Wednesday, August 31, 2011

Prediction, Empiricism and Austrian Economics

A commentator on the previous post who supports Austrian economics asserts this:
“Since our learning is inherently unpredictable through and through, and since our learning influences what we do, and since what we do is the subject of economics, it follows that economics is not a predictive, empirical science like chemistry and physics. Atoms and molecules don’t learn over time. They don’t act. So inductive logic through empiricism is justified. The reason why almost all mainstream empiricist economists couldn’t predict the housing bubble and collapse, is because they are using a faulty methodology. The reason why so many Austrians could predict it, is because they are using a proper methodology.”
The assertion that sticks out to me is “economics is not a predictive … science like chemistry and physics.” Even if you subscribe to Austrian aprioristic praxeology (and reject the empirical approach to economics), how can economics not be predictive, yet somehow (magically?) Austrians can predict the “housing bubble and collapse”?

When we turn to Mises and Rothbard, we find a blatant contradiction of this view:
“Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters.” (Mises 1998: 117-118).

“Economics too can make predictions in the sense in which this ability is attributed to the natural sciences. The economist can and does know in advance what effect an increase in the quantity of money will have upon its purchasing power or what consequences price controls must have. Therefore, the inflations of the age of war and revolution, and the controls enacted in connection with them, brought about no results unforeseen by economics.” (Mises 2003: 129).

“Economics provides us with true laws, of the type if A, then B, then C, etc. Some of these laws are true all the time, i.e., A always holds (the law of diminishing marginal utility, time preference, etc.). Others require A to be established as true before the consequents can be affirmed in practice. The person who identifies economic laws in practice and uses them to explain complex economic fact is, then, acting as an economic historian rather than as an economic theorist. He is an historian when he seeks the casual explanation of past facts; he is a forecaster when he attempts to predict future facts. In either case, he uses absolutely true laws, but must determine when any particular law applies to a given situation. Furthermore, the laws are necessarily qualitative rather than quantitative, and hence, when the forecaster attempts to make quantitative predictions, he is going beyond the knowledge provided by economic science.” (Rothbard 2006: 311).
Mises is quite clear that economics “too can make predictions in the sense in which this ability is attributed to the natural sciences.” So even Mises and Rothbard thought that their economics had predictive power.

And the claim that Austrian aprioristic praxeology escapes empiricism is wholly false. Why? Because praxeology requires any number of synthetic propositions that are hidden or stated premises in its deductive arguments (Schuller 1951: 188), and only empirical testing of these synthetic propositions will establish their truth, as Karen Vaughn, amongst numerous others, has pointed out:
“... Mises does not deduce all of praxeology from the action axiom. He slips in subsidiary statements that can only be viewed as hypotheses and not certain truth.” (Vaughn 1994: 77).
Even some of Mises’s fundamental starting axioms are synthetic and only provable by empirical evidence, such as the “disutility of labor” axiom:
“The disutility of labor is not of a categorial and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world …. Experience teaches that there is disutility of labor. But it does not teach it directly. There is no phenomenon that introduces itself as disutility of labor. There are only data of experience which are interpreted, on the ground of aprioristic knowledge, to mean that men consider leisure—i.e., the absence of labor—other things being equal, as a more desirable condition than the expenditure of labor. We see that men renounce advantages which they could get by working more—that is, that they are ready to make sacrifices for the attainment of leisure. We infer from this fact that leisure is valued as a good and that labor is regarded as a burden. But for previous praxeological insight, we would never be in a position to reach this conclusion” (Mises 1998: 65).
M. Blaug has pointed out that a fundamental hidden assumption underlying Mises’s praxeology is the justification for belief in negatively inclined demand curves:
“[sc. there is a] the fundamental flaw in Ludwig von Mises’ ‘praxeology’: [sc. it is] the notion that purposive choice as a Kantian ‘a priori synthetic proposition’ is more than sufficient to account for negatively inclined demand curves. This ignores the fact that a number of a posteriori auxiliary propositions are also required, such as transitivity or consistency of choices ... To this day, this failure to recognize the limited power of a priori synthetic propositions to generate substantive implications for economic behaviour characterises neo-Austrian writings in defence of Mises” (Blaug 1994: 132–133, n. 14; see also Blaug 1997: 332ff.).
But as is now known, even in higher-level neoclassical literature, demand curves are not necessarily downward sloping, even though this is a fundamental assumption of the law of demand:
“Economists can prove that ‘the demand curve slopes downward in price’ for a single individual and a single commodity. But in a society consisting of many different individuals with many different commodities, the ‘market demand curve’ is more probably jagged, and slopes every which way. One essential building block of the economic analysis of markets, the demand curve, therefore does not have the characteristics needed for economic theory to be internally consistent.” (Keen 2001: 25).
And it has been behavioural and experimental economics, with their strong empirical character and experimentation, that are relevant to establishing this.

Austrian economics and even praxeological methodology does not evade a fundamental empirical basis: this point should be stressed to all and every Austrian pushing the sort of nonsense I have quoted above, where they declare that their economics is somehow completely independent of empiricism. They are plainly wrong. Without elementary methods of empiricism, their theory (even as they conceive it) wouldn’t even work, and could provide no certain knowledge.

Of course, it comes as no surprise that there is another strand of Austrian economics where an empirical method is accepted. Hayek never accepted Mises’ apriorism at all, and admitted a role for empirical evidence which is far closer to Popper’s falsificationism (see Appendix 1). Gerald P. O’Driscoll and Mario J. Rizzo have offered a reconstructed Austrian methodology in their book The Economics of Time and Ignorance (Driscoll and Rizzo 1996), allowing a role for empirical testing of interpretive theories to see whether they apply to the real world.

Appendix 1: Hayek on Popperian Method

Hayek talks about Popperian ideas on methodology:
“I became one of the early readers [sc. of Karl Popper’s Logik der Forschung, 1934]. It had just come out a few weeks before …. And to me it was so satisfactory because it confirmed this certain view I had already formed due to an experience very similar to Karl Popper’s. Karl Popper is four or five years my junior; so we did not belong to the same academic generation. But our environment in which we formed our ideas was very much the same. It was very largely dominated by discussion, on the one hand, with Marxists and, on the other hand, with Freudians. Both these groups had one very irritating attribute: they insisted that their theories were, in principle, irrefutable. Their system was so built up that there was no possibility – I remember particularly one occasion when I suddenly began to see how ridiculous it all was when I was arguing with Freudians, and they explained, “Oh, well, this is due to the death instinct.” And I said, “But this can’t be due to the [death instinct].” “Oh, then this is due to the life instinct.” … Well, if you have these two alternatives, of course there’s no way of checking whether the theory is true or not. And that led me, already, to the understanding of what became Popper’s main systematic point: that the test of empirical science was that it could be refuted, and that any system which claimed that it was irrefutable was by definition not scientific. I was not a trained philosopher; I didn’t elaborate this. It was sufficient for me to have recognized this, but when I found this thing explicitly argued and justified in Popper, I just accepted the Popperian philosophy for spelling out what I had always felt. Ever since, I have been moving with Popper” (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 18–19).

There was a poorly phrased sentence in the original post that could be misconstrued, where I say

“this point should be stressed to all and every Austrian pushing the sort of nonsense I have quoted above, where they declare that their economics is not an empirical science.

That was a poor choice of words on my part. Of course, the Austrians think that their predictions made by praxeology are arrived at using an aprioristic method different from that used in the natural sciences. I have rewritten and clarified the sentence as

“this point should be stressed to all and every Austrian pushing the sort of nonsense I have quoted above, where they declare that their economics is somehow completely independent of empiricism.


Blaug, M. 1994. “Why I am not a Constructivist: Confessions of an Unrepentant Popperian,” in R. E. Backhouse (ed.), New Directions in Economic Methodology, Routledge, London and New York. 109–136.

Blaug, M. 1997. Economic Theory in Retrospect, Cambridge University Press, Cambridge and New York.

Keen, S. 2001. Debunking Economics: The Naked Emperor of the Social Sciences, Zed Books, New York and London.

Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition, Mises Institute, Auburn, Ala.

Mises, L. von. 2003. Epistemological Problems of Economics (3rd edn; trans. G. Reisman), Ludwig von Mises Institute, Auburn Ala.

Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.

O’Driscoll, G. P. and M. J. Rizzo, 1996. The Economics of Time and Ignorance (rev. edn), Routledge, London.

Rothbard, M. N. 2006. Power and Market: Government and the Economy (4th edn), Ludwig von Mises Institute, Auburn Ala.

