In a previous life as a London-based ‘global strategist’ (I was never sure what that was) I was known as someone who was worried by QE and more generally, about the willingness of our central bankers to play games with something which I didn’t think they fully understand: money. This may be a strange, even presumptuous thing to say. Surely of all people, one thing central bankers understand is money? They certainly should understand money. They print it, lend it, borrow it, conjure it. They control the price of it… But so what? What should be true is not necessarily what is true, and in the topsy-turvy world of fi nance and economics, it rarely is. So file the following under “strange but true”: our best and brightest economists have very little understanding of economics. Take the current malaise as prima facie evidence. Let me illustrate. Of the many elemental flaws in macroeconomic practice is the true observation that the economic variables in which we might be most interested happen to be those which lend themselves least to measurement. Thus, the statistics which we take for granted and band around freely with each other measuring such ostensibly simple concepts as inflation, wealth, capital and debt, in fact involve all sorts of hidden assumptions, short-cuts and qualifications. So many, indeed, as to render reliance on them without respect for their limitations a very dangerous thing to do. As an example, consider the damage caused by banks to themselves and others by mistaking price volatility (measurable) with risk (unmeasurable). Yet faith in false precision seems to us to be one of the many imperfections our species is cursed with. One such ‘unmeasurable’ increasingly occupying us here at Edelweiss is that upon which all economic activity is based: trust. Trust between individuals, between strangers, between organisations… trust in what people read, and even people’s trust in themselves. Let’s spend a few moments elaborating on this. First, we must understand the profound importance of exchange. To do this, simply look around you. You might see a computer monitor, a coffee mug, a telephone, a radio, an iPad, a magazine, whatever it is. Now ask yourself how much of that stuff you’d be able to make for yourself. The answer is almost certainly none. So where did it all come from? Strangers, basically. You don’t know them and they don’t know you. In fact virtually none of us know each other. Nevertheless, strangers somehow pooled their skills, their experience and their expertise so as to conceive, design, manufacture and distribute whatever you are looking at right now so that it could be right there right now. And what makes it possible for you to have it? Exchange. To be able to consume the skills of these strangers, you must sell yours. Everyone enters into the same bargain on some level and in fact, the whole economy is nothing more than an anonymous labor exchange. Beholding the rich tapestry this exchange weaves and its bounty of accumulated capital, prosperity and civilization is a marvelous thing. But we must also understand that exchange is only possible to the extent that people trust each other: when eating in a restaurant we trust the chef not to put things in our food; when hiring a builder we trust him to build a wall which won’t fall down; when we book a flight we entrust our lives and the lives of our families to complete strangers. Trust is social bonding and societies without it are stalked by social unrest, upheaval or even war. Distrust is a brake on prosperity, because distrust is a brake on exchange. But now let’s get back to thinking about money, and let’s note also that distrust isn’t the only possible brake on exchange. Money is required for exchange too. Without money we’d be restricted to barter one way or another. So money and trust are intimately connected. Indeed, the English word credit derives from the Latin word credere, which means to trust. Since money facilitates exchange, it facilitates trust and cooperation. So when central banks play the games with money of which they are so fond, we wonder if they realize that they are also playing games with social bonding. Do they realize that by devaluing money they are devaluing society? To see the how, first understand how monetary policy works. Think about what happens in the very simple example of a central bank’s expanding the monetary base by printing money to buy government bonds. That by this transaction the government has raised revenue for the government is obvious. The government now has a greater command over the nation’s resources. But it is equally obvious that no one can raise revenue without someone else bearing the cost. To deny it would imply revenues could be raised for free, which would imply that wealth could be created by printing more money. True, some economists, it seems, would have the world believe there to be some validity to such thinking. But for those of us more concerned with correct logical practice, it begs a serious question. Who pays? We know that this monetary policy has redistributed money into the government’s coffers. But from whom has the redistribution been?
