaneous. Thus, asset prices respond only to the unexpected part of information since the expected portion is already embedded in prices.
For example, if the central bank raises interest rates by 0.5 percent, and if market participants anticipated this action, asset prices will reflect this expected increase prior to the central bank’s raising interest rates. Note that once the central bank lifts the interest rate by 0.5 percent, this increase will have no effect on asset prices since stock prices have already adjusted. However, should the central bank raise interest rates by 1 percent, rather than the 0.5

According to the post-Keynesian School of Economics economist Hyman Minsky, the capitalist economy has an inherent tendency to develop instability that culminates in a severe economic crisis. The key mechanism that pushes the economy toward a crisis is the accumulation of debt.
According to Minsky, during “good” times businesses in profitable sectors of the economy are rewarded for increasing their debt levels. The more one borrows, the more profit one seems to make. The rising profit attracts other entrepreneurs and encourages them to raise their debt levels.
Since the economy is doing well and borrowers show visible improvements in their financial health, lenders are more eager to lend. Over time, however, the pace of debt accumulation starts to rise much faster than the borrower’s

According to mainstream economists, the expectation of inflation leads to higher prices. That is impossible, however, because actual inflation involves real increases in the money supply.
Original Article: Inflationary Expectations Do Not Cause Inflation

Econometric models are constructed with the idea that they can be substituted for authentic human action. Not surprisingly, they fail badly.
Original Article: Can Econometric Models Provide a Laboratory Setting for Economic Analysis?

Many people believe that a general increase in stock prices is an important factor in economic growth. However, this is a questionable observation.
The view that the stock market drives economic growth originates from the observation that changes in stock prices precede changes in economic data. We suggest that various economic indicators are heavily influenced by money supply, which also drives stock prices.
The price of something is the amount of money asked for per unit. When an increased money supply enters a market, more money is being paid for those goods, which means the prices of those goods have increased. Furthermore, when money is increasing in supply, it does not move instantly to all markets. Instead, it moves from one market to another with time lags. Furthermore, the time

Many economists believe that inflationary expectations cause general increases in prices. For instance, if there is a sharp increase in oil prices, people will form higher inflationary expectations that set in motion general increases in the prices of other goods and services. According to the former Federal Reserve chairman Ben Bernanke, “Undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.”
Economists believe that if expectations could be made less responsive to various shocks, then over time this would mitigate the effects of these shocks on the momentum of the prices of goods and services. Many economic commentators think that central bank policies can bring inflationary expectations to a

Forget the other mainstream explanations for interest. Time preference explains this phenomenon and gives a true picture of why interest exists in the first place.
Original Article: Time Preference Is the Key Driver of Interest Rates

Econometric model building attempts to produce a laboratory with controlled variables. By means of mathematical and statistical methods, an economist establishes functional relationships between various economic variables.
For example, personal consumer outlays are related to personal disposable income and interest rates, while fixed capital investments are explained by the past stock of capital, interest rates, and economic activity. A group of such estimated relations constitutes an econometric model.
A comparison of the goodness of fit of the dynamic simulation versus the actual data is an important criterion in assessing the reliability of a model. (In a static simulation, the model is solved using actual lagged variables. In a dynamic simulation, the solution is obtained by employing

Many economists, including Milton Friedman, have claimed that reality is elusive and that one cannot know its true nature. Most mainstream economists also believe that data gives us the state of the economy. By inspecting numbers such as gross domestic product (GDP) or the consumer price index, only then can an economist accurately assess the state of economic conditions.
Ludwig von Mises and the Austrian School of Economics have had a different view. According to Mises, the data is a historical display and, by itself, cannot provide the facts regarding the real world. To make sense of the data, one needs to have a theory beforehand that will allow one to interpret the data, and the theory must originate from something real that cannot be refuted. A theory resting on the foundation that

The field of behavior economics downplays the role of purposeful praxeology in economics. Austrian economics does not make that error.
Original Article: Reason versus Emotion in Economics: A Praxeological Response

By popular thinking, whenever the central bank raises the growth rate of the money supply through the buying of financial assets such as Treasuries this pushes the prices of Treasuries higher and their yields lower. This is labeled as the monetary liquidity effect. This effect is inversely correlated with interest rates.
Furthermore, an increase in the money supply after a time lag strengthens economic activity and this pushes interest rates higher. Note that we have here a positive correlation between economic activity and interest rates.
After a much longer time lag, the increase in the growth rate of money supply is starting to exert an upward pressure on the prices of goods and services. Once prices begin to move higher, the inflation expectations effect emerges. Consequently, this is

The New York Federal Reserve said on Tuesday, September 5, 2023, that the estimate for the neutral rate for Q2 has eased to 0.57 percent from 0.68 percent in Q1. Analysts typically translate that rate into a real-world setting by adding the neutral rate to the Fed’s 2 percent inflation target. The current reading suggests that a federal funds rate of around 2.5 percent would represent a neutral setting. Given that the Fed’s current target rate range is between 5.25 and 5.5 percent, this suggests that the interest rate policy remains very restrictive.
Based on this, it is quite likely that the Fed will loosen its interest rate stance ahead. This view is further reinforced by the massive increase in the ratio of the federal funds rate target to the neutral rate of 9.2 in Q2 this year from

Popular economic thinking holds that consumer spending is the most important driver of the economy. Actually, demand can’t exist without something first being supplied.
Original Article: Why Must Supply Precede Demand? Understanding Economic Foundations

According to a relatively new economics field called Behavioral Economics (BE), one’s emotional state rather than reason influences their economic decisions. Vernon Smith, the BE economist who won a Nobel in economics, wrote:
People like to believe that good decision making is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.
Whether individuals are generally patient or impatient determines whether or not they are inclined to spend or save today, according to BE. If they are more patient, then they disposed to save more.
Furthermore, an

