Robert Blumen, a software engineer with a background in
financial applications, recently spoke with the Mises
Institute about the Austrian School’s growing influence among investors.
Mises Institute: In recent years, we’ve seen
more and more Austrian-tinged economic analysis coming from investors like
Mark Spitznagel and Jim Rogers, to just name two.
As someone personally involved in the investment world, have you yourself
seen growth in Austrian ideas among investors and similar professionals?
Robert Blumen: There has been tremendous growth in interest in Austrian
economics among financial professionals. I started an interest group for
Austrians in Finance on LinkedIn which, in a few years, has grown to almost
2,000 members from the US, South America, East, Southern, and Central Asia,
Africa, and Eastern and Western Europe. Peter Schiff appears regularly on
financial shows. The Mises Institute drew hundreds
of people from the investment world to an event in Manhattan.
Since 2002, a number of
Austrian-themed books in financial economics have come out. Alongside titles
from established writers such as James Grant, there is Detlev
Schlichter’s Paper Money Collapse,
and several books by Peter Schiff. There are many popular Austrian bloggers
such as Grant Smith and Robert Wenzel. Over two million viewers watched a
2006 video in which a parade of condescending media hosts heap ridicule on
Peter Schiff, who, to his credit, did not back down in the face of their
smugness.
MI: Did the financial crisis of
2008 help increase the sympathy for Austrian economics?
RB: I have heard the same story
from many people in finance. When the bust of 2000 (or 2008) happened, it did
not fit what they had been taught in school, nor could it be explained within
the belief systems of their colleagues in financial markets. Their next step
was reading, searching for answers, and then, finding the writings of Mises, Hayek, or Rothbard that
enabled them to make sense of what had happened.
To answer your question,
yes, I think that the failure of the popular economic theories — evidenced by
these inexplicable crises — has driven the search for superior ideas. The Mises Institute has been publishing for years, explaining
these boom and bust cycles with Austrian economics. When people searched,
many of them ended up at mises.org.
MI: In spite of lackluster
growth on Main Street, Wall Street appears quite happy with growth over the
past two years. For the casual observer, one might argue that the Fed has
managed things well. What do you see as problematic with the current
approach, and are there some in the finance world skeptical of the Fed’s
current strategy?
RB: The Fed has a series of
mistaken theories supporting their belief that higher stock prices indicate
the success of their policies.
The first is the thinking
that asset prices are actual wealth, when they are only the prices of the
capital goods, which are a form of real wealth. Asset prices, in real terms,
are the exchange ratios between consumption goods and capital goods.
Artificially-boosted asset prices mean only that the owners of assets who
bought them at lower prices have increased their consumption possibilities in
relation to non-owners of assets. The owners of most assets, the so-called “1
percent” are the beneficiaries of Fed policies.
There is no systemic
economic benefit to any particular value for stock prices. Young people
saving for the future and entrepreneurs who are looking to pick up capital
goods at bargain prices would find lower stock prices give them a better
deal. This is the same as for any good.
Their second error is
that higher stock prices create a “wealth effect,” in which people see their
asset values rise, feel richer, and consequently save less and spend more.
Their goal is to boost consumption through pumping up asset prices. As
Keynesians, they are all in favor of this because they think that consumption
drives production.
Sound economic thought
has recognized, at least since the classical school, that production must
precede consumption, and that production drives demand, not the other way
around. The Fed understands none of this because they have no understanding
of the purpose of capital goods in the production process, which is to increase
the productivity of labor.
They believe this about
home prices as well, which is arguably an even greater fallacy because homes
are consumption goods. A rising standard of living means that we are able to
buy consumption goods at lower real prices over time, not higher.
And finally, they see the
stock market as a sort of public referendum on their policies. They point to
the stock market and say, “see, the market approves of what we are doing.”
But when you realize that through its monetary expansion, the Fed itself is
responsible for the rising stock market, that calls into question whether we
can use it as independent measure of public opinion, or instead, the Fed
voting for itself with money that it prints.
Austrian-informed
financial thinkers understand this. There are hundreds of Austrian-oriented
blogs and commentary sites, as well as some excellent heterodox sites with a
very Austrian-friendly perspective such as Zero Hedge, Jim Rickards, Marc Faber, and Fofoa.
MI: We’ve mostly been talking
about the US so far, but speaking globally, do you see any areas that are of
particular concern, such as China or the Euro zone?
RB: Credit allocation in China
is not market-based. They import the Fed’s inflation through their currency
peg, which diverts dollars into their sovereign wealth fund where it is
“invested” by bureaucrats in various forms of dollar-zone assets. Their
domestic savings go into their banking system, where it is wasted on
politically-favored projects due to non-market allocation of bank credit. The
entire system is experiencing a series of bubbles in real estate and other
sectors.
Their rate of
infrastructure spending for comparably developed economies is about twice as
high as normal. This is because the communist party officials are under great
pressure to hit GDP targets — as if prosperity could be spent into existence
by hitting a number. Infrastructure such as roads and empty cities present an
opportunity to spend a large amount of money, all in one place, on a lot of
Very Big Stuff, which under market-based economic calculation would be
revealed as wasteful.
The problems in Europe
are a combination of the massive debts that can never be paid back, the
unfunded entitlements, and the growth in the burden on producers, a theme
that I addressed in my recent Mises
Daily article on Say’s law. This burden consists of the totality of
regulation, taxation, inflexible prices and labor markets, and the threat to
the confiscation of wealth. If you project these trends into the near future,
I’m not sure where the lines cross, but the system is clearly unsustainable
in its present form because it relies on sustaining current levels of
consumption as fewer and fewer people produce.
