Wednesday, July 28, 2010

Cwik Lectures at FEE in 2010

This summer I had the opportunity to give eight lectures at two of FEE's Summer Seminars. The first seminar was called "Freedom University" and the second was "Introduction to Austrian Economics."

FEE is in the process of posting the lectures in both audio and video forms. (As they become available, I will update this post.)

The lectures are either new or very much reworked from last year's presentations. There is significantly more content in the lectures.

In addition to the lectures, I have also provided FEE with the PowerPoint Presentations that I used.

I hope you like them. Please give me feedback one way or the other.

So here is the lineup with the appropriate links:

Freedom University
Lecture #1: Praxeology, Supply and Demand
This lecture starts with the foundational building blocks of economics: the Human Action Axiom and derives Supply and Demand curves, a model of the market and finishes with a comparison between the mainstream's derivation of demand curves with that of the Austrians.
The link for the audio page is
here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #2: Competition and Entrepreneurship
This lecture looks at how markets are able to solve the problems of how we transform raw materials into goods and services, but not just randomly. We need to create useful goods and services, but again, not just randomly useful goods and services. We want to create goods and services that satisfies the most intense wants and desires of the consumers without wasting resources. The lecture concludes with a comparison of the Austrian view of competition with that of the mainstream.
The link for the audio page is
here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #3: Business Cycles
This lecture is at an introductory level and is not very technical. The lecture focuses on the causes of the business cycle as well as the cures.
The link for the audio page is
here. There was no corresponding PowerPoint with this lecture.

Lecture #4: Current Economic Events

This lecture was opened up so that, during the week, students could request topics that interested them. The first part of the lecture deals with the Economic Crisis in Greece. The second part focuses on the economic situation in the US. And the third part centers on the Yasuni National Forest in Ecuador.
The link for the audio is page
here. There was no corresponding PowerPoint with this lecture.

Introduction to Austrian Economics
Lecture #1: Menger and the Early Austrians

This lecture covers the thoughts and ideas that found the Austrian School of Economics. It includes the work of Carl Menger [1840-1921], Eugen von Böhm-Bawerk [1851-1914], Friedrich von Wieser [1851-1926], David I. Green [1864 - 1925], Philip Wicksteed [1844-1927], and William Smart [1853-1915].

The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #2: Methodology
To my delighted surprise, this lecture received the most attention by the students. It starts with a brief discussion of the Methödenstreit. It then critics Modern Positivism/Empiricism. Finally, it presents the Misesian Praxeological view and the relation between theory and history.

The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #3: Capital and Interest
This lecture begins with the questions posed by Böhm-Bawerk. It then provides an introduction into Austrian Capital Theory and the Structure of Production. It then presents the traditional Austrian theory of interest. And then draws comparisons between the Austrian view and the Neo-Classical view of capital and interest. A proper understanding of capital and interest theories is critical to understanding business cycle theory.

The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #4: Business Cycles
This lecture is a more advanced presentation of the Austrian Business Cycle Theory. In the tradition of Roger Garrison, extensive use of graphs is made. The lecture then demonstrates how that simply adjusting the money supply, adjusting prices, or spending money to boost aggregate demand are all inadequate to create an economic recovery. The key to an economic recovery is liquidation of malinvested capital and creation of new and proper capital structures.

The link for the audio page is not yet posted. The PowerPoint for this lecture is forthcoming.

The Prodigal President (and the rest of us too!)*

*This article appears as an Editorial in July 28th edition of The Garner Citizen News and Times here.

I cannot recall the first time that I heard the story of the prodigal son. I know that I have heard this story at least once a year in church and I am sure it has been more than that. For the longest time I thought that “prodigal” meant that the son returned. So I thought that the title meant that the story was about a returning son. I could not have been more wrong. Recently, the true definition of the word “prodigal” was brought to my attention. According to, the definition is “wastefully or recklessly extravagant.”