The simple answer is that we don’t and can’t know, at least not on an amount per person basis. This is unfortunate and unsatisfactory, but it also happens to be true. Had the extra money come from taxation, everyone would at least know where the burden had fallen and who had decreed it to fall there. True, the upper-rate tax payers might not like having a portion of their wealth redirected towards poorer members of society and they might not agree with it. Some might even feel robbed. But at least they know who the robber is. When the government raises revenue by selling bonds to the central bank, which has financed its purchases with printed money, no one knows who ultimately pays. In the abstract, we know that current holders of money pay since their cash holdings have been diluted. But the effects are more subtle. To see just how subtle, consider Cantillon’s 18th century analysis of the effects of a sudden increase in gold production: If the increase of actual money comes from mines of gold or silver… the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains. … All this increase of expenditures in meat, wine, wool, etc. diminishes of necessity the share of the other inhabitants of the state who do not participate at first in the wealth of the mines in question. The altercations of the market, or the demand for meat, wine, wool, etc. being more intense than usual, will not fail to raise their prices. … Those then who will suffer from this dearness… will be first of all the landowners, during the term of their leases, then their domestic servants and all the workmen or fixed wage-earners … All these must diminish their expenditure in proportion to the new consumption. In Cantillon’s example, the gold mine owners, mine employees, manufacturers of the stuff miners buy and the merchants who trade in it all benefit handsomely. They are closest to the new money and they get to see their real purchasing powers rise. But as they go out and spend, they bid up the prices of the stuff they purchase to a level which is higher than it would otherwise have been, making that stuff more expensive. For anyone not connected to the mining business (and especially those on fixed incomes: “the landowners, during the term of their leases”), real incomes haven’t risen to keep up with the higher prices. So the increase in the gold supply redistributes money towards those closest to the new money, and away from those furthest away. Another way to think about this might be to think about Milton Friedman’s idea of dropping new money from a helicopter. He used this example to demonstrate how easy it would theoretically be for a government to create inflation. What he didn’t say was that such a drop would redistribute income in the same way more gold from Cantillon’s mines did, towards those standing underneath the helicopter and away from everyone else. So now we know we have a slightly better understanding of who pays: whoever is furthest away from the newly created money. And we have a better understanding of how they pay: through a reduction in their own spending power. The problem is that while they will be acutely aware of the reduction in their own spending power, they will be less aware of why their spending power has declined. So if they find groceries becoming more expensive they blame the retailers for raising prices; if they find petrol unaffordable, they blame the oil companies; if they fi nd rents too expensive they blame landlords, and so on. So now we see the mechanism by which debasing money debases trust. The unaware victims of this accidental redistribution don’t know who the enemy is, so they create an enemy. Keynes was well aware of this insidious dynamic and articulated it beautifully in a 1919 essay: By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. … Those to whom the system brings windfalls… become “profiteers” who are the object of the hatred…. the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. Deliberately impoverishing one group in society is a bad thing to do. But impoverishing a group in such an opaque, clandestine and underhanded way is worse. It is not only unjust but dangerous and potentially destructive. A clear and transparent fiscal policy which openly redistributes from the rich to the poor can at least be argued on some level to be consistent with ‘social justice.’ Governments can at least claim to be playing Robin Hood. There is no such defense for a monetary driven redistribution towards recipients of the new money and away from everyone else because if the well-off are closest to the money, well, it will have the perverse effect of benefitting them at the expense of the poor. Take the past few decades. Prior to the 2008 crash, central banks set interest rates according to what their crystal ball told them the future would be like. They were supposed to raise them when they thought the economy was growing too fast and cut them when they thought it was growing too slow. They were supposed to be clever enough to banish the boom-bust cycle, and this was a nice idea. The problem was that it didn’t work. One reason was because central bankers weren’t as clever as they thought. Another was because they had a bias to lower rates during the bad times but not raise them adequately during the good times. On average therefore, credit tended to be too cheap and so the demand for debt was artificially high. Since that new debt was used to buy assets, the prices of assets rose in a series of asset bubbles around the world. And this unprecedented, secular and largely global credit inflation created an illusion of prosperity which was fun for most people while it lasted. But beneath the surface, the redistributive mechanism upon which monetary policy relies was at work. Like Cantillon’s gold miners, those closest to the new credit (financial institutions and anyone working in fi nance industry) were the prime beneficiaries. In 2012 the top 10 names on the Forbes list of richest Americans included the fortunes of eleven investors, financiers or hedge fund managers. In 182 the list had none. Besides this redistribution of wealth towards the fi nancial sector was a redistribution to those who were already asset-rich. Asset prices were infl ated by cheap credit and the assets themselves could be used as collateral for it. T e following chart suggests the size of this transfer from poor to rich might have been quite meaningful, with the top 1% of earners taking the biggest a share of the pie since the last great credit inflation, that of the 1920s.