Schuller, G. J. 1951. “Mises’ ‘Human Action’: Rejoinder,” American Economic Review 41.1: 185–190

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

Tuesday, August 30, 2011

Interview with David Graeber on the History of Money and Debt

There is an interesting interview here with the anthropologist David Graeber on the history of barter, money, debt:
“What is Debt? – An Interview with Economic Anthropologist David Graeber,” August 26, 2011.
What stands out is Graeber’s attack on the view that money arose by barter:
Philip Pilkington: … Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

Monday, August 29, 2011

The “Dreaded” Post Keynesians?

In my various readings of the blogs that I find interesting, I just came across these remarks (that I seem to have missed) by George Selgin on the Free Banking blog referring to the debate that I recently had with Selgin here in the comments section of my blog on the Keynes versus Hayek LSE debate:
“At Social Democracy a post-Keynesian blogger who styles himself ‘Lord Keynes’ similarly misinterpreted my ‘liquidationist’ stand, inviting what became a long exchange with me there that was interesting in part because by engaging in it I learned that trying to argue with a dreaded Post-Keynesian can after all be a lot more rewarding, as well as a lot more pleasant, than trying to argue with many Rothbardians!
George Selgin, “The Keynesians Answer Back,” August 5th, 2011.
I did indeed make an error in my original post on Selgin’s position, but I was happy to correct it. And it was a pleasant surprise to find that Selgin’s position on the bailouts was one that a Post Keynesian could readily agree with. In actual fact, debating Selgin was a pleasure, and so much more rewarding than the blathering nonsense that one normally encounters from Rothbardian anarcho-capitalists.

But Selgin refers to the “dreaded” Post-Keynesians? Why “dreaded”?

It has long been known that the radical subjectivist wing of the Austrians and the Post Keynesians have ideas in common. In fact, the Austrian moderate subjectivists O’Driscoll and Rizzo tried to reach out to Post Keynesians in their book The Economics of Time and Ignorance with this comment:
“[i]t is evident that there is much more common ground between post-Keynesian subjectivism and Austrian subjectivism …. the possibilities for mutually advantageous interchange seem significant” (The Economics of Time and Ignorance, Oxford, UK, 1985, p. 9).
The “possibilities for mutually advantageous interchange” seem real to me, but there is so much mutual hostility from both sides that dialogue rarely comes to anything, mainly because Austrian economics is hijacked by the Rothbardian cult.

But I would like to think that the Austrians and Post Keynesians can learn from each other, even if obstacles remain. Ludwig Lachmann seems to be an Austrian whose work should be seriously examined by Post Keynesians.

Another point is that aspects of the Austrian/libertarian critique of Roosevelt’s New Deal, particularly those of Robert Higgs, are quite reasonable in some ways, especially since Keynes himself was also critical of the New Deal. There was undoubtedly some degree of “regime uncertainty” caused by the unprecedented interventions of Roosevelt’s New Deal which had never been seen before in America. When Keynes visited America in 1934, he saw first hand something that would confirm Higg’s view:
“[sc. Keynes] acknowledged that some aspects of the New Deal had created a crisis of confidence in the business community, but turned this into an argument that the government should increase its emergency expenditure to $400m. a month, while trying to reassure business that ‘they know the worst’ and discontinuing some aspects of the objectionable policies of the National Recovery Administration.” (Skidelsky 1992: 508).
The truth is that certain aspects of the New Deal had little if anything to do with Keynesianism. The New Deal came out of different ideas and types of thinking, and one of these was the sort of American corporatism/cartelism that even Herbert Hoover had supported to some extent. The solution to Roosevelt’s troubles was simply stopping his anti-business rhetoric and ending many of his counterproductive programs, and concentrating on fiscal stimulus, just as Keynes advised.


Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour, 1920–1937 (vol. 2), Macmillan, London.

Saturday, August 27, 2011

Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s

Japan’s experience during the 1930s is something that is not often discussed. For example, did Japan get out of the Great Depression before the war? In fact, it did, and used Keynesianism before Keynes’s General Theory.

A number of countries escaped the depression or the high involuntary unemployment and economic weakness after their contractionary phases of the Great Depression: Sweden, the US (to some extent), Germany, and Japan. In the 1930s, Sweden was an example of monetary and fiscal stimulus to escape the depression.* The US under Roosevelt was a moderate example of stimulus, but far too timid. It has been known for a long time that Germany and Japan escaped the depression by large-scale fiscal stimulus in the 1930s, but of course when you point this simple fact out (and stress that it is not in any way support for fascism), it provokes a cacophony of nonsense from Austrians and libertarians.

The Japanese recovery was masterminded by Takahashi Korekiyo, Japan’s Finance Minister, often referred to as the Japanese “Keynes” (Cha 2003).

Japan abandoned the gold standard on December 13, 1931, and escaped the death grip of deflationary shocks transmitted internationally by adherence to the gold standard. Japan then devalued its currency, and implemented effective foreign exchange controls. The yen was devalued by about 40% (Cullen 2003: 251), and most of this devaluation occurred in 1932 and 1933. After 1933 the value of the yen stabilized (Cha 2003: 130). By 1934, the yen started to appreciate against the US dollar (Drysdale and Gower 1998: 223). One of the reasons why devaluation was implemented was that the yen had been significantly overvalued in the 1920s (Teranishi 2005: 130-133), and this had seriously harmed Japanese exports and caused trade deficits in the 1920s.

Japan then engaged in large government deficit spending to stimulate the economy:
“The Takahashi fiscal expansion rested upon enlarged military spending and upon a package of public investments labeled ‘emergency relief expenditures’ (jikyoku kyokyuhi), largely comprising land reclamation, irrigation, drainage, dykes, roads, and river repairs.” (Flath 2000: 59).
While it is true that military spending was one component of fiscal policy, it is now known that its fiscal effect was not that great:
“It was once widely believed that the revival of prosperity in the early 1930s was due to increased military spending, but this is incorrect. According to Miwa Ryoichi, the rate of dependence of heavy and chemical industrial output on military demand was at its maximum in 1933 at 9.8 percent and then declined to 7 percent in 1936. For the machinery industry, this rate peaked in 1932 at 28 percent but fell to 18 percent in 1936. Even though the political clout of the military grew stronger, the influence of military spending on the economy was not all that great.” (Nakamura 1997: 135).
Moreover, military spending was not even a necessary component of fiscal policy at all: Japan could have concentrated on social spending and public works, the latter of which was in fact a large part of the spending program - larger than the military component (Nakamura 1997: 135). The public works projects funded by government deficit spending included public infrastructure investment, particularly public works for rural areas and villages (Nakamura 1997: 135).

As a matter of interest, it is also notable that Japan’s industrial policy was intensified in these years, which saw significant growth of domestic industry by infant industry protectionism and the emergence of some sectors with goods approaching world standards (such as electrical machinery and machine tools) and others becoming highly competitive internationally (Nakamura 1997: 135–136).

By 1933, Japan had emerged from the Great Depression. Japan did not levy new taxes to pay for deficit spending, but issued bonds. The Bank of Japan lowered its discount rate and lent more money to the banks.

Mark Metzler in Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan describes the Japanese government’s method of bond issuance:
“[the deficits were funded by government bonds] and in November 1932 the government began to sell entire issues of its deficit bonds to the Bank of Japan rather than to private institutions. That is, increased government spending was funded by the direct creation of money by the BOJ. Takahashi’s idea was first to boost the money supply and stimulate industry, and then, as conditions improved, to have the private sector buy government bonds from the Bank of Japan, soaking up money from circulation and controlling inflation” (Metzler 2006: 250).
This fiscal policy is also described by Nakamura:
“Central government expenditures declined from ¥1.74 billion in 1929 to ¥1.48 billion in 1931 and then increased to ¥1.95 billion in 1932 and ¥2.25 billion in 1933, after which they were fixed at a level of about ¥2.2 billion. Spending increases were financed with government bonds, but in order not to siphon private funds off the market with a huge government debt issue, a ‘Bank of Japan acceptance issues’ formula was adopted. The Bank of Japan underwrote the bonds when issued, and whenever there was a surplus of funds on the market as fiscal spending proceeded, the Bank of Japan would sell bonds to financial institutions.” (Nakamura 1997: 132).
In other words, Japan was using a policy we would now associate with Modern Monetary Theory (MMT). From November 1932, the government’s deficit was financed by issuing bonds directly to the Bank of Japan, and then later the Bank sold these bonds to private banks. Not only was there no hyperinflation, but no significant inflation.

If Japan had renounced its militarism and liberalised some trade later in the decade, it could have had access to raw materials to continue development.