In other words, the story is about the wasteful son, who asks for his fortune upfront and then spends it all in a reckless and extravagant manner. What was known to the people that Jesus was telling the parable to, and unknown to me, was that being prodigal was acting sinfully. Every one knew that spending everything on trifles and then borrowing, spending that, and then trying to spend even more, was just flat-out wrong.

It is amazing how much the world has (and has not) changed. Today, Americans are encouraged to spend, spend, spend. We are encouraged to run up credit card debt and purchase luxury items like new TVs, stylish clothes and nice gadgets. The tax code is designed to discourage savings and thrift. It is designed this way purposefully.

The dominant economic philosophy that governs the writers of our tax codes is the Keynesian economic philosophy. In the Keynesian point of view, GDP and Aggregate Demand are everything. According to economists, Aggregate Demand is defined as the summation of Consumption, Investment, Government Spending, and Net Exports. The largest component in this list is consumption. Therefore, the government “encourages” us, by manipulating the tax code, to spend our money on consumer goods, especially in a recession.

The government wants us to be a “prodigal populace.” (I think that they have been largely successful.)

Continuing along the Keynesian train of thought, since we are in a recession, it can be concluded that there is simply not enough Aggregate Demand. Thus, we need to increase one of the variables to boost our GDP. The variable most easily manipulated is government spending.

The Congress has been more than a willing accomplice to increasing government expenditures. The Federal Budgets have been as follows: $2.7 trillion (2007), $2.9 trillion (2008), $3.5 trillion (2009), $3.7 trillion (FY2010). In less than four years, we have expanded the annual Federal Budget by another trillion dollars. Meanwhile we have increased the national debt to well over $13.1 trillion. Despite these record levels, there are many in Washington that say that this is not enough.

We are clearly living in an age of the “prodigal politician.”

Finally, we come to the piece of news that recently caught my attention. The White House announced that through the $862 billion stimulus package that was passed in 2009, somewhere between 2.5 and 3.6 million jobs have been “saved” or created. I have no idea how one calculates a “saved” job, but let’s assume that these numbers are true. In fact, let’s assume that the larger number of jobs (3.6 million) is the correct number. So, how much did we spend per job? (The math isn’t all that hard.) The answer is $239,444.44 per job!

We can easily see that this is a policy package that was created by a “prodigal President.”

Why? Because, the jobs created by the stimulus package must be some of the nicest jobs in the world. I think that I would like to have a $239,444 job. In fact, with all of this excessive, wasteful and reckless spending I’ve been doing recently, I think that a job that pays $239,444 is the only way I will be able to start to pay my bills. Then again, maybe I should just go ahead and spend it all anyway. But if I did that, would I then become a prodigal Paul?

Wednesday, July 21, 2010

Are We Still in a Recession?

If you ask an economist for a technical definition of a recession, you’ll probably get an answer that limits the experience to a decline in output. In fact, once the economy hits bottom, then every small increase thereafter is called “the recovery.” Here is what a business cycle and a recession look like:

The recession is the shaded area that begins at the top of the business cycle and ends at the bottom of the trough. If one asks a non-economist about this definition, they’d tell you that there was something clearly wrong here. A non-economist is most likely to describe a recession as not being over until at least the time when we recover to the trend line. Anything before that, we have a “depressed” economy.

(It’s funny to see how dogmatic the economics profession is on this point, especially when we mix politics in with these definitions.)

If you ask an economist how long the Great Depression lasted, you will get the answer that it started in 1929 (Spring 1929, if it’s a good economist) and that it ended around 1939/1940. However, if we truly look at the data, we see the following ups and downs over this period.

As indicated in the graph, the shaded areas indicate recessions. What we see is that, technically, there was no such thing as “the Great Depression,” but rather a steep, prolonged recession, a slow recovery, followed by another recession.

Does this graph seem similar to what we are currently experiencing?

Will there be a second recession? Will this be called the Second Great Depression by future economists? Only time will tell.

It was for these reasons that I have helped to create the Distress Index and update it monthly. You can see it on the left hand side of this blog. It helps us to see where we are in the greater schema of the economy. Any number above a 47.0 seems to indicate that there is a fair amount of distress in the economy.

