Wednesday, July 02, 2014

Resist the Austrian Brain Worm!

At Bloomberg View, I urge the good people of America to resist the burrowing, mind-controlling brain-worm that calls itself "Austrian economics" (despite actually being neither Austrian, nor, except in the most general sense, economics):
In the film ``Star Trek II: The Wrath of Khan,'' the super-genius villain puts alien worms into people’s brains in order to subvert them to his demented cause. I think Khan could have been an Austrian economist. To those of you who have run afoul of the defenders of Austrianism on the Internet, the analogy will be clear. The Austrian worldview is like a brain worm that has infected large swathes of our financial industry, commentariat and general public. Even you, dear reader, may carry one or two of its wriggling larva inside your gray matter. 
When the Austrian brain-worm invades, you start believing things like: 1) Federal Reserve money-printing is a government plot to boost big banks, 2) prices are rising much faster than anyone thinks, 3) real “inflation” means money-printing, not an increase in prices, 4) printing money can never boost the economy, 5) academic economics is a plot to use mathematical mumbo-jumbo to cover up government giveaways to big banks, etc., etc. 
The Austrian catechisms range from almost plausible (taking toxic mortgage assets off of bank balance sheets must have been part of the reason the Fed did quantitative easing), to somewhere in the neighborhood of the 9/11 truthers and moon-landing hoaxers. Most of the elements of Austrianism are so directly contradicted by data that the belief system practically screens itself for people who are out of touch with reality...
Read the whole thing here!


Here is a lengthy response from Austrian economist and blogger Bob Murphy.

Here is a lengthy response from gold-flogging derp-fountain website Zero Hedge.

Here is a brief response from blogger Mike Shedlock.


  1. Anonymous1:32 PM

    When virtually every main player in Austrian economics is from Austria, how exactly is it not really Austrian?

    1. A) Not anymore.

      B) Most economists from Austria are not part of the "Austrian school", and are very annoyed that it uses their country's name.

    2. Anonymous2:02 AM

      "Not anymore." And exact what does that have to do with anything?

      "...are very annoyed that it uses their country's name." Says you. I'm willing to bet they don't even know or care...

      PS, not that it matters, but the photo has nothing to do with Wrath of Khan

  2. Where do you get the idea that the themes you are attacking are "central to the Austrian worldview"? I doubt I discuss any one of them in my posts about Austrian economics. (

    1. Anonymous7:13 PM

      Yes, because when we think about experts in economics of whatever kind, we think of Robert Vienneau. What a laugh.

    2. Thank you for your expression of concern about my views. The most recent available version of my paper refuting the Austrian Business Cycle Theory can be downloaded from here:

    3. Anonymous9:35 AM

      Calling you out for spamming your blog was not an invitation for you to spam any other BS.

    4. Thank you for your interest in my views. Some reviewers told me that it was too obvious that ABCT is wrong, for the reasons I state, for that paper to be publishable.

      Anyways, I wrote much of the Wikipedia article on the Austrian School before they transitioned to the current platform. The oldest version now available, at, reflects much of my take on what I think central to the school.

    5. Anonymous7:03 AM

      Some should tell you that you're another Quixotian nutcase parasitising upon other people's blogs to parrot your agenda. No one is going to take a lesson in what Austrianism believes from a 1-issue crusading nutcase like you.

    6. Thank you for your interest in my views. Several years ago I criticized the confusion about mainstream utility theory often exhibited by vulgar Austrian school fanboys: I updated that post post the other day to provide a link to a post from Mike Freimuth on his blog Free Radical.

  3. This comment has been removed by the author.

  4. Redefining words is a truly desperate bid.

    A: "The murder rate is increasing."

    B: "No, it isn't."

    A: "You misunderstand. The murder rate is actually sales figures for violent video games."

    B: "Ok."

    Basically what the Austrians are up to.

    1. The Austrians have redefined what exactly?

      This Economic Commentary considers the origin and uses of the word "inflation" and argues that its definition was a casualty in the theoretical battle over the connection between money growth and the general price level. What was once a word that described a monetary cause now describes a price outcome.

  5. Anonymous2:07 PM

    "5) academic economics is a plot to use mathematical mumbo-jumbo to cover up government giveaways to big banks"

    Well, of course it's not, but it seems to be that the majority of the more complicated math in academic econ (real analysis and so on) is not actually very useful for doing economics, and is mostly just for impressing academic economists. Econ has to sort out its core philosophy before it can start making fancy models - how much success have DSGEs had, exactly?

    It's like if a bunch of physicists decided that they could ignore chaos theory and if they just had enough math and data they could predict storm paths of next year's hurricanes. Well, math and data aren't going to save you there, it's not going to work.

    How are the agent based models coming along?

    PS: Prepare for the Austrian Onslaught, I don't think they even sleep...


  6. Oh dear, Noah, I agree with Robert V., and I think you have badly misstepped here. There are serious splits among Austrian economists, and the self-styled "Austrians" who have most publicly spouted the most nonsensical of this stuff have often not even been academics, e.g. the execrable and embarrassing Peter Schiff, who is disowned by many academic Austrians. The academic ones who spout some of this, such as Murphy, are more likely to be found hanging out at the Ludwig von Mises Institute in Auburn, AL. They have long had major fisticuffs with their more numerous cousins in the Hayekian camp, whose base is at George Mason University. They even have competing journasl, the Quarterly Journal of Austrian Economics out of LvMI, edited by Joe Salerno, and the Review of Austrian Economics out of GMU, edited by Peter Boettke and Chris Coyne. By and large the latter do not go along with most of what you rightly cite as wacky arguments and predictions. You should have been more careful here, tarring with way too broad a brush, sir.