Much of modern neoclassical economic theory depends upon assumptions that do not reflect real world conditions. Austrian economists, however, know that realistic assumptions matter.
Original Article: Economics and the Real World

According to popular thinking, the definition of money is flexible. Sometimes the money supply could be M1 (currency and demand deposits); at other times it could be M2 (all of M1, plus savings deposits, time deposits, and money market funds) or some other M. According to popular thinking, what determines whether M1, M2, or some other M is considered the money supply is whether it is well correlated with key economic data such as the gross domestic product (GDP).
However, since the early 1980s, correlations between various definitions of money and the GDP have broken down. The reason for this breakdown, I have suggested, is the financial deregulation that made the demand for money unstable. Consequently, the usefulness of money supply as a predictor of economic activity has significantly

Keynesians claim that the source of economic growth is consumer spending. Austrians know that net savings are the key to a growing economy.
Original Article: Real Economic Growth Depends on Savings

While central banks use administered interest rates in hopes of emulating the natural rate, these efforts are always going to fail. Without free markets, there is no natural rate.

Original Article: The Central Bank Policy Interest Rate vs the Natural Rate

In the market economy, wealth generators do not produce everything for their own consumption. Part of their production is used in exchange for the produce of other producers. Hence, in the market economy, production precedes consumption.
This means that something is exchanged for something else. This also means that an increase in the production of goods and services sets in motion an increase in the demand for goods and services.
According to David Ricardo,
No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the

In the wake of bad news on inflation, the Federal Reserve is pushing up interest rates. However, a Fed-induced higher rate is not the same as an interest rate decided by the market.

Original Article: Why the Fed’s Tight Rate Stance Damages the Economy

The US consumer sentiment index, compiled by the University of Michigan, fell to 69.5 in August from 71.6 in July. A weakening consumer sentiment index is seen as indicating a potential downturn in consumer spending and the economy in general.
Most economic commentators agree that individual consumption rather than saving is the key to economic prosperity. Saving, they believe, hinders economic growth because it coincides with weakening demand for goods. In this theory, economic activity is depicted as a circular flow of money in which one individual’s spending is part of the earnings of another.
If, however, individuals become less confident about the future, they are likely to cut back on their outlays and hoard more money, thereby diminishing the earnings of some other individual, who

Economists and political elites fondly claim that economic growth is due to increased technological knowledge. That is only partly true.

Original Article: Does Technical Knowledge Always Lead to Economic Growth?

According to many commentators, the Fed’s monetary policy, which aims at price stability, is the key factor in attaining stable economic growth. They claim that what prevents the attainment of price stability are fluctuations in the federal funds rate relative to the neutral interest rate, also known as the natural interest rate. Under this view, since the natural interest rate is consistent with stable prices and a balanced economy, Fed policymakers should steer the federal funds rate toward it.
This theory has its origins in the writings of British economist Henry Thornton (1760–1815) and was further articulated by Swedish economist Knut Wicksell in the late nineteenth century.
Knut Wicksell’s Theory of Price Stability
The heart of Wicksell’s theory is the natural interest rate, which he

On August 16, 2023, the Federal Reserve expressed concern about the pace of inflation, saying future rate hikes could be necessary if conditions do not change. Currently, the federal funds target rate is between 5.25 and 5.50 percent, the highest level in more than twenty-two years.
Mainstream economists and journalists think about inflation in terms of consumer prices. To counter a general increase in prices, they believe, the central bank should raise interest rates, which supposedly weakens the demand for goods and services and slows the growth rate of the Consumer Price Index.
But is inflation, at its core, really about the prices of goods and services? Examining the origin of inflation is an essential first step toward answering this question.
The Essence of Inflation
Inflation may be

While many economists claim that high overall debt levels can lead to economic recessions, irresponsible government spending and money expansion are the real culprits.

Original Article: "Easy Money Is a Much Bigger Economic Problem than Debt"

Many economists believe that technical knowledge is the key to economic growth. If this is the case, why do third world economies continue to experience poverty, since these economies can access the same technical knowledge as the developed world? Therefore, technical knowledge being the key to economic growth is not the case as economic growth depends upon the pool of consumer goods.
Pooling Consumption Goods
To maintain life and well-being, man must have at his disposal an adequate amount of final consumer goods. These goods, however, are not readily available—they have to be extracted from nature. Without tools at his disposal, man can only secure from nature the minimum goods for his survival.
The current state of available goods determines the creation of labor-enhancing tools. If the

Too many economic commentators claim that monopolies are the cause of inflation. Austrian economic analysis shows that this is impossible.

Original Article: "Do Monopolies Cause Inflation?"

In contrast to the imaginary way that mainstream economists present value, Austrian economists properly use ordinal rankings to determine value.

Original Article: "How People Determine the Value of a Good"

Many economic commentators view debt as a major risk factor as far as economic health is concerned. This way of thinking has its origins in the writings of Irving Fisher. According to Fisher, the high level of debt runs the risk of setting in motion deflation and, in turn, a severe economic slump. According to Fisher, the high level of debt sets in motion the following sequence of events.
Stage 1: The debt liquidation process is set in motion because of random shocks; for instance, a sudden, large fall in the stock market. The act of debt liquidation forces individuals into the distressed selling of assets.
Stage 2: Because of the debt liquidation, the money stock starts shrinking and this, in turn, slows down the velocity of money.
Stage 3: A fall in the money stock leads to a decline in