So check back frequently to see the updates.

Thursday, July 15, 2010

I am Doomed

I have been told that you don’t really know anything until you experience it first hand. While this might not always be the case, it is certainly true when it comes to raising children. Is it a rewarding experience? Yes. Is it a necessary experience? Absolutely. Nevertheless, having one child is not a good indicator of how hard and time consuming raising two children can be.

During this past week, I have had a revelation. I am doomed, at least in regards to the new rationed health care system that we are soon going to enjoy. During this past week, my wife scheduled an appointment with her hairdresser. Since she is a stay-at-home Mom, I try to accommodate these outings as best I can. So I got to play Mr. Mom at home. In fact, it started out rather nicely. The wife dropped the boy off at his half-day preschool, so it was just me and the three-year old girl for the morning. Breakfast, playing, reading, lunch all went smoothly.

Then the carpool brings the boy home. However, he is sporting a fashionable band-aid on his hand. Apparently, at preschool, he was running, fell into the mulch and embedded a 0.5 – 0.75 inch splinter in his palm. It looked like it was removed, but I couldn’t really tell. So while he had his lunch, I called the injury expert—my Mom. After lunch and an inspection by Grandma, it was determined that a call to the pediatrician was necessary.

So I called and got a message that they were out to lunch until 2pm. I then impatiently waited an hour and called again. Shortly after 2pm, I got through and talked to a machine. After not pressing numbers 1-8, I got a person who then said that the next available appointment was at 4:50pm. From a larger perspective, I suppose that this is perfectly reasonable, but I have discovered that I am not very good at waiting. I am a fairly impatient person when it comes to the service industry. All I could think of was that this appointment was about three hours away.

And then it struck me, I am doomed when socialized medicine becomes reality. The most distinguishing feature of socialized health care is the incredible amount of waiting one has to do.

You see, scarce resources need to be rationed. There are so many people that want the services and there is less than that available. If there were more available than people wanted, then the resource wouldn’t be economically scarce; it would be a free good. The economic question that arises is how do we divvy up the resources to the people who want them? There are a number of methods to do this distribution: according to need; first come, first served; a lottery; by force; according to merit; or by the market.

With the sole exception of the market, all of these methods ignore supply incentives. In other words, when there is an increase in demand none of these, except for the market solution, will communicate to the producers that more is needed and reward those who produce that extra amount. The non-market methods of distributing goods and services translate an increase in demand into an increase in non-pecuniary costs, like, for example, standing in line. Instead of creating more health care services, the lines just get longer and longer.

So I suppose that I should be thankful that I was able to schedule an appointment for the same day. I think that in the not too distant future, I will be able to think back nostalgically and think, “Do you remember when you could call a doctor’s office and make an appointment for that same day, instead of days (weeks, months, whatever) later like we have today?”

What I do know is that I will not be able to skirt the system. My wife will have to take charge of this as well. She has the comparative advantage when it comes to bribery. She lived in Eastern Europe that had freshly thrown off the yolk of communism. While they were striving for freedom, there were several industries that had not been completely adjusted to the market.

Here is the story that she likes to tell… She was skiing, hurt her neck and decided, later, that she needed to see a doctor. Making an appointment in the official manner would have taken months. So some of her friends, had friends who knew people, who set up an appointment for her. It required a bribe—coffee. Apparently, coffee was rare and expensive at this time. However you can’t do what I would have done and say, “Here’s your bribe, may I now see the doctor?” No, that wouldn’t do. Instead there is a whole art to bribery. What my wife was told to say was, “As I was walking to the office, I noticed this coffee in the store window and thought that you might really enjoy it, blah, blah, blah….”

So this analysis leads me to an inevitable conclusion. I have no patience to wait for health care services and I have no bribery skills. So in the coming years, when socialized health care takes over, I am doomed. Now some young entrepreneur might sense an opportunity here. How about a class on how to bribe? If my wife offered such a class, I could then send her into the work force and permanently become a stay-at-home Dad. Oh my! That might even be worse. I am so doomed.