Moreover, the yen depreciation in 1932 stimulated demand for Japanese exports overseas, especially for Japanese textiles in Asia. Thus the yen devaluation allowed a surge in Japanese exports, and this actually improved Japan’s current account. By 1934, Japan was moving to a trade balance, not to a trade deficit. Japan actually had a trade surplus in 1935, because of greater earnings from exports due to the yen depreciation (Fletcher 1989: 98). It could have paid for raw materials by concentrating on further development of its manufacturing sector, instead of turning to militarism. It was not until 1935 that inflation started to build up, and Takahashi Korekiyo, the Finance Minister, reduced government spending, especially military spending, to rein in inflation and to sterilize his previous budget deficits.

But Takahashi Korekiyo’s attempt to reduce military expenditures caused a conspiracy of army officers who assassinated him and the Prime Minister on February 26, 1936. They did so because they disagreed with his policy of reducing military spending. The policies of Takahashi Korekiyo’s successor gave the army a free hand in budget spending and by early 1937 there was a balance of payments and inflation crisis. That crisis, however, was precisely the result of not contracting demand under good Keynesian macroeconomic principles during the boom. Japan’s turn to militarism in 1936 was the result of the internal power of the army and the failure of civilian politicians and the murder of Takahashi Korekiyo, who had attempted to manage the economy on Keynesian principles.

Now I can just imagine the kind of inane comments that this post will provoke below – e.g., “You’re an apologist for fascism!,” “So Keynesianism only works in fascist countries!,” etc., etc. – and all such comments will be nonsense. Let me be clear: Japan’s imperialism and war crimes in these years were an immoral disgrace and utterly criminal. None of the comments above is a defence of Japan’s imperialism. There is no necessary connection between countercyclical fiscal policy and militarism/imperialism. The statement that fiscal stimulus allowed Japan to escape the depression is merely a statement of fact, not an endorsement of fascism.

* It is sometimes claimed that Sweden’s recovery was largely the result of Germany’s demand for imports during rearmament, but that is false, as German rearmament did not begin on a large scale until 1936, after Sweden had experienced recovery:
“Orthodox economists will maintain that the first German ‘miracle’ was simply the result of increased military spending. In fact, however, there was comparatively little increase in German military spending until after 1936. Public works such as the autobahns were financed by deficits, and women were encouraged to drop out of the labor force and reproduce.” (Turgeon 1996: 122–122, n. 1).


Cha, M. S. 2003. “Did Takahashi Korekiyo Rescue Japan from the Great Depression?,” The Journal of Economic History 63.1: 127–144.

Cullen, L. M. 2003. A History of Japan 1582–1941: Internal and External Worlds, Cambridge University Press, Cambridge and New York.

Drysdale, P. and L. Gower (eds), 1998, The Japanese Economy, Routledge, London and New York.

Flath, D. 2000. The Japanese Economy, Oxford University Press, Oxford and New York.

Fletcher, W. M. 1989, The Japanese Business Community and National Trade Policy, 1920–1942, University of North Carolina Press, Chapel Hill.

Metzler, M. 2006. Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan, University of California Press, Berkeley.

Nakamura, T. 1997. “Depression, Recovery, and War, 1920–1945,” in K. Yamamura (ed.), The Economic Emergence of Modern Japan, Cambridge University Press, Cambridge. 116–158.

Teranishi, J. 2005. Evolution of the Economic System in Japan, Edward Elgar Pub., Cheltenham, UK and Northhampton, MA.

Turgeon, L. 1996. Bastard Keynesianism: The Evolution of Economic Thinking and Policymaking since World War II, Greenwood Press, Westport, Conn. and London.

Lachmann on Trade Cycle Models

Chapter VII of Ludwig Lachmann’s Capital and its Structure contains a number of insights into trade cycle theory mostly ignored by modern Austrians:
“By ‘Trade Cycle’ we shall mean nothing more precise than the periodic ups and downs of output, incomes, and employment to which modern industrial economies seem to be prone. … The task of trade cycle theory is therefore not confined, as it has been so often in the past, to explaining the similarities of successive fluctuations. The dissimilarities also have to be accounted for. It is certainly our task to indicate causes for downturn and upturn, and to analyse the cumulative processes of expansion and contraction. But on the evidence we have no right to believe that these causes will always be the same, nor to doubt that their relative force will vary from case to case. … The Trade Cycle cannot be appropriately described by means of one theoretical model. We need a number of models each showing what happens when certain potential causes become operative. The many models that have been constructed by economists in the past are therefore not necessarily incompatible with each other. Overinvestment and underconsumption theories, for instance, are not mutually exclusive. None of them of course is the true theory of the Trade Cycle; each is probably an unduly broad generalization of certain historical facts. Once we admit the dissimilarity of different historical fluctuations we can no longer look for an identical explanation. In dealing with industrial and financial fluctuations eclecticism is the proper attitude to take. There is little reason to believe that the causes of the crisis of 1929 were the same as those of the crisis of 1873.” (Lachmann 1978:100–101).
Moreover, Israel M. Kirzner seems to have had the same view as Lachmann:
“AEN: Do you accept the idea that interest-rate manipulation by the central bank can cause distortions in the structure of production?

KIRZNER: Certainly the Austrian cycle theory showed brilliantly how this can happen. But it’s one thing to develop a theory which could explain a downturn. It’s quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.”
“An Interview with Israel M. Kirzner,” Austrian Economics Newsletter (vol. 17.1, 1997).
Under the sensible viewpoint of Lachmann that the “many models that have been constructed by economists in the past are therefore not necessarily incompatible with each other,” it would seem that Austrians could accept Irving Fisher’s debt deflation theory of depressions or even Hyman Minsky’s development of that theory in the financial instability hypothesis.

It is curious to me how the view of two leading Austrians like Lachmann and Kirzner that the Austrian business cycle theory (ABCT) is not a universal explanation of all “periodic ups and downs of output, incomes, and employment” in modern economies is ignored by any number of modern Austrians (especially your typical ignorant, internet “pop” Austrian), who instead dogmatically declare that ABCT is a universal theory that must explain every cycle ever seen in modern capitalist history.


Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City.

Friday, August 26, 2011

Mises and Logic

Hans Albert points out a serious flaw in Mises’s understanding of logic:
“Mises gives a Kantian answer to the question of how the a priori character of praxeological knowledge and its apodictic certainty is to be explained. This knowledge apparently can be reduced to the logical structure of the human mind which is supposed to be the basis for thought and action. ... On the one hand he seems to suggest that he is introducing with his principle of action a synthetic a priori proposition, as he ascribes informational content to the principle. On the other hand, he declares the question of whether the respective propositions are synthetic or analytic to be purely verbal and therefore uninteresting. This seems to show that he was not aware of the connection between analyticity and informational vacuity. He permanently compares his allegedly a priori knowledge with logical and mathematical knowledge and gives such a description of the respective propositions and their mode of derivation that one comes to suspect them to be analytic. He confounds the analytical character of propositions with the logical character of the relationships between propositions in a deduction. But the fact that particular propositions are deducible from particular sets of premises does not render them analytic. For instance, in physics propositions from geometry get an empirical interpretation, and, interpreted in this way, they are synthetic. But propositions which are the result of the ‘logical unfolding’ of certain concepts contain no information. They are analytic not because they are derived, but because they follow from definitions which do not carry information themselves. When Mises tells us that the concept of money already implies all theorems of the theory of money, the alleged certainty of the basis of this derivation does not help him to establish a nonvacuous economic theory. The theory of money as he envisages it here would be without informational content and could not be used to explain anything.” (Albert 1999: 131–132).
That is a rather serious error. Another criticism of Human Action was pointed out a long time ago by G. J. Schuller:
“Acceptance of Mises’ stated axioms does not necessarily imply acceptance of the ‘principles’ or ‘applications to reality’ which he has drawn from them, even though his logic may be impeccable. When a logical chain grows beyond the limits set by stated assumptions, it uses unstated assumptions. The number of unstated assumptions (axioms, postulates, or other) in Human Action is enormous. If Mises denies this, let him try to rewrite his book as a set of numbered axioms, postulates, and syllogistic inferences using, say, Russell’s Principia or, closer home, Von Neumann’s Theory of Games as a model” (Schuller 1951: 188).
As it happens, Mises seems to have conceded this:
“Every theorem of praxeology is deduced by logical reasoning from the category of action. It partakes of the apodictic certainty provided by logical reasoning that starts from an a priori category. Into the chain of praxeological reasoning the praxeologist introduces certain assumptions concerning the conditions of the environment in which an action takes place. Then he tries to find out how these special conditions affect the result to which his reasoning must lead. The question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience. But if the answer is in the affirmative, all the conclusions drawn by logically correct praxeological reasoning strictly describe what is going on in reality” (Mises 1978: 44).
This concession makes a nonsense of Mises’s assertion that “Every theorem of praxeology is deduced by logical reasoning from the category of action. It partakes of the apodictic certainty provided by logical reasoning that starts from an a priori category.” If there is even some small doubt about the truth of the synthetic stated and hidden assumptions or premises in praxeological arguments, then the apodictic certainty of the inferences vanishes like a puff of smoke.


