Central Banks in Many Countries Have for Decades Published Deliberately Misleading Statistics

Central banks in many countries, the venerable Bank of England not excepted, have for decades published deliberately misleading statistics, as, for example, when part of the gold in their possession is put under “other assets” and only part is shown as “gold.” In democratic Great Britain before World War II, the Government’s “Exchange Equalization Account” suppressed for a considerable period all statistics about its gold holdings, although it became clear later that these exceeded the amount of gold shown to be held by the Bank of England at the time. This list could be greatly lengthened. If respectable governments falsify information for policy purposes, if the Bank of England lies and hides or falsifies data, then how can one expect minor operators in the financial world always to be truthful, especially when they know that the Bank of England and so many other central banks are not? 

—Oskar Morgenstern, On the Accuracy of Economic Observations, 2nd ed. (Princeton, NJ: Princeton University Press, 1973), 20-21. 

Oskar Morgenstern Questions the Accuracy of Economic Data, the Very Basis for Econometrics

A Morgensternian critique of econometrics is different from other critiques that focus on econometrics as practiced by prominent economists. Edward Leamer (1983), in an influential article, stated that econometric analysis is not taken seriously due to the amount of “data mining” and “number crunching.” Econometricians make implicit assumptions about the distribution of errors, the functional form, and the variables in the model. According to Leamer statistical interference is based on opinions and whims. In a similar way, Deirdre McCloskey and Steven Ziliak (2008) criticize the procedure of econometricians and the abuse of significance testing. Too often statistical significance is confused with real world significance. Morgenstern’s critique is, however, on a different level. The critique of econometric practices and techniques does not deal with the accuracy of the underlying data but takes it as given. Morgenstern more fundamentally questions the accuracy of economic data and, consequently, the very basis for econometrics.

It is indeed surprising to note how much the problem of accuracy in economic data has been neglected. This is not the case in the physical sciences (Preston and Dietz 1991). Within the physical sciences the error of observation is always explicitly mentioned, yet in economics there is simply no error estimate. This means that economists do not know the accuracy of the economic data presented to them. This is even more troubling when one considers that in social or economic data there are more possible sources of error than in the physical sciences. Economists, therefore, face the question of why the problem of accuracy of economic data is rarely mentioned or passed over in silence in economics, while in the physical sciences this problem is widely acknowledged.

—Philipp Bagus, “Morgenstern’s Forgotten Contribution: A Stab to the Heart of Modern Economics,” American Journal of Economics and Sociology 70, no. 2 (April 2011): 542. 

Under Democratic Government, the Problems of Capital Preservation and Accumulation Become the MAIN Issue of Political Antagonisms

If such a country is under a democratic government, the problems of capital preservation and accumulation of additional capital become the main issue of political antagonisms. There will be demagogues to contend that more could be dedicated to current consumption than those who happen to be in power or the other parties are disposed to allow. They will always be ready to declare that “in the present emergency” there cannot be any question of piling up capital for later days and that, on the contrary, consumption of a part of the capital already available is fully justified. The various parties will outbid one another in promising the voters more government spending and at the same time a reduction of all taxes which do not exclusively burden the rich. In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens. In the individual citizens’ budgets the state was an item of expenditure. Today the majority of the citizens look upon government as an agency dispensing benefits. The wage earners and the farmers expect to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption. 

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:849-850.

Failing to Understand the Problems of Capital, the Welfare School Pushes Santa Claus Fables

The Santa Claus fables of the welfare school are characterized by their complete failure to grasp the problems of capital. It is precisely this defect that makes it imperative to deny them the appellation welfare economics with which they describe their doctrines. He who does not take into consideration the scarcity of capital goods available is not an economist, but a fabulist. He does not deal with reality but with a fabulous world of plenty. All the effusions of the contemporary welfare school are, like those of the socialist authors, based on the implicit assumption that there is an abundant supply of capital goods. Then, of course, it seems easy to find a remedy for all ills, to give to everybody  “according to his needs” and to make everyone perfectly happy. 