    Barkley Rosser

    1. Well, here's the thing...yes, there are a handful of GMU guys who call what they do "Austrian", but what they do bears little resemblance to the quasi-religious "Austrian" belief system held by many many many thousands of people. The GMU guys have essentially zero influence on popular thought or policy, while the quasi-religious belief system seems to have a fairly large amount of influence.

      So yes, I'm throwing Peter Boettke & co. under the bus a bit by unleashing a rant such as this one, but I think that the GMU "Austrians" will not actually be hurt, while the imperative of combating the quasi-religious belief system must take precedence...

    2. I have been an Austrian since 1973 at age 21. Over that period, I have never come across a single critic of the Austrian School who demonstrated the slightest familiarity with, much less an understanding of, basic Austrian concepts such as catallactics and/or most importantly, economic calculation. Mr. Smith says he is throwing Peter Boettke under the bus. Mr. Boettke has written the best explanation of economic calculation available. I am certain that Mr. Smith has attacked Mr. Boettke and the rest of the Austrian School because he has no understanding whatsoever of basic Austrian concepts analysis. This will be confirmed when Mr. Smith fails to demonstrate such an understanding.

    3. So you admit you are a racist in that you have been involved in this movement the since the Rothbard and others where promoting holocaust denialism and race-realism?

      I read the paper by Mr. Boettke. It contains no arguments merely assertions so vague about as to meaningless in a real context.

      Private Property i.e. the right to use violence against the bodies of others against the consent others to exclude them from use of the factors outside an owner consent is said to the basis of all production.

      The statement is asserted again and against without evidence or reason as to why exclusionary violence is necessary for production rather than inclusionary cooperation without the need for a centralized ownership structure of capital.

      Please explain the need for exclusionary ownership and centralized management in production.

    4. Anonymous6:58 AM

      @ Septeus Non sequitur piled high upon non sequitur. I read your comment. It contains no arguments merely assertions so vague as to be meaningless in a real context.

      Please explain why exclusionary the need for exclusionary ownership over the body and why one should keep their body unavailable to all others who want to use it. This is against their consent.


    5. I am always encouraged when I read that the problem with Austrian analysis is the existence of private property and personal integrity and safety. Indeed, Septeus7 may have been the inspiration for Mr. Smith delightful article when he wrote:

      MMT rests on the notion that "Free Markets" can't exist (because it's a non-defined concept) and real markets do fail that results in stagnation and unemployment. Bob, most of us here are tired of dealing with you theoclassical religious fundamentalist of all kinds. America is being crushed by fundamentalism. You don't know any economics. All you have is a religious belief in a false God called the "Free Market" I have news for you. That God doesn't exists. It never did.

      Then Septeus7 outdid himself.

      The Austrian school denies the existence of human beings with their apriori assumptions about human action which deny the possibility of human creativity which of course is man's most defining characteristic. The Austrian school also denies the existence of accounting.

      I guess he told me.

    6. Anonymous11:30 AM

      What's telling is the unmitigated ignorance of their comments. I wonder if Noah gets paid for this? I mean there must be some pretty desperate individuals out there, if so. Otherwise, does Bloomberg have -any- standards left or is it just another gutter rag like the NYT? As for Septeus, I think this shows pretty much his level of understanding of AE.

      The thing is, Noah's "god", Krugman, the "wise", "benevolent" Fed, the "experts", the "intelligent designers" etc. don't exist in any real capacity. They're engaged in clueless, seat of the pants policy "making", trying rather embarrassingly to delude the markets even as their world crumbles around them. It is he who is engaged in pushing theoclassical religious fundamentalism in the wisdom of the planners, and as his Bloomberg article shows, it doesn't even sell anymore. Go and engage your audience there, you little worm.

    7. Bob Roddis, take a look at this

    8. Tom Brown:

      1. I fail to see the point of the post.

      2. Rejecting Cantillon Effects is preposterous. If there was ever an a priori event in economics, that is it. The first people to get an emission of new funny money will be snatching purchasing power away from those holding the existing money. That is always the case; it cannot be “tested” and need not be tested.

      3. Read Boettke on economic calculation and learn it. The Austrian critique of Marx and Keynes is simply an application of Cantillon Effects and the impairment of economic calculation through the abolition of voluntary exchange and/or the issuance of funny money and/or government spending so that there remain no undistorted prices to provide essential knowledge and information. To the extent there are prices at, they will be distorted and will draw labor and capital into unsustainable lines of investment and production. As Hayek said on “Meet the Press” in 1975 (see my link above):

      ”[The present difficulty is] due to the fact that without continued inflation, you cannot maintain the people in the new employments in which they have been drawn by the inflation of the past."

      Once funny money emissions have artificially drawn people into unsustainable lines of production, it will require addition emissions to maintain them in those lines of productions which are still unsustainable in the long run.

    9. Daniel6:39 AM

      Rejecting Cantillon Effects is preposterous.

      Oh, really ? So I take you sprint to ATMs to get to the money first ?

      What's that ? You don't ?

    10. Daniel:

      Your "argument" is so dumb that I probably should not even respond. However, the way sophisticated people with money resolve the problem is to invest in "inflation hedges" which they can do because they have access to new emissions of funny money at very low interest rates. They can use the new funny money to artificially bid up the price of assets and then flip them. It's another way the 1% can suck wealth out of the poorer, less sophisticated 99%. But I'm sure you know that already.

    11. Daniel8:24 PM

      So you don't run to ATMs. It's almost as if you don't believe in your own theories.

    12. Quote: "Please explain why exclusionary the need for exclusionary ownership over the body and why one should keep their body unavailable to all others who want to use it. This is against their consent.."

