Incredible confusions, Part 2: Of interest and the dangerous habit of suppressing it

woodcut on the subject of usury; attributed to Albrecht Duerer

Usury; woodcut attributed to Albrecht Duerer

The idea that the charging of interest is unethical and should be banned has a long tradition in the history of human civilisation. It seems to have played a role at some point in all the major religions, certainly in Christianity, Judaism and Islam, and it is today promoted most strongly by advocates of Islamic banking.

As an economist I cannot (and should not) comment on matters of religion. Religion and economics deal with completely different aspects of human existence. Religion is about ‘ultimate ends’ and ‘personal values’. Economics does not deal with ends but with means. Economics does not tell anybody what his or her values should be. Contrary to what is frequently claimed – usually by those who do not understand economics – economics does not tell you that you should strive for more material goods and more services at your disposal.

But it so happens that we live in a world in which most people have personal aims or goals that involve having at least a certain material wealth, and in which most people prefer the possession of more material goods to less material goods; and the science of economics – for economics is a science, and in fact an objective, wertfreie (value-free) science – can then explain why people have a better chance of achieving these (material) aims if they use such social institutions as the division of labor, private property, trade, money, and many others. Additionally, the science of economics can show how these social institutions work, demonstrate the laws and regularities inherent in them, and can develop rules for their most appropriate use. Economics is purely about the means of social cooperation for the attainment of material goals. It never concerns itself with ultimate ends.

If most of the population became Buddhist monks tomorrow and would lose any interest in accumulating material wealth, would happily withdraw into monasteries and dedicate themselves to meditation, none of the principles and laws of economics would have suddenly become less true or invalid. The law of comparative advantage as articulated by David Ricardo would be as true on that day as on any other. The laws of economics would still apply just as the laws of gravity would. Of course, the interest in economic studies would probably diminish rapidly but that is all. Or, not quite all: Society would also be rapidly impoverished in material terms – even to the point of mass starvation –, and this the economist can ascertain with certainty, although nothing can be said about any compensating gains in spiritual wealth, of course.

If you believe that your God demands that if you lend money you should not charge interest, than there is nothing that I, as an economist, can say to you – other than, maybe, give me a call whenever you have some extra cash. The point at which I can – and should – comment is when you were to claim in addition that the observance of this rule would lead to a more stable and better functioning economy, that the non-charging of interest would not diminish society’s wealth but even increase it, or that the resulting economic structure would at least conform better to some generally accepted notion of fairness. Here we have reached a point where debate has become possible, not because I, as an economist, have intruded onto the religious ground of values and ultimate ends but because the advocate of religion has intruded onto the economists’ ground of the study of the laws for wealth creation.

I am not saying that all advocates of the non-charging of interest for religious reasons also claim that this would fix the economy. I assume that in the case of most religious rules the goal is spiritual not material, meaning the objective is to make the follower a better person, not better off. But in the wake of the financial crisis interest in fundamental aspects of our economy has increased, and within the ensuing debate it has certainly been argued by some that non-interest models of finance and banking could address fundamental problems of our present system, or even provide a functioning alternative to present arrangements. I have also encountered skepticism to the charging of interest, or, as it is often put, ‘interest on money’, by apparently non-religious commentators to my website.

Usury and the mainstream

To many readers this debate may at first appear as a bit of a sideshow. It does not appear to be one of the main areas of debate between economists, policy makers and financial market participants right now, at least outside Islamic finance. However, I fear that the representatives of today’s economic and political mainstream have much more in common with those who want to reintroduce usury laws than might at first appear. The vast majority may not ask for the banning of interest per se. However, it is today certainly the view of the vast majority that interest can and should be depressed to low levels in order to squeeze more growth out of the economy. It is today generally believed that, as long as inflation is not a major problem, policy makers may manipulate interest rates to lower levels with impunity. In fact, almost our entire financial infrastructure is designed for the utmost flexibility in the production of money under the guidance of the central bank, and this is done almost for the sole purpose of being able to ‘guide’ interest rates to the benefit of economic growth, which almost always means guiding them downwards. That is why the inelastic monetary base that once formed the foundation of finance and banking and that consisted of gold or silver, was replaced with the fully elastic base of limitless fiat money as the new bank reserves; and why in every economic downturn it is now the unquestioned obligation of monetary authorities to lower interest rates and to keep them low.