Albert, H. 1999. Between Social Science, Religion and Politics: Essays in Critical Rationalism, Rodopi, Amsterdam.

Mises, L. 1978 [1962]. The Ultimate Foundation of Economic Science: An Essay on Method (2nd edn), Sheed Andrews & McMeel, Kansas City.

Schuller, G. J. 1951. “Mises’ ‘Human Action’: Rejoinder,” American Economic Review 41.1: 185–190.

Thursday, August 25, 2011

Keynes and Pyramid-Building: What He Really Meant

Here is a passage in Keynes’s The General Theory of Employment, Interest, and Money that his opponents repeatedly misrepresent:
“When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how ‘wasteful’ loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly ‘wasteful’ forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.” (Keynes 2008 [1936]: 1936: 115–116).
What is notable is that the hordes of commentators on this passage supress the important qualifications:
Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
The assumption behind these comments is an economy suffering from
(1) severe depression or
(2) high involuntary unemployment and idle resources.
It is not an economy at full employment. In other words, we are talking about the terrible conditions of the 1930s when there were armies of unemployed and idle plant in many capitalist nations. Keynes’s solution of deficit-financed public works spending faced opposition from the neoclassicals of his day who held the so-called “Treasury” view.

Keynes’s assertion that even wasteful public loan expenditure might “serve to increase wealth” in such times was his way of shocking contemporaries into seeing that effective demand drives output and employment, and that even wasteful spending would tend to raise production and employment in conditions of idle resources, insufficient demand and low private investment. In fact, Keynes could have added that even wasteful private investment or spending would have done the same thing. In such an economy with high involuntary unemployment and idle resources, any failed or wasteful private investment is essentially in the same category as the government having people dig holes in the ground, but no one doubts that this private activity raises output and employment while it is in progress.

But the whole point of the passage is precisely that that we do not want wasteful public loan expenditure, and that it is the incompetence and stupidity of neoclassical theory held by many economists and policy makers that prevents the necessary public investment in useful spending programs.

Keynes did not seriously advocate pyramid-building, wars or digging holes in the ground as a method of stimulus. His preferred method was the equally misunderstood solution of the “socialisation of investment”:
“By ‘socialisation of investment’ Keynes did not mean nationalisation. Socialisation of investment need not exclude ‘all manner of compromise and devices by which public authority will co-operate with private initiative’ ... This single throw-away line in the General Theory reflects Keynes’s thinking on ‘public-private partnerships’, which came out of his involvement in Liberal politics in the 1920s (Skidelsky, 1992, chs 7 and 8). In essence, he sought to expand the public-utility component of investment to give greater stability to the investment function. Today, he would have seen the big institutional investors like pension funds as a major support for stability. A guaranteed stream of investment would reduce fluctuations to modest dimensions, which could be readily controlled, if so wished, by speeding up or slowing down elements in the investment programme. Such investment would not necessarily be profit-maximising. But provided it yielded positive returns, there would be a gain. If markets had perfect information, public investment would be inefficient. But with uncertainty, there is a gain as against having no state investment at all, because of the losses due to uncertainty.” (Robert Skidelsky, “The Relevance of Keynes,” January 17, 2011).

Keynes, J. M. 2008 [1936]. The General Theory of Employment, Interest, and Money, Atlantic Publishers, New Delhi.

Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour 1920–1937, Macmillan, London

Wednesday, August 24, 2011

Austrians have No Sense of Humour

I note that the usual rogues’ gallery of Austrians seized upon Krugman’s remarks in a debate with Kenneth Rogoff over the economy.

First, the interviewer made a statement that is an outright falsehood: that Keynes seriously advocated stimulus by building pyramids or digging holes in the ground. Kenneth Rogoff makes the same error, falsely accusing Keynes of really advocating employing people by digging holes in the ground. Krugman’s mistake was his failure to correct this rubbish right away (although I get the sense that this interview may be edited, so maybe it got cut out). Keynes, of course, did not seriously advocate this: he said that if you could find nothing else of use to do, then even these acts would still raise income and production, even though it would be of no use in itself. This comment was in fact Keynes’s way of underlining how aggregate/effective demand is what drives output and employment, and he was right. Moreover, any failed private investment is essentially in the same category as the government having people dig holes in the ground, but no one doubts that this private activity raises output and employment while it is in progress. The point is precisely that we want the government to raise output and employment by doing economically and socially productive and useful things.

In the course of the debate, Krugman made what is obviously a facetious remark, a piece of levity, invoking aliens: that, if massive government spending programs were instituted on the scale of World War II to fight off some serious threat to America, say, like an alien invasion, then this would drive the economy to full employment. Note that Krugman was at pains to point out that this kind of military spending involves negative social product spending. Note that he did not seriously advocate any such military spending. Krugman’s point, illustrated in a rather silly way, is the same as that of Keynes: merely that effective demand drives output and employment in modern capitalist economies, and that spending and employment programs on the scale of World War Two would eliminate the sluggish growth and high unemployment the US is currently experiencing.

However, as everyone else who is not an Austrian cultist knows, Krugman favours public works and social spending, not military spending.

This is very clear in the full video of the debate, which you can see below.

It is fairly amusing to see assorted libertarians and Austrians reduced to blathering idiocy as they distort Krugman’s remarks, and falsely say that he really and seriously urged government military spending to fend off an alien invasion. I guess cultist, loser ideologues also tend to have no sense of humour either.*

The haplessness of Austrians was doubly emphasised when the same hacks seized upon the following false message that someone just made up by pretending to be Krugman:
“People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.”
Some links on this whole business:
Daniel Kuehn, “The Fake Krugman on Keynesian Economics” August 24, 2011.

Daniel Kuehn, “One More Quick Thought,” August 24, 2011.
* P.S. the title of this post and the latter comment are also facetious, before I get inane comments below.

Steve Keen on Behavioural Finance, Lecture 4

The next in the series of lectures by Steve Keen on behavioural finance:

Keynes on Germany in the 1930s

Robert Skidelsky has a revealing description of Keynes’s disgust at Nazi Germany:
“… by October 1934 three million workers had been reemployed in Germany over two years, half the previous total of unemployed, and Keynes’s silence on Hitler’s New Deal was deafening. The reason is that Hitler’s recovery programme was too mixed up with imperialist aims and terroristic methods for it to hold any attraction for him. Keynes was trying to save liberal society, not destroy it. He would give no comfort to its enemies. Garraty has noted the similarities between Hitler’s and Roosevelt’s programmes; even their rhetoric, with its invocation of the war spirit, sounded the same.

But, whereas Roosevelt was the scion of the American ruling class, Hitler was nurtured on the hatreds of Central Europe and the agony of Germany’s defeat; for him war was the purpose, not the symbol, of the effort to restore Germany’s industrial might.

Keynes understood this from the start. ‘Germany is at the mercy of unchained irresponsibles,’ he wrote on 15 July 1933. And on 19 September: ‘Broken in body and spirit, [they] seek escape in a return backwards to the modes and manners of the Middle Ages, if not of Odin.’ Anti-semitic though Keynes occasionally seems by the standards of out day, he was outraged by the officially sponsored outbreaks of Jew-baiting in Nazi Germany. On 25 August 1933, he wrote to Professor Spiethoff, who was arranging the publication of a German translation of ‘National Self-Sufficiency’:
Forgive me for my words about barbarism. But that word rightly indicates the effect of recent events in Germany on all of us here …. It is many generations in our judgement since such disgraceful events have occurred in any country pretending to call itself civilised ... If you tell me that these events have taken place, not by force, but as an expression of the general will … that in our view would make some of the persecutions and outrages of which we hear … ten times more horrible.
When Germany withdrew from the World Disarmament Conference on 14 October, he wrote to Lydia, ‘Everyone must soon be faced with the alternative of simply allowing Germany to rearm when she likes, or of attacking her as soon as she begins to do so. Hideous!’ Keynes never went to look at the ‘new’ Germany. Carl Melchior, subjected to anti-semitic attack, died in December 1933. When the Mayor of Hamburg visited King’s College in 1934 and invited Keynes over, he replied, ‘After the death of my friend . . . there is nothing left that could attract me to Hamburg.’” (Skidelsky 1992: 486).
Hitler had come to power on 30 January, 1933. What is interesting is that already by August 1933 Keynes condemned Nazi Germany as barbarism, long before the horrors of Kristallnacht (November 9–10, 1938) or Hitler’s international aggression.


Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour 1920–1937, Macmillan, London.

Monday, August 22, 2011

Keynes’s Opinion of Communism and Marxism

Ralph Raico quotes a radio interview by Keynes, where Keynes supposedly praises the Soviet Union:
Ralph Raico, “Keynes and the Reds,” Mises Daily, February 13, 2002.

“The Case for Robert Skidelsky as a Liar,” August 20, 2011.
The remarks in question were allegedly made by Keynes in a radio talk for the BBC in June 1936 in which he discussed Sidney and Beatrice Webb’s book Soviet Communism: A New Civilization? (Longmans, 1935), a rather disgraceful apologia for Soviet communism.

Raico draws attention to this comment of Keynes:
“Until recently events in Russia were moving too fast and the gap between paper professions and actual achievements was too wide for a proper account to be possible. But the new system is now sufficiently crystallized to be reviewed. The result is impressive. The Russian innovators have passed, not only from the revolutionary stage, but also from the doctrinaire stage.

There is little or nothing left which bears any special relation to Marx and Marxism as distinguished from other systems of socialism. They are engaged in the vast administrative task of making a completely new set of social and economic institutions work smoothly and successfully over a territory so extensive that it covers one-sixth of the land surface of the world. Methods are still changing rapidly in response to experience. The largest scale empiricism and experimentalism which has ever been attempted by disinterested administrators is in operation. Meanwhile the Webbs have enabled us to see the direction in which things appear to be moving and how far they have got.”
If Keynes really thought that Soviet Union was “impressive,” then that was a wrong, ridiculous, contemptible and disgraceful remark.

However, I have not seen the full interview yet, and I suspect that there is some kind of selective quotation going on here. Why? The reason is that such a remark blatantly contradicts Keynes’s other writings and statements. The fact is that Keynes’s explicit public and private condemnation of Marxism, communism, and the Soviet Union is well attested.

First, Skidelsky is clear that Keynes did not support the Webbs’ book:
“unlike the Webbs, he [sc. Keynes] could never think of Soviet Russia as a serious intellectual resource for Western civilisation. In the 1920s he had said that Marxism and communism had nothing of scientific interest to offer the modern mind. The depression did not alter his view. Russia ‘exhibits the worst example which the world, perhaps, has ever seen of administrative incompetence and of the sacrifice of almost everything that makes life worth living ...’; it was a ‘fearful example of the evils of insane and unnecessary haste’; ‘Let Stalin be a terrifying example to all who seek to make experiments.’” He found Kingsley Martin too ‘pro-Bolshie’ in the New Statesman.” (Skidelsky 1992b: 488).
Secondly, Keynes wrote a letter in reply to George Bernard Shaw in 1935 on the issue of Marx, where he was quite clear in rejecting Marxism:
“Thank you for your letter. I will try to take your words to heart. There must be something in what you say, because there generally is. But I’ve made another shot at old K.[arl] M.[arx] last week, reading the Marx-Engels correspondence just published, without making much progress. I prefer Engels of the two. I can see that they invented a certain method of carrying on and a vile manner of writing, both of which their successors have maintained with fidelity. But if you tell me that they discovered a clue to the economic riddle, still I am beaten – I can discover nothing but out-of-date controversialising.

To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionalise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the final upshot will be in its effect on action and affairs. But there will be a great change, and, in particular, the Ricardian foundations of Marxism will be knocked away.

I can’t expect you, or anyone else, to believe this at the present stage. But for myself I don’t merely hope what I say, – in my own mind I’m quite sure.”
(Keynes to Shaw, 1 January, 1935, quoted in Skidelsky 1992b: 520–521).
Thirdly, Keynes rejected the Soviet system:
“And so he [sc. Keynes] could both love the communist generation for their idealism, and despise them for their muddle-headedness. If Keynes could not solve the ‘primal question’ of how to live, he felt he could solve the secondary question of what to do. His assault on the scientific pretentions of Marxism and the horrors of the Soviet system was unremitting, and needed no revelation of mass murder. He insisted on the supreme importance of ‘preserving as a matter of principle every jot and tittle of the civil and political liberties which former generations painfully secured ....’. He was outraged when London University tried to silence the loquacious Professor Laski of the LSE, writing in the New Statesman to defend Laski, but adding, ‘Too many of the younger members of the Left have toyed with Marxist ideas to have a clear conscience in repelling reactionary assaults on freedom.’” (Skidelsky 1992b: 518).
His verdict on Bolshevism was made in 1922, in a remark that unfortunately also evinces some anti-Semitism:
“Bolshevism is such a delirium, bred by besotted idealism and intellectual error out of the sufferings and peculiar temperaments of Slavs and Jews. But we can no more regard this culminating delirium as a lasting fact or influence than the rule of Robespierre or the Jacobins.” (Keynes 1977 [1922]: 373).
But suppose, for the sake of argument, that Keynes did praise the Soviet Union in this one radio address, even though on numerous other occasions he condemned it. The correct response to this by any modern progressive liberal or Keynesian is to condemn Keynes for this particular morally disgraceful remark, and to question why he would have been so inconsistent when he clearly and correctly criticised and rejected communism many times. This example of a personal, moral failing of Keynes does not, however, invalidate his ideas in the General Theory.

To dismiss Keynesian economics on the basis of an ad hominem attack on Keynes is nothing but an informal logical fallacy.

If Austrians really think the ad hominem fallacy is valid, then by the same fallacious reasoning all of Mises’s economics can be dismissed by this remark:
“It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history. But though its policy has brought salvation for the moment, it is not of the kind which could promise continued success. Fascism was an emergency makeshift. To view it as something more would be a fatal error.” (Mises, 1978 [1927]: 51).
You could not find a clearer apology for fascism. Keynes, for all his moral faults (for example, his support for eugenics and anti-Semitism), never declared that fascism “saved European civilization” or that the “merit that Fascism has … won for itself will live on eternally in history”. It was Ludwig von Mises - the Austrian school hero - who wrote this vile nonsense.

Appendix: Paul Sweezy and Keynes

I will note as an interesting appendix that many of the less doctrinaire Marxists of the late 20th century abandoned pure Marxism and came to see merit in Keynes’s work, as noted by Gilles Dostaler:
“It was in the Anglo-American world that Marxism, much less established, or recognized than in France, or in other Latin countries, particularly Italy, was more receptive to Keynesianism, and where efforts were made to rethink Marx in the light of Keynes thought. The pioneer here was Paul Sweezy, who was first a disciple of Hayek, in his book The Theory of Capitalist Development, published in 1942. The Keynesian-Marxist synthesis that he put forward lead him to call into question fundamental ideas developed by Marx, such as the tendency of the rate of profit to fall, which was replaced by the tendency of the surplus to rise. Sweezy developed his ideas with his co-author Paul Baran in Monopoly Capital, published in 1966, and wrote about them extensively in Monthly Review which he co-founded.” (Dostaler, “The General Theory, Marx, Marxism and the Soviet Union,” p. 18).
Paul M. Sweezy (1910–2004) was a leading American Marxist and abandoned Marx’s value theory and the belief that the rate of profit had an inevitable tendency to fall in modern capitalism. His version of Marxism attempts to reconcile Marxism with Keynesian macroeconomics.


Dostaler, Gilles, “The General Theory, Marx, Marxism and the Soviet Union,”

Keynes, J. M. 1977. The Collected Writings of John Maynard Keynes. Vol. 17, Activities 1920–1922, Treaty Revision and Construction (ed. E. Johnson), Macmillan, London.

Mises, L. von. 1978 [1927]. Liberalism: A Socio-Economic Exposition (2nd edn; trans. R. Raico), Sheed Andrews and McMeel, Mission, Kansas.

Skidelsky, R. J. A. 1992a. John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 2), Macmillan, London.

Skidelsky, R. J. A. 1992b. John Maynard Keynes: The Economist as Saviour 1920–1937, Macmillan, London.

Skidelsky, R. J. A. 2000. John Maynard Keynes: Fighting for Britain 1937–1946 (vol. 3), Macmillan, London.

Webb, S. and B., Webb, 1935. Soviet Communism: A New Civilization?, Longmans.

Thursday, August 18, 2011

Miscellaneous Links, 18 August, 2011

Some interesting links:
Steve Keen, “Sense from Krugman on Private Debt,” August 17th, 2011.

Bill Mitchell, “Self-inflicted Catastrophe,” August 18, 2011.

