May 24^th, 2013 will remain in the annals of the Circle Bastiat as an infamous day of self-promotion. There is indeed a second publication which yours truly is most happy to announce: the Russian edition of the Last Knight of Liberalism: Последний рыцарь либерализма: Биография Людвига фон Мизеса (Chelyabinsk: Социум, 2013), 893 pp. Translated by Alexander Kuryaev, Tatiana Danilova, Elena Vasilyeva, Marina Oborina, Yuri Nurmeev, Vasily Koshkin, and Natalia Avtonomova.

My Bielorussian doctoral student, Olga Peniaz, sent me the picture of the book-cover, which seems to be identical with the Amercian edition except for the Cyrillic letters. How truly astonishing that the first translation of this book (and possibly the only one ever) has been made for those very people who arguably suffered most under the ideas of statism and socialism, which the great Ludwig von Mises opposed so fiercely during all his life. My special thanks go to the wonderful persons who have made this edition possible, especially to the sponsors, and to the translator team coordinated by Alexander Kuryaev, who also made a book presentation on May 18^th (watch the video as from about 1h30). God bless you, and I hope to meet you all in person one day.

Yours truly is happy to announce a new book publication : Krise der Inflationskultur (Munich: Finanzbuch-Verlag, 2013), 320 pp.

The strongest criticisms of fiat money and central banking have been based on monetary considerations and on the theory of capital. By contrast, the repercussions of an inflationary monetary system on financial markets and on the use of wealth has been somewhat neglected. The present essay on the political economy of finance fills this gap. The central thesis is that, in a fiat money system, financial markets tend to turn into engines of destruction; they absorb excessive amounts of savings, facilitate the consumption of savings, and reinforce a culture of inflation that saps and undermines the economic foundations of civilisation.

The publisher wished to announce the title early for marketing purposes, thus we had to make up a title (Crisis of the inflation culture) that approximately covered the essence of the book. But writing it was very much a work in progress, and it turned into something much more fundamental than I had planned. Initially the project was to publish a collection of some of my German-language articles and op-eds that had been published in the previous five years, in which I had commented on the never-ending financial crisis and highlighted various implications of capital theory. But once I sat down to put this material into a meaningful order I realised that the result would be very unsatisfactory both for the readers and myself. Thus I started to invest much more into the project, first filling gaps, then adding ever more new material, and taking out more and more of the material that was initially supposed to be in the book. When the manuscript was completed it had turned into an entirely new book, definitely a result of my studies and teaching as from about 2006, but nothing that I had imagined or planned quite in that way. The invisible hand, once again.

The only negative externality was that the title no more quite reflected the essence of the book. If I had to give it a new title now it would be Fiat Money and the Wealth of Nations or Political Economy of Finance or maybe The Finance of Nations. One of these shall be the title of the American edition, forthcoming from the Mises Institute in 2014.

Table of contents
Intro
PART ONE: On Growth
I Savings and growth
II The role of financial markets
III Scarecrow deflation
IV Money illusions
V On the appropriate use of statistics
PART TWO: On Inflation
VI Inflation and price inflation
VII The Misesian critique of inflation
VIII The bubble economy
IX The nationalisation of wealth
X Inflation culture
PART THREE: Dealing with the crisis
XI Billy-goat the gardener
XII Fewer crises through smaller government
Arguments developed in the first part (more in the other two parts)

(1) The uses of savings in a free society. Virtually any proportion of income can be saved (short of 100%). As the savings rate increases, investment increases as well, but less than savings, because the return on investment diminishes. This means that in a flourishing and free economy more and more savings tend to fund non-commercial projects: arts, science, philanthropy, environment, and the embellishment of public space.
(2) Financial markets are not necessary for the “financial division of labour” between savers and the final users of savings. The same function is fulfilled by the traditional form of savings through money hoarding. This point is completely neglected in today’s academic literature on financial markets. Due to Fritz Machlup’s very negative influence, Austrian economists too did not sufficiently stress this point. The implication is that all forms of savings are conducive to economic growth, and ultimately for the same reasons.
(3) The political dimension of the transition from money hoarding to financial saving-investment is a greater dependence on financial intermediaries and, especially, much lower costs for governments bent on expropriating the wealth of the citizens.
(4) The true reason why financial markets can be instrumental in fostering growth is that, as a tendency, they stimulate savings (that is, they provide incentives to reduce spending on consumers’ goods). This point too is completely brushed under the carpet in the conventional financial literature. According to the prevailing opinion, financial markets help collecting money that would otherwise lay dormant in money hoards without diminishing consumer spending whatsoever. Thus they stimulate aggregate spending respectively aggregate demand. Therefore (and not because they encourage savings) they allegedly tend to promote growth.
(5) Financial markets tend to promote growth only in a competitive environment. If they are hampered by government regulations (“financial repression”) they become prone to inefficiency and corruption. If they are subsidised, they suffer from moral hazard, absorb excessive amounts of savings; this entails wasteful uses of capital and it also facilitates political abuses. Today financial markets are massively regulated and they are also massively subsidised through the printing press. This two-fold damage is usually overlooked. In particular, the conventional theory has no place for the notion that financial markets absorb excessive amounts of savings. Its motto is: the more, the better. We present data to show that, today, in all major countries, a large part of financial savings (40-60%) are used to finance public and private consumption, rather than non-financial firms.
(6) Price-deflation and the deflation of the money supply, respectively the risk thereof, are essential features of a free economy. They impose limits on the development of the credit market and preserve the practice of equity finance and of high liquidity.
(7) National accounting fully confirms the Austrian analysis. Savings-investments are the main source of revenue in developed countries. I demonstrate this with data from the US (BEA) and from Germany. I also have corresponding data for France, Japan, and the UK.
(8) Austrian economists draw attention on the fact that capital consumption embellishes nominal and real GDP figures in the short run. I analyse the case of fixed capital of German non-financial firms to illustrate this point, highlighting the significance of GDP and inflation-rate figures, and how they are calculated.