The advocates of the banning of interest (a minority in the present debate) argue that no interest makes for a better economy; the advocates of the periodic but frequently long-lasting artificial depressing of interest rates (an overwhelming majority in the present debate) argue that low interest makes for a better economy.

Both are wrong.

The answer from the economist should be this: Interest rates are market prices and they express, like all market prices do, the subjective valuations and preferences of market participants. In order for economic processes to be guided ultimately by the valuations and preferences of the public, prices need to remain completely uninhibited in their formation and in whatever impact they may exert on the employment of resources, including labor.

The financial crisis is not the result of the habit of charging interest but the inevitable consequence of the systematic distortion of interest rates– usually to the downside – through our fiat money arrangements and our monetary policy of making credit artificially ‘cheap’ in the mistaken belief that this aids economic performance.

Time preference

Interest is not confined to a monetary economy and not exclusive to the lending of money. Even in a society that does not know and use money, we could observe the phenomenon of interest. At its most basic level, interest is the difference between the present price of a good that is available today and the present price of a good of the same kind that is only available later. An apple today is worth more than an apple next week or next month. The ratio between these two prices is interest and it is an expression of time preference.

Time preference is not a psychological phenomenon in the sense that some people may have it and others do not. If you want something – and ‘wanting something’ is in fact the precondition for considering this something to be a ‘good’ – then you will value you it higher at a nearer date than at a date further in the future. As George Reisman put it so well: “All else being equal, to want something means to want it sooner rather than later.”

Let us assume you claimed to have no time preference in respect to a specific good. That would mean that you were indifferent as to whether you could obtain that good today or tomorrow; and tomorrow you would be indifferent as to whether you could have it that day or the next. Logically, this means you would be indifferent as to whether you obtained it at all, which means you wouldn’t really want it and it was therefore not a ‘good’ to you. (Quod erat demonstrandum.)

This would also mean you would never feel the urge to act to obtain it. Economics deals with action and action requires ‘wanting’ and ‘wanting’ logically entails time preference and time preference is the core element of interest.

There is nothing mysterious, suspicious, sinister or wicked about the phenomenon of interest.

If you lend a consumption good or a small amount of money to a close friend or a close relative, you may not ask to be compensated for not having this good at your disposal for some time, or for departing with some of your purchasing power for a while, but in the more extended network of human cooperation among otherwise unconnected individuals that makes for the modern society you would probably expect most people to ask for some compensation when lending to others, and for their counterparts to grant them some compensation, and none of this would appear irrational, unjust or forced.

The height of time preference is subjective and will be different from person to person, and different for the same person at different moments in time. Time preference and therefore interest is always an expression of personal, subjective valuation.

Market interest rates

The interest rates we observe daily in markets contain, of course, certain other elements in addition to time preference, although time preference remains the core ingredient. These other elements are usually a risk premium for the risk that the borrower cannot repay (credit risk) and a premium that money will have lost some of its purchasing power by the time the loan gets repaid (inflation risk). Thus, when lending to entities with non-negligible risk of default (most private entities) and in a currency that has a tendency to inflate (most paper monies), market interest rates will be higher than would be justified by time preference alone.

Under certain circumstances, these ‘premiums’ may actually turn into ‘discounts’. If the period for which the loan is agreed is expected to be a period of general deflation, than the nominal loan rate could actually be lower than justified by time preference, as the expected rise in the purchasing power of money during the life of the loan already constitutes a form of compensation. Under a strict gold standard the monetary unit could reasonably be expected to gradually gain in purchasing power over time (secular deflation, which means money has an inherent real rate of return), and loans to borrowers with relatively low default risk would be extended at very low nominal rates of interest.

Negative interest rates

Certain interest rates are presently very low, zero or even negative. To the extent that they are policy rates we have no trouble explaining them. They are not market rates and not even ‘prices’ in the strict economic definition. They are administrative decrees, determined by central bank bureaucrats, and not the outcome of the voluntary interaction of market participants. For what it is worth, I expect some of these rates to be lowered again, probably from near-zero into negative territory. But this is entirely a political phenomenon.