Mark Weisbrot, “U.S. and Europe: slow strangulation is much more likely than financial Catastrophe,” August 18, 2011

“Interview with Randy Wray, Regarding the Next Crisis (Part 2),” August 13, 2011.
Steve Keen in the first post makes some important points:
“... one reason why deflation hasn’t been as sharp this time as it was in the Great Depression—even though the private debt level is higher—is that non-financial businesses are actually in less debt now than they were then. Non-financial businesses entered the Great Depression with a debt to GDP ratio of 100 per cent—well above the 75 per cent level that applied at the start of our crisis. So they don’t face the same direct pressure to service debts that led to the “distress selling” Fisher focused upon. But households are in far worse shape now than in the 1930s, with a peak debt level that is two and a half times as high as it was in 1930. That’s why the crisis now is manifesting itself in stagnant consumer demand. It doesn’t involve the same plunge into deflation as the Great Depression, but it does imply a more drawn out deleveraging, because it’s much harder for households to reduce debt than it is for businesses. Businesses can get out of debt by going bankrupt, sacking workers, and stopping investment. Households have to live with the shame of bankruptcy and the limitations it imposes on behaviour in future, they can’t sack the kids, and it’s impossible to stop consuming completely. So we may face a far more drawn out process of deleveraging than the Great Depression.”

Tuesday, August 16, 2011

Debunking Catalán on the Recession of 1937-1938

Jonathan M. Finegold Catalán attempts to prove that the recession of 1937–1938 was not caused by contractionary fiscal and monetary policy:
Jonathan M. Finegold Catalán, “Dangerous Lessons of 1937,” Mises Daily, February 2, 2010.
I. The Data
First, some basic facts about the recession and data:
(1) In the US, the fiscal year before 1976 ran from July 1 to June 30 in the next year. So in the relevant years the actual fiscal years were as follows:

Roosevelt inaugurated March 4, 1933.
Fiscal 1934: July 1, 1933 – June 30, 1934
Fiscal 1935: July 1, 1934 – June 30, 1935
Fiscal 1936: July 1, 1935 – June 30, 1936
Fiscal 1937: July 1, 1936 – June 30, 1937
Fiscal 1938: July 1, 1937 – June 30, 1938
Fiscal 1939: July 1, 1938 – June 30, 1939
Fiscal 1940: July 1, 1939 – June 30, 1940

In analysing the effects of fiscal policy in these years, one should not confuse the calendar year with the fiscal year: these are two different things.

(2) The actual recession (economic contraction) ran from May 1937 to June 1938.1 Thus the contraction began in the last months of fiscal year 1937 and lasted until the end of fiscal year 1938.

(3) Data on the Federal budget can be found here:
Federal Budget Receipts and Outlays: Coolidge – Obama.
(4) Data on total government spending (including local, state and federal) can be found here:
Total US Government Spending in billions of dollars.
The figures on total government spending (state, local, federal):

Year Outlays
1933 $12.62
1934 $12.81
1935 $14.78
1936 $16.76
1937 $17.22
1938 $17.68
1939 $19.05
1940 $20.42

Now these figures do not show us whether increases in total government spending were expansionary or contractionary, as one needs to look at whether the spending increases occurred by deficit spending or merely out of current revenues.
II. Critique
Let us now refute and correct Catalán’s assertions and errors here:
(1) Catalán states that
“The idea that Herbert Hoover was a laissez-faire president and that Roosevelt's New Deal paved the road to recovery have been refuted elsewhere.”
I have already refuted the Austrian attempts to paint Herbert Hoover as some radical interventionist president or big-spending Keynesian here:
“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011.
Hoover adopted some very limited policy interventions and very mild increases in federal government spending from 1929–1932, but these were almost completely destroyed by state and local austerity.

(2) Catalán states that
“Interestingly, during 1935 — a year considered one of recovery — total government outlays measured $6.4 billion, less than during both 1936 and 1937. In fact, looking back to the years from 1933 to 1935, government spending peaked at $6.5 billion in 1934. It suffices to say that explaining Roosevelt's recession by pointing at a decrease in government spending is severely dishonest.”
Catalán commits the red herring fallacy, and is laughably ignorant of basic Keynesian theory: to gauge the effects of fiscal policy in any particular year and to see whether it was expansionary or contractionary, one must look at
(1) the size of the deficit and whether there was increased spending done via deficits, not just the size of spending per se;
(2) whether tax policy changed and if revenues rose owing to tax increases, and
(3) not just federal spending by itself, but total government spending at the local, state and federal level, to see if the net effect of deficit spending was expansionary.
In fact, total government spending in fiscal years 1935 and 1936 was highly expansionary:

Year* Total Outlays
1933 $12.62
1934 $12.81
1935 $14.78
1936 $16.76

1937 $17.22
1938 $17.68
1939 $19.05
1940 $20.42
*the fiscal year

The expansionary effect of fiscal policy in these years must be attributed to the large federal deficits. In fiscal year 1934 there had been a large deficit, but its expansionary effect was reduced to some extent by state and local austerity. In the fiscal years 1935 and 1936 federal deficits overcame that state and local austerity and imparted significant stimulus at a time when the financial system had been stabilised and monetary policy aided recovery.

It is no surprise that GDP soared in these years, with growth rates of 8.1% (1935) and 14.1% (1936). In 1937 and 1938, Roosevelt turned to budget balancing: the result was that federal deficit was virtually eliminated by fiscal year 1938 by
(1) the raising of taxes (which contracted private spending power), and
(2) reducing overall federal spending.
This shows up in the figures above for total government spending for 1937 and 1938, where total spending barely moved, and was at any rate offset by contractionary state and local fiscal policy, as in 1934 (Cary Brown 1956: 867–868).

In fact, the role of state and local governments during the depression was deeply contractionary most of the time:
“The nation’s fiscal policy throughout the Great Depression included the fiscal actions of state and local governments as well as of the federal government. During the early years of the depression, state governments increased spending for unemployment relief, primarily through subventions to local governments, which faced sharply declining property tax revenues, soaring rates of default, and even popular revolts, including a tax strike in Chicago. They did so by increasing sales taxes and by reducing spending on public works, especially highways, and schools. State constitutions, however, limited deficit finance, and new state and municipal bonds were extremely difficult to market. As the Depression worsened in 1931 and 1932, state and local governments found it impossible to conduct business as usual and still balance their budgets. State and local governments began adopting drastic economies, scaling back total expenditures in 1931 and sharply contracting them in 1933 and 1934. State governments welcomed federal funding of unemployment relief and public works, although they resisted the requirement of the Federal Emergency Relief Administration and the PWA for state matching funds. When economic recovery advanced, particularly in 1936 and 1938, state and local governments resumed spending on public works and education and thus once again increased their total outlays. Sharp increases in tax rates, however, erased any stimulative effect of state and local spending. State and local governments had pushed up tax rates every year between 1929 and 1933, and maintained those high levels until 1936, when they undertook even further increases. State governments increased the scope and rates of their sales taxes until, in 1940, they raised most of their funds through such levies.” (Elliot Brownlee 2000: 1044).
What was also deeply contractionary was the fact that state and local governments were running surpluses:
“Over the same seven years [sc. 1932–1938], state and local government revenues increased—principally from higher taxes—at a faster rate than expenditure.” (Bagwell and Mingay 1987: 282).
What the figures for total government spending (state, local and federal) from 1937–1938 tell us is that, while state and local governments did increase spending (which led to an overall increase in total government spending in each year), they
(1) did so by raising taxes (which did not stimulate the economy), and

(2) they even ran surpluses, which drained even more spending power from the economy, an astonishingly anti-Keynesian thing to do at a time when the economy needed countercyclical fiscal policy.
State and local government contractionary fiscal policy in 1937 and 1938 was thus caused by (1) raising taxes and (2) running surpluses.

The net effect of government fiscal policy in 1937 was to cause “a shift in demand of over [2.5] per cent of GNP in one year” (Cary Brown 1956: 866).

Catalán also ignores the following:
(1) in June 1936, the Revenue Act passed Congress and caused a significant increase in income tax rates, as well as the tax on undistributed profits. The main effect of the tax on undistributed profits was to adversely affect the cost of investment for small and medium-sized firms. There is a reasonable case to be made that this tax increased business uncertainty about profitability of investment.

(2) collection of the Social Security tax began in January 1937, another tax measure contracting private spending power.

(3) The Fed increased Reserve requirements on July 14, 1937 and this went into effect the next month; the second and third increases in reserve requirements were announced on January 30, 1937, and came into effect on March 1 and May 1 respectively. From December 1936, the treasury began to sterilise gold inflows into the United States by using proceeds of bond sales to pay for gold brought to the treasury. From December 1936 to February 1938 the monetary base grew by only 4% while gold stock grew by 15%.
The tax increases reduced the federal deficit very significantly indeed by fiscal year 1938, by causing revenues to rise. The net effect of all this when combined with federal spending cuts was highly contractionary: this was the cause of the 1937–1938 recession.