      First, please write a proper sentence without double adverbs. I am assume you are asking why I assume self ownership of the body.

      I never assumed such a thing. You missed the point. If one is to assume ownership as the basis of rights then one would have to assume the absolute self ownership of the body as one must have a body before one take possession of anything outside of the bodies hence one much logical conclude that if absolute ownership of anything is possible then it must proceed from the most direct access one has to the physical world of things which one can own i.e. one's body.

      However, the idea of self-ownership of the comes in conflict with the idea of ownership of objects outside of the body out the necessarily fact that ownership of objects outside of the body requires acting on bodies of others i.e. to prevent from accessing your non-body property using their bodies without the consent of the owner hence contradiction.

      I'm not a liberal or a modernist so I don't believe in the concept of absolute individual rights as such.

      I noticed Bob still hasn't explained why he didn't object to his movement's promotion of holocaust denial and racist writings in the 1970s. One must then wonder as to Bob's position on those issues.

      You seem to like my quote about absurdist nature of Austrian reductionism on human nature as if it were wrong. Bob still hasn't made an argument.

      Daniel. You may be libertarian but unlike you have actually intelligence. Bob has no theories he simply repeats the same phrases over and over again and has understanding of any of the terms his is using.

      Take a look at his mindless ranting at LordKeynes blog about economic calculation.

    13. Bob Roddis, did you read the post? The article wasn't about Cantillon effects. He mentioned Cantillon effects in passing once near the top (listing other disagreements he has with Austrians). The article is instead about his disagreement with Austrians regarding "diminishing marginal utility." In fact that's in the title of the post, which is only a few days old BTW, so rather than comment to me, you should comment there to "free radical" (AKA Mike Freimuth). Freimuth has a number of articles about Austrians (in fact he wrote one after the above piece), and in general he disagrees with them on their economics (although he shares many of their libertarian beliefs).

      I don't know much about Austrians, but I found the article interesting, and with a little background reading on ordinal vs cardinal utility, I was able to follow the logic of his complaint and why he thinks the Austrian view on this subject is flawed. He even finds an Austrian who carefully follows through the logic, and essentially agrees exactly with his complaint, right there on, though the quoted Austrian in question then inexplicably goes on to ignore his own conclusion, and carries forward with the usual Austrian party line. He includes an extensive quote from the material.

      Mike would probably appreciate thoughtful feedback from an Austrian other than Major_Freedom, so why not check it out and comment there if you don't agree. But I would read the post first.

  7. The column's nasty tone was designed to be provocative. So in the same spirit , remember that it is almost always excellent policy to keep the economics department , and especially the assistant professors , away from the management of the endowment fund.

    Does Smith think price fixing works well and can be accurately monitored and controlled by the tools at hand? No? Then what do you think the Federal Reserve is doing now and why, given the political frictions inherent in the maintenance in this policy does he think it will end well now?

    1. Rationing works well enough in times of war when the occasional grifter is shot. Concentrates their minds

  8. Anonymous4:54 PM

    I bet the Bloomberg comment section will be more entertaining than the article.

  9. How is it that the comment section of that article not overrun by Austrians? Usually whenever an article about reactionary ideologies("austrians", HBDers, MRA antifeminists) gets published anywhere on the web, any sane voice gets drowned by a 200 to 1 ratio.

    What's your secret, dude?

    1. Bill Ellis7:33 PM

      Well... they are getting pretty hilarious now...Brain worms everywhere !

    2. Yes, the brain worm crowd certainly has come out there. I do not wish to get into arguing with those folks. I will however note here one point. One of them was bashing Noah by noting that Milton Friedman and Hayek both got Nobel Prizes. Without getting into it at any length, I shall simply note that while Friedman and Hayek were ideological allies and co-founders of the Mont Pelerin Society, Friedman was most definitely not an Austrian economist, and indeed played a role in the fact that when Hayek was at the University of Chicago in the late 40s, he did not have an appointment in the economics department, rather was in "Social Science," kind of a floating space. Friedman was always a good neoclassical of the Marshallian variety.

    3. Anonymous7:10 AM

      The fact that he isn't taken seriously enough by anyone with half a brain and that he himself is a reactionary. That's his secret. He isn't "sane". He is just a sarcy little bitch hiding on his blog.

    4. Whooooa, somebody's maaaaad!! ;-)

    5. Anonymous11:27 AM

      High school bimbo commentary, really.

    6. Milton Friedman still has a blog? Who knew

  10. Bill Ellis7:23 PM

    Goooooooal ! Great article. Funny too.

    1. Anonymous7:04 AM

      Funny in how stupid it is. Do I get a "thanks! :-)" too?

  11. Here's a libertarian who's not so found of Austrian econ (a rare breed?), that has a post up on the subject today too:

    One of several he's done (click on the "Austrian" tag to see the others).

  12. Speaking of Uncle Milt, remember that he said there was no such thing as Austrian economics -- just good economics and bad economics.

  13. The most dangerous Austrian idea right now is Austerity. "Austrian economics" might laughed off by academic economists, but is taken very seriously by the public and politicians. A lot of politicians in Europe and the US have professed their confidence in austerity citing Hayek or Mises as an inspiration.

    The main political strength for the movement is that it has massive right-wing appeal, the way no other economic school of thought does.

    1. Of course, there is "real austerity":

    2. Anonymous7:05 AM

      Go scaremonger a more gullible cro-

      Oh wait, this is Noah Smith's blog. Can't get much more gullible...

  14. Anonymous11:33 PM

    Austrian economics exists because they are fearful of reactionaries(MMT) in the Nation State will destroy the market economy and set the state for the next national socialism.