However, certain government securities, usually in the so-called safe-haven markets and usually those with shorter maturities, have also been trading at zero interest rates or even at negative interest rates (yields) lately. Very low administrative rates (policy rates) may have helped here but on their own they cannot cause this phenomenon. How can we explain it?

Deflation could be one explanation but I do not think it is the main driver, as other indicators of inflation expectations often still point to ongoing declines in money’s purchasing power. I think that in these instances the ‘credit risk premium’ has actually been turned into a ‘credit risk discount’.

Government bonds, in particular those with shorter maturities, are often held not for their return but their liquidity and safety. In these instances, they do not compete directly with equities or corporate bonds or real estate but with money. In the present environment there is, I believe, a strong demand for money holdings. Holding cash or cash equivalents allows investors to remain on the sidelines, to keep their firepower dry and wait how things pan out. But for many institutional investors holding large sums of money inevitably means holding sizable bank deposits and thus incurring considerable counterparty risk in respect to the fragile banking sector. Government bonds are expected to be (almost) as liquid as money proper or deposits, and to have lower counterparty risk than bank deposits. The demand for them is so considerable that investors even accept a negative yield, which means they are willing to pay a fee rather than collect a return for the privilege of ‘parking’ funds with the state.

A personal comment here: I think that these investors are sitting on a powder keg as I expect inflation to rise and concerns over sovereign solvency to intensify. But I have no problem understanding why certain market rates can become negative under certain conditions. It has to be stressed, however, that none of this means that the public’s time preference has disappeared or has even become negative. Time preference is always positive.

‘Interest on money’

Money – or at any rate, money proper – does not earn interest or any other income. Money is a medium of exchange. It has no direct use-value, only exchange value. Gold used to be money and gold does not pay interest (other than its inherent real rate of return in the case of deflation). Today, otherwise worthless pieces of paper are used as money and these paper tickets do not pay interest, either.

Already, the Romans knew that pecunia pecuniam parere non potest, money doesn’t beget money. You have to invest money to make a return, that is, you have to spend it.

If you pay money into a bank, ownership of that money passes on to the banker. You no longer own money proper but you now own a claim against the banker for the payment of money proper. You own a monetary derivative. For obvious reasons, the public today considers these derivatives as good as money proper (at least most of the time) but they are certainly not the same thing. If you hold money proper (cash) you hold a form of money that is not somebody else’s liability. Also, your bank deposit does not constitute a contract for safekeeping, as in that case you would have to pay the banker a fee rather than the banker paying you interest.

There is no such thing as interest income from holding money.

The manipulation of interest rates

There can be no doubt that a lot of the blame for the deterioration in the quality of economic debate can safely be put at the feet of Keynesianism’s half century of intellectual domination. Today, many people still seem to perceive the main economic problem to be one of a lack of overall activity, so the government should boost that aggregate by adding its own activity (through deficit spending) or by providing an extra dose of caffeine for the private sector in the form of low interest rates. Any activity seems to be better than too little activity, although nobody can explain how activity came to be so insufficient all of a sudden.

The key challenge for any economy, however, is not the aggregate level of activity but the coordination of the activities of diverse and usually unconnected individuals with different ideas, values, plans and objectives. Nobody participates in the economy for the sake of a higher GDP but only for the fulfilment of personal plans. A well-functioning economy is not one that delivers a certain aggregate of activity but that allows its individual participants to achieve their own individual objectives in the best possible way. (Remember the Buddhist monks.) For that we need uninhibited markets with unobstructed price-formation.

One of the important challenges of coordination for any economy is this one: To what extent should society’s available pool of resources be employed for the satisfaction of immediate consumption needs, and to what extent can resources be used to meet consumption needs in the more distant future, that is, to what extent can they become capital goods in the meantime? Evidently, this should be determined by the public’s time preference, and this is communicated to all actors in the economy via interest rates.

If the public has a high time preference it means it values present goods particular highly relative to future goods; it has a strong urge for present consumption; it has a low tendency to save; and market interest rates will tend to be relatively high. Every one of these sentences is simply a different way of describing the same phenomenon: the public has a high time preference.