(3) Catalán ignores the fact that the Federal deficit was almost abolished in fiscal year 1938. Catalán states:
“It is not much more useful to look at deficit spending. True, deficit spending in 1937 was at its lowest since 1933, but it is worth mentioning that in 1938 — the same year as the economy rebounded from the 1937 dip — total government deficit spending amounted to only $89 million.”
In a strange non sequitur Catalán notes in passing that the deficit was massively reduced in fiscal year 1938 (July 1, 1937 – June 30, 1938): in fact, it was virtually eliminated and caused contractionary fiscal policy. The deficit in fiscal year 1938 was the lowest ever in all the years from 1931–1941. In terms of its fiscal impact, the federal budget was almost balanced in fiscal year 1938.

Catalán also confuses the fiscal year with the calendar year. Some data:
(1) The actual recession (economic contraction) ran from May 1937 to June 1938.

(2) Fiscal years:
Fiscal 1937: July 1, 1936 – June 30, 1937
Fiscal 1938: July 1, 1937 – June 30, 1938
Fiscal 1939: July 1, 1938 – June 30, 1939.
The recovery began in July 1938, which is in fiscal year 1939. Most of the actual recession coincided with fiscal year 1938, precisely the year when the deficit had been nearly abolished.

It was only in about April 1938 that Roosevelt turned once again to expansionary fiscal policy and ended the austerity programs. It was no surprise that some months later the recession ended, and economy began to grow again, and entered another expansionary phase of real GNP growth, as the federal deficit soared to $2.8 billion in fiscal year 1939 (July 1, 1938–June 30, 1939).

(1) There seems to be some disagreement about when the recession ended. Cf. Gene Smiley (1997: 154), who states that the recession lasted from May 1937 until August 1938. The official NBER chronology, however, shows a recession from May 1937 to June 1938.


Bagwell, P. S. and G. E. Mingay, 1987. Britain and America 1850–1939: A Study of Economic Change (2nd edn.), Routledge, London.

Cary Brown, E. 1956. “Fiscal Policy in the ’Thirties: A Reappraisal,” American Economic Review 46.5: 857–879.

Elliot Brownlee, W. 2000. “The Public Sector,” in S. L. Engerman and R. E. Gallman (eds), The Cambridge Economic History of the United States. Volume 3. The Twentieth Century, Cambridge University Press, Cambridge. 1013–1060.

Gene Smiley, W. 1997. “Depression of 1937–1939,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 154–155.

Monday, August 15, 2011

Confusion About Trade Deficits

The blogger Cynicus Economicus has a new post here:
“A Ramble towards a Conclusion,” Cynicus Economicus, August 13, 2011.
In this post one finds a curious statement about the nature of trade deficits:
“And then there is the West. We have the infrastructure. We have opportunities and systems that have allowed us to have lifestyles that this emerging labour could only dream about. However, it was not enough for us. We wanted more, and more and more. We voted in governments that told us that we could have more and who borrowed in our names, and we borrowed to support our lifestyles, all the time thinking that it was our ‘right’ to enjoy our huge share of the world’s resources. Well, it is time for the West to wake up, and accept that the game has changed. What excuse was there for countries with fully developed infrastructure to borrow money, or why did so many individuals borrow so much when their wages might allow for a reasonably good life? It was borrowed because we wanted to consume more than we can produce.”
The post, and in particular this passage, demonstrates fundamental confusion about trade deficits: the author conflates a government budget deficit with a trade deficit.

Governments with monetary independence borrow in their own currency: they do not require foreigners to finance their deficits. When foreigners in fact purchase the newly issued bonds of another country it is because they have freely chosen to convert their foreign exchange for the local currency and purchase the bond. A great deal of government spending goes to purchasing domestic output, and even when money in a government deficit is used to buy an import, the financing of that purchase of a foreign good is a completely separate matter.

The blogger Cynicus Economicus complains that Western nations “consume more than we can produce,” a state of affairs that is allegedly an example of the West “living beyond its means.” What is conveniently ignored is the fact that the Eurozone* is the second largest Western economy (as well as the second largest in the world) and generally has trade surpluses:
Euro Area Trade Balance 2008–2011,
Moreover, any country that successfully runs a trade deficit is not “living beyond its means.” Such a nation paid for its imports because it attracted a capital account surplus to fund its current account deficit.

Foreigners freely and voluntarily bought the nation’s real and financial assets, and gave it the foreign exchange necessary to pay for imports. Even an individual is not “living beyond his means” if he sells, say, four of his 100 luxury cars to pay for additional consumption in one year, over and above his salary: he had the money to pay for his additional consumption by selling his assets. And, if he has a very large stock of many assets (both real and financial) which is constantly growing, he might be able to live like this for his whole life. Some nations (like Australia) have had virtually perpetual trade deficits through their history, but have no difficulty running them, precisely because they have a very large stock of real and financial assets, which is constantly growing, and these assets are bought by foreigners every year to fund trade deficits, even though the actual percentage of financial assets owned by foreigners each year might only fluctuate within the 15–30% range.

In short, the only time that a country is actually “living beyond its means” is when it has a balance of payments crisis, and the whole central argument of Cynicus Economicus collapses like a house of cards.

* The Eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Rothbard’s Argument for Natural Rights: A Critique

Natural rights and natural law were traditionally defended by appeal to the existence of a god or divine agent. Like other early modern natural law philosophers, Murray Rothbard rejected the idea of basing natural law on the existence of god or through theological justifications, but leaves open the question of the existence of god:
“The Thomist tradition … [sc. vindicates] the independence of philosophy from theology and [sc. proclaims] … the ability of man’s reason to understand and arrive at the laws, physical and ethical, of the natural order. If belief in a systematic order of natural laws open to discovery by man’s reason is per se anti-religious, then anti-religious also were St. Thomas and the later Scholastics, as well as the devout Protestant jurist Hugo Grotius. The statement that there is an order of natural law, in short, leaves open the problem of whether or not God has created that order; and the assertion of the viability of man’s reason to discover the natural order leaves open the question of whether or not that reason was given to man by God. The assertion of an order of natural laws discoverable by reason is, by itself, neither pro- nor anti-religious.” (Rothbard 2002: 4).
In this, Rothbard tries to find a non-religious or secular justification for natural law and natural rights independent of the existence of god.

According to Rothbard, natural law and natural rights are supposedly deduced from the essential nature of human beings. Rothbard presents his case for natural rights in For a New Liberty: The Libertarian Manifesto (rev. edn; 2002 [1973]):
“Let us turn then to the natural-rights basis for the libertarian creed, a basis which, in one form or another, has been adopted by most of the libertarians, past and present. ‘Natural rights’ is the cornerstone of a political philosophy which, in turn, is embedded in a greater structure of ‘natural law.’ Natural law theory rests on the insight that we live in a world of more than one—in fact, a vast number—of entities, and that each entity has distinct and specific properties, a distinct ‘nature,’ which can be investigated by man’s reason, by his sense perception and mental faculties. Copper has a distinct nature and behaves in a certain way, and so do iron, salt, etc. The species man, therefore, has a specifiable nature, as does the world around him and the ways of interaction between them. To put it with undue brevity, the activity of each inorganic and organic entity is determined by its own nature and by the nature of the other entities with which it comes in contact. Specifically, while the behavior of plants and at least the lower animals is determined by their biological nature or perhaps by their ‘instincts,’ the nature of man is such that each individual person must, in order to act, choose his own ends and employ his own means in order to attain them. Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life. Since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man’s survival and prosperity that he be free to learn, choose, develop his faculties, and act upon his knowledge and values. This is the necessary path of human nature; to interfere with and cripple this process by using violence goes profoundly against what is necessary by man’s nature for his life and prosperity. Violent interference with a man’s learning and choices is therefore profoundly ‘antihuman’; it violates the natural law of man’s needs.” (Rothbard 2002 [1973]: 26-27).
Against this a number of points can be made, as follows:

(1) It is not even clear that “since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man’s survival and prosperity that he be free to learn, choose, develop his faculties, and act upon his knowledge and values.” Virtually all human beings begin life as children subject to the coercion of their parents who choose to instruct their children with knowledge and values. Children can survive and flourish while being subject to quite severe parental constraints and rules. For example, if one is raised Catholic, one did not give one’s consent as a child to be raised with Catholic values and religion: the choice was made by the parents, but one may well become a moral, successful, and prosperous human being, despite that parental coercion in knowledge and values.