    Careful of what you don't understand. 9-11 truthers? Mostly types who post on this blog.

    1. Daniel5:28 AM

      Except that, in real life, it was the inter-war implementation of the gold standard that brought about national socialism.

      Get your head out of your ass.

    2. Anonymous5:36 AM

      The gold standard was only a means to a end. National Socialism was coming in the latter 19th century. It was just pushing the string enough to do it.

    3. Daniel5:12 PM

      National Socialism was coming in the latter 19th century.

      Sure it was. Gotta love the austro-sadists - always looking for an excuse to inflict pain upon people.

    4. Anonymous7:07 AM

      No Daniel, gotta love the governments that enact the policies that create the need for this massive pain in the first place. Gotta love the economists who then cheerlead them, prolonging the pain, worsening the damage to the economy, i.e. the mainstream econo-sadists. You can use your typical passive aggressive Americanism "Sure it was" in your squeaky little nerd voice, but you cannot show that it was the gold standard that brought about NS, as opposed to America's other interventions into European affairs at the time. Otherwise, prove it.

    5. Daniel9:29 AM

      you cannot show that it was the gold standard that brought about NS

      When your worldview relies upon blatant lies, you know you're in the wrong.

    6. Anonymous6:21 AM

      When you can't even demonstrate that these soi-disant blatant lies are blatant lies, you know you're a liar.

    7. Daniel6:35 AM

      One does not waste time discussing biology with a creationist. Or playing chess with a pigeon.

      Similarly, one does not waste time arguing macroeconomics with an austro-sadist.

      But lest ye take a dump over the chess pieces and claim victory, here's how it goes.

      Under a gold standard, M is fixed.

      Also, we know that wages (among other things) are not downwardly flexible

      So you might want to ask yourself - if M is fixed, and wages don't readily go downwards (and even when they do, it's very painful) - what happens when money velocity goes down ? Ya know, like it did in the 1930s.

      Of course, I don't expect you to revise your priors, since you have already been infected by the Misesian brain worm.

  15. Unanimous11:41 PM

    Are you trying to create sympathy for Austrians? I also think they are a wacky bunch, but this article is pretty much just name calling cyber bullying.

    You say shadowstats is a hoax, but when I first looked at it several years ago, it was quite clear that it was just presenting "compensated" CPI charts. The "compensations" being estimates mostly made by the government of how inaccurate the older CPI methods were, but when you add those together you end up with an overestimate of the total error. Although I also think that what they have done is pretty useless and distracting in finding a more accurate CPI, I don't see how clearly stating your methods and presenting data is a hoax, and in fact in the link you provide, the "revealed hoax" is just a statement from the producers of shadowstats stating their method. Your use of the word "hoax" is a hoax.

    1. Daniel5:26 AM

      You do know that all Shadowstats did was take the official inflation data and add an arbitrary amount to it, right ?

      If Shadowstat is to be believed, the US has spent the last two decades in a recession.

      So get your head out your ass.

    2. Anonymous5:37 AM

      Find out who finances "shadow stats" and you may not like it anymore. The dialect knows no political movement it cannot control.

    3. Unanimous6:31 PM

      I never did like shadowstats, I just don't see how it qualifies as a hoax, because their method, poor as it is, is explained by the site itself. It's not a credible site, but that's all it is, more noise on the internet.

      Name calling just degrades the people who do it.

  16. Anonymous1:03 AM

    I miss the days when Noah was an audacious grad student and his every blog post did not begin with "Over at Bloomberg View, I . . ."

    1. I miss those days too. Oh well, all good things must come to an end. On to the next party...

    2. ArgosyJones1:41 PM

      This Bloomberg gig is ruining you. The day is not far off when we'll say of you, "He's gone from America's most lovable econ-geek to a generic Clickbait Turd-Slinger."

    3. I was America's most lovable econ geek???


    4. Anonymous3:18 PM

      Yeah, man. You're throwing it away. Not with posts like this; this was classic. With the opinionless nonpieces.

    5. Dang, I called myself "no opinion" right there in the title...did y'all think I was being tongue-in-cheek??? ;-)

  17. The case of Croatia is interesting since it seems to just opposes some other economic theories. For some reason (ignorance of the economists most probably) nobody talks about country with its own currency which is for the 6 years in the row in recession thus being the country with longest recession of all.
    a) 24 quarters of falling gdp in row.
    b) Its own currency
    c) no banking crisis
    d) two different government
    e) static fiscal policy (very small expansion followed by very small contraction)

    As my american friend now living in Zagreb told me - This country is crazy because even the most ridiculous right wing economic policies seem at least a bit reasonable here. I would like to see analysis of croatian depression from some good economists of all sides ... The case study should be interesting.

    1. Zdravo Vinko,

      The Croatian National Bank has kept rates very high to keep the Kuna from devaluing. It has its own currency, but the wrong monetary policy. I'm not sure about the static fiscal policy, most governments in the neighbourhood practice austerity, even if no one gives them credit for it.

      There is no need for a banking crisis to make things go bad in the first place, small economies like ours (hi from BG) catch colds when the EU sneezes and things are worse with high interest rates.

  18. Noah,
    Hmmm, this may be another round of you the Bloomberger vs you the economics blogger. Yeah, probably they will not be hurt by this, but I would contend that the Boettke/Mason crowd are the dominant group among academic Austrian economists and way outnumber the others by far. It may be that I am biased because James Madison is not too far from George Mason and I have friendly relations with those folks, who are generally pretty reasonable about most things, even if I disagree with many of their views. Heck, I used to have people ask me "So, how are things at James Mason?" and "How do you get along with James Buchanan?" to which I would reply, "I get along with him fine, although it probably makes it easier that we are not in the same department."