Who paid? Those with no access to credit, those with no assets, or those who bought assets late in the asset inflations and which now nurse the problem balance sheets. Th ey all paid. Worse still, future generations were victims too, since one way or another they’re on the hook for it. So with their crackpot monetary ideas, central banks have been robbing Peter to pay Paul without knowing which one was which. And a problem here is this thing behavioral psychologists call self-attribution bias. It describes how when good things happen to people they think it’s because of something they did, but when bad things happen to them they think it’s because of something someone else did. So although Peter doesn’t know why he’s suddenly poor, he knows it must be someone else’s fault. He also sees that Paul seems to be doing OK. So being human, he makes the obvious connection: it’s all Paul and people like Paul’s fault. But Paul has a different way of looking at it. Also being human, he assumes he’s doing OK because he’s doing something right. He doesn’t know what the problem is other than Peter’s bad attitude. Needless to say, he resents Peter for his bad attitude. So now Peter and Paul don’t trust each other. And this what happens when you play games with society’s bonding. When we look around we can’t help feeling something similar is happening. The 99% blame the 1%; the 1% blame the 47%. In the aftermath of the Eurozone’s own credit bubbles, the Germans blame the Greeks. The Greeks round on the foreigners. The Catalans blame the Castilians. And as 25% of the Italian electorate vote for a professional comedian whose party slogan “vaff a” means roughly “f**k off ” (to everything it seems, including the common currency), the Germans are repatriating their gold from New York and Paris. Meanwhile in China, that centrally planned mother of all credit inflations, popular anger is being directed at Japan, and this is before its own credit bubble chapter has fully played out. (The rising risk of war is something we are increasingly worried about…) Of course, everyone blames the bankers (“those to whom the system brings windfalls… become ‘profiteers’ who are the object of the hatred”). But what does it mean for the owner of capital? If our thinking is correct, the solution would be less monetary experimentation. Yet we are likely to see more. Bernanke has monetized about a half of the federally guaranteed debt issued since 2009 (see chart below). The incoming Bank of England governor thinks the UK’s problem hasn’t been too much monetary experimentation but too little, and likes the idea of actively targeting nominal GDP. The PM in Tokyo thinks his country’s every ill is a lack of infl ation, and his new guy at the Bank of Japan is revving up its printing presses to buy government bonds, corporate bonds and ETFs. China’s shadow banking credit bubble meanwhile continues to inflate…
For all we know there might be another round of illusory prosperity before our worst fears are realised. With any luck, our worst fears never will be. But if the overdose of monetary medicine made us ill, we don’t understand how more of the same medicine will make us better. We do know that the financial market analogue to trust is yield. The less trustful lenders are of borrowers, the higher the yield they demand to compensate. But interest rates, or what’s left of them, are at historic lows. In other words, there is a glaring disconnect between the distrust central banks are fostering in the real world and the unprecedented trust lenders are signaling to borrowers in the financial world. Of course, there is no such thing as “risk-free” in the real world. Holders of UK cash have seen a cumulative real loss of around 10% since the crash of 2008. Holders of US cash haven’t done much better. If we were to hope to fi nd safety by lending to what many consider to be an excellent credit, Microsoft, by buying its bonds, we’d have to lend to them until 2021 to earn a gross return roughly the same as the current rate of US inflation. But then we’d have to pay taxes on the coupons. And we’d have to worry about whether or not the rate of infl ation was going to rise meaningfully from here, because the 2021 maturity date is eight years away and eight years is a long time. And then we’d have to worry about where our bonds were held, and whether or not they were being lent out by our custodian. And of course, this would all be before we’d worried about whether Microsoft’s business was likely to remain safe over an eight year horizon. We are happy to watch others play that game. There are some outstanding businesses and individuals with whom we are happy to invest. In an ideal world we would have neither Peters nor Pauls. In the imperfect one in which we live, we have to settle for trying hard to avoid the Pauls, who we fear mistake entrepreneurial competence for proximity to the money well. But when we find the real thing, the timeless ingenuity of the honest entrepreneurs, the modest craftsmen and craftswomen who humbly seek to improve the lot of their customers through their own enterprise, we find inspiration too, for as investors we try to model our own practice on theirs. It is no secret that our quest is to find scarcity. But the scarce substance we prize above all else is trustworthiness. Aware that we worry too much in a world growing more wary and distrustful, it is here we place an increasing premium, here that we seek refuge from financial folly and here that we expect the next bull market.
El Reino Unido ha dado por terminada su participación en la Unión Europea. Desde que, hace 70 años, Winston Churchill lanzó la idea de unos Estados Unidos de Europa hasta la creación del euro en una UE presidida por Blair, las relaciones entre Gran Bretaña y la Europa continental han sido un elemento central de la agenda política en ambos lados del Canal de la Mancha. En el momento del adiós, hay que rechazar un tópico convertido en verdad popular: la idea de un Reino Unido antieuropeo.
