Why Deflation Isn’t Harmful — Jörg Guido Hülsmann
This is lecture 8 in a series of talks about the Introduction to Austrian Economics which was recorded September 2005, Klampenborg - Denmark. You can see the full lecture here and concise: “Deflation: The Biggest Myths”:
- Myth #1: You cannot earn a living and make profits when the price level falls
- Myth #2: While falling prices are good, lacking aggregate demand is bad
- Myth #3: You cannot earn a living and make profits when the money supply shrinks
- Myth #4: Deflation entails slower economic growth than inflation
- Myth #5: Deflation is particularly burdensome for lower-income groups
- Myth #6: Deflation destroys the credit of the state
- Myth #7: Deflation creates unemployment
- Myth #8: Deflation entails unequal and arbitrary burdens for the citizens
- Myth #9: It will take decades to settle deflation-induced legal disputes
- Myth #10: Deflation confers no positive net benefit
- Myth #11: Letting deflation happen is “passivism”
"On a miniature golf course in summer 1977, Murray Rothbard demonstrates the logic of purposeful action, while Sudha Shenoy prefers to be a praxeological voyeur, watching with amusement."
Bitcoin Decrypted: Part III - Social Theory Aspects is an introduction to Bitcoin that spans practical, technical, historical, and social-theory perspectives in an integrated narrative. For those with already an interest in Austrian Economics and an understanding of money, this is the one to watch.
Bitcoin Decrypted: Part II - Technical Aspects is an introduction to Bitcoin that spans practical, technical, historical, and social-theory perspectives in an integrated narrative.
Myth 9: An income tax cut helps everyone; not only the taxpayer but also the government will benefit, since tax revenues will rise when the rate is cut.
"This is the so-called "Laffer curve," set forth by California economist Arthur Laffer. It was advanced as a means of allowing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy its tax cut, be happy at the balanced budget, and still receive the same level of subsidies from the government.
It is true that if tax rates are 99%, and they are cut to 95%, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District’s gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to the chagrin and confusion of D.C. bureaucrats, they had to repeal the tax.
But this is not likely to happen with the income tax. People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut.
There are some other problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If—a big if—we are really at the upper half of the Laffer Curve, we should then all want to set tax rates at that “optimum” point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.”
Rothbard,[…] describes how, in his economic treatise Man, Economy, and State, he took care to revise precisely this Misesian doctrine:
"[Most important was a thorough revision of the very first eight pages of the work—the pages which state the original axioms upon which the entire work is based.] The revision purged the original formulation of its definite philosophical pessimism, of the idea that human beings are constantly in a state of dissatisfaction and that man could only be happy in a state of inactive rest, such as in Paradise. Such a philosophical view is contrary to the nature state of man, which is at its happiest precisely when it is engaged in productive activity. The revised part eliminates the philosophical pessimism from praxeology." (Correspondence quoted in Stromberg 2005, xl [Intro to MES])
Accordingly, Rothbard [citation] acknowledges the possibility of “satisfaction in the labor itself,” and so grounds the “disutility of labor” not in labor’s being inherently distasteful, but in the fact that “labor always involves the forgoing of leisure,” which is also a value—though not pace Mises, the ultimate value. The fact that leisure has value for us explains why we prefer to economize on labor, thus allowing Rothbard to draw all the essential conclusions for which Mises thought he needed the mistaken Nirvana premise.
I have argued that the features of Misesian praxeology that Rand found most objectionable—its aprioristic methodology, its value-subjectivism, and its claims about motivational psychology—can be reinterpreted in ways that make them congenial to Rand’s philosophical principles while still preserving the essential points that Mises was seeking to make. Hence there is no reason for those of a Randian philosophical bent to deprive themselves of the powerful methodological instrument developed by Mises and his fellow Austrians: praxeology, the a priori science of human action”.
— Roderick T. Long, “Praxeology: Who Needs It”, p12 was written for the Journal of Ayn Rand Studies but essentially attempts to clear the language up regarding the ‘differences’. Anyway the part about Mises and “felt-uneasiness” condition is enlightening. If you’re dealing with objectivist’s who aren’t fans of praxeology/Mises formulation this would be the text to refer to.
"Intellectual curiosity has a habit of breaking through, however, especially among college and graduate students. As a result, the Austrian School has flourished over the last two decades, despite severe institutional obstacles.
In fact, the number of Austrians has grown so large, and the discussion so broad, that differences of opinion and branches of thought have arisen, in some cases developing into genuine clashes of thought. Yet they have all been conflated and jammed together by non-Austrians and even by some within the school, giving rise to a great deal of intellectual confusion, lack of clarity, and outright error.
The good side of these developing disputes is that each side has clarified and sharpened its underlying premises and world-view. It has indeed become evident in recent years that there are three very different and clashing paradigms within Austrian economics: the original Misesian or praxeological paradigm, to which the present author adheres; the Hayekian paradigm, stressing “knowledge” and “discovery” rather than the praxeological “action” and “choice,” and whose leading exponent now is Professor Israel Kirzner; and the nihilistic view of the late Ludwig Lachmann, an institutionalist antitheory approach taken from the English “subjectivist”-Keynesian G.L.S. Shackle.”
- AEN: Since then, you have been the strongest defender of the Austrian method, praxeology, since Rothbard.
- HOPPE: Independently, I had concluded that economic laws were a priori and discoverable through deduction. Then I stumbled on Mises’s Human Action. That was the first time I found someone who had the same view; not only that, he had already worked out the entire system. From that point on, I was a Misesian.
- Mises took the idea of synthetic a priori–the idea that there are true statements about reality, derived from axioms and logic, that do not need to be tested–from Immanuel Kant. But Mises added an extremely important insight; Kantian mental categories can be understood as ultimately grounded in categories of action. With this, Mises bridged the gulf in Kantianism that separates mental from physical; what we think from the outside, physical world.
- If you start with the concept of action, you immediately realize that action involves a subject and an object. Action means; I do something with something in order to reach certain goals. That implies a theory of casuality, which had been a sticking point in Kantianism and remains so in positivism. There were hints of this in Kant, but nothing as explicit as you find it in Mises.
Because there is no rational economic calculation taking place, politics rushes in to fill the vacuum. In politics, failure is success. The worse any government bureaucracy performs, as a rule, the more money it gets. All government bureaucracies have powerful incentives to grow, regardless of whether or not such growth actually serves the public.
Every bureaucrat is inherently an empire builder, because that is how he advances in his career. The route to promotion in managing a bigger and better-paying bureaucracy is to prove that one can “manage” a large number of people. And since there are no profits or shareholders in government, bureaucrats “profit” personally by spending taxpayers’ dollars lavishly on perquisites—a large staff, travel, office space, etc.
Thus, there are built-in incentives to maximize the number of subordinate bureaucrats, regardless of what this may mean for public service. Cost maximization characterizes all government bureaucracies, as opposed to cost minimization in private, competitive markets. Not to mention the notoriously shoddy quality of all government ‘services.’
- The problem of rights violating rights protectors [1:22]
- Differentiating law and ethics [10:47]
- Three core legal theory modules [18:35]
- The full range of responses to aggression [33:56]
- Consistently rights-protecting legal institutions [39:12]
- Who wins and loses from misplaced complexity? [46:36]
There are several questions at the end of the presentation. As usual the above was brilliant. A listing of more timestamps are available in the video description. The paper I mentioned in the introduction which is the basis of the talk is available here along with some choice excerpts. This is the most cutting edge article on Austro-Libertarianism that exists today.