The Economics of Freedom

Hayek vs. Keynes

This is one of the best videos on this economic debate. It also happens to be a pretty good rap.

F.A. Hayek was one of the pioneers in the Austrian school of economics, a school of thought that held the government is not knowledgeable or motivated enough to try to steer the economy in the right direction. He received the Nobel prize for his work. It believed in total economic liberation and that the only legitimate use of government was to protect people from violence. Mises called it “liberalism”; today, we might say it’s “libertarian.”

John Maynard Keynes was an English economist who completely changed the profession of economics with his ideas about how government could put the economy on the right track. His ideas included spending money you didn’t have through debt, discouraging saving, and legal plunder. All of this so that money would continue to cycle and get stuff done. He is the founder of modern economics, and provided the economic theory for the stimulus package.

Liberty or Regulation?

What about that video? Now, how ’bout the ideas behind it? Should the government spur the economy?

See this video for a little more: http://www.youtube.com/watch?v=fXqc-yyoVKg
Hayek doesn’t even trust government to have a monopoly on the money supply. He believes there should be competing currencies. Do you agree the government should have so little to do with the economy? Would the free market have avoided the crash?

Now time for Milton Friedman quotes! Another liberty-leaning school of economics was the Chicago school of economics, the most famous member was probably Friedman, also a Nobel Laureate. He said:

“The market gives people what the people want instead of what other people think they ought to want.”

“‘Fair’ is in the eye of the beholder; free is the verdict of the market.”

So, what do you think?

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31 Responses

  1. The clip certainly is a fresh way of tackling a normally dry subject.

    As far as Hayek is concerned, I’m not sure about the competing currencies concept. Although to some extent, that’s what we have with credit cards. Prior to the Civil War individual banks would print their own dollar bills.

  2. I think I side with Hakek. Because it’s not a really good idea to go into debit. But I also agree with Paul I don’t think we should have “competing currencies.”

  3. I have only one question: why? Why not have competing currencies?

    Hayek’s argument is simple. If we don’t want the government to set the supply or demand for oranges, why have it set the supply of money? How does one determine how much money an economy needs? The easy way is experimentation. That’s what makes a free market work. But you can’t do that if the government has a monopoly on money.

    I could go more into it, but it would probably require a whole post…

    ><> Brian

  4. The answer, Brian, is to have a fixed-value, precious-metal based currency. For example, in the 1800’s an ounce of silver was worth $1. This price never fluctuated. Period. In addition, one could always turn in his dollars for silver, so really the currency was just a representation of that amount of silver. The currency was extremely stable this way. One currency, one standard, one stable economy.

  5. The problem with that solution: It’s based upon the assumption that the supply and value of money should be constant. Why? I see no reason to assume that the economy always needs roughly the same amount of money. I also see no reason to assume that a metal correctly models the correct inflationary policies for a country.

    Even assuming that postulate, the problem is that silver tanked when on mammoth load was discovered in an American Silver mine. That’s why most countries started using Gold, which leaves me wondering: What happens when we discover a gigantic gold mine?

    ><> Brian

  6. @brianfactor

    I agree with this. The problem with a precious metals standard is that precious metals only have the value to them that we assign to them, so it’s delaying the problem, but it doesn’t actually solve it.

  7. @scottishclaymore point taken. If we define money as “The most easily traded thing a society” nothing is safe from inflation. How would competing currencies solve inflation? I would like to hear your definition of money as this will give us a clear outline as to how we solve this problem. Also, one thing precious metals have to their advantage is that there are no artificial ways of making them. Thus, the government does not control inflation. Say we used seashell for currency, one could simply model more seashells and, as long as they were accurate, nobody would notice. Frankly, I’d rather base my economy off tried-and-true methods than “experimentation”. Precious metals have worked for thousands of years, why change now? Wish I could ask Nixon that question.

  8. @brianfactor, You might have a point about competing currencies, but I’m still not sure about it. To an extent we do have competing currencies… world currencies. Americans are just as free to trade in pesos or in dollars as they choose.

    Typically if a government can print money without destroying old bills (like the USA does – the banks ship old bills back to the Treasury) inflation skyrockets.