Low savings availability on capital markets and high interest rates mean that entrepreneurs can only realize investment projects with the highest prospective returns. This changes naturally if the public lowers its time preference, increases savings, which lowers interest rates and encourages extra investment. Real resources are being shifted from present consumption to investment and allow for future consumption.

Saving and investing are the key inter-temporal decisions in an economy, and they are being coordinated by interest rates. Low interest rates are not necessarily good or bad. What matters is that they correctly reflect the preferences of the public.

The temptation to artificially lower interest rates is understandable. Investment increases the capital stock, and raising the amount of capital per worker is one of only two means we know of, of how to increase overall prosperity (the other being the division of labour). But a proper capital stock requires real resources, and those can only be made available through acts of real saving from real income. Printing more money and lowering interest rates on loan markets artificially creates the illusion of savings and it must lead to the dis-coordination between real saving and real investment, and thus to economic imbalances. Those are the true cause of financial crises and economic recessions.

Interest is an essential component of human action and the charging of interest rates an integral component of human cooperation on markets. Abolishing interest rates or depressing them through policy intervention will never make markets work better, will never make financial markets more stable, and will never make society more prosperous.

In the meantime, the debasement of paper money continues.



Print Friendly
Share on LinkedInShare on TwitterSubmit to StumbleUpon to redditShare via email
Bubble trouble: Is there an end to endless quantitative easing?
Incredible confusions Part 1: ‘Positive Money’ and the fallacy of the need for a state money producer


  1. Lyonwiss says

    You said: “the science of economics – for economics is a science, and in fact an objective, wertfreie (value-free) science”. This is wishful thinking, because economics is not a science. Economic knowledge has not been derived from the scientific method. That’s why there are so many antagonistic schools, like different religions. Nelson’s book, “Economics as religion”, argues for this view. The Austrian view of money makes more sense than mainstream views. But there is no scientific proof, something which appears considered unnecessary among economists. That’s why we continue to have economic disasters.

  2. Zog says

    Lyonwiss, are geologists or evolutionary psychologists (for example) scientists? To my mind and, I believe that of most people, they are scientists.

    Yet they are both unable to set up an experiment which produces the same result, no matter who carries it out and how many times it is carried out, which I suspect is your characterisation of “the scientific method”. Instead they rely on observation and logical reasoning which seeks to explain the data they observe.

    In the same way the economist (or at least the Austrian economist) observes human nature, reasons logically as to the economic results of that human nature, then tests the results of those deductions in the real world.

    To my mind, there is no difference between the scientific method of the geologist, evolutionary psychologist or the economist.

    • Lyonwiss says

      Astronomy has no controlled experiments, but it is science. Geology is also science, but can also do limited experiments. Psychology and some areas of medicine are less like a science.

      My definition of science, perhaps not commonly understood in economics, is knowledge derived from the scientific methods, which is a close iterative application of deduction and induction. Some economic schools (e.g. some Austrians) believe in one or the other method, but not both.

      In science, contrary empirical evidence leads to revisions in theory. A scientific paradigm has substantial consensus and contradictory theories are largely resolved through evidence. For example, the steady-state theory versus the big bang theory of cosmology was resolved from available evidence at the time, without experiments.

      Economics is not science, because economists in general are intellectually weak, without rigour. They discuss issues without definitions or discipline. There is no better example than the current discussion on money, which Detlev does a better job than most. Some economists say you can create money “out of thin”, other say you can’t, gold is money and everything else is debt, etc.

      Economists do not agree what money is. Physics would not be a science, if physicists do not agree what energy or matter is.