The yearly growth rate of the consumer price index jumped from 5.4 percent in June 2021 to 9.1 percent in June 2022. Some economists attributed this increase to monopolies. According to Business Insider, economists at the Federal Reserve Bank of Boston have claimed that monopolies help keep the prices of goods and services high.
Most economists believe that monopolies make markets less efficient by influencing the prices and the quantity of products. Efficiencies emerge because monopolies deviate from the ideal state of the market as depicted by the “perfect competition” framework.
The “Perfect Competition” Framework
In the world of perfect competition, a market has the following features:
There are many buyers and sellers in the market.Goods are homogeneous.Buyers and sellers are

Why do individuals pay higher prices for some goods than others? The common reply references laws of supply and demand, but what are these laws? The answer is found in the law of diminishing marginal utility.
Most economists explain this law by describing the satisfaction one derives from consuming a good such as an ice cream cone. The satisfaction derived from consuming a second cone might be less than the satisfaction derived from the first cone, and so on. Mainstream economics concludes that the more of any good we consume in each period, the less satisfaction, or utility, we derive out of each additional unit, so the price that one is willing to pay per unit also declines.
By quantifying utility, economists can introduce mathematics here to determine the additional satisfaction to

Keynesian economists believe that recessions occur because of a weakening in aggregate demand, so boosting demand will end the downturn. Whenever an economy shows signs of weakness, most experts believe that increasing aggregate demand will prevent the economy from sliding into a recession. Since private spending is declining, Keynesians say the government should counterbalance this decline by increasing government spending on goods and services.
Demand is constrained by the ability to produce goods. The more goods that an individual can produce, the more goods he can acquire. The same can be said for the economy at large because what drives an economy is not demand but rather the production of goods and services.
Producers, not consumers, are the engine of economic growth. Obviously, a

To explain Japan’s economic problems, Paul Krugman employed a model that assumes people are identical and live forever. While admitting that the model is not realistic, Krugman nonetheless argued that his model could still offer solutions to the crisis.
In The Philosophical Origins of Austrian Economics, David Gordon wrote that Eugen von Böhm-Bawerk believed economic concepts must originate from reality and should be traced to their ultimate source. If one cannot trace them to their source, the concepts are meaningless.
Similarly, Ayn Rand suggested that concept formations are not arbitrary. The role of concepts is to integrate relevant existents, while the role of definitions is to identify the essence of the existents of a concept. According to Rand:
A definition is a statement that

Many economists believe that economics must emulate the physical sciences with controlled experiments to be credible. Econometric models, they claim, can fulfill the role of laboratory experiments.
Through mathematical and statistical methods, an economist supposedly establishes relationships between various economic variables. For example, personal consumer outlays are related to personal disposable income and the interest rates, while capital expenditure is explained by the past stock of capital, the interest rates, and economic activity. Various estimated relations—i.e., equations, which are grouped together—constitute an econometric model.
A comparison of the model’s dynamic assumptions versus the data establishes the model’s reliability. (In a static simulation, the model is solved

According to some commentators, the US banking crises is over, or at least can be easily managed by the Federal Reserve System. In addition, the Fed chairman has vouched for the health of the US banking sector.
However, the banking crisis is likely in its early stages. What has started as the collapse of regional banks is likely to spread to national banks. The key reason for that is the decline in the pool of savings and continuation of fractional reserve lending in which banks are legally permitted to use money placed with them in demand deposits in lending activities. Banks treat deposits as though they were loaned to them.
Although permitted by law, from an economic point of view, this results in money creation leading to consumption not supported by production, diluting the pool of

Can the injection of new money into the economic system enhance economic growth? Not really. Increasing (or decreasing) the money supply affects the demand for money but doesn’t make us wealthier.

Original Article: "Understanding Relationships between Money Supply and Liquidity"

Monetarists believe there is an optimum growth rate of money. However, a fiat money system itself is unstable, so there is no optimum growth rate.

Original Article: "Is There an Optimum Growth Rate of Money?"

The most popular measure of economic growth is GDP. However, GDP movement is driven by changes in the money supply, not real economic factors.

Original Article: "Does GDP Present an Accurate Picture of the Economy? Not Likely"

In a market economy, money is the medium of exchange; producers exchange their goods for money and then exchange that money for other goods. As the production of goods increases, the demand for money expands. Conversely, as economic activity slows down, the demand for money follows suit.
Price changes also affect the demand for money. An increase in the prices of goods and assets increases the demand for money, since people now demand more money to purchase goods that are more expensive. Conversely, a fall in goods prices results in less demand for money.
According to Ludwig von Mises in his book Human Action:
The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight

A central tenet of Keynesian economics is that governments must run budget deficits to stimulate economic growth. But government spending actually shrinks the economy.

Original Article: "Government Budget Deficits Cannot Stimulate True Economic Growth"

It is widely held that a growing economy requires a growing money stock because economic growth increases demand for money. Many economists also believe that failing to accommodate the increase in the demand for money leads to a decline in consumer prices. This could destabilize the economy and produce an economic recession or even a depression.
Some economists who follow Milton Friedman—also known as monetarists—want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage is maintained over a prolonged period, it will create economic stability.
The idea that money must grow to support economic growth implies that money sustains economic activity. However, money’s main job is to be a medium of exchange, not sustain economic activity.

To understand the economy, most financial experts and commentators rely upon gross domestic product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year.
This statistic is constructed with the view that consumption, not wealth production, drives an economy. Since consumer outlays are the largest part of the overall demand, it is assumed that consumer demand drives economic growth, a fundamental assumption in Keynesian economics.
The belief is that demand for goods gives rise almost immediately to their supply. This framework, however, ignores the stages of production that precede the emergence of the final good. It is not enough to demand goods; there must be the means to accommodate the demand. Real

Keynesian economists say that during an economic slump, the government must run large budget deficits in order to keep the economy going. In contrast, Austrian economists maintain that increased budget deficits are usually monetized, leading to general price increases. Therefore, from this perspective, the government should avoid increasing budget deficits and instead balance the budget.
Government Spending Takes Resources from Wealth Generators
Governments do not generate wealth, as government spending uses resources that must be taken from people who generate wealth. This, in turn, undermines the wealth-generating process of the economy. This means that the effective level of tax is the size of the government.
For instance, if the government plans to spend $3 trillion and collects $2

Keynesian economists claim that cutting costs in a business slowdown is counterproductive. As usual, the Keynesians have it backward.