La situación actual de Europa guarda enormes semejanzas con la etapa de entreguerras
Margaret Thatcher fue la principal impulsora del mayor programa liberalizador acometido hasta la fecha en Europa, el Mercado Único; Blair fue el promotor de la Agenda de Lisboa, el ambicioso y aparcado plan de reformas estructurales cuyo objetivo era hacer de la economía europea la más competitiva del mundo, y los gobiernos laboristas y conservadores postacherianos fueron campeones de las sucesivas ampliaciones de la UE. Sin embargo, siempre ha existido una profunda discrepancia sobre el proceso de construcción europea entre la visión anglosajona de corte liberal, asumida también por las pequeñas democracias nórdicas, y la continental, de naturaleza corporativo-estatista. La concepción de una «unión más estrecha» abanderada por la Comisión y por un buen número de los Estados ha sido percibida en Britania como un reforzamiento de esa predisposición estato-intervencionista. Los británicos han creído imposible reformar la UE desde dentro y han optado por dejarla. Esta explicación tiende a olvidarse, pero resulta fundamental para entender las causas del divorcio británico y también la persistencia de un problema de fondo que la salida del Reino Unido no elimina. Ahora bien, el optimismo manifestado por muchos liberales partidarios del Brexit ha de relativizarse. Por un lado, una parte sustancial del rechazo a la UE no procede de los partidarios de una Britania abierta al mundo, defensores de un modelo de capitalismo competitivo, sino de los sectores de la sociedad británica para quienes la globalización constituye una fuente de inseguridad y de amenaza para su nivel de vida y, también, para su concepción de una sociedad estable y equilibrada. Por otro, el discurso adoptado por el Partido Conservador supone un retroceso hacia una especie de tercera vía comunitarista, similar a la del conservadurismo prethatcheriano y de evidente aroma corporativista. Su plasmación en políticas concretas haría inviable el plan tory de construir una Britania Global. Sería una recreación dentro del Reino Unido del modelo socioeconómico europeo, que es precisamente del que se pretende huir al abandonar la UE.
El proceso negociador GB-UE debería conducir a un acuerdo razonable que permitiese a ambas aprovechar los beneficios de la cooperación. Pero esta desiderata no parece fácil. Europa no hará un traje a medida para los británicos y éstos no aceptarán un esquema de relación similar al noruego o al suizo que, en la práctica, tienen casi todos los costes de formar parte de la UE y menos beneficios que los derivados de la plena integración. Por añadidura, si salir del marco institucional europeo es gratis, los incentivos para que se produzcan movimientos centrífugos en otros Estados son muy altos. En la presente coyuntura continental parece improbable que la racionalidad económica se imponga a la razón política. En coherencia con este planteamiento, el resultado sería un juego de suma negativa… todos perderemos…La evaluación de los costes del Brexit para el Reino Unido y para la UE es de una enorme complejidad. Existen estudios sólidos cuyas conclusiones son radicalmente diferentes. Las repercusiones de un fenómeno inédito dependen de variables difíciles de prever y de controlar, tanto si el divorcio concluye en una relación beneficiosa para las partes como si culmina sin un acuerdo amigable entre ambas. En este último supuesto, no es obvio anticipar quiénes serán los ganadores y los perdedores relativos de la ruptura. Contemplar el Brexit como un desastre para el Reino Unido es tan irreal como considerarlo una garantía de éxito; estimar que es inocuo para la UE tampoco resiste un análisis económico-político elemental. A priori, sus implicaciones son indudablemente negativas para la UE e inciertas para Gran Bretaña.
La razón es evidente…El Brexit se produce en un momento de crisis existencial del proyecto europeo. La actual situación del Viejo Continente guarda extraordinarias semejanzas con la del periodo de entre-guerras (1918-1939). La puesta en cuestión de las instituciones democráticas por partidos antisistema, el anémico crecimiento de la economía y la evidente pérdida de interés estratégico de Europa para la nueva Administración norteamericana configuran un panorama similar al de aquella turbulenta época. En este entorno, el abandono de la UE por parte de la quinta economía del mundo, de su primer poder militar y del Estado con la red de soft power más consistente de Europa tiene implicaciones sustanciales y adversas para la economía, para la política y para la estrategia de seguridad del Viejo Continente.