      • says

        I think your statement that economists are intellectually weak and operate without rigor is an unfair generalization, although you partially and kindly exempt me from it, and although I have to agree that many people who call themselves economists today do not go about their business with the rigor that a proper science requires. But the better economists in the history of economics were (and, I am sure, some of those who work today, are) very rigorous. I am a particular fan of Ludwig von Mises, who was a very serious and rigorous thinker, indeed, and who wrote extensively on the question of what economics is, what its special place in the the broad field of human knowledge should be, and also what its peculiar methods of inquiry are. So if you are interested in economics and in epistemology, I recommend you read Mises’ “Grundprobleme der Nationaloekonomie (1933)”, translated as “Epistemological Problems of Economics”, or “The Ultimate Foundation of Economic Science” (1962). Mises argues very convincingly that economics is a science, just very different from the natural sciences.
        Because economics deals with human action, ‘empirical evidence’ is of little use in economics, at least when it comes to formulating general theory. ‘Empirical evidence’ means statistical data, which means history. But no two historical events are entirely comparable. By simply looking at them we cannot ascertain what was cause and what was effect, or at least to what degree, or isolate and properly weigh the importance of the various drivers of action. In human affairs, we are missing the type of stable relationships that we can at least legitimately assume to exist in many natural phenomena and that allow us to discover regularities from observation (from history) or, where applicable, from experiments, in sciences such as physics or chemistry. In human affairs there are no stable relationships of the kind that many natural sciences concern themselves with. Additionally, all market phenomena are highly complex. To try and find regularities through observation, data collection, and then mathematical analysis of the collected data, regardless how sophisticated, may allow the economist to appear like a natural scientist to the layperson but the results must – almost always – be nonsense. Economics cannot use the same methods as the natural sciences. It deals with entirely different phenomena.
        But the economist has one advantage: he deals with purposeful human action, and as he is a purposefully acting human being himself, he can understand the motivation behind the actions that are to be analyzed. By contrast, the natural scientist never knows the ‘prime mover’, he is always outside the phenomena he tries to understand. The economist is ‘inside’. The economist knows why people save, work, use money, and so forth. And if you start from this angle (and all the great economists of the past 300 years have done this, I believe) you will discover that certain rules, laws and patterns within purposeful human action and market cooperation MUST and DO exist (not in the sense of linear, stable relationships that can nicely be squeezed into mathematical equations and that make certain natural phenomena so beautifully predictable but in the sense of clear laws and patterns). What is the application of this knowledge – call it science or not – if it cannot make precise predictions? Well, remember, we are not dealing with natural phenomena but with purposefully acting human beings. They can use economic knowledge to ‘act better’ (achieve the intended goals in a more efficient way), mainly by improving their institutions, such as money, laws, markets. Economics does not explain ‘from the outside’ but helps ‘understand from the inside’, and this understanding can be applied by us as apart of our own economic activities.

        • lyonwiss says

          I’m very grateful for your reply, because you summarised very well what I understood von Mises said. Most of what you and Austrians say about the difference between human and natural sciences is self-evidently correct, particularly about the empirical aspects. Economics cannot start from empiricism (e.g. the German historical school), but has to start from introspection of human action.

          But I disagree both Mises and Hayek on their understanding of science, because they did not fully appreciate empiricism. Whatever great insights the Austrian school’s deductive method have brought to economics, they have effectively failed to convince the rest of the world. Their lack of impact in policy is unfortunate, as they are approximately right, while others are precisely wrong.

          In my definition, science must involve empiricism for arbitration, because otherwise how you do decide between one deductive theory of human action from another. It is like deciding which religion is more correct. Whilst observations cannot be used to discover “laws” of economics, they can be used to reject theories. The current theory behind limitless quantitative easing should be abandoned, if economics is science based on evidence. Instead the policy continues because mainstream economics is not a science (by my definition), but actually just another wrong deductive theory.

        • overtheedge says

          Economics is no more a science than political science. They are both applied philosophy. Nobody would claim Adam Smith versus Karl Marx is a scientific argument. By the same token, economics is not religion. Nobody worships economics; they might study it ad nauseum and bore everyone in the room, but no worship.

          In science, contrary evidence eliminates the hypothesis. If it ain’t replicable, it ain’t so.

          In philosophy, there are mitigating circumstances that arise from the human condition. People aren’t logical. They are driven by situational necessity. Most lack the critical thinking skills to stay out of trouble.

          I would contend that economics is historical in nature with many adherents subscribing to the silly notion that they can foretell the future. At times it appears that the Law of Causality is broken, but few of us can augur the end effect let alone the time frame of what we interpret as the cause.

          Science is all about quantification. With so damn much secrecy about who has what, there can be no quantification. And science doesn’t accept guesses. Science is the skeptic.

          But hey go ahead. Some famous guy once said something like, “The first thing we do is corrupt the language.”