Original Article: "Does Cost Cutting Undermine Economic Growth?"
This Audio Mises Wire is generously sponsored by Christopher Condon.

Keynesian economists claim that cost cutting by companies in order to protect profits can lead to an economic slump. They believe that if everyone tries to cut costs, demand from retrenched workers for goods and services weakens, and as a result corporate revenues and profits come under pressure. This necessitates new layoffs, and the downward spiral accelerates.
Popular thinking presents economic activity as a circular flow of money: spending by one individual becomes part of the earnings of another individual, and spending by this other individual becomes part of the first individual’s earnings. The idea is that recessions occur because consumers—for unknown reasons—cut expenditures and increase savings.
To Be Successful, Businesses Must Abide by Consumer Demand
But successful businesses

Keynesians and fellow travelers hold the Phillips curve to be sacrosanct. But because the Phillips curve cannot establish causality, it is useless as economic theory.

Original Article: "The Phillips Curve Is an Economic Fable"
This Audio Mises Wire is generously sponsored by Christopher Condon.

Keynesians and other economists believe the central bank can influence economic growth via monetary policy but that it may bring inflation. Thus, if the goal is faster economic growth and lower unemployment, then the economy may pay the price with a higher inflation rate. There is supposedly a tradeoff between inflation and unemployment, described by the Phillips curve: the lower the unemployment rate, the higher the rate of inflation; conversely, higher unemployment rates come with less inflation.
Some commentators maintain that once the unemployment rate falls below what’s known as the nonaccelerating inflation rate of unemployment (NAIRU), it sets off an inflationary spiral. This acceleration in the inflation rate takes place through increases in the demand for goods and services,

At the heart of Keynesian business cycle theory is the so-called liquidity trap. Contra Keynes, however, economies don’t falter because a sudden increase in the demand for money.

Original Article: "Forget the Liquidity Trap—Loose Monetary Policies Cause Recessions"
This Audio Mises Wire is generously sponsored by Christopher Condon.

Advocates of Keynesian economics believe the Federal Reserve should pursue policies that will prevent the possible decline of the economy into a liquidity trap. But what is a liquidity trap?
Economic activity often is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings. Recessions, by this thinking, occur because consumers—for whatever reason—have decided to cut spending and increase their savings.
For instance, if people become less confident about the future, they are likely going to lower their outlays and hoard money. Therefore, if an individual spends less, this is going to worsen the situation of some other individual, who in

According to popular thinking, the government’s definition of money is of a flexible nature. Sometimes it could be M1, and at other times it could be M2 or some other M money supply. M1 includes currency and demand deposits. M2 includes all of M1, plus savings deposits, time deposits, and money market funds.

The heart of economic growth is an expanding subsistence fund, or the pool of real savings. This pool, which is composed of final consumer goods, sustains individuals in the various stages of the production process. The increase in the pool of real savings permits the expansion and the enhancement of the infrastructure, and this strengthens economic growth.

Keynesians believe that economic growth can occur only with an expanding supply of money. Growth doesn’t need more money; it needs more savings.

Original Article: "Economic Growth Requires Savings, Not Money Pumping"
This Audio Mises Wire is generously sponsored by Christopher Condon.

A relatively new area of study in economics, behavioral economics, has started to gain popularity. The behavioral economics framework emerged because of dissatisfaction with the neoclassical theory regarding consumer choice. A major problem with the neoclassical theory is that human beings are presented as if hardwired with a scale of preferences. Regardless of circumstances, this scale is considered to remain the same at all times.
Mainstream economics argues that, if preferences are constant, it is possible to compress preferences into a mathematical formulation called a utility function. Similarly, the assumption of constancy is considered an important characteristic of rationality.
According to behavioral economics, however, human beings are not considered rational actors. behavioral

The U.S. personal savings rate eased in September to 3.1 percent from 3.4 percent in August. In September 2021 the savings rate stood at 7.9 percent. By popular thinking, a decline in the savings rate during an economic slowdown is regarded as supporting economic activity.

The yearly growth rate of the Consumer Price Index (CPI) fell to 7.7 percent in October from 8.2 percent in September. Note that in October 2021 the yearly growth rate stood at 6.2 percent. Some experts are of the view that it is quite likely that the momentum of the CPI might have peaked.

According to the Austrian business cycle theory, the boom-bust cycle emerges in response to a deviation in the market interest rate from the natural interest rate, or the equilibrium interest rate. As a rule, it is held, the tampering with market interest rates by the central bank sets the boom-bust cycle in motion.

Most economists believe that a general decline in the prices of goods and services is bad news because it is associated with major economic slumps such as the Great Depression. In July 1932, the yearly growth rate of US industrial production stood at –31 percent whilst in September 1932 the yearly growth rate of the US Consumer Price Index (CPI) stood at –10.7 percent.

It is not possible to establish the conditions of the economy by just inspecting the data as a whole, according to many economists. What is required, instead, is to break the data into its key components, which supposedly will enable economists to identify the true state of the economy.

For many commentators, a change in the shape of the differential between the long-term interest rate and the short-term interest rate—i.e., the yield spread provides an indication of the likely direction of the economy in the months ahead. Thus, an increase in the yield spread raises the likelihood of a possible strengthening in economic activity in the months to come.

It is commonly held that prices of goods and services can produced by means of supply and demand curves. These curves describe the relationship between the prices and the quantity of goods supplied and demanded. Within the framework of supply-demand curves, an increase in the price of a good is associated with a fall in the quantity demanded and an increase in the quantity supplied.