En este contexto, el Brexit debería ser una llamada de atención para Europa. Guste o no, el proyecto europeo ha perdido atractivo para amplios sectores de la sociedad. Esto no obedece sólo a los efectos de la Gran Recesión, sino también a problemas estructurales de fondo, el déficit democrático de la UE y la resistencia a adoptar las reformas estructurales necesarias para impulsar el crecimiento, la competitividad y la creación de empleo. La actual UE ha degenerado en una especie de Despotismo Ilustrado al servicio del mantenimiento de un statu quo estatista, que es la causa eficiente de la innegable decadencia del Viejo Continente. Si la afirmación de fe europeísta realizada por todos los Estados Miembros esta semana se traduce en consolidar el marco existente, el futuro de Europa será cuanto menos gris. Para terminar, el Brexit constituye el mayor movimiento sísmico registrado en Europa desde la caída del Muro de Berlín. Además, se produce en un momento de elevada inestabilidad e incertidumbre en el mundo y en el continente. La magnitud de sus consecuencias no puede ser predicha y dependerá no sólo de cuál sea la relación que se establezca entre la Unión Europea y el Reino Unido en el horizonte del corto, del medio y del largo plazo, sino de las políticas que uno y otro adopten. Ello implica la asunción de un escenario abierto, en el que nada está escrito. Al final, la evolución de los acontecimientos no depende nunca de unas supuestas y quiméricas fuerzas inexorables que rigen la historia y el destino de los pueblos, sino de las decisiones de los individuos y de quienes les representan
Keynesian economics has witnessed a remarkable resurgence since the crisis of 2008. The inability of mainstream economics to predict or explain the crisis led many economists to become skeptical of its core macroeconomic tenets. Several have turned the clock back to the ideas of Keynes to make sense of the housing bubble and the ensuing recession.
One such explanation inspired by the General Theory emphasizes the endemic uncertainty of the future and its implications for market stability. Championed by Paul Davidson1 and popularized by Robert Skidelsky,2 this line of thought blames the crisis and recession on the fickle expectations and “animal spirits” that guide investment in a market economy.3
Per this thesis, in an uncertain world, entrepreneurs and investors suffer from mood swings. Optimism regarding the future abruptly gives way to pessimism. Fluctuations in economic activity are the result of these variations in outlook.
With its focus on uncertainty, this line of thought bears a striking resemblance to Austrian ideas. Moreover, its rejection of mathematical probability as a foundation for expectations is echoed by several prominent Austrian economist.
Nevertheless, while Keynesians conclude that the uncertainty of the future renders a market economy inherently unstable, Austrians embrace uncertainty without losing faith in the order generated by a market economy. What lies at the root of this puzzle?
Keynes on Expectations, Uncertainty, and Market Stability
Think of Mary, a plastic bottle manufacturer drawing up plan to open a new factory. Given the durability of the investment, her decision is based on a set of long-term expectations. How does Mary arrive at these estimations of future prices?
In a neo-classical world, she does so by absorbing as much information as possible regarding past prices. Using this information, she calculates the numerical probabilities associated with various prices and forms her expectations based on these probability distributions.
In such a world, expectations share a deterministic relationship with the past. The numerical probabilities associated with future prices are inferred mechanistically from those associated with past prices. Thus, Mary’s expectations of the future are objective in nature. Anybody else in her place would have come to identical conclusions regarding the future with the information at hand.
Keynes sharply disagreed with this approach. Long-term expectations, he argued, are formed in a fog of uncertainty. This renders mathematical probability useless as a basis for forming one’s expectations. Since the future may differ significantly from the past, information about past prices provides “no scientific basis on which to form any calculable probability whatever” regarding the likelihood of future prices.4
Entrepreneurs and investors cannot mechanically extrapolate probability judgments regarding the future from an analysis of information regarding the past. As a result, their expectations are subjective in nature. Mary’s expectations now bear a personal stamp.
These subjective expectations share no connection to the past. The inability to use probability to form expectations renders the future unknowable to entrepreneurs and investors. Unable to turn to the past to assess the likelihood of future events, they find themselves confronted by a radical uncertainty.
In such a world, Mary’s decision to build a new factory is not the “outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” Instead, it is governed by her “animal spirits;” by a sense of “spontaneous optimism” that results in an “urge to action rather than inaction.”
Nevertheless, even in a radically uncertain world, investments must be guided by some expectations regarding the future. Instead of grounding them in an analysis of the past, Mary bases her expectations on an assessment of what others believe regarding the future.
Lurking behind her animal spirits are expectations formed as the result of an attempt on her part to “conform with the behavior of the majority or the average.” A similar striving on the part of everyone else gives rise to a “conventional judgment” regarding the future, shared by the overwhelming majority of entrepreneurs and investors.