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:848.

After the “Court Packing” Attempt of 1937, the Supreme Court Gave Up Its Mission of Protecting Property from Depredations

 When the Supreme Court, operating under the old principles, declared unconstitutional a number of New Deal laws, Roosevelt tried to alter its composition by adding new and more liberal justices. Although the infamous attempt to “pack the Court” in 1937 failed, the demoralized Court beat a retreat, and as old justices retired and appointees of Roosevelt replaced them, its philosophical complexion underwent substantial change:

The lacerating struggle over the validity of the New Deal Program engendered lasting hostility to the judicial protection of property rights. . . . Once the Supreme Court accepted the New Deal, the justices abruptly withdrew from the field of economic regulation. This reflected a monumental change in the Court’s attitude toward property rights and entrepreneurial liberty. From its inception, one scholar noted, “the Court deemed its mission to be the protection of property against depredations by the people and their legislatures. After 1937 it gave up this mission.” A sharply limited concept of property rights thus operated for the next generation. . . . Consequently, the Court gave great latitude to Congress and state legislatures to fashion economic policy, while expressing only perfunctory concern for the rights of individual property owners.

—Richard Pipes, Property and Freedom (New York: Alfred A. Knopf, 1999), Vintage e-book.

The Popular Doctrine of Modern Interventionism Exists in Defiance of Economic Science

 In defiance of economic science the very popular doctrine of modern interventionism asserts that there is a system of economic cooperation, feasible as a permanent form of economic organization, which is neither capitalism nor socialism. This third system is conceived as an order based on private ownership of the means of production in which, however, the government intervenes, by orders and prohibitions, in the exercise of ownership rights. It is claimed that this system of interventionism is as far from socialism as it is from capitalism; that it offers a third solution of the problem of social organization; that it stands midway between socialism and capitalism; and that while retaining the advantages of both it escapes the disadvantages inherent in each of them. Such are the pretensions of interventionism as advocated by the older German school of etatism, by the American Institutionalists, and by many groups in other countries. Interventionism is practiced—except for socialist countries like Russia and Nazi Germany—by every contemporary government. The outstanding examples of interventionist policies are the Sozialpolitik of imperial Germany and the New Deal policy of present-day America.

—Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2011), 69.

The Most Foolish Accusation Against the System of Free Trade and Private Property Is That It “Atomizes” the Body Social

Of all accusations against the system of Free Trade and Private Property, none is more foolish than the statement that it is anti-social and individualistic and that it atomizes the body social. Trade does not disintegrate, as romantic enthusiasts for the autarky of small portions of the earth’s surface assert; it unites. The division of labour is what first makes social ties: it is the social element pure and simple. Whoever advocates the economic self-sufficiency of nations and states, seeks to disintegrate the ecumenical society; whoever seeks to destroy the social division of labour within a nation by means of class war is anti-social. 

A decline of the ecumenical society, which has been slowly forming itself during the last two hundred years under the influence of the gradual germination of the liberal idea, would be a world catastrophe absolutely without parallel in history as we know it. No nation would be spared. Who then would rebuild the shattered world? 

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 276.

A Great Sociological Achievement of Classical Political Economy Was to Recognize the Social Function of Private Property

The division of individuals into owners and non-owners is an outcome of the division of labour.

The second great sociological achievement of Classical Political Economy and the  “individualistic” social theory of the eighteenth century was to recognize the social function of private property. From the older point of view property was always considered more or less a privilege of the Few, a raid upon the common stock, an institution regarded ethically as an evil, if sometimes as an inevitable one. Liberalism was the first to recognize that the social function of private ownership in the means of production is to put the goods into the hands of those who know best how to use them, into the hands, that is, of the most expert managers. Nothing therefore is more foreign to the essence of property than special privileges for special property and protection for special producers. Any kind of constraint such as exclusive rights and other privileges of producers, are apt to obstruct the working of the social function of property. Liberalism fights such institutions as vigorously as it opposes every attempt to limit the freedom of the worker. 