    Anyway, you are probably right that the non-academic/popular view of Austrianism is closer to the sort of thing you are caricaturing. I have a suspicion that even though he goosed the sales of Hayek's Road to Serfdom, Glenn Beck is unaware that Hayek came out for national health insurance in it.


  19. BTW, just for the record, the late Buchanan, a sometimes self-styled "libertarian socialist," was always the proper courtly Southern Gentleman to everybody, in contrast to his sometimes coauthor and occasional sparring partner (intellectually), the notoriously irascible Gordon Tullock, although Gordon has always had a heart of gold (no, not the standard!), if one could pierce the veil of his combative sarcasm, :-).

  20. Oh dear, all of this was meant to be a reply to your reply to me above above. Hopefully anybdoy reading this thread can figure out where these comments should have gone. Sorry about that.


    1. Well, heck, since I am indulging in old "James Mason" tales, I shall recount how one needed to respond to Tullock when he went at one, keeping in mind that he landed on Omaha Beach a few days after D-Day. So, if he would say (as he did on more than one occasion), "Rosser, hasn't the sheriff taken you away yet?" the appropriate comeback would be "Not until he takes you away first, Gordon." And a lot of people got offended by him because they did not realize that if he insulted you, it meant he took you seriously. If he thought nothing of you, then he simply would not speak to you. (I am speaking of him in the past tense, although he is still alive, but now largely inactive both professionally and personally.)


  21. Anonymous7:01 AM

    I am so glad I ended my subscription to Bloomberg and don't have to subsidise unproductive, useless sacks of shit like the OP.

  22. Anonymous10:53 AM

    Noah, your writing is so pitiful that you don't even deserve the attention that Murphy gave you in this flat-out smack-down:

  23. oh vey, austrian economics is anti-semitic. worship greenspan, bernanke and yellen you stupid goy

  24. This is just a string of baseless insults and hilariously ignorant statements. Yawn.

    But, the average financial press reader is as ignorant as you, so I guess your propaganda effort will be successful.

  25. Excess Reserves are not part of the money supply and don't contribute to inflation till they come out of the Fed. Like government debt, they do add to the risk of hyperinflation.

    Avalanches, earthquakes, and forest fires are examples of chain reactions that once started do a lot of damage. You can tell when conditions are right for the chain reaction, but not be able to predict the exact time it will start. The best we can do is say that there is a "high risk" of forest fire/earthquake/avalanche. Hyperinflation is like this. Conditions in Japan are such that a hyperinflation chain reaction could start at any time, but it is not possible to say exactly when it will start.

    1. Interesting theory. This theory says otherwise:

      It says that once log (M0/c) / log (NGDP/c) gets large, then the price level P is insensitive to changes in the money supply. You can see how the theory stack up against the data from multiple different countries over several decades of time from the chart in the above link. The model has only a few parameters per country (there's literally only one parameter per country in the above), and it's based on a theory.

      How many examples can you demonstrate of 1st world countries in which large amount of excess reserves suddenly flood out into the economy as cash?

    2. ... although the above model does not say hyperinflation is impossible when M is large compared to NGDP, because it assumes a central bank targeting a market based target, such as inflation rate, NGDP levels, or price levels.

      The theory here states that a central bank could force another class of solutions to the fundamental differential equation of the model:

      price (p) is defined as dNGDP/dM = k*NGDP/M

      by ignoring market targets. But that's not what's happening in Japan or the US for example. I'd like to see how your model fits data from around the world over several decades. And what's the parameter count on your model?


    3. ... here's another three parameter model based on the theory showing how it compares with the Fed's P* price level time series model (note the Fed model has more than twice the number of parameters):

      What's the deal with counting parameters? Check out this comment addressing another time series Fed model (this one using 42 parameters).

    4. ... I should add to my first comment above: *I think* this model says otherwise. It's not my model, and perhaps the author (Jason Smith) would say I got that part wrong, I'm not sure.

      Now I know you have a model Vincent, and I even tried your interactive simulation once or twice... but based on your comment here, perhaps the thing it should be modeling is probability of hyperinflation? (BTW, can your model show a huge increase in excess reserves with flat inflation?... like what we've seen in reality? What parameters in your model produce a result like that?). Or perhaps your model should be adapted to output probabilities? (since that's what you're discussing). I have no idea if Smith's model could be adapted to model such a thing... and it's natural for his theory to produce a general price level (P) model as it has as its core a definition of price (one that I screwed up in the above comment... the formula above is not the definition of lower case price "p" (as in a single market), rather it's an adaptation of the model to use NGDP and M instead of demand (D) and supply (S)). Here's the true "hard core of the theory:

      with D replacing NGDP and S replacing M in what I wrote above. Also k = 1/kappa, in case that's not obvious.

    5. Tom, he seems to only be looking at regular inflation and not hyperinflation.

    6. Hi Vincent. Above I stated (or should have stated) that the basic definition of price at the heart of the model: price (p) defined as dD/dS = k*D/S, from which he gets a macro approximation for the general price level: P = dNGDP/dM = k*NGDP/dM, has two solutions that he investigates: one used in the plots above (CB has market based target) which is NGDP/NGDP0 = (M/M0)^k, from which he gets P = k*(M/M0)^(k-1), with k = log(NGDP/c)/log(M/c), with c, M0 and k in $. c and M0 being parameters.

      However, the other solution (non-market based CB policy) *can* result in hyperinflation:

      You actually read that post and commented on it before, and I thought you were going to add it to your list.