Popular thinking says that banks are the key factor in the expansion of credit. However, is this really the case? For example, take a farmer Joe that produces two kilograms of potatoes. For his own consumption, he requires one kilogram, and lends the rest for one year to a farmer Bob. The unconsumed one kilogram of potatoes that he agrees to lend is his savings.

Many mainstream economists believe that economic stability refers to an absence of excessive fluctuations in the overall economy. An economy with constant output growth and low and stable price inflation is likely to be regarded as stable, while an economy with frequent boom-bust cycles and variable price inflation would be seen as unstable.

Most commentators believe a growing economy requires a growing money stock because economic growth gives rise to a greater demand for money, which then must be accommodated. Failing to do so will lead to a decline in prices of goods and services which, in turn, destabilizes the economy and leads to a recession or, even worse, depression.

Instability in financial markets has brought back the ideas of post-Keynesian school of economics (PK) economist Hyman Minsky. Minsky held that the capitalist economy inherently is unstable, culminating in severe economic crisis, accumulation of debt being the key mechanism pushing the economy toward a crisis.

Speaking at Jackson Hole, Wyoming, on August 26, 2022, the chair of the Federal Reserve, Jerome Powell, said the Fed must continue to raise interest rates—and keep them elevated for a while—to bring the fastest inflation in decades back under control.

Most economic commentators believe that historical data is the key in assessing the state of the economy. Thus, if a statistic such as real gross domestic product or industrial production displays a visible increase, then the economy is stronger. Conversely, a decline in the growth rate says the economy is weakening.

Some experts hold that the key to economic growth is to strengthen the labor market, which is based on the view that because of the reduction in the number of unemployed workers, more individuals can afford to increase spending. As a result, economic growth follows suit.

According to Federal Reserve minutes from last month, Fed officials expressed a willingness to push ahead with a tight interest rate stance to eradicate the inflationary menace. For most commentators, inflation is seen as a general increase in the prices of goods and services, so raising interest rates will soften the increase in prices.

A decline in the yearly growth rate of the Consumer Price Index (CPI) to 8.5 percent in July from 9.1 percent in June has prompted many commentators to suggest that inflation has likely peaked. If this assessment is valid then it is held Fed policy makers are unlikely to push for an aggressive interest rate tightening in the months ahead.

According to many economic commentators, an effective way to generate economic growth is through the lowering of taxes. The lowering of taxes, it is held, will place more money in consumers’ pockets, thereby setting in motion an economic growth.

According to the National Bureau of Economic Research (NBER), the institution that dates the peaks and troughs of the business cycles: A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP [gross domestic product], real income, employment, industrial production, and wholesale-retail sales.

In the July 26 Financial Times article entitled “Is the Dollar about to Take a Turn?,” Barry Eichengreen writes that the US dollar has had a spectacular run, having risen more than 10 percent against other major currencies since the start of the year. According to Eichengreen, the key reason behind the spectacular strengthening in the US Dollar is that the Federal Reserve has been raising interest rates faster than other big central banks, drawing capital flows toward the US.

According to the New York Times (NYT) article July 17, 2022, “The pioneering economist says our obsession with growth must end,” a major threat to our living standard is the obsession with economic growth. Herman Daly—an economist that has been exploring for more than fifty years the relationship between economic growth and individuals’ living standards—is of the view that the pursuit of economic growth causing ecological harm.

Most economists see GDP as a snapshot of the performance of the economy. However, it is better understood as a misleading statistic which fails to accurately describe what really is happening economically.

By popular thinking, the key driver of economic growth is the increase in total demand for goods and services. It is also held that overall output increases by a multiple of the increase in expenditure by government, consumers and businesses.

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year.

In the recent Wall Street Journal article “Inflation Surge Earns Monetarism Another Look,” Greg Ip writes that a recent surge in inflation is not likely to bring authorities to reembrace monetarism. According to Ip, money supply had a poor record of predicting US inflation because of conceptual and definitional problems that haven’t gone away.

In his June 21 New York Times article “Is the Era of Cheap Money Over?,” Paul Krugman argues against the view that the Fed has kept interest rates artificially low for the past ten to twenty years.

Currently the world is on a fiat money standard—a government-issued currency that is not backed by a commodity such as gold. The fiat standard is the primary cause behind the present economic instability, and is tempted to suggest that a gold standard would reduce instability. The majority of experts however, oppose this idea on the ground that the gold standard is in fact a factor of instability.

According to the June 1, 2022, Financial Times, Janet Yellen, the US Treasury secretary conceded she was wrong last year about the path inflation would take.

The occurrence of stagflation is associated with a situation of general strengthening in the momentum of prices while at the same time the pace of economic activity is declining. A famous stagflation episode occurred during the 1974û75 period, as year-on-year industrial production fell by nearly 13 percent in March 1975 while the yearly growth rate of the Consumer Price Index (CPI) jumped to around 12 percent.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. 

Many economists believe that during an economic slump government should run large budget deficits in order to keep the economy going with increases in government outlays, with the consequent budget deficit giving individuals more disposable money.

For most economists and politicians, the role of central bank authorities is to make the economy as stable as possible. What do they mean by economic stability? Economic stability refers to an absence of excessive fluctuation, so an economy with constant output growth and low and stable price inflation is likely to be regarded as stable.

On April 19, 2022, at the Economic Club in New York, the Chicago Federal Reserve Bank president Charles Evans said the Fed is likely to lift by year end its federal funds rate target range close to the neutral range of between 2.25 to 2.50 percent. Furthermore, on April 21, 2022, Fed chairman Jerome Powell corroborated this by stating that the Fed wants to raise its benchmark rate to the neutral level.