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 276-277.

In His 1903 Work Titled “Money” (“Das Geld”), Karl Helfferich Laid Down the “Austrian Circle” Challenge to the Austrian School of Economics

In 1903, the influential monetary economist Karl Helfferich, in his work on Money, laid down a challenge to the Austrian School. He pointed out correctly that the great Austrians, Menger, Böhm-Bawerk, and their followers, despite their prowess in analyzing the market and the value of goods and services (what we would now call “micro-economics”), had not managed to solve the problem of money. Marginal utility theory had not been extended to the value of money, which had continued, as under the English classical economists, to be kept in a “macro” box strictly separate from utility, value, and relative prices. Even the best monetary analysis, as in Ricardo, the Currency School, and Irving Fisher in the United States, had been developed in terms of “price levels,” “velocities,” and other aggregates completely ungrounded in any micro analysis of the actions of individuals.

In particular, the extension of Austrian analysis to money faced a seemingly insuperable obstacle, the “problem of the Austrian circle.”

—Murray N. Rothbard, The Essential von Mises (Auburn, AL: Ludwig von Mises Institute, 2009), 55.

The Austro-Hungarian Bank Saw Mises’s Gold Standard Proposal as a Threat to Its Secret and Illegal Slush Fund

In 1906, his doctorate out of the way, Mises determined to take up the Helfferich challenge, apply marginal utility theory to money, and solve the problem of the Austrian circle. He devoted a great deal of effort to both empirical and theoretical studies of monetary problems. The first fruits of this study were three scholarly articles, two in German journals and one in the English Economic Journal in 1908–09, on foreign exchange controls and the gold standard in Austria-Hungary. In the course of writing these articles, Mises became convinced that, contrary to prevailing opinion, monetary inflation was the cause of balance of payments deficits instead of the other way round, and that bank credit should not be “elastic” to fulfill the alleged needs of trade.

Mises’s article on the gold standard proved highly controversial. He called for a de jure return in Austria-Hungary to gold redemption as a logical conclusion of the existing de facto policy of redeemability. In addition to running up against advocates of inflation, lower interest rates, and lower exchange rates, Mises was surprised to face ferocious opposition by the central bank, the Austro-Hungarian Bank. In fact, the Bank’s vice-president hinted at a bribe to soften Mises’s position. A few years later, Mises was informed by Böhm-Bawerk, then Minister of Finance, of the reason for the vehemence of the Bank’s opposition to his proposal for a legal gold standard. Legal redemption in gold would probably deprive the Bank of the right to invest funds in foreign currencies. But the Bank had long used proceeds from these investments to amass a secret and illegal slush fund, from which to pay subventions to its own officials, as well as to influential journalists and politicians. The Bank was keen on retaining the slush fund, and so it was fitting that Mises’s most militant opponent was the publisher of an economic periodical who was himself a recipient of Bank subsidies.

—Murray N. Rothbard, The Essential von Mises (Auburn, AL: Ludwig von Mises Institute, 2009), 56-57.

Irving Fisher Was the True Founder of Modern Macroeconomics with Its Aggregative Reasoning and Its Politically Managed Fiat Money

This new view culminated in the work of Irving Fisher, who in 1911 formalized the quantity theory in mathematical terms and proposed it as a formula for use by politicians and bureaucrats charged with the task of managing money in the interests of stability of the price level. Indeed, it was Fisher and not Keynes who was the true founder of modern macroeconomics with its aggregative reasoning and its central notion of politically managed fiat money. As the modern monetary theorist and historian of thought, Jürg Niehans wrote:

Fisher’s reformulation of the quantity theory of money … has successfully survived seventy-five years of monetary debate without a need for major revision; its analytical content is accepted today by economists of all persuasions, and in the present world of fiat money it is actually more relevant than it was in Fisher’s gold standard world.