          If you compromise your integrity, is that something like politicians reaching a compromise?

          • lyonwiss says

            Economic is religion only in the sense that each school of economics has its own set of creeds, which cannot be questioned like religious creeds. You cannot question the role of government in Keynesian economics anymore easily than you can question the role of Mohammed in Islam. But there is a deeper historical allusion.

            Adam Smith’s faith in the market mechanism is a religious statement about the “invisible hand” of God making everything work in close parallel to Isaac Newton whose theological training would have seen universal gravitation as from the “hand of God”. In his book, Nelson noted (Ch 10) “the enlightenment embraced the science found in Newtonian physics as the new religion”.

            Indeed, Nelson concluded that “modern economics in its early development was thus effectively asserting a religious authority”. It is also not a coincidence that Lloyd Blankfein, when asked in 2009 about Goldman Sachs’ role in the financial market crisis, replied that he was “doing God’s work”.

  3. Michael says

    I think that economics, in dealing with humanities dispositions, provides observable aspects of human action through the lens of monetary based values. Yes this is a science from the perspective of study and measurement and postulations. In the end it is however a ‘faith’ in forecasting. ‘Economics theory’ may be true, but not all of the time (think ‘irrational exuberance’ period) and certainly someone lost the FAITH in monetarism back in 2006/2007 and at a point where everyone knew for years that the ‘system’ needed everyone (actually only banks!) to ‘keep the FAITH’ to continue.

    However, looking at interest rates, there is a glaring problem in my mind. Not only do banks create ‘new money’ when they loan money (something Positive Money are looking at curbing) but they bring forward purchasing-power from the future in a way that inflates the asset to a non-realistic price (ie to the future inflated price). Banks are now the gate-keepers of house prices. If they, as a cohort, find that through collateralisation they can offload the liability (or get caught up thinking it’s a one-way bet), then so long as the house prices go up (likely when they open the gate to bring forward future spending power) then the next generation is more impoverished and not able to afford the next prices unless the ‘gate’ is opened more. Now factor interest rates being charged on the ‘money from the future’ and try to square the circle. What I am saying is that interest as expressed in the article is lucid and reasonable for ‘real money’ – but when you look at it from money newly created (a form of legal counterfeit, and for the benefit of private banks) your explanation surely lacks explanation of the real world monetary problems of interest rates. As things stand now the populace faces austerity (partly because of bailing out banks – not their decision by the way) who continue to make big profits and charge £25 for a letter telling them that they will be charged ‘interest’ of £10 for a cheque that was not honoured, etc. Interest rates being reviled is just part of the common man’s abhorrence of banks.

  4. Bud Wood says

    Probably a good essay. However, I went to sleep before I got too far into the arguments because there is too much “dancing around” here and there as the specific points appear to be overwhelmed by the verbiage.

    - – But I did want to understand the concepts which you address because I think that what you’re trying to say is valid.

  5. Zog says

    Lyonwiss, you are of course correct in observing that “In science, contrary empirical evidence leads to revisions in theory”.

    I suppose a good example of how this should be applied in economics is Keynes’s multiplier effect from quantitive easing; a perfectly tenable theory which, although the Austrian School argue that it is incomplete because it ignores the effect on those who do not receive the initial injection of additional money, is ultimately capable of testing through empirical observation.

    In my view the evidence that Keynes’s multiplier does not work as he theorised is overwhelming, and if Keynes were alive today I would like to think that he would have modified his theory accordingly. However, again as you point out, many economists are “intellectually weak” and are blind to the evidence, despite the fact that it continues to be the same wherever you look.

    I think a key point her is that many economists are politically motivated. The same situation applies to other sciences such as “climate science” or “nutrition theory”, where a combination of intellectual weakness and religious like fervour can lead to the most irrational logic and blatant disregard for the evidence.

    So, in summary, I think Economics is capable of being, and should be, a science. However, I accept that it is not necessarily treated as a science by many economists, largely because of political motivation.

    Hope this makes sense.

    • lyonwiss says

      I used to work in government, where research means finding theoretical and empirical evidence to support a particular policy decision.

      Essentially resources or funding decide what’s correct, not facts or evidence, in economics, climate science and any area where the intellectual foundation is weak, vulnerable to political pressures.