    Currently there’s about $830 billion of US currency in circulation. So… remember that the stimulus package is about $700 billion? So the Fed isn’t printing any of that, it’s just credit. (BTW, I’m not saying that the stimulus package is working, I’m just saying those are the facts.

  9. Ok, now for the next interesting question I’ve been pondering: why are we trying to “solve inflation”? Inflation simply means that good over the economy are getting more expensive. What’s wrong with that?

    If a good is more expensive to produce, has other harmful effects, or is highly valued, it should be expensive.

    Artificial inflation is bad – that’s agreed. But how is a currency inflating because of competition artificial?

    A gold standard is 100 times better than a blank licence to print money, (like our govt currently has) but, like Richard said, it’s delaying the problem; not actually solving it.

    ><> Brian

  10. @brianfactor That, I’m afraid, is where you’re wrong. The rising price of goods across the economy is a direct result of inflation, not inflation itself. Inflation is any increase in the money supply. For this reason, a precious metal based economy would work well, as it has before. We can ONLY have as many dollars as we have ounces of silver, or grams of gold, or whatever.

    “If a good is more expensive to produce, has other harmful effects, or is highly valued, it should be expensive.” Yes, absolutely correct, this is the free market in action. This is not inflation, but good business.

    Now if you really want to get complicated, lets talk about monetary velocity. The faster money changes hands, the less willing people are willing to hold that currency, the faster it is spent. This means that people who are holding a nearly worthless currency, say one that has lost most of its value since the 60’s (the dollar), don’t want to hold it as long, since it is simply losing value if they keep it. So they buy material assets that aren’t being inflated as fast. People will charge more and more for their goods, the government will print more and more money, and boom! You have hyper-inflation. A precious metal based currency will never, I repeat never, hyper-inflate.

  11. Actually, Luke, you need to look up your economic definitions. Inflation vs. printing money is a common confusion, but, alas:

    “In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services…” http://en.wikipedia.org/wiki/Inflation

    Now, a lot of economists say that the ONLY way that the price of goods can rise ACROSS AN ECONOMY is for the money supply to increase. That’s a legitimate point. But let’s not confuse our terms here.

    “A precious metal based currency will never, I repeat never, hyper-inflate.”
    Unless, as I stated before, we discover some kind gigantic silver/gold mine.

    And, once again, what’s wrong with hyper inflation in itself? (assuming no government manipulation has occurred)

    ><> Brian

  12. Countering your Wikipedia definition (rather sad), according to Recession.org “Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices.”
    Also, hyper-inflation cannot happen without governmental interference. Are you seriously questioning what is wrong with HI itself? Look at Germany during the 20’s. Money supply rapidly increasing created a highly unstable economy where prices were effective for hours. With modern technology, prices would only be effective for minutes, or even seconds.

  13. Here’s what’s wrong with Inflation. It discourages international investment, domestic investment, reduces the worth of everyone’s money, and kills the currency.

    When you’ve worked hard for ten years putting money in the bank, saving, investing, making money; and then all of a sudden the worth of all your work is going down, that’s bad.

    Foreign nations will not be interested in investing because the currency is not stable. Domestic investing will go down because the currency is not stable. Overall, inflation kills your economy.

    Right now, we have an oil-based market. The government should only print money when there is more oil in the market. And print it equal to the amount of oil, so that there is not inflation, nor deflation. The worth of the money does not decrease or increase when it is printed equally to its worth because there is enough oil to keep it even-keeled.

    @brianfactor When you ask “what’s wrong with hyper inflation” just look at Zimbabwe. As of 2008 Zimbabwe’s prices are doubling every 24 hours. (SOURCE: http://www.cato.org/zimbabwe) Zimbabwe has killed their currency and their economy.

    -Ben

  14. Luke, the Wikipedia article cited four sources, all of which were from economists; unlike “recession.org”.
    And I wish you had given me a link to verify you source. When I tried to look up the context, I found this: “Inflation is the rise in the prices of goods and services over a period of time.” http://recession.org/definition I don’t think your source disagrees with me.

    Ben, how is that any different than making a bad real estate investment? You buy up all this land, you didn’t do your research and the value suddenly drops.

    My point is that we can’t argue a particular economic trend is bad just because prices rise. Expensive =/= Bad.