Such was the state of monetary economics when Mises published his seminal work on The Theory of Money and Credit, in 1912. In writing this book, Mises achieved two aims. The first was to reconstruct monetary theory by integrating it with the subjective-value theory of price which had been developed by the early Austrian economists, most notably Carl Menger and Eugen Böhm-Bawerk. By doing this Mises was able to resolve the so-called “Austrian Circle,” according to which the value of money could not be explained in terms of marginal utility because any such explanation involved circular reasoning. It was this misconception that opened the door to Fisher’s analysis of money in terms of aggregative variables such as the national money supply, velocity of circulation of money, the average price level, and so on, eventually leading to the unquestioned predominance of the macroeconomic quantity theory of money.

—Joseph T. Salerno, introduction to Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), xv-xvi.

The Bimetallistic Refinement of the Quantity Theory after 1870 Contributed to the Destruction of the Gold Standard

The proponents of the bimetallic standard argued for remonetization of silver on the grounds that this measure would increase the money supply and thus arrest the decline in prices under the monometallic gold standard that had begun in the late 1870s. The quantity theory of money was the foundation of the arguments put forward by the bimetallists. The theoretical counter-arguments of the advocates of the monometallic gold standard were completely inadequate to meet the challenge posed by the quantity theorists. They were based on the view that the costs of production of mining gold directly determined the price level, a distortion of classical monetary theory developed by Ricardo and the currency school. Paradoxically, although the gold standard remained intact, at least for the short run, the seeds for its eventual abolition had been sown because the classical sound money doctrine had been discredited among economists.

As David Laidler, a modern proponent of the quantity theory, commented:

[T]he refinement of the quantity theory after 1870 did not strengthen the intellectual foundations of the Gold Standard. On the contrary, it was an important element in bringing about its eventual destruction. . . . [T]he notion of a managed money, available to be deployed in the cause of macroeconomic stability and capable of producing a better economic environment than one tied to gold, was not an intellectual response to the monetary instability of the post-war period. The idea appeared in a variety of guises in the pre-war literature as a corollary of the quantity theory there expounded.

Thus by the end of the nineteenth century the view that money should ideally be “stable” in value had fully displaced the classical ideal of “sound” money, meaning a commodity chosen by the market whose value was strictly governed by market forces and immune to manipulation by governments.

—Joseph T. Salerno, introduction to Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), xiv-xv.

Bimetallist Regimes Functioned As Alternating Monometallic Standards Due to Differences Between the Legal and Market Bimetallic Ratios

The bimetallist regimes that were legally in force in France, Belgium, Switzerland, Italy, and the U.S. actually ended up functioning as alternating monometallic standards. In the face of fixed legal bimetallic ratios (i.e., the official mint values at which silver could be exchanged for gold) in these nations, developments in the market for precious metals that caused the international market bimetallic ratio (i.e., the price at which silver bullion exchanged for gold bullion on the open market) to change also caused one of the metals to drive the other out of circulation.

In the U.S., for instance, the period before 1834 was a de facto silver standard owing to the fact that the market bimetallic ratio was consistently greater than the legal ratio (15-to-1) that prevailed in the U.S. Reacting to a shortage of circulating gold, Congress raised the legal ratio to 16-to-1 in 1834. This now placed the legal ratio above the market ratio, which meant that it would now be profitable for individuals to take silver out of circulation (which was now the undervalued rather than overvalued metal at the mint) and bring their gold (which was now the overvalued metal) to the mints. Quite expectedly, gold now displaced silver in circulation. In 1853, the revision of the coinage laws did not alter the legal ratio so as to bring silver back into circulation. Hence, the U.S. was actually practicing a gold standard de facto from the 1830s.

—Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880-1914 (New York: Oxford University Press, 1995), 21.