Based on the flimsy foundations of the psychology of opinion and with no moorings in experience, this conventional judgment is subject to sudden and violent change. Like a school of fish, investors and entrepreneurs swim this way and that, always taking their cues on what to do from others, without recourse to any solid foundations in which to ground their expectations.
Buoyed by an optimistic conventional judgment, investors, with positive animal spirits pumping through their veins, rush to produce more capital goods, lifting the fortunes of workers with them. Soon the judgment turns and pessimism sets in. Investors no longer have the urge to act. They become quiescent, and unemployment increases.
Thus, for Keynes the endemic uncertainty that surrounds the future gives rise to an inherently unstable market economy. Fluctuations in output and employment are endogenous to the market and are ultimately to be traced to the shifting sands that underlie the prevailing conventional judgment regarding the future.
The path to greater market stability requires heavy government intervention. It is the job of the state to counter the waxing and waning of animal spirits and help stabilize the level of investment, output and employment.
Uncertainty and Subjective Expectations in the Austrian Framework
Prominent Austrian economists such as Mises,5 Lachmann,6 and Rothbard7 agree with Keynes’s rejection of a mechanistic relationship between past and future prices.
This rejection is the result of a consistent application of the subjective theory of value. The prices of the past result from the individual valuations that prevail in a specific set of circumstances. Two individuals, however, can form different valuations in the same circumstances. Moreover, the same individual may react differently to identical conditions at two different points in time.
It follows that the reemergence of a similar set of conditions in the future need not result in the reappearance of the same set of prices as in the past. Thus, there is no simple, deterministic relationship between the past and the future. Instead, the future is inherently uncertain.
This has implications for the formation of expectations. Entrepreneurs cannot study past prices, calculate the numerical probability associated with them and then simply extrapolate these numbers into the future. As a result, mathematical probability is not a suitable foundation on which to base expectations. However, this does not imply that we know nothing about the future. The past can still serve as a guide to action.
Entrepreneurs can still estimate the likelihood of future events. They do so by trying to understand the motivations underlying the valuations of market participants in specific situations in the past. They must peer beneath the veil of past prices and must analyze why market participants acted the way they did under the given conditions.
This analysis of unique, heterogeneous situations as they arose in the past, and not the numerical probabilities associated with past prices, provides the raw material to appraise the valuations and prices that will prevail in the future in a different set of conditions. Thus, in the Austrian framework, expectations do not rest on utilizing numerical probability but on interpreting and understanding the past.
This, as in the case of Keynes, lends them a subjective flavor. Nevertheless, the subjective expectations of entrepreneurs do not coalesce into a homogenous and ever-shifting conventional judgment regarding the future. Instead, these expectations are heterogeneous. Two entrepreneurs may come to different conclusions regarding why individuals behaved the way they did in the past. Moreover, their grounding in the past gives them a basis in reality. Thus, they are not whimsical and subject to random fluctuations.
Subjective Expectations, Profit and Loss, and Market Order in the Austrian Framework
The expectations of entrepreneurs, while subjective, exhibit a discernible pattern. The ability to appraise the future is not distributed evenly across market participants. Instead, in a market economy there are leaders, or those who are better able to formulate a judgment of the future based on the past, and there are others who are less proficient at doing so.
The profit and loss system ensures that the better appraisers are rewarded for their more successful judgments and accumulate capital. Those who are less successful at this endeavor are, meanwhile, gradually stripped of their capital. Thus, they lose influence in shaping the course of the market.
This process of entrepreneurial selection allows for the coordination of the decisions of producers and consumers. It ensures that, at any given moment in time, the best appraisers of the future are in control of making the key production decisions in the economy. Thus, in the Austrian framework, uncertainty and subjective expectations are compatible with market order and stability.
The key to ensuring this is a price system that results from the voluntary decisions of market participants to engage in mutually beneficial exchange. The prices that emerge on the various factor markets must reflect the appraisements of the participating entrepreneurs. Any interference with such a system of prices can interfere with this process of coordination and the order generated by the market.
An artificial reduction of the interest rate that results from an expansion of the money supply is an example of such an intervention. The increase in liquidity interferes with the process of entrepreneurial selection. In fact, it turns this system on its head.
Profits no longer reward those entrepreneurs who allocate scarce resources to the highest ranked ends of the consumers. Instead, they reward those who, misled by the artificially low interest rate, embark on production projects that are unsustainable. Those entrepreneurs who correctly perceive the underlying unsustainability now lose control of the capital at their disposal and gradually lose the ability to influence the course of affairs.