Robinson: …[N]ow you’re saying that multiculturalists [who argue for] bringing kids into [academic] institutions for which they’re ill-qualified — you take bright, hard-working, otherwise perfectly well-qualified students and put them in the wrong institution and you set them back in life.
Sowell: Yes.
R: And they’re culpable as well. They had ought to know better.
S: Yes.
R: Intellectuals and Race, quote: “The Intelligencia pay no price for being wrong.”
S: I think that’s the secret of their influence.
R: How’s that?
S: Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.
R: Tom, you’re coming pretty close to saying that intellectuals aren’t very smart.
S: [Laughs.] They are very smart in very limited areas. And they don’t realize [it]. That’s the problem.

Although Sowell’s book isn’t explicitly about epistemology, it does deal with critiques Austrians have long made to understand why false ideas persist. For instance, Keynesian ideas persist among intellectuals in large part because so many intellectuals accept them uncritically. Indeed, to point out the failures of massive Keynesian stimulus since 2008 is the intellectual equivalent today of pointing out the emperor is not wearing any clothes. In both cases, too many careers and incomes depend on ignoring what is actually quite obvious. Mises pointed this out in Human Action (Scholar’s Edition, p. 868) as well when he noted that “[t]ax-supported universities are under the sway of the party in power. The authorities try to appoint only professors who are ready to advance ideas of which they themselves approve.”

The result is a herd mentality that affects the tenor and quality of much discourse in higher education today, whether it is about race, economics, the environment, marriage and the family, or “good citizenship.” The irony is that the Keynesian notion of animal spirits is actually strongest within the marketplace of ideas where, at present, state-supported research institutions exert the most influence.

For more, see Mises’ Epistemological Problems in Economics and Hayek’s Counter-Revolution of Science. For a personal account of these issues, also see Bill Anderson’s short article, “Austrian Economics and the ‘Market Test’: A Comment of Laband and Tollison”.

For example, he said in the Communist Manifesto  that: “The cheap prices of its commodities are the heavy artillery with which [ the profit system]…compels all nations, on pain of extinction, to adopt the  [ profit]… mode of production.” President Obama evidently missed that passage, since he claimed in a debate with Mitt Romney that the government could provide health services more cheaply because it did not have to earn a profit. The truth, as even Marx understood, is that  the search for profit  drives prices down.

One of the few things Keynes got right was his dismissal of Marx. He told his student Michael Straight: ” Marxism was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523] Curiously, Marx had already said much the same about Keynesianism, even before Keynes was born. His scorn for Keynesianism was of course possible because there wasn’t anything particularly new about what Keynes said.

Here is the passage from Capital [ P. 827-29] in which Marx seems to be anticipating the Keynesian  system:

“The only part of the so-called national wealth that actually enters into the collective possessions of modern people is– their national debt. Hence,…the modern doctrine that a nation becomes richer the more deeply it is in debt. Public debt becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of blasphemy against the Holy Ghost….

As with the stroke of the enchanter’s wand…, [ the public debt] endows barren money with the power of breeding and thus turns it into capital.”… [But] modern fiscal policy…contains within itself the germ of automatic progression. Overtaxation is not an accident, but rather a principle.”

It would be fitting punishment for Marx and Keynes to have to debate each other face to face forever  in some gloomy spot beyond the River Styx.

Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions. . . . monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems.

Unfortunately, President Bullard did not articulate those “more direct labor market policies,” but they would include: the repeal of minimum-wage legislation, which destroys jobs for the unskilled; the repeal of the National Labor Relations Act, which coerces employers into collective bargaining and privileges union “insiders” against non-union “outsiders” causing unemployment or lower wage rates among the latter; and the phasing out of unemployment “insurance,” which encourages unemployed workers to spend an excessive amount of time in “searching” for jobs.

The full PowerPoint presentation of Bullard’s speech can be found here.

The Great Deformation is an indispensable book, packed with insights and careful historical analysis. The massive bailouts injected into the economy by the Bush Administration in response to the 2008 crisis were not needed to stave off a collapse of the monetary system. To the contrary, Stockman shows, they were a triumph of “crony capitalism”. This nefarious system, based on massive government debt, has deep roots in twentieth-century economic history. Stockman offers one of the best discussions I have ever read of Roosevelt’s New Deal, and the vital role of Richard Nixon on our road to financial ruin receives much needed stress. Neither Keynes nor Milton Friedman fares very well here, and readers will learn why the policies of both of them have led to disaster. The Great Deformation is a magnificent defense of a free economy and sound money.