Once You Admit the Existence of a State, then All Private Property Has Been Effectively Abolished; Therefore, State, Any State, MEANS Socialism

What Murray realized and I still had to learn was that the most vociferous and ferocious rejection and opposition to Austro-libertarianism would not come from the traditional socialist Left, but rather from these very self-proclaimed “anti-socialist,” “limited government,” “minimal state,” “pro-private enterprise,” and “pro-freedom” outfits and their intellectual mouthpieces, and above all from what has become known as the Beltway Libertarians. They simply could not stomach the fact that Murray had demonstrated with plain logic that their doctrines were nothing but inconsistent intellectual clap-trap, and that they were all, to use Mises’s verdict vis-a-vis Milton Friedman and his company, a “bunch of socialists,” too, notwithstanding their vehement protestations to the contrary. For, as Murray argued, once you admitted the existence of a State, any State, defined as a territorial monopolist of ultimate decision-making in every case of conflict, including conflicts involving the State itself, then all private property had been effectively abolished, even if it remained provisionally, qua State-grant, nominally private, and had been replaced instead by a system of “collective” or rather State-property. State, any State, means socialism, defined as “the collective ownership of factors of production.” The institution of a State is praxeologically incompatible with private property and private property based enterprise. It is the very anti-thesis of private property, and any proponent of private property and private enterprise then must, as a matter of logic, be an anarchist. In this regard (as in many others) Murray was unwilling to compromise, or “intransigent,” as his detractors would say. Because in theory, in thinking, compromise is impermissible. In everyday life, compromise is a permanent, and ubiquitous feature, of course. But in theory, compromise is the ultimate sin, a strict and absolute ‘no no.’ It is not permissible, for instance, to compromise between the two incompatible propositions that 1+1=2 or that 1+1=3 and accept that it is 2.5. Either some proposition is true or it is false. There can be no “meeting in the middle” of truth and falsehood.

—Hans-Hermann Hoppe, Getting Libertarianism Right (Auburn, AL: Mises Institute, 2018), 109-111.

Any Explanation of the Business Cycle Must Necessarily Be a Praxeological (As Opposed to a Psychological) One

Business cycles—so the central message of chapter 22 of Keynes’s General Theory, the “Notes on the Trade Cycle”—are psychologically determined phenomena. This is surely incorrect. A psychological explanation of the business cycle is strictly impossible, and to think of it as an explanation involves a category mistake: Business cycles are obviously real events, experienced by individuals, but experienced by them as occurring outside of them in the world of real goods and real wealth. Beliefs, sentiments, expectations, optimism, and pessimism on the other side are psychological phenomena. One can think of one psychological phenomenon as affecting or influencing another one, but it is impossible to conceive of a psychological phenomenon as having any direct impact on outcomes in the outside world of real things and goods. Only through actions can the course of real events be influenced; and any explanation of the business cycle then must necessarily be a praxeological (as opposed to a psychological) one.

—Hans-Hermann Hoppe, “Theory of Employment, Money, Interest, and the Capitalist Process: The Misesian Case Against Keynes,” in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 167-168.

The Socialist Society Will Always Decide for the Shorter Production Period, Preferring to Produce Consumer Goods Instead of Capital Goods

In the individualistic society the individual, not society, accumulates. Capital accumulation takes place by saving; the saver has the incentive of receiving income from the saved capital as the reward of saving. In the communist society, society as such will receive the income that today flows to the capitalists alone; it will then distribute this income equally to all members or otherwise use it for the good of the whole. Will that alone be a sufficient incentive for saving? To be able to answer this question, one must imagine that the society of the socialist state will be faced every day with the choice whether it should devote itself more to the production of consumer goods or more to that of capital goods, whether it should choose productive processes that do indeed take a shorter time but correspondingly yield less output or choose ones that take more time but then also bring greater output. The liberal thinks that the socialist society will always decide for the shorter production period, that it will prefer to produce consumer goods instead of capital goods, that it will consume the means of production it will have taken over as heir of the liberal society or at best maintain them but in no case increase them. That, however, would mean that socialism will bring stagnation, if not the decline of our whole economic civilization, and misery and need for all. That the state and the cities have already pursued investment policy on a large scale is no disproof of this assertion, since they pursued this activity entirely with the means of the liberal system. The means were raised by loans, that is, they were provided by private parties who expected from them an increase in their capital incomes. If in the future, however, the socialist society should face the question whether it will feed, clothe, and house its members better or whether it will save on all these things in order to build railroads and canals, to open mines, to undertake agricultural improvements for the coming generations, then it will decide for the former, even on psychological and political grounds alone.

—Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006), 157-158.

In “Hydraulic Keynesianism,” the Models Resembled the Mathematical Description of a Plumbing System

The difficulty in understanding the General Theory may have contributed to its success as the founding text of macroeconomics. The book is open to alternative interpretations. In the post-war years, if you wanted to propose interventionist policies to ‘stabilise the economy’ or otherwise improve economic performance, you might well cite the General Theory as the source or context for your proposed policies. Thus, a variety of interventionist systems of thought were labelled ‘Keynesian’.

After the war, one version of economics, described as Keynesian, came to dominate macroeconomics. This breed of Keynesianism would estimate a consumption function, an investment function and other functions intended to represent stable relationships determining the overall levels of output, employment and prices. Changing policy variables such as the government deficit could, it was thought, shift these functions about and give us a better combination of output, employment and prices. Increasing money growth, for example, would inevitably cause some price inflation, but it would also reduce unemployment. This supposed inverse relationship between inflation and unemployment (Samuelson and Solow 1960) is known as the ‘Phillips curve’. Assuming a stable Phillips curve, any event that might increase unemployment could be met with a bit of inflation as a reliable offset.

This sort of macroeconomics is sometimes called ‘hydraulic Keynesianism’. Keynes was claimed as an important source and it was ‘hydraulic’ because the models resembled the mathematical description of a plumbing system. The flow of spending in an economy looked like the flow of water in a system of pipes. And just as we can regulate the flow of water with a few valves, we can regulate the economy with a few relatively simple policy instruments – or so it was thought.

—Roger Koppl, From Crisis to Confidence: Macroeconomics after the Crash, Hobart Paper 175 (London: Institute of Economic Affairs, 2014), 41-43.

For John Law, Money Is an “Instrument” That Is Deliberately Designed to Achieve the “Policy Goals” of Government Planners

In 1705, Law published his principal work on money, entitled Money and Trade Considered: With a Proposal for Supplying the Nation with Money. Law’s “proposal” was intended to provide his native Scotland with a plentiful supply of money endowed with a long-run stability of value. The institutional centerpiece envisioned in Law’s scheme resembles a modern central bank, empowered to supply paper fiat money via the purchases and sales of securities and other assets on the open market. Also strikingly modern are the theoretical propositions with which Law supports his policy goals and prescriptions.

Law initiates his monetary theorizing with two fundamental assumptions about the nature and function of money. The first is that if money is not exactly an original creation of political authority, it ideally functions as a tool to be molded and wielded by government. Law believes that the State, as incarnated in the King, is the de facto “owner” of the money supply and that it therefore possesses the right and the power to determine the composition and quantity of money in light of the “public interest.” Writes Law:

All the coin of the Kingdom belongs to the State, represented in France by the King: it belongs to him in precisely the same way as the high roads do, not that he may appropriate them as his own property, but in order to prevent others doing so; and as it is one of the rights of the King, and of the King alone, to make changes in the highways for the benefit of the public, of which he (or his officers) is the sole judge, so it is also one of his rights to change the gold or silver coin into other exchange tokens, of greater benefit to the public. . . .

Translating Law’s statement into modern terms, money is an “instrument” that is or should be deliberately designed to achieve the “policy goals” considered desirable by political money managers and other government planners.

—Joseph T. Salerno, “Two Traditions in Modern Monetary Theory: John Law and A. R. J. Turgot,” in Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), 3-4. 