      Also, just to be clear, M0 here is a normalizing constant, but the way I used it in the above comments was as the currency component of MB (the base). M in this comment should be taken to be this currency component.

    7. correction: NGDP0, M0 and c in $. k is unit-less.

    8. His math does not really seem to explain why hyperinflation happens. He also says that Japan is not headed for hyperinflation when all the other explanations for hyperinflation make it seem like Japan is at risk. In general it really seems to boil down to being forced to monetize debt and he does not explain the why of that, just that if you blindly monetize you get hyperinflation. He just arbitrarily decides that Japan is not blindly monetizing debt so there is no risk of hyperinflation. So I don't really like/trust his explanation at the moment. I have been busy and ignoring economics but just posted a question on his blog on the hyperinflation post you link to.

    9. Vincent, good move on posting a question. If we talk about the two solutions to the fundamental price level equation at the heart of his theory, he calls one "endogenous" and the other "exogenous." He uses those terms somewhat differently (I think) than a mainstream economist does. Here's a bit more information:

      I read your question, and it's a good one. I've asked a similar question of Jason myself, essentially saying "tell me more about the transition from the endogenous solution to the exogenous one or vice versa."

      In one response he likened the endogenous solution to his differential equation to the electrodynamic solution to the equations of electromagnetism, while the exogenous solution he likened to the electrostatic solution. I've probed him quite a bit on this subject BTW, and I think he acknowledges that he's missing some details there.

      Nonetheless, I think what he has in mind for an exogenous solution is that the CB just blindly starts increasing the monetary base, w/o regard to any feedback from the market. Now does this have to result in hyperinflation? No, I don't think that's the case. He demonstrates how it *could* result in hyperinflation or accelerating inflation anyway. Also, if the CB were to blindly start decreasing M, they could probably induce deflation (I'm not sure about that one, so don't quote me on that).

      OK, good luck.

    10. If you look at what Weimar did from 1915 to 1922 or so you see a similar pattern: they just left the interest rate fixed at 5%. During 7.5 years of this, the annualized inflation rate bounded all over the place, from high single digits to (mostly) double digits. Did they change the rate? No, they left it fixed rock solid at 5%. It wasn't until the annualized inflation rate got up past 400% per year in the middle of 1922 that they raised it to [drum role please] ... 5.1%... and from that point forward until the end of the hyperinflation they raised it what could only be described as a symbolic amount... even though at the end they'd raised it to 90% or so, the inflation rate was many orders of magnitude bigger by that point. Now of course that's an interest rate, and not M, but 71/2 years of a single fixed rate when inflation was mostly double digits (but prior to the hyperinflation itself), probably qualified as a non-market based CB strategy, thus deserving of his "exogenous" solution.

      I'd guess Japan would have to do something just as willfully egregious in order to start exciting the exogenous solution (assuming Jason's theory is true). But we'll see what he says.

    11. ... well I guess altogether it was about 9 years (through to the end of the hyperinflation, counting the period of "symbolic" rate increases). It was 29.7 orders of magnitude, BTW, that the Reichsbank's interest rate was undershooting the annualized inflation rate (Oct. 1923 the monthly inflation rate reached 29500%, which is 4.34e31 % annualized).

    12. Weimar held interest rates at 5% for 7.5 years and then things were out of control. The USA has held interest rates at about 0% for 6 years. Oil is up 20% this year and CRB Food index is up 50% over 6 years. Food and energy go up first in hyperinflation. Tom, are you maybe just a bit worried yet?;&cancelstudy=&a=M

    13. Vincent, lol,, no I'm not worried. Inflation in Weimar was only in the single digits one of those years, every other year it was double digits... and yet the CB did nothing. Like they were ignoring the market. Now they may have had other reasons for doing that.

      To try to compare it with here seems a stretch! ... there's inflationphobia rife in the US. I don't think they're ignoring the market at all. Like I've explained many times, it they really HAD to put the brakes on, simply raise the RR. It can be done in such a way (incrementally), that you don't bankrupt the banks (how about 10% more per week, until you get close, then back off a bit). I brought that up to David Andolfatto (of the St. Louis Fed) asking if that would be a possible (perhaps messy) emergency brake, and he agreed that it would.

      Even if it's never practical to do that (because other methods are better, and don't fail to work), this seems to address all your concerns to me:

      1. Doesn't cost anything
      2. Doesn't have to be done in such a way as to bankrupt the banks (do it incrementally, and remember that as the banks with fewer ERs start to get swqueezed, they can borrow them from the banks with higher amounts of ERs)
      3. How do you know when you've soaked up enough ERs this way? Keep watching the target you're monitoring: price level, inflation rate, or NGDPLT.

      That's Jason's point: the endogenous solution is the one in which the CB puts itself into a feedback loop with the rest of the economy. It hardly matters what kind, just so long as the polarity is right.

      To get to the exogenous case, they remove themselves from the loop. As Weimar shows, even with a moderate interest rate, given enough time of ignoring the market, this can cause trouble (can you imagine the CB ignoring 6 years of double digit inflation today?).

      What you always seem to assume is that they put themselves in the loop, but have the polarity wrong.

    14. On point 3. above, the first target to watch is the FFR itself. On paper it looks like the Fed could immediately jump to 170% RR (and recall: the Fed currently pays IOR on *both* RR and ER), but as Nick Rowe points out often, there legal ER and there's textbook ER. Textbook ER is reserves in excess of what banks *desire* to hold... so all you have to do is soak up the textbook ER. Creep up on it 10% a week and watch the overnight rate while you do so... at some point the overnight rate is going to move off of zero... if it moves too much, back off a bit. Iterate until you converge. What will the final answer be? 150%? 120% ... the point is, the Fed doesn't have to know ahead of time! They process of raising requirements changing nothing about the cost, has been done before (as David pointed out), and can be done on whatever time schedule the Fed wants!... The don't have to buy or sell anything... they are in complete control of that figure and can do precisely what they want with it when they want with it w/o having to interact with the market except to watch carefully what happens.