For most experts, deflation is bad news since it generates expectations for a continued decline in prices, leading consumers to postpone the purchases of present goods, since they expect to purchase them at lower prices in the future. Consequently, this weakens the overall flow of current spending and this, in turn, weakens the economy.

The conventional view among mainstream economists, as presented by Milton Friedman, is that three factors determine market interest rates: liquidity, economic activity, and inflationary expectations. In this viewpoint, whenever the central bank raises the growth rate in the money supply by buying financial assets such as Treasurys, this pushes the prices of Treasurys higher and their yields lower.

At the end of March this year the difference between the yield on the ten-year Treasury bond and the yield on the two-year Treasury bond fell to 0.010 percent from 1.582 percent at the end of March 2021.

In the New York Times article “How High Inflation Will Come Down,” Paul Krugman suggests that the key for future inflation is inflation expectations. Krugman does not think that currently inflation expectations are comparable to the 1980s.

Most people believe lending is associated with money. But there is more to lending. A lender lends savings to a borrower as opposed to "just money." Let us explain. Take a farmer, Joe, who has produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he agrees to lend for one year to another farmer, Bob. The unconsumed kilogram of potatoes that he agrees to lend is his savings. 

According to the popular way of thinking, our knowledge of the economy is elusive. Consequently, the best that we can do is to attempt to ascertain some facts of economic reality by applying various statistical methods to the so-called macro data.

In the National Income and Product Accounts (NIPA), savings are established as the difference between disposable money income and monetary outlays. Disposable income is defined as the summation of all personal money income less tax payments to the government. Personal income includes wages and salaries, transfer payments, income from interest and dividends, and rental income.
The NIPA framework is based on the Keynesian view that spending by one individual becomes part of the income of another individual. The spending of the purchaser is the income of the seller. From this, it follows that spending equals income.
So if people maintain their spending, this keeps overall income coming in. Now, an increase in the supply of money affects the total amount of money spent. Consequently, the

Recently, a relatively new economics called behavioral economics (BE) has started to gain popularity. Its practitioners, such as Daniel Kahneman, Vernon Smith, and Richard Thaler, were awarded Nobel Prizes for their contribution in the field of BE.

Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher profits. (See the New York Times article “Democrats Blast Corporate Profits as Inflation Surges,” January 3, 2022). Note that the yearly growth rate of the Consumer Price Index jumped to 6.8 percent in November 2021 from 1.2 percent the year before.

Most experts tend to assess the strength of an economy in terms of real gross domestic product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year. The GDP is formed as the summation of consumer outlays on goods and services; outlays by businesses on plants, machinery, and inventories; outlays by government; and exports less imports.

The price of the euro in terms of the US dollar closed at 1.135 in November, against 1.156 in October and 1.193 in November last year. The yearly growth rate of the price of the euro in US dollar terms fell to –4.8 percent in November from –0.7 percent in October. Some commentators are of the view that the US dollar is likely to weaken against the euro (i.e., the price of the euro in US dollar terms is likely to increase).

According to the popular narrative, the role of the central bank is to navigate the economy along the so-called path of economic stability. By this way of thinking if various shocks cause the economy to deviate from this path, then it is the role of central bank policy makers to offset these shocks.

Contrary to popular thinking, there is no such thing as a price level that should be stabilized by the central bank in order to promote economic prosperity.

Many economic commentators are in favor of phasing out cash. They are of the view that cash provides support to the shadow economy and permits tax evasion. It is also held that in times of economic shocks that push the economy into a recession the rising demand for cash exacerbates the downturn—it becomes a factor of instability.

One of the mandates of the Federal Reserve System is to attain price stability. It is held that price stability is the key as far as economic stability is concerned. What is it all about?

Writing in the Investment Monitor on March 18, 2021, Klaus Schwab, the founder of the World Economic Forum, was urging the replacement of the present economic system. According to Schwab, the present system is deficient, since it only benefits a small minority of the population while leaving all the others at a visible disadvantage.

Most commentators label increases in the prices of goods and services over a period of time as inflation. Ludwig von Mises however, held that the popular definition of inflation is erroneous.

It is not possible to replace productive credit by means of the easy monetary policies of the central bank. If this could have been done, then the world would have already ended poverty.

Original Article: "’Idle Resources’ Are Problems Caused by the Central Bank"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Why do individuals desire to have money, which cannot be consumed and produces nothing? To provide an answer to this one must go back in time to establish how money emerged.

Original Article: "Why Does Money Have Value? Not Because the Government Says It Does."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Warum hat der Geldschein in unserer Tasche einen Wert? Einigen Kommentatoren zufolge hat Geld einen Wert, weil die Regierung, die an der Macht ist, dies sagt. Für andere ist der Wert des Geldes auf die gesellschaftliche Konvention zurückzuführen. Dies bedeutet, dass Geld einen Wert hat, weil es akzeptiert wird, und warum wird es akzeptiert?

Why does the dollar bill in our pockets have value? According to some commentators, money has value because the government in power says so. For other commentators the value of money is on account of social convention. What this implies is that money has value because it is accepted, and why is it accepted?

Most economists are of the view that through the inspection of economic data it is possible to identify early warning signs regarding boom bust cycles. What is the rationale behind this way of thinking?

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Most commentators’ regard savings as harmful to economic growth on the ground that savings are associated with fewer outlays. These commentators portray economic activity as a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

According to a popular way of thinking, the central bank can influence the rate of economic expansion by means of monetary policy. It is also held that this influence carries a price, which manifests itself in terms of inflation.

Monetary inflation is just a type of embezzlement. Historically, inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process of minting new coins, the king would lower the amount of gold contained in each coin and return lighter gold coins to citizens.