Thus, it is monetary expansion and an artificially low interest rate and not the endemic uncertainty of the future that generates booms and busts and market instability. In a free market, thanks to the profit-loss system, resources are allocated primarily by those who are best at grappling with uncertainty. In a world of artificially cheap credit, however, the very same system rewards those entrepreneurs who engage in the consumption of capital and the malinvestment of scarce resources.
La obra filosófica de Ayn Rand tiene dos puntos de anclaje ya convertidos en clásicos: La rebelión del Atlas y El Manantial. Este último, además, inmortalizado en la gran pantalla por King Vidor y con Gary Cooper como personaje principal. Su lectura es perenne y, como buena novela, su relectura siempre suma. Se trata no únicamente de una apasionada historia de amor protagonizada por dos caracteres fuertes descritos con una prosa muy angulosa y bien perfilada, sino también un gran tratado de filosofía política entorno al eterno conflicto entre lo colectivo y lo individual. El genio de Rand al describir los diferentes arquetipos es lo que le da carácter universal a la obra que permite extraer mensajes y lecciones de gran interés actual.
1) “Never compromise”. Nunca comprometas tus ideas ni tus principios por intereses espurios, corto placistas, por el miedo al que dirán o por la presión de la corrección político. No se trata de ser dogmático en el proceso de aprendizaje sino precisamente lo contrario: gracias a tener una actitud abierta (en el sentido más poperiano de la palabra) luego es posible poder contar con criterio propio y poder defender ideas propias sin necesidad de ir haciendo la media a cada momento para conocer la opinión propia.
2) Ligado con lo anterior, no te preocupes por los resultados ocúpate únicamente de hacer las cosas bien, acorde a unos principios. Procura simplemente hacer lo que creas correcto en cada momento.
3) Haz y dedícate a lo que te gusta. No sigas el “dinero”, como se suele decir: las modas y los gustos cambian (hoy, además, de manera acelerada), tomar decisiones en base al entorno es una manera segura de equivocarse.
4) No trabajes nunca gratis. Se el primero en valorar tu trabajo.
5) Se constante. El éxito necesita de acumulación de capital: no hay nada gratis, lo que rápido llega, rápido se va. Sin constancia en el trabajo es imposible la acumulación de capital, y sin esto el éxito -en su definición más amplia- es imposible (o es flor de un día).
6) Se resiliente. La vida es una carrera de obstáculos y dificultades. Sin error no hay aprendizaje (i.e. acumulación de capital): la resiliencia es la capacidad de ser constante en la adversidad. Ten fe en lo que haces y como lo haces.
7) Ten visión largo plazo.
8) Cultiva la paciencia: todo lo que vale la pena requiere esfuerzo y tiempo.
9) Desarrolla criterio propio, desarrolla la capacidad de defender y argumentar tus propias opiniones. Trabaja según tus propias normas: preocúpate por leer y formarte, un proceso que tiene principio pero no final.
10) No te compares, no sigas modas, ni el comportamiento de los demás como guía para tus propias decisiones.
Después de la tormentosa caída en el precio de las materias primas que ha castigado con dureza la economía rusa, parece que la caída de algunas divisas en el escenario global podría agudizar más aún la caída del PIB de Rusia.
En un comunicado el pasado lunes, el servicio Nacional de Estadísticas reportaba una caída del PIB del 4,6% en el segundo trimestre en tasa interanual. Esta caída duplica el retroceso de 2,2% registrado el trimestre anterior. Esta cifra es ligeramente peor que la esperada por el consenso de analistas que facilita Bloomberg situada en un también pesimista 4,5%.
El país, altamente dependiente de los ingresos del gas y el petróleo para mantener a flote sus ingresos fiscales, aún se recupera de las severas correcciones en las materias primas, los vaivenes en su divisa que han erosionado su poder de compra y las sanciones impuestas por la crisis de Crimea que de facto le limitan su acceso libre al mercado de capitales.
El Banco Central ruso acumula ya cinco bajadas consecutivas de los tipos de interés de referencia en lo que va de año pasando del 17% al 11% lo que ha conducido a una devalución masiva del rublo con respecto al dólar: un 43% en los últimos 12 meses, el peor comportamiento que registra Bloomber al margen de países rotos como Venezuela.
Los entes oficiales han empeorado ligeramente sus previsiones y esperan una caída de la actividad económica del 3,2%. Esta por ver como Rusia cerrara un año para olvidar.
