Guidance from Friedman’s “Capitalism and Freedom” (with commentary)

22 11 2012

In the preface to Milton & Rose Friedman’s book “Free to Choose” (Harcourt Brace, Jonanovich Publishers, 1980), reference is made to the Friedman’s earlier book “Capitalism and Freedom”.

Capitalism and Freedom examines “the role of competitive capitalism – the organization of the bulk of economic activity through private enterprise operating in a free market – as a system of economic freedom and a necessary condition for political freedom.” In the process, it defines the role that government should play in a free society.

“Our principles offer,” Capitalism and Freedom says, “no hard and fast line how far it is appropriate to use government to accomplish jointly what it is difficult or impossible for us to accomplish separately through strictly voluntary exchange.  In any particular case of proposed intervention, we must make up a balance sheet, listing separately the advantages and disadvantages.  Our principles tell us what items to put on one side and what items on the other and they give us some basis for attaching importance to different items.”

The Friedman’s are being diplomatic and circumspect in providing such advice – calling on people to look carefully at both the costs and benefits of government involvement in the functions of resource allocation markets.

In recent years rapid expansion in U.S. government regulatory oversight and in some cases inhibiting interference with the functions of free market resource allocation has occurred in a number of sectors of the U.S. economy, such as the healthcare system, energy production, automobile production, and the financial / futures industries.  Furthermore, proposed increases in regulation of agricultural production systems and consumer’s food and dietary choices are also being considered by U.S. government agencies.

As governmental dictates interfere with free market resource allocation, history shows that poorer U.S. economic performance, fewer and poorer employment opportunities, and a lower economic standard of living are the near assured end result.  Governments – no matter their good intentions to correct economic and social wrongs – do a poor job of allocating scarce economic resources in comparison to free markets.

As we go through the works of Milton Friedman, Thomas Sowell, Friedrich Hayek, and other free market-oriented economists on this blog, the economic damage to efficient allocation of economic resources by over-regulating government actions will be a primary topic of analysis and discussion.

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KC Fed Financial Stress Index => Still low U.S. Financial Stress in October 2012

15 11 2012

The Kansas City Federal Reserve calculates a monthly Financial Stress Index (here).  See the following description to by the KC Fed of the KCFSI….

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KC Fed – Financial Stress Index

The Kansas City Financial Stress Index (KCFSI) is a monthly measure of stress in the U.S. financial system based on 11 financial market variables.

A positive value indicates that financial stress is above the long-run average, while a negative value signifies that financial stress is below the long-run average. Another useful way to assess the current level of financial stress is to compare the index to its value during past, widely recognized episodes of financial stress.

How should the index be interpreted? The KCFSI is constructed to have a mean value of zero and a standard deviation of one. A positive value of the KCSFI indicates that financial stress is above the longrun average, while a negative value signifies that financial stress is below the long-run average. A useful way to assess the level of financial stress is to compare the index in the current month to the index during a previous episode of financial stress, such as October 2008.

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The most recent KCFSI report for October is available at the following web address, with exerpts from the report to follow:

http://www.kansascityfed.org/publicat/research/indicatorsdata/KCFSI/kcfsi.oct.2012.pdf

“The Kansas City Financial Stress Index (KCFSI) continues to indicate that financial stress remains low. The KCFSI measured -0.40 in October, a slight increase from September’s value but below its long-run average. This is the first increase in the KCFSI since May 2012.