There are even adults who prefer to let others choose their ends. Certain mentally impaired human beings can survive and even flourish even though they are subject to strict control by their carers (on these criticisms, see Feser, Edward, “Rothbard as a philosopher,” August 8, 2009).

(2) Rothbard is wrong that humans possess “no automatic instincts”
Rothbard makes a bold statement:
“Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life.”
What? Human beings do possess “automatic instincts”: hunger, thirst, and a vast range of genetically determined behavioural traits. To take one example: human children have a genetic predisposition to acquire language as naturally as a bird grows its feathers.

(3) Rothbard commits the “is-ought” problem of David Hume.
The central passage where Rothbard attempts to deduce a human being’s natural right to be free from violence or coercion is here:
“the nature of man is such that each individual person must, in order to act, choose his own ends and employ his own means in order to attain them. Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life. Since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man’s survival and prosperity that he be free to learn, choose, develop his faculties, and act upon his knowledge and values. This is the necessary path of human nature; to interfere with and cripple this process by using violence goes profoundly against what is necessary by man’s nature for his life and prosperity. Violent interference with a man’s learning and choices is therefore profoundly ‘antihuman’; it violates the natural law of man’s needs.”
This is subject to Hume’s “is–ought problem”. How is it possible to derive the prescriptive or normative statement (“violent interference with a man’s learning and choices is therefore profoundly ‘antihuman’) from mere descriptive ones?

To see how unconvincing this argument is, one only needs to make some changes to it to see its absurdity:
“the nature of a leaf under the influence of gravity is to fall to the ground, such that each leaf must, in order to fall, be free from obstruction and interference when it detaches from the tree. Possessing no automatic instincts, each leaf must be subject to gravity, and fall to the ground; to interfere with and cripple this process by using interference to stop the leaf falling to the ground goes profoundly against what is necessary by the leaf’s nature. Violent interference with a leaf’s nature is therefore profoundly ‘antileaf’; it violates the natural law of the leaf’s natural action.”
Just because the nature of a leaf is to fall to the ground under the influence of gravity, it does not follow that the leaf has any moral right whatsoever to fall to the ground.

(4) Rothbard’s argument for the “right to self-ownership” is flawed.
Rothbard’s defence of the “right to self-ownership” is as follows:
“The most viable method of elaborating the natural-rights statement of the libertarian position is to divide it into parts, and to begin with the basic axiom of the ‘right to self-ownership.’ The right to self-ownership asserts the absolute right of each man, by virtue of his (or her) being a human being, to ‘own’ his or her own body; that is, to control that body free of coercive interference. Since each individual must think, learn, value, and choose his or her ends and means in order to survive and flourish, the right to self-ownership gives man the right to perform these vital activities without being hampered and restricted by coercive molestation. Consider, too, the consequences of denying each man the right to own his own person. There are then only two alternatives: either (1) a certain class of people, A, have the right to own another class, B; or (2) everyone has the right to own his own equal quotal share of everyone else. The first alternative implies that while Class A deserves the rights of being human, Class B is in reality subhuman and therefore deserves no such rights. But since they are indeed human beings, the first alternative contradicts itself in denying natural human rights to one set of humans. Moreover, as we shall see, allowing Class A to own Class B means that the former is allowed to exploit, and therefore to live parasitically, at the expense of the latter. But this parasitism itself violates the basic economic requirement for life: production and exchange.” (Rothbard 2002 [1973]: 28).
Rothbard’s claim that there are only “two alternatives” to denying each man the right to own his own person is manifestly false, as is shown by Edward Feser (“Rothbard as a philosopher,” August 8, 2009).

In fact, there are a number of alternatives that Rothbard does not consider, as Feser notes:

(1) no human actually owns himself or herself;
(2) a divine, creator being owns all human beings;
(3) one group of human beings might have a right to partial ownership of another group;
(4) all human beings have a partial and/or unequal ownership of everyone else.

Rothbard, M. N. 2002. The Ethics of Liberty, New York University Press, New York, N.Y. and London.

Rothbard, M. N. 2002 [1973]. For a New Liberty: The Libertarian Manifesto (rev. edn), Ludwig von Mises Institute.

Rothbard, M. N. 2006 [1970]. Power and Market: Government and the Economy, Ludwig von Mises Institute, Auburn, Ala.

Feser, Edward, “Rothbard as a philosopher,” August 8, 2009

Saturday, August 13, 2011

Skidelsky versus Selgin: The Full Version

Finally, the LSE debate between Skidelsky and Selgin is available as a full video:

One of the things that stands out to me in this longer version is that the defenders of Hayek were quick to argue that Hayek wanted to stabilise the money supply by 1933 (at 24.51–29.07; and 32.54–34.41), that Hayek was not a “do nothing” economist, and that (like Keynes) he did not want spending to collapse.

Selgin quotes a passage from Hayek’s essay Savings:
“Unless the banks create additional credits for investment purposes to the same extent that the holders of deposits have ceased to use them for current expenditure, the effect of such saving is essentially the same as that of hoarding and has all the undesirable deflationary consequences attaching to the latter” (See Hayek 1975 [1939] for the complete essay).
Selgin also points to the comments in the second edition of Prices and Production (1935).

Skidelsky shot back that Hayek, by accepting this, just fell in line with the neoclassicals of his day, and that monetary stabilisation by open market operations is a highly ineffective way of doing this stabilisation, a very good point, to which no answer was given.


Hayek, F. A. von. 1967 [1935]. Prices and Production (2nd edn.), Augustus M. Kelley Publishers, New York.

Hayek, F. A. von. 1975 [1939]. Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ.

Bill Mitchell on Full Employment

There are quite a few good videos about at the moment.

This is a wonderful but short lecture by Professor Bill Mitchell giving a keynote address at the National Skills Conference in Melbourne (Australia) on June 29, 2011, on full employment from the perspective of Modern Monetary Theory (MMT). What is notable is that the attack on full employment in Australia began in 1975, under the Liberal Prime Minister Malcolm Fraser (1975-1983), and this continued with reduction of public sector employment in the late 1970s.

A better measure of unemployment measures broad labour underemployment, which at the moment in Australia is about 12.2%.

Friday, August 12, 2011

James Galbraith on the Downgrade and Crisis in Europe

A nice interview with James Galbraith on the downgrade, the problems in the Euro zone, and the recent stock market crash.

Steve Keen on Behavioral Finance

Two great lectures from Steve Keen on Behavioral Finance below:

Tuesday, August 9, 2011

Steve Keen on the Return of Bear Markets

An insightful post from Steve Keen analysing the recent stock market collapses from the perspective of Hyman Minsky’s financial instability hypothesis:
Steve Keen, “The Return of The Bear,” Debtwatch, August 9th, 2011.

Who Owns the US Public Debt?

Another great post from Bill Mitchell:
Bill Mitchell, “When the Government Owes itself $US1.6 trillion,” Billy Blog, August 9.
As of March 2011, the composition of US public debt, as percentages of the total gross debt, is as follows:
Federal Reserve holdings 8.9%
Intergovernmental holdings 32.8%
Domestic private 26.9%
Private and Foreign holdings 58.3%
China 8%
Japan 6.4%
Other foreign 17%
First, it is notable that the US government itself holds nearly half of its own debt (41.7%). The Federal Reserve owns more than China does, and the Fed has massively increased its holdings in QE1 and QE2. The bonds held by the Fed are not a burden to the government, and should not be regarded as “debt” in the accepted sense, because these bonds have been bought back from the public by the Fed and are essentially “paid back.” The Fed has the power to create money from nothing and uses this money to purchase bonds, which are then effectively retired. No taxpayer money is normally used in these standard open market operations. Although the Treasury does pay interest to the Fed on the bonds it holds on the asset side of its balance sheet, this money simply goes right back to the Treasury, as the government and central bank are essentially one entity. Thus the interest payments are not a burden to the US government, nor are the bonds held as assets by the central bank. In fact, central bank purchases of bonds reduce the stock of government debt owed to the public, and hence the burden of such debt. In fact, Alan Greenspan, Chairman of the Federal Reserve from 1987-2006, recently told us what we all know:
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

(Greenspan’s remark which is a statement of plain fact is naturally seized upon by Austrians and other free market apologists, with their usual and ridiculous screams about hyperinflation).

Secondly, China itself owned some 8% of the total, as of March 2011. Not really that much. What is the significance of this? Bill Mitchell explains:
“The accumulation of these US-dollar denominated assets is the ‘reward’ that the Chinese (or other foreigners) get for shipping real goods and services to the US (principally) in exchange for less real goods and services from the US. Given real living standards are based on access to real goods and services, you can work out who is on top (from a macroeconomic perspective).
This is consistent with the MMT view that imports are a benefit and exports a real cost – a view also held by Milton Friedman, curiously.