It’s considered politically incorrect to criticize culture these days, but whether using euros or drachmas, in or out of the European Union, Greece really has to, somehow, sort out its cultural dysfunction. I’m not talking about its customs, traditions, architecture or music, and I’m definitely not talking about its food. I’m talking about its cultural anti-capitalism. The negotiations, deals, counter-deals, referenda, protests and everything in between all mean very little if Greeks, by and large, don’t ditch their statist zeitgeist and rediscover Greek capitalistic exceptionalism.
A perfect example is Argentina. A default and sovereign crisis is supposed to chasten a nation into a sensible, market-oriented direction as the folly of debt-addicted big state crony socialism gets utterly discredited. It’s a nice theory. But Argentina, thirteen years after its 2002 default, and after years of soaring inflation, dollar shortages, and economic malaise, clings to its completely clueless, hyper-interventionist, socialist overlords who continue to run the economy into the ground. The reason is the core culture never changed. When your culture is toxic, up is down, black is white, socialist failure is capitalist failure.
In The Anti-Capitalistic Mentality Ludwig von Mises described this cultural anti-capitalism:
As John Doe sees it, all those new industries that are supplying him with amenities unknown to his father came into being by some mythical agency called progress. Capital accumulation, entrepreneurship and technological ingenuity did not contribute anything to the spontaneous generation of prosperity. If any man has to be credited with what John Doe considers as the rise in the productivity of labor, then it is the man on the assembly line. …
The authors of this description of capitalistic industry are praised at universities as the greatest philosophers and benefactors of mankind and their teachings are accepted with reverential awe by the millions whose homes, besides other gadgets, are equipped with radio and television sets.
The biggest risk to Greece is not austerity or fauxsterity or default or the euro or the drachma. And it’s certainly not the bogeyman of being frozen out of sovereign credit markets — it’s that Greek culture remains antagonistic to free, unfettered markets and is chronically state-dependent.
Take another Latin American country: Venezuela. After suffering crippling inflation rates throughout the 1980s and 90s, the electorate went on in 1998 to vote in another central planning inflationist in Hugo Chavez. They re-elected him in 2000, 2006 and 2012, and his successor Nicolás Maduro in 2013, even while the country was in a hyperinflationary death spiral and heading toward outright economic collapse. Venezuela’s problem ultimately is not fiscal mismanagement — it’s an anti-capitalist culture.
And so it is with Greece. After already securing debt relief and effectively being allowed to default by restructuring its debts over the next fifty years at subsidized interest rates — and after actually achieving economic growth in 2014 by cutting taxes and slashing the size of its sclerotic, bloated government — this toxic Greek culture prevailed once more and elected a team of socialist die-hards to drag it back into the mire. Of course it doesn’t help that on the other side of the negotiating table is another bunch of central planners in the EU, IMF, and ECB. Nevertheless, Greece sits stuck between two central planning negotiation parties because its people have been too busy demanding goodies instead of freedom.
Most Countries Get Into Trouble — But Some Bounce Back Better Than Others
Any sovereign nation can overspend and get into financial trouble, and most have. It wasn’t that long ago that Britain was forced to go cap in hand to the IMF in 1976 and cede its fiscal sovereignty to that institution. By the latter half of the 70s, Britain was a downright mess. America stealth-defaulted on its international obligations in 1971 and suffered a rolling inflationary economic crisis for the rest of the 1970s. Both these countries bounced back. As did Chile, Uruguay, and the Philippines after their fiscal and financial turmoil of the 70s and 80s.
But some don’t bounce back, and I believe this happens when the national culture is, or has become, fundamentally anti-capitalist and resigned itself pathetically to cradle-to-grave state-dependency. In addition to Argentina and Venezuela, we’ve seen prolonged economic and financial malaise following painful crises in the likes of Zimbabwe, Ghana, Bolivia, Nigeria, Russia, Turkey, and now southern Europe. These countries don’t seem to learn from their mistakes because they don’t seem to want to or can’t locate the lesson amid the intellectual haze of their cultural zeitgeist.
But really the lesson is clear. An economic crisis can jolt a fundamentally pro-capitalist (or mostly pro-capitalist) nation that had lost its way back onto the straight and narrow. But there is no guarantee of recovery when the culture has descended into infantile anti-capitalism, dysfunctional statism, and an antagonism toward entrepreneurial dynamism and self-reliance. For these a crisis may not herald recovery but instead a longer, deeper national decline. Only a culture shift resulting from the spread of sound ideas can make Greece (and other countries) a fertile ground to accept real solutions. The need to spread the good news of liberty and free markets is clearly as urgent as ever.