    15. Vincent, I noticed in that hyperinflation article of Jason's, in the comments you requested that he write up a paragraph that you could add to your collection, and he did, but I didn't see that in your collection. Did I just miss it?

    16. No, I did not add it to the collection. I find his explanation not helpful for understanding hyperinflation. He is just saying that if they blindly monetize they get hyperinflation but only a stupid central bank would do that. In real life it is not so simple. The reality is the central banks do end up monetizing like crazy. He is not helping with the question of why hyperinflation happens, which is the hard question.

      His theory does not help in deciding if Japan will get hyperinflation. His theory can go either way and it is just up to the user to pick. This is not helping to understand hyperinflation.

    17. "He is just saying that if they blindly monetize they get hyperinflation but only a stupid central bank would do that."

      Maybe it's not a question of stupidity. For example, why do you suppose the Reichsbank (of 1st word industrialized Germany) kept their interest rate rock solid at 5% when inflation was essentially double digit for 7.5 years (except one year when it was about 8%)? What could have motivated them to be so stupid? Hmm... well three of those years they were still fighting WWI, and then they lost and had to pay a huge foreign denominated debt (with foreign troops stationed on their land to make sure it happened)... I'm not saying I can answer my own question, but there appear to be extenuating circumstances ... so perhaps their choice didn't seem that "stupid" at the time. And let's not forget that even when inflation went exponential over the next 1.5 years, they still only made symbolic increases. So nine years of "stupidity?" In hindsight, yes, but at the time?

    18. Now would it be stupid for the BoJ to willfully cause a hyperinflation (assuming there are no unforeseen extenuation circumstances to force their hand)? Yes, probably: but if Jason's theory is true, a period of accelerating inflation (and yes, even hyperinflation potentially), could actually get a country out of an "information trap."

  26. Anonymous6:10 AM

    "Massive torrents of Fed “money-printing” failed to budge prices; this fact directly cracked the central foundations of Austrian thought."

    So, because prices didn't rise by much, Austrian theories of capital, business cycles, interest etc are all wrong? I didn't realize "money-printing will inevitably lead to high price inflation" was a central premise in Austrian theories.

    Also, the original definition of inflation was an increase in the money supply. If you don't know this, you clearly haven't read any old literature.

    1. Anonymous6:20 AM

      It's easy to tell he doesn't follow the Bastiat blog, where Salerno and others have taken this contention by the horns several times, nor does he understand that the Austrian position is such that it is conditional on the money actually entering the economy and being used, which to a degree, it is, e.g. with bonds and other assets.

      He is either a troll or an idiot. Take your pick.

  27. Dan Sanchez chimes in on Mr. Smith’s baseless and desperate smear:

    Mises and Rothbard were not just founding figures of the Austrian school, they also are, among Austrians, the school’s most beloved figures. Many Austrians were devoted friends of Rothbard, some older Austrians even reverently studied under Mises, and many are now the dearest of friends with other Jewish Austrians like Walter Block and David Gordon. Sneer all you want, Noah, but it actually is absurd and contradictory (not to mention despicable) to accuse a tradition of “anti-Semitic overtones,” when the people in that tradition have two Jewish scholars, not only as predecessors, but as dearly remembered friends and cherished heroes.

    Of course the source of this character assassination is likely desperation. Smith and DeLong know that their mainstream, Keynesian, and anti-sound-money charlatanry is, in the view of the public, tired, discredited, and waning, while the Austrian school is waxing. Smith betrays his recognition of this rapid spread of sound economic ideas when he sniffs at it as a spreading plague of “brain worms.” Smith and DeLong don’t have the intellects to fight Austrian ideas fairly, so they resort to smearing Austrian critiques of their precious policies and institutions as motivated by anti-Semitism, in a desperate attempt to convince their readers to ignore those critiques.

    “Never mind them, everything’s fine! The Fed’s money printing is going to turn this economy around any day now. Don’t listen to their arguments; they’re motivated by anti-Semitism. Just keep voting, shopping, and leave the money stuff to us. Nothing to see here!”

    Sorry Noah. Sorry Brad. Your smears won’t save your falsehoods.

    1. Daniel12:58 PM

      Between austrian and communists, I don't know whose cult of personality is more laughable.

      But getting back on topic - mr Roddis, please tell us about your sprints to the ATM.

      Do you engage in them regularly ?
      Do they help you stay in shape ?

      Wait, what's that ? You don't run to the ATM ? Why not ? Isn't that the implication of your beloved Cantillon effect ?

      Could it be that you don't actually believe in the Cantillon effect, and you just use it as pseudo-intellectual justification of your priors ?

    2. Such an interesting and insightful analysis. Libertarianism, which totally prohibits the initiation of violence against others, is EXACTLY THE SAME as communism which resulted in the slaughter of at least 100 million innocents. And I use to think that the anti-Austrian crowd had no good arguments.

    3. Daniel7:14 PM

      Libertarianism, which totally prohibits the initiation of violence against others

      Except I was taking a shot at Austrians, not libertarians. Not that libertarians aren't deluded, but that's a different matter.

      I take it Austrians economics now claims to be synonymous with libertarianism ?

      I have to give it to you guys, you're not lacking in chutzpah.