      Governments love Keynesian economics which justifies their power, even though it fails. Keynes never bother the discuss why governments should be effective in demand management, when they are run by the same humans with irrational “animal spirits”.

  6. Dr James Thompson says

    A psychological point: governments seem to prefer it when their people are busy. The devil makes work for idle hands? They strongly believe (and may be right) that things will turn nasty if the common folk are denied ….. denied the illusion of work and progress, if not the reality of work and progress. Hence the fear of deflation, and of creative destruction. Hence also the fear of saving, or hoarding cash as some Keynesians describe it. The attack on interest is an attack on letting real prices direct action, which may mean some inaction while citizens work out what to do next. Sometimes it is preferable to pause and think, rather than just carry on with activities which may no longer be appropriate to changed circumstance.

    • Lyonwiss says

      No one, or practically no one, thinks. Academic economists do not think, or are incapacitated to think, because they are forced to publish research papers in journals, which only accept biased confirmations of established paradigms (or religions). Government bureaucrats do not think or not allowed to think because they are controlled by politics. Business and households have more incentives to think, but they find it too hard, being confused by bad education, propaganda and misinformation.

      Despite my criticism of the government solution of Keynesian economics, I admire Keynes for his insightful observations, among which are the following last two sentences of his famous book, “…in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.”

      Unfortunately, there are no signs yet of new economic thinking, since it is old professors who are making anew most of the noises at the moment. So we are “just carry on with activities which may no longer be appropriate to changed circumstance”.

  7. dingo says

    As i see it, economic systems, like all natural systems or eco-systems, are always self-regulating…its just that whe the self-regulating corrections, which serve to redistribute mis-allocated energy, are artificially pushed away…then it requires even bigger self-correction. Left alone, it would function smoothly, but when manipulated and constricted artificially, it beckons a much larger self-correction…which makes for a much bumpier ride !

  8. David Goldstone says

    “In my definition, science must involve empiricism for arbitration, because otherwise how you do decide between one deductive theory of human action from another”
    The scientific method depends upon the refutation of false theories. But refutation comes in many ways. Empirical testing is only one way of testing a theory. Criticism of the logic is another – and often more powerful. Economics (or at least Austrian economics is a science because its postulates and logical steps are transparent and fully open to criticism.

    • Lyonwiss says

      Agreed. Any theory with an internal logical contradiction is an invalid theory, worthless for further consideration. Logical consistency is assumed in any valid theory, which then has to pass empirical tests. Most economic theories are logically inconsistent with respect to facts, including Austrian economics, because logically consistency of a deductive system is necessary but not sufficient to describe the real-world.

  9. Yannis Michaleas says

    Another great article Detlev!
    I wish you could visit Greece and give a speech about monetary economics.

  10. says

    You wrote,

    The law of comparative advantage as articulated by David Ricardo would be as true on that day as on any other.


    Interest is an essential component of human action and the charging of interest rates an integral component of human cooperation on markets. Abolishing interest rates or depressing them through policy intervention will never make markets work better, will never make financial markets more stable, and will never make society more prosperous.

    Both statements are not true. If your educational experience taught you how micro and macro economics are bridged, then you would understand why the first statement is false.

    The second statement even contradicts your book, “Paper Money Collapse : the folly of elastic money and the coming monetary breakdown”.

    Hope you see these as constructive criticism.


  1. [...]…Related posts:Anarchy in the AachenAfter the StormDancing on the Grave of the Keynesian SystemWilliam N. Grigg: Reich Here, Reich NowWill Grigg: Living in AmerikaPete Guither: Musing on this dayAnthony Wile: Sit Silently … as Bombs Burst in AirU.S. Constitution Created an EmpireI, Pencil: The Movie11 Secret Documents Americans Deserve to SeeThey Can Do That?! 10 Outrageous Tactics Cops Get Away WithDavid Galland: Welcome to the Company StoreBill Bonner: Zombie NationPaul Craig Roberts: Attack On SovereigntyThe Fed's Asset-Inflation Machine This entry was posted in Essays and tagged Bankocracy, Big Lie, Economics, Money, Money For Nothing by admin. Bookmark the permalink. [...]

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>