Tuesday, October 21, 2008

Common Errors in Austrian Economics

National debt problem

Paying the national debt would cause deflation, since 40% of the debt goes to central banks as interest payments. Paying the national debt, per se, would not lower average income if each individual proportionally pays his or her income to pay back the debt, since the "value" of money goes up from deflation while paying the debt.

Also, "we" owe no money to pay the debt owed to foreigners. Paying this debt equals collective punishment.

"Adjustment" occurs during a recession

Malinvestment and underinvestment already exist, since the state enforces regulations and taxes that undermine the economy. More generally, if the state exists, then distortion and malinvestment must exist. During a bust, many Misesians view that as "adjustment." "Adjustment" just shifts some malinvestment in one sector to another sector, within the already distorted system. So, in a statist society, one should call the "boom" phase of the business cycle as increased malinvestment, not just malinvestment, since the state always causes malinvestment.

Businesses misled during the "boom" phase

Malinvestment, per se, does not originate from poor business decisions. During the "boom" phase, businesses make sound decisions to invest. Contrary to the Misesian understanding of the business cycle, businesses actually overinvest in long-term assets during the boom phase because it actually profits them.

Inflation causes malinvestment.

Inflation, per se, does not cause increased malinvestment. The lower real interest rates than the "equilibrium" rate causes malinvestment. The lower real interest rates encourage firms to invest in long-term assets at the expense of short-term assets, distorting the "optimal" ratio of long-term assets and short-term assets. Thus, this un-"optimal" equilibrium would result in more opportunity costs for individuals.

Only in the "boom" phase of the cycle, malinvestment occurs. In the "bust" phase, the "adjustment" occurs. The ratio of long-term assets to short-term assets approaches the "optimal" level during the bust. Therefore, the bust phase makes consumers wealthier! Then why do some consumers get poorer in the "bust" phase? The individuals who has a loan during a monetary contraction would not have enough money to pay back to the banks.

So-called: Boom, bust, growth, and recession

The Misesians misnamed the terms such as "boom" and "bust," and "growth" and "recession." Actually the only variables that define the boom and bust phases include violently lowering and increasing interest rates, respectively. Monetary expansion has nothing to do with "booms" and "busts." We should define "boom" and "growth" as lowering interest rates, and define "bust" and "recession" as raising interest rates.

Malinvestment causes loan crises

Note that during a bust phase, one should not view the two concepts: malinvestment and unpayable loans, as related or correlated with one another. In a "bust," malinvestment may occur without a loan crises, and vice versa.

Monetary contraction causes unpayable loans. Monetary expansion, per se, does not cause increased malinvestment. Lower than "optimal" interest rates actually causes malinvestment.

Without monetary expansion, malinvestment may still occur by lowering real interest rates. Conversely, without lower interest rates, loan defaults may still occur due to not enough money to pay the loan from monetary contraction.

Artificially low interest rates

One should also note that in a free society, interest rates will probably decrease, since a free society does not have lending restrictions and taxes that increases interest rates.

Central banks cause depressions

The common Misesian folk thinks that central banks caused the Great Depression. Labor union regulations actually caused the Great Depression. The "closed shop" regulation in labor unions violently forces each individual to join the labor union, even if he or she does not want to. Also, as labor union regulations guarantee a "minimum wage," it would cause unemployment. During a monetary contraction, the real "minimum wages" guaranteed by labor unions increase above the market rate. The forced real wage increases during a monetary contraction makes the employer to fire many, thus causing massive unemployment. Thus, central banks did not cause the Great Depression, labor union regulations did.

Only abolishing minimum wages would abolish unemployment

The common paleolibertarian, especially those at the Ludwig von Mises and the LewRockwell.com institutes, thinks that only minimum wages cause unemployment. Others would refute that by citing high unemployment rates in states that do not have an official minimum wage law, such as Hong Kong. Hong Kong's strong labor union regulations caused their high unemployment rates, even they do not have any official "minimum wage." For a more obvious example, labor unions caused massive unemployment during the Great Depression, even when the official minimum wage did not "exist" at that time.

The trade deficit

Various paleolibertarians in the Mises and LewRockwell institutes, such as Bob Murphy and Peter Schiff, view the trade deficit as a harm. First of all, an actual trade deficit might not "exist". Since the state estimates the imports and exports, we should not see it as accurate. Second, trade deficits do not cause offshoring and unemployment, and vice versa.

Increased taxation forces corporations to raise the nominal prices of their products to cover their costs

Wrong. If the money supply stays constant during a corporate income tax hike, prices will stay constant. It would only decrease the nominal wages to the employees, since the money supply stays constant. Constant money supply during almost any tax hike would not cause corporations to raise their prices since the supply of money does not increase.

Also, since most corporations have tax loopholes, it would have a very small effect on the wages of the employees.

The variations of interest rates have a larger influence on employee wages than corporate taxation. If the central bank lowers interest rates, corporations would borrow more to invest in more long-term assets. This would lower the real wages of the employees since the un-optimal long-term/short-term asset ratios caused from lower interest rates does not reflect consumer preferences.

Most of the self-identified left-libertarians view anarcho-communism as compatible

Even some so-called left-libertarians deny anarcho-communism as compatible with anarchism.

Left-libertarians hate corporations

Even though that some libertarians oppose corporations as they define corporations as charters from the state, some left-libertarians defend the existence of corporations.

Not all left-libertarians hate corporations. Lee McCracken defended the existence of corporations at anti-state.com, and Kevin Carson defended the existence of corporations.

Foreign nations as economically free

Various individuals who have read Peter Schiff's book, Crash Proof: How to Profit from the Coming Economic Collapse, have brainwashed his into incorrect China-bashing views.

Many individuals who read his book, especially those Ron Paul advocates, seem to hold a belief about Peter Schiff's cult that China has more economic freedom than the United States. Schiff, the neo-mercantilist, mentioned in his book that China possesses more economic freedom because, empirically, it appears to have a larger manufacturing sector than the United States. Schiff's neo-mercantilist beliefs include that if the U.S. falls into an economic depression, China will prosper because it would not export "useless" goods but instead produce goods for their own consumption. Peter Schiff holds an idea of self-sufficiency that nations which have a large manufacturing base would supposably increase wealth. I view that as protectionism.

Foreigners have more economic freedom

Specifically, many racists believe that non-whites possess less intelligence than white people. Why does "developing" economies apparantly grow "faster" than "us" when they have less intelligent than white people? They realize that this why does the "developing" nations grow "faster" than the United States when the foreigners possess less intelligence. Finally, they concluded that the supposed superior economic "freedom" of the developing nations made their economy grow faster.

Also, the racists often possess an inferiority complex that non-white nations have more economic and political freedoms than white nations. Even though the supposably "developing" nations have massive economic regulations, high tariffs, much more corrupt, and monetary expansion much higher than the United States, the racists still concluded that the "developing" nations have more economic freedom than the United States.

This inferiority complex additionally reinforces the confirmation bias that foreign nations have more economic freedom than the United States.

Additionally, the domestic bailouts in the U.S. reinforced their confirmation bias that foreign nations have greater economic freedom than we possess.

One should view economic "freedom" as subjective. At least the foreign nations have a large counter-economy.

Definitional...aggression, coercion and violence as interchangeable

One should not confuse nonviolence, non-aggression and non-coercion. Non-aggressive violence exists: retaliation from self-defense. Murray Rothbard even defined self-defense as a violent act, even though it does not contradict non-aggression. Non-aggressive coercion exists: Threatening a criminal.

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