      Anywhoo, seeing as how the inter-war implementation of the gold standard led DIRECTLY to Hitler, whose war made it possible for Stalin to get his paws on Eastern Europe and China (with the full complicity of FDR, I might add), I'd say Austrians did plenty to undermine the stability of capitalism.

      Now are you going to answer my question regarding your sprints to ATMs (or rather, lack thereof) or are you going to pretend you didn't see it ?

      Do you run to ATMs to get to the money first ?
      If not, why not ?

      Isn't what the Cantillon effect implies, that you should spend the money first ?
      Seeing as how you (and the rest of the Austrians) fail to act in accordance with the implications of the Cantillon effect ... what does that say about your faith in your own theories ?

    4. Mr. Hayek: Well, it’s almost entirely the work of one man – in a way a genius, Lord Keynes – who is much more concerned about influencing current policies than about advancing the right sort of theories and he was operating then in a very peculiar situation. Now in Great Britain, a successful attempt was made after World War I – which brought a good deal of inflation – to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages. Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime salary and wages, or inflated wages, could buy much more. Wages had not come down.

      Now, his first argument was wages must come down. Then he found that was politically impossible, so he must find another way. Instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages and then by a curious intellectual somersault I would almost say he led himself to believe that even bringing down money wages was not of any use. It involves a complex economic argument and all he concluded was that – well, we must inflate, in short.

      Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:

      “Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.

      Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive and effective, he called it THE general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.

      Mr. Buckley: It was an ad hoc.......?

      Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And if I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.

      Mr. Buckley: Like Nixon.

      Mr. Hayek: No, no. (laughter).

  28. Not that she has had much influence upon me, but let's not forget that Alisa Zinov'yevna Rosenbaum was and remains one of the most popular promoters of the Austrian School.

  29. Anonymous12:37 PM

    Has there ever been any government that ever implemented foundational Austrain economic policies that has ever lasted? Seems to me that a lot of these "Austrains" have been so knee-deep in theory and their ivory towers for so long that a lot of what they spout are nothing more than post-hoc analysis on why the last economic crises happen, and then, without fail, always blame the Central Bankers as if it's rabid dog that needs to be out down.

    1. There was an imperfect but workable "gold standard" era that was supplanted by a violent boom/bust inducing Keynesian Kleptocracy as David Stockman explains:

      The Great Depression thus did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression—absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence—the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking.

      But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens—-Keynesian economics and monetary central planning.

      So, it is a strike against a good but flawed system to be supplanted by a violent and evil system?

    2. Daniel7:16 PM

      The Great Depression represent the monumental failure of gold standard.

      Now - tell us about your sprints to the ATMs. Or rather, lack thereof.

    3. Daniel:

      1. Surprisingly, it does not hurt my feelings that you are unable to muster any facts and/or analysis to support your name-calling.

      2. Krugman says you should read this paper by Daniel Kuehn on the 1920 depression:

      3. I point out that Kuehn’s paper SUPPORTS the Austrian analysis the of 1920 depression:

      Kuehn first demonstrates that it was the Fed's funding of WWI that caused an artificial boom and inflation. The problem was not caused by any failure of "the free market".

      “2. The austerity depression of 1920–21

      During World War I federal expenditures ballooned and although the new income tax was able to partially finance the war effort, most of the financing was done through federal borrowing and by the highly accommodating monetary policy of the Federal Reserve. The role of the Federal Reserve at this time was expressed unambiguously by the New York Federal Reserve Bank Governor Benjamin Strong, who told a Congressional committee in 1921 that ‘I feel that I, or the bank at least, was their [the Treasury’s] agent and servant in those matters’ and further added that the wartime inflation caused by the low interest rates maintained by the bank were ‘inevitable, unescapable, and necessary’ for prosecuting the war(Strong, 1930) [emphasis added}”

      This is the pure Rothbardian explanation. Wars are funded with fiat money which robs average people of purchasing power without the victims understanding exactly what is being done to them and without any due process of law.

      It is the same analysis employed by Stockman.

      4. Kuehn has conceded my point that his analysis is consistent with the Rothbardian/Austrian analysis:

      However, he naturally refuses to identify the alleged “failure of the free market” in his story.

      Your volley.

    4. Daniel8:21 PM

      I'm still waiting for your answer regarding ATMs.

      Do you run to ATMs to get to the money first ?

      If not, why ? Isn't your behaviour in contradiction with the implications of the Cantillon effect ?

      Also - you're an imbecile. If you want to know what the human face of Dunning-Krueger looks like, all you have to do is look in the mirror.

      Have fun arguing with your imaginary Keynesians.

    5. You might notice that Roddis has no idea what Cantillon effects are. They have something to do with the capital sructure, not just money.

      But why should that aspect of Austrian economics be any different from any other that Roddis goes on about?

    6. You are right. I failed to write a 30 page paper in these comments on Cantillion Effects when I was just bringing up a generalized observation that first receivers of new money get to spend it before others holding the old money realize the loss of purchasing power. I give Mr. Viennueau a D+ for subject-changing.

    7. Daniel4:25 PM

      I was just bringing up a generalized observation that first receivers of new money get to spend it before others holding the old money realize the loss of purchasing power

      And yet you don't run to ATMs to get the money before others. In fact, you dismiss it as "dumb".

      Funny thing is, you're right. Cantillon effects are, in fact, dumb. And so is any theory that relies on it.

    8. Anonymous5:11 PM

      Seems to me anyone who says Gold Is Money is nothing more than engaging in Economic Lysenkoism.

  30. I had forgotten the Mike Shedlock had predicted deflation back in 2009. He links to this additional outstanding response to Mr. Smith from "Acting-Man":