    ><> Brian

  15. @brianfactor Making bad real estate investment? If it drops in value, that’s the buyers fault for not doing his research. Inflation is money being devalued (i.e. stolen) without your control. There’s no point in having money if it’s not worth anything.

    I’m not sure what your last sentence meant. Do you mean that Inflation, deflation, regulation, etc. Don’t matter? And that the only things that matters are expenses?

    -Ben

  16. Look back at the definition.
    Inflation = goods getting more expensive.
    Inflation = / = “devaluing” money.

    (Although inflation usually results in less purchasing power.)

    Remember also the context. We’re not just talking about government currencies here; we’re also discussing privately-issued monies.

    If the government makes a promise of a stable money supply, and then inflates, we’re agreed that it’s wrong. But I don’t see how “private monies would inflate” translates into a disadvantage.

    And, again, every word is important when you’re reading. Inflation is not bad IN ITSELF. That’s what I said.

    ><> Brian

  17. Okay. Devaluing money IS less purchasing power. When it’s not worth as much, you can’t buy as much with the same amount.

    Inflation in and of it self is not exactly bad. If there is more of the commodity to base the currency on, then inflation isn’t bad. But, when there is not more to base the currency on, that’s when negative consequences occur.

    … I think we’re agreeing… indirectly…

  18. FATAL FLAW @brianfactor “If the government makes a promise of a stable money supply, and then inflates, we’re agreed that it’s wrong.” You just negated your definition of inflation. The government does not itself raise prices, businesses do. Inflation is, in fact, increase in the money supply, not rising prices. You do agree with me! And this is the basis of the argument. As soon as the government increases money supply, purchasing power always goes down. Inflation is in fact bad in of itself. Less purchasing power caused by the government is STEALING!!!. Please, word your comments better if you are against what I’m saying, because it looks like you agree with me.

  19. @luke “Inflation is in fact bad in of itself.” What if there is more to base the money on? Printing more money according to the new commodities would technically be “inflation” by you’re definition.

    Are you saying that all new commodities (that we base currencies on) should be allowed to sterilize? (Sterilize: [using example of oil] is when more oil hits the market and the currency is not increased, because there is no compensation oil is then devalued.) That’s dangerous too.

    -Ben

  20. @thebenster Every currency is going to be based on something. Because there is no direct link for dollars to be based on oil(though the two are connected) or anything else, it only has fiat power, with no natural purchasing power. The reason it is easy to base a currency on precious metals is because they are by nature exceedingly rare, thus sterilization has a much smaller effect. With oil, millions of barrels are being pumped every day.

  21. @luke Okay, you sort of missed the point. You say that inflation in and of itself “bad”. If it is “bad” then it should never happen. But (as I already pointed out) if there is more oil (for our dollar) and we don’t print any more money because that would be “bad” (even though there is more oil to back up more dollars which = no devaluation of the dollar.) So, through your ideas we would be sterilizing commodities all the time. Which is dangerous. Not to mention damaging to foreign relations (devaluing their commodities too.)

  22. (NOTE: Replace “and” on third line with “so”.)

  23. So, correct me if I’m wrong but we’ve got three ideas here for currency options:

    a) Base it off gold/silver/copper/whatever “precious” metal we think will be hard to find.

    b) Base it off the most ubiquitous good in the economy. In our economy, that’s oil. In @owenstroud‘s house, that’s me?? (sorry, inside joke)

    c) Base it off supply and demand, like any other good, and allow for banks to compete for the best currency.

    I think the right frame of mind is “Every currency is going to be based on something.” (@luke) The WRONG frame of mind is that “something” must be a good (an object).

    So, guys, convince me. WHY base it on an object and not on market forces?

  24. How do you mean base our currencies “on market forces”?

  25. Just like I said before – competing currencies. Let private banks compete for who has the monies that best meet the economy’s need rather than giving the government a money monopoly.

  26. @Brianfactor So… You advocate a Constitutional amendment?

  27. Why’s that a problem?

  28. No, its just REALLY difficult.

  29. Okay, so I haven’t actually read all the comments all the way through, but I just wanted to point something out:

    Economists themselves don’t agree on the definition of “inflation”. I have heard it defined several ways by different economists. From what I’ve gathered through reading economic books and taking my two economics courses here at Baylor, here is what inflation is NOT.