Although the Demand for Money Can Be Defined as a FLOW or as a STOCK, We Will Use the Stock or Cash Balances Definition

The demand for money can be defined either as the demand for monetary payments (flow), or as the demand for cash balances (stock). As far as the determination of the price level is concerned, both definitions lead to the same result. We will work with the second definition (money demand concerns cash balances) because it highlights the crucial fact that money renders its services not only at the moment when it is used in spending, but also during the entire period when it is being held or “hoarded.” Money is the most marketable commodity. Thus cash balances, even while they are not being spent, provide liquidity services to their owners.

Cash balances are demanded for the liquidity services they provide. They are demanded for their purchasing power. The only exception is the merely nominal demand for money by collectors. The latter are not interested in the purchasing power of the bank notes and coins they collect. They are only interested in the notes and coins per se—that is why we call them collectors. But true money users do not demand mere nominal cash balances, but real cash balances. They demand a certain purchasing power.

—Jörg Guido Hülsmann, “The Demand for Money and the Time-Structure of Production,” in Property, Freedom, and Society: Essays in Honor of Hans-Herman Hoppe, ed. Jörg Guido Hülsmann and Stephan Kinsella (Auburn, AL: Ludwig von Mises Institute, 2009), 311.

The Static State Can Dispense with Economic Calculation But a Static State Is Impossible in Real Life

The static state can dispense with economic calculation. For here the same events in economic life are ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view. But this is only conceptually possible. For the moment, we leave aside the fact that a static state is impossible in real life, as our economic data are forever changing, so that the static nature of economic activity is only a theoretical assumption corresponding to no real state of affairs, however necessary it may be for our thinking and for the perfection of our knowledge of economics. Even so, we must assume that the transition to socialism must, as a consequence of the levelling out of the differences in income and the resultant readjustments in consumption, and therefore production, change all economic data in such a way that a connecting link with the final state of affairs in the previously existing competitive economy becomes impossible. But then we have the spectacle of a socialist economic order floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation.

—Ludwig von Mises, Economic Calculation in the Socialist Commonwealth, trans. S. Adler (1990; repr., Auburn, AL: Ludwig von Mises Institute, 2012), 22-23.

Calculation “In Natura,” In an Economy Without Exchange, Can Embrace Consumption Goods Only and Completely Fails with Goods of a Higher Order

It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation. Calculation in natura, in an economy without exchange, can embrace consumption goods only; it completely fails when it comes to dealing with goods of a higher order. And as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.

It is easy to overlook this fact, considering that the extent to which socialism is in evidence among us constitutes only a socialistic oasis in a society with monetary exchange, which is still a free society to a certain degree. In one sense we may agree with the socialists’ assertion which is otherwise entirely untenable and advanced only as a demagogic point, to the effect that the nationalization and municipalization of enterprise is not really socialism, since these concerns in their business organizations are so much dependent upon the environing economic system with its free commerce that they cannot be said to partake today of the really essential nature of a socialist economy. In state and municipal undertakings technical improvements are introduced because their effect in similar private enterprises, domestic or foreign, can be noticed, and because those private industries which produce the materials for these improvements give the impulse for their introduction. In these concerns the advantages of reorganization can be established, because they operate within the sphere of a society based upon private ownership of the means of production and upon the system of monetary exchange, being thus capable of computation and account. This state of affairs, however, could not obtain in the case of socialist concerns operating in a purely socialistic environment.

—Ludwig von Mises, Economic Calculation in the Socialist Commonwealth, trans. S. Adler (1990; repr., Auburn, AL: Ludwig von Mises Institute, 2012), 17-18.

A Consistent Macroeconomic Approach Would Have to Shun Any Reference to Prices and to Money

The macroeconomist deceives himself if in his reasoning he employs money prices determined on the market by individual buyers and sellers. A consistent macroeconomic approach would have to shun any reference to prices and to money. The market economy is a social system in which individuals are acting. The valuations of individuals as manifested in the market prices determine the course of all production activities. If one wants to oppose to the reality of the market economy the image of a holistic system, one must abstain from any use of prices.

—Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (Princeton, NJ: D. Van Nostrand Company, 1962), 84.

This Is Not Science — It Is Witchcraft! Seeing How Bad Econometric Forecasting Is

As for forecasting, a look at the literature on exchange rate economics gives us an idea of how bad econometric forecasting is. We can predict precisely when a falling object will hit the ground and where a projectile will land, but we cannot predict with a reasonable level of confidence whether a currency will appreciate or depreciate on the announcement of unemployment data — that is, we cannot even predict the direction of change, let alone the magnitude of change. I must admit, however, that economists (or applied econometricians) are good at finding explanations for currency appreciation or depreciation in response to the announcement of unemployment data — only after the fact, of course. It all depends on what the researcher wants to prove and if that turns out not to be the case, an explanation is found for why it did not turn out to be the case, sometimes blaming the unwanted results on econometrics itself (such as the low power of the test). This is not science — it is witchcraft.

—Imad A. Moosa, Econometrics as a Con Art: Exposing the Limitations and Abuses of Econometrics (Cheltenham, UK: Edward Elgar Publishing, 2017), 52.

Econometrics Has Been a Success Only in the Limited Sense That It Can Be Used to Prove Almost Anything

Econometrics has been a success only in the limited sense that it can be used to prove almost anything. I have always challenged seminar presenters, saying that if they let me have their data I could turn their results upside down and come up with a different conclusion. Econometrics is very useful for those wanting to prove a pre-conceived belief or find results that support an ideologically driven hypothesis. Take, for example, Brexit, which had proponents and opponents. The empirical results produced by the opponents on the effect of Brexit on the British economy of leaving the EU are all over the place but ideological bias is conspicuous. For example, the Confederation of British Industry (2013), which is against Brexit, estimated the net benefit to Britain of EU membership to be in the region of 4 per cent to 5 per cent of GDP — that is, between £62 billion and £78 billion per year. Conversely, Congdon (2014) puts the cost of Britain’s membership of the EU at 10 per cent, attributing this cost to regulation and resource misallocation. Congdon’s estimates were prepared for the United Kingdom Independence Party (UKIP), which has a strong anti-Europe stance.

—Imad A. Moosa, Econometrics as a Con Art: Exposing the Limitations and Abuses of Econometrics (Cheltenham, UK: Edward Elgar Publishing, 2017), 18.

Anglo-American Economists Are Living in Their Dream World and Are Ignorant of the History of Economic Thought

To one outside the magic circle of the Keynesians the reason seems to be what can be called the isolationism of Anglo-American economics. It is this isolationism that prevents economists from seeing the merits and weaknesses of their work in a detached and objective way and in the right perspective. It prevents them from being aware that most economists in Germany, France and Italy strongly oppose the Keynesian doctrines. For example, to Professor Adolf Weber, the well-known economist of the University of Munich, the idea that full employment is mainly threatened by a lag of investment behind saving, sounds merely like a bad joke. But the isolationism of Anglo-American economists is also historical. They believe earnestly that their ideas are fundamentally new, unique, and a definite answer to the problems of a competitive economy. Insufficiently educated in the history of economic thought, they do not realize that Keynesianism — down to the most technical details, like the concept of the foreign exchange multiplier — is mercantilism or, more precisely, John Lawism pure and simple. Thus they do not recognize that the objections of the classical economists to mercantilism are valid also in respect to their own teachings. Nor do they see that many concepts of the modern planners — fair prices, fair wages, fair profits, and so on — are nothing else than a new edition of the medieval scholastic concepts of justum pretium and justum salarium [just price and just salary], which proved so detrimental to economic progress.

Reading, quoting, praising and promoting each other, and only each other, will not liberate these economists from their voluntary isolationism. They will remain in their dream world. They will continue to predict the unpredictable.

—L. Albert Hahn, “Predicting the Unpredictable,” The Freeman: A Fortnightly for Individualists 3, no. 1 (October 6, 1952): 24.