Press "Enter" to skip to content

Tag: austrian economics

On hyperinflation in Diablo 3

The Mises Institute has a great article by Pete Earle analyzing the reasons behind the hyperinflationary collapse in Diablo 3. Key bit – this:

Considering the level of planning that goes into designing and maintaining virtual gaming environments, if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing?

Mises on value and credit

These two quotes by Ludwig von Mises stuck with me from a quick late-night re-reading of his Human Action. The first pertains to the classical economic position (now defended only by the Austrian School) on the notion of value. To my best knowledge this position (known as the subjective theory of value) was first developed by the Salamanca School in the 16th century, in reply to the centuries-old medieval church dispute over what constitutes a just price. The church fathers – most famously Thomas Aquinas – argued that value is intrinsic to every good, and is expressed through the labour of the person producing that good. Accordingly, a just price would cover the cost of labour in the production of a good plus a small charge on top of that. Interestingly enough, after this line of argumentation was abandoned by the Catholic church, it was taken with renewed vigour in the 19th century by Marx. The subjective theory of value on the other hand, as first expressed by the Dominican monks from Salamanca, argues that the only just price is the one settled on between a buyer and a seller. Here, Mises phrases it excellently:

Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. Neither is value in words and doctrines, it is reflected in human conduct. It is not what a man or groups of men say about value that counts, but how they act.

The second quote pertains to the Austrian school’s position on credit expansion. In Mises’s position credit expansion by the state leads to severe market distortions and directly causes the boom-bust cycles of economic activity. His argument is that the only way for the system to clear itself from the bad credit is to allow those institutions who participated in the transactions to bear the consequences – i.e. go bankrupt. The longer this reset is postponed the more drastic the consequences will be, simply because postponement here stands for further infusion of bad credit into the system so as to maintain the illusion of operability. Here, he describes the final consequences of a boom fabricated through state credit expansion.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Keynes on currency debasement

“There is no subtler, or surer means of overturning the existing basis of society than to debase the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which only one man in a million is able to diagnose.”

–John Maynard Keynes

The gold dinar

The following news stories, coupled with the recent unveiling of a gold ATM in Abu Dhabi seem like the first steps on the road to a trend:

1. Apparently the Malaysian state of Kelantan introduced some time ago the gold Dinar and the silver Dirham as legal tender, and the coins are in circulation with at least 3 different banks responsible for coinage and distribution. Interestingly, one of the reasons given by the chief minister of the state of Kelantan for introducing the coins, is that:

“the poor would be protected against inflation by the intrinsic value of the precious metals”

Who would have expected an Islamist party member from provincial Malaysia to speak words straight from an Austrian Economic Theory textbook?

2. An amazing video from Indonesia, where a private Islamic organization is coining – you guessed it – gold Dinars and silver Dirhams. Their explanation for doing it, and the interviews with ordinary people using the coins for their savings, are eye-opening.  One of the interviewees frames it as follows:

“The Dinar and Dirham represent a moral movement of maximum individual freedom”

It seems that this coinage movement sees itself as both enabling individual freedom from banking manipulation and the resulting inflation (obliteration of savings), and as a protest against state corruption and central bank control over individual lives (centrally controlled interest rates).

The death of the middle class

22 statistics from the Business Insider illustrating the complete obliteration of the middle class in the US. Sobering data, considering that all countries pursuing US economic/monetary/taxation policies are in line for the same medicine. In essence this is a massive, unprecedented in its scale, hollowing up of individual wealth.

1. 83 percent of all U.S. stocks are in the hands of 1 percent of the people.
2. 61 percent of Americans “always or usually” live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.
3. 66% of the income growth between 2001 and 2007 went to the top 1% of all Americans.
4. 36 percent of Americans say that they don’t contribute anything to retirement savings.
5. 43 percent of Americans have less than $10,000 saved up for retirement.
6. 24% of American workers say that they have postponed their planned retirement age in the past year.
7. Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.
8. Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975.
9. For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.
10. In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
11. As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.
12. The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
13. Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008.
14. In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.
15. The top 1% of U.S. households own nearly twice as much of America’s corporate wealth as they did just 15 years ago.
16. In America today, the average time needed to find a job has risen to a record 35.2 weeks.
17. More than 40% of Americans who actually are employed are now working in service jobs, which are often very low paying.
18. For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.
19. This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.
20. Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.
21. Approximately 21 percent of all children in the United States are living below the poverty line in 2010 – the highest rate in 20 years.
22. The top 10% of Americans now earn around 50% of the national income.

The horror, the horror

Haven’t been able to post for a while due to plenty of boring work – the worst combination. The flaneur spirit crumbles when faced with repetitive and intellectually unchallenging tasks. However, meanwhile in the real world the Greece fiasco turned into farce, and The Economist captured that just brilliantly in their May 1 issue, with Angela Merkel appearing as a natural in the Colonel Kurtz role on the cover below.

While the Greeks were burning banks, and keeping in line with the Apocalyptic theme, the Euro almost collapsed with the beginning of this week:

May the 6th was an interesting day in that context, because while the euro was heading for the Acropolis gold broke above 1200:

And, what a curious coincidence, something even stranger happened on that same day:


The financial markets had a 20 minute period of complete collapse, which the media immediately explained as a human error (haha). Other, less imbecile explanations are to be found here and here. I find it fascinating how in a highly leveraged complex system a relatively small event (sorry Greece) can cause tremendous and unpredictable repercussions which apart from forming a somewhat black swan, cause system-wide readjustments. This again comes to show that [1] in a complex networked environment the notion of periphery is meaningless, [2] connectivity acts as a magnifying glass for network events, [3] the longer structural instabilities are ignored/covered up, the bigger the eventual ripple-effects of the collapse.

Interesting weeks ahead.

Dealing with entropic complexity

John Robb over at Global Guerrillas has an interesting post on the root problem in dealing with entropic complexity (entropic because of the inevitability of collapse) – influenced by the work of Quigley and Tainter. As he narrates it, the key issue is the uniqueness of each system at the level of its smallest nodes – the entities/actors enacting the system. In other words, whether it is the international wheat market, the English Premier League, or the Australian banking system, while there are certain structural similarities once the systems reach a certain level of complexity (network power laws, etc) at the most local level each system is absolutely unique, and differs even from ‘similar’ systems next door. Furthermore, the local level is the fastest changing part of a system, in that it is the closest to the inputs (of course all levels are local as actor network theory argues, but that is all too often not understood), and consequently when viewed over time there grows a chasm between the fluidity of the local and the structural integrity of the wider system. As Robb words it:

The need for evolutionary advances at the local level will always outstrip the pace of evolutionary change at the center.  When the mismatch grows too large, the entire system collapses.

Of course, Robb forgets that every system is always local at every layer of its network, the center and the periphery are equally situated in a local setting, and the problem he describes is not one of miscommunication between local and global, but of breakdown of translation between equally local layers. The solution Robb proposes is one of resilient local communities existing in some sort of semi-autonomy from a wider system. This of course has been an old political dream of both the far left and the far right. Interestingly though, the Austrian economic school and Murray Rothbard in particular have long argued for the independent city-state as the optimal politico-economic entity on a global scale – I don’t think Robb is aware of that though.