    Inflation is NOT, as most economists will say, “a rise in the price of goods and services over time”. Unlike what someone else said earlier, inflation is NOT the only reason this could happen. If the price of something really important to our economy goes up, it could cause the prices of everything to go up. In our economy, this is oil and gas. When the price of oil and gas go up, the price of EVERYTHING will go up as well, because almost every good or service either uses oil/gas in the production, or it uses it in the transportation of those goods (people in the case of services). Although it is not a direct correlation, it still happens. Therefore, we cannot make the blanket statement that rising prices are inflation. A lot of economists describe it this way because the rising prices are what we can see, and therefore we understand it. However, the rising prices themselves are not inflation.

    There are several reasons prices might rise. Inflation is what happens as a direct result of the value of money going down. Not changes in supply or demand, not decisions of the individual businesses, not changes in the quality of goods or services. When the purchasing power of money goes down with everything else remaining constant, THAT is inflation. It takes more money to buy the exact same goods and services.

    Now, what causes the devaluation of money? In theory, there are several things that could cause a devaluation, but in practicality, it most often comes down to an increase in the money supply. However, DON’T SAY that an increase in the money supply is inflation. If it were possible to increase the money supply without causing prices to rise, inflation would not happen. Granted, this is almost impossible to do, because you would basically have to increase the money supply at the exact same rate of increases in goods and services.

    Please don’t equate an increase in either prices or the money supply with inflation. There has to be a SPECIFIC REASON for those increases, and a SPECIFIC RESULT of the increase in money supply. If anything, inflation needs to be defined as “the increases in the prices of goods and services due to the devaluation of currency”.

    Also, whoever said that the United States prints new money without destroying old money is wrong. Old bills get shredded at the Treasury. Granted, old bills are not destroyed at the rate that new bills are produced, so the money supply increases, which results in inflation.

    I actually agree with Hayek on the idea of competing currencies. The major flaw with the government (or, technically, the Fed, which is a “non-government agency”, which although technically true, is basically hogwash in practicality) controlling the money supply is that they are trying to fulfill two competing goals: first, avoid inflation; second, keep the interest rate stable. The interest rate determines the rate of investment in the economy. The more money is in the economy, the more will be invested. However, if too much money is introduced, inflation results. The major flaw here is that the Fed assumes it knows how much or how little investment the economy needs, and therefore has the information it needs to set the interest rate. In my arrogant-college-student opinion, this is hogwash, the Fed doesn’t know what they’re doing and they should leave the money supply alone and let the free market determine equilibrium money supply and investment.

    Now, while inflation is not inherently bad, it is inherently problematic. That may seem like a contradiction, so let me explain. Inflation is inherently problematic because nothing GOOD results from inflation, all the results of inflation tend to be bad. It causes an inherent instability of the value of currency, which causes problems when negotiating wages (do we really know how much we’ll need to make in order to buy what we need?) and other sorts of contracts. It also causes fear in some people, and instead of investing their money they will spend it now because they are not sure that their money will buy the same amount of goods and services ten years from now, even with interest, that it could today. The inherent value of goods tends to be constant, while the inherent value of money is not.

    Now, having said that, inflation will naturally happen as other things happen, so we cant say inflation is inherently bad. Even if we had competing currencies, money supply would still increase, causing inflation. However, money supply increases would be happening as a result of increasing demand for money through increased investment, increased goods and services, etc., so we couldn’t say that inflation is bad. It just…is. We try to control it as much as we can because of its consequences, but it’s going to happen regardless of who controls the money supply.

    • I think maybe I’m starting to get what you’re saying. It seems to me like a contradiction, which is maybe why it took so long to understand.

      Re: oil as a cause of inflation
      I think Ben alluded to this idea when he said the rate of inflation should fit the price of oil. The problem is that a higher price of oil doesnt just raise the price of most goods – it also decreases the demand. When people have to spend more money on oil based products, they have less money for other goods. Therefore, there is no NET increase in price across the economy unless there’s an increase in the money supply.

      I guess I got confused by how you then defined inflation as “the increases in the prices of goods and services due to the devaluation of currency”. So is inflation the legitimate cause or not?

      And this still confuses me: “Inflation is NOT, as most economists will say, “a rise in the price of goods and services over time”. Unlike what someone else said earlier, inflation is NOT the only reason this could happen.”

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