It is widely held that the central bank is a key factor in the determination of interest rates. By popular thinking, the Fed influences the short-term interest rates by influencing monetary liquidity in the markets. Through the injection of liquidity, the Fed pushes short-term interest rates lower. Conversely, by withdrawing liquidity, the Fed exerts an upward pressure on the short-term interest rates.

The increase in the growth rate of the Consumer Price Index (CPI) has fueled concerns that if the rising trend were to continue the Fed is likely to tighten its interest rate stance. Observe that the yearly growth rate in the CPI climbed to 4.2 percent in April from 2.6 percent in March and 0.3 percent in April 2020.

It is only through the increase in capital goods, i.e., through the enhancement and the expansion of the infrastructure, that labor can become more productive and earn a higher hourly wage. 

Most economists hold that a growing economy requires a growing money stock on the grounds that growth gives rise to a greater demand for money that must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.

[unable to retrieve full-text content]For most experts a key factor that policymakers should be watching is the ratio between actual real output and potential real output. The potential output is the maximum output that the economy could attain if all resources are used efficiently. In Q3 2020, the US real GDP–to–potential US real GDP ratio stood at 0.965 against 1.01 in Q3 2019.

In his writings, Milton Friedman blamed central bank policies for causing the Great Depression. According to Friedman, the Federal Reserve failed to pump enough reserves into the banking system to prevent a collapse in the money stock.1 The adjusted money supply (AMS), which stood at $26.6 billion in March 1930, had fallen to $20.5 billion by April 1933—a decline of 22.9 percent.

An individual’s demand is constrained by his production of goods. The more goods an individual produces, the more of other goods he can secure for himself.

Understood properly,  inflation is not a general increase in prices but is an increase in the money supply "out of thin air" which brings about the impoverishment of wealth generators. When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary.

Following the ideas of John Maynard Keynes and Milton Friedman, many commentators associate economic growth with increases in the demand for goods and services. Both Keynes and Friedman held that the Great Depression of the 1930s was due to an insufficiency of aggregate demand and that thus the way to fix the problem was to boost aggregate demand.

In the New York Times on September 8, 2020, Paul Krugman wrote that. The CARES Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down.

In July this year the US trade balance stood at a deficit of $63.6 billion against a deficit of $51 billion in July last year. Some commentators regard a widening in the trade deficit as an ominous sign for the exchange rate of the US dollar against major currencies in the times ahead.

The US Fed is considering lifting its inflation target above 2 percent in order to revive the economy. Contrary to the accepted practice, the Fed is not expected to raise an alarm if the measured price inflation begins to rise.

In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model building is an attempt to create a laboratory where controlled experiments can be conducted.

As a result of the coronavirus pandemic, most experts are of the view that it is the role of the government and central bank to minimize the damage inflicted by the virus—and the policy response to it—on the economy.

According to popular thinking, not every increase in the supply of money will have an effect on the production of goods. For instance, if an increase in the supply is matched by a corresponding increase in the demand for money, then there will be no effect on the economy.

Most economists hold that a growing economy requires a growing money stock on grounds that growth gives rise to a greater demand for money that must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession, or even worse, depression.

The US personal savings rate jumped to 33 percent in April from 12.7 percent in March and 8 percent in April last year. An increase in savings is regarded by popular economics as less expenditure on consumption. Since consumption expenditure is considered as the main driving force of the economy, obviously a rebound in savings, which implies less consumption, cannot be good for economic activity, so it is held. Saving and wealth—what is the relation?

It is a common belief that sound economics must be based on facts and not on theoretical reasoning as such. Some commentators are dismissive of economic analysis that is not derived from the true data, since it is not describing the facts of reality as depicted by historical data. The use of the free market economy framework, without the central bank and government intervention and with businesses as a foundation to derive valid conclusions, is dismissed as nonsensical.

Inflation is typically defined as a general increase in the prices of goods and services—described by changes in the Consumer Price Index (CPI) or other price indexes. If inflation is a general rise in measured prices, then why is it regarded as bad news? What kind of damage can it inflict? Mainstream economists maintain that inflation causes speculative buying, which generates waste.

The yearly growth rate of the US consumer price index (CPI) fell to 0.4 percent in April from 2 percent in April last year while the annual growth of the producer price index (PPI) plunged to –1.2 percent last month against 2.4 percent in April 2019.

What typifies the phenomenon of the boom-bust cycle is that it is recurrent. What is the reason for this? Loose monetary policies set the platform for various activities that would not emerge without the easy monetary stance. What loose monetary policy does here is to engineer the transfer of real savings from wealth generating activities to artificially stimulated activities, which we can label as bubble activities.

According to a popular way of thinking, monopolies undermine the efficient functioning of the market economy by being able to influence the prices and the quantity of products. Consequently, this undermines the well-being of individuals in the economy. By this way of thinking, the inefficiency emerges because of the deviation from the ideal state of the market as depicted by the “perfect competition” framework.

In response to the coronavirus, central banks worldwide are currently pumping massive amounts of money. This pumping, it is held, is going to arrest the negative economic side effects that the virus-related panic inflicts on economies. As appealing as it sounds we suggest that this view is erroneous.

In the midst of the emerging economic chaos triggered by the COVID-19 coronavirus, individuals are seeking answers from governments as to how to prevent the emerging economic disaster.
Most economic experts are sympathetic to this and are urging the authorities to push massive injections of money. Thus in the US the central bank has embarked on a $2 trillion stimulus.

It is widely held that financial asset prices fully reflect all available and relevant information, and that adjustments to new information is virtually instantaneous. This way of thinking which is known as the Efficient Market Hypothesis (EMH) is closely linked with the modern portfolio theory (MPT), which postulates that market participants are at least as good at price forecasting as any model that a financial market scholar can come up with, given the available information.

Economic fluctuations, also known as business cycles, are seen as being driven by mysterious forces that are difficult to identify. Finn Kydland and Edward C. Prescott (KP), the 2004 Nobel laureates in economics, decided to attempt to find out what these forces were.1 They hypothesized that technology shocks are a major factor behind economic fluctuations and demonstrated that a technology-induced shock can explain 70 percent of the fluctuations in the postwar US data.

According to the Financial Times’s February 20 article “Why Sweden Ditched Its Negative Rate Experiment,” economists are pondering whether Sweden’s central bank experiment with negative interest rate was a success. Sweden’s Riksbank, the world’s oldest central bank, introduced negative interest rates in early 2015.

According to the US Labor Department, worker productivity in the non-farm sector increased at an annual rate of 1.4 percent in the fourth quarter of 2019 after declining by 0.2 percent in the previous quarter. For the year, productivity increased 1.7 percent, up from 1.3 percent in both 2017 and 2018. It was the best annual showing since the 3.4 percent increase in 2010.

In December 2019, the US trade account balance stood at a deficit of $48.9 billion, against a deficit of $43.7 billion in November and $60.8 billion in December 2018.
Most commentators consider the trade account balance the single most important piece of information about the health of the economy. According to the widely accepted view, a surplus on the trade account is considered a positive development while a deficit is perceived negatively. What is the reason for this?

Whenever there are signs that the economy is likely to fall into an economic slump most experts advise that the central bank and the government should embark on loose monetary and fiscal policies to counter the possible economic recession. In this sense, most experts are following the ideas of the English economist John Maynard Keynes.

Most economists are of the view that by means of economic indicators it is possible to identify early signs of an upcoming recession or prosperity. What is the rationale behind this opinion? The National Bureau of Economic Research (NBER) introduced the economic indicators approach in the 1930s.

For most so-called practical economists, information regarding the state of an economy is derived from data. Thus, if an economic statistic such as real gross domestic product or industrial production shows a visible increase, it is considered indicative of a strengthening of the economy. Conversely, a decline in the growth rate is regarded as weakening. It seems that by looking at the data one can ascertain economic conditions. Is this the case, though? The so-called data that analysts are looking at is a display of historical information.

In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality?
According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible to ascertain how the world of economics really works.

Mainstream thinking considers the central bank a key factor in the determination of interest rates. By setting short-term interest rates, the central bank, it is argued, can influence the entire interest rate structure by creating expectations about the future course of its interest rate policy.

A visible weakness in economic activity in major world economies raises concern among various commentators that world economies have difficulties recovering despite very aggressive loose monetary policies. The yearly growth rate of US industrial production stood at minus 1.1 % in October, against minus 0.1% in September, and 4.1% in October last year.

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with governments playing a limited role. Many commentators regard her as a revolutionary thinker that challenges the accepted dogma regarding the role of government in promoting innovations and economic growth.

With interest rates in many countries close to zero or even negative, some commentators are of the view that monetary policy of the central banks are likely to become less effective in navigating the economy. In fact it is held that we have most likely reached a situation that the economy is approaching a liquidity trap. But what does this mean?

According to an article in Bloomberg on November 5, 2019, Milton Friedman’s business cycle theory seems to be vindicated. According to Milton Friedman, strong recoveries are just natural after particularly deep recessions. Like a guitar string, the harder the string is plucked down, the faster it should come back up.

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.

For most financial commentators an important factor that either reinforces or weakens the effect of changes in the money supply on economic activity and prices is the “velocity of money”.

A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).

For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index. According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services.

A Difference of Opinions, In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle.

In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.

In his speech at the New York Federal Reserve of New York on October 5, 2016, the Federal Reserve Vice Chairman Stanley Fischer has suggested that a visible decline in the natural interest rate in the US could be on account of the world glut of saving. According to Fischer, both increased saving and reduced investments have potentially significantly lowered the natural rate of interest.

A fall in the US velocity of money M2 to 1.44 in June from 1.51 in June last year and 2.2 in May 1997 has alarmed many experts. Note that the June figure is the lowest since January 1959.

“We are all Keynesians now, so let’s get fiscal.” This is one view according to Ambrose Evans-Pritchard from The Telegraph who believes the time is right for the UK government to loosen its fiscal stance. He suggests that the “Bank of England has done everything possible under the constraints of monetary orthodoxy to cushion the Brexit shock. It is now up to the British government to save the economy, and the sooner the better,” — argues the economics editor of The Telegraph.

“Experts” Assert that Inflation is an Agent of Economic Growth. For most experts, deflation, which they define as a general decline in prices of goods and services, is bad news since it generates expectations for a further decline in prices.

Once Upon a Time… Prior to 1933, the name “dollar” was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67.

The tenets of the Efficient Market Hypothesis and Modern Portfolio Theory. It is widely held that financial asset markets always fully reflect all available and relevant information, and that adjustment to new information is virtually instantaneous.

If the process of wealth generation is currently in good shape then Britain’s exit from the EU shouldn’t have any negative effect on real economic growth. This, however, might not be the case.
It is likely that the reckless monetary policy of central banks in the UK and the eurozone has inflicted a severe damage to the process of real wealth formation.

  What Determines a Currency’s Value? At the end of March the price of the euro in terms of US dollars closed at 1.1378. This was an increase of 4.7 percent from February when it increased by 0.3 percent. The yearly growth rate of the price of the eu…

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Entrepreneurs need very specific information about their products, markets, customers, and profits. Government macroeconomic data, however, does nothing to assist entrepreneurs to obtain this important information, but only helps justify economic intervention, writes Frank Shostak.This audio Mises Daily is narrated by Keith Hocker.

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Mises Institute is a tax-exempt 501(c)(3) nonprofit organization. Contributions are tax-deductible to the full extent the law allows. Tax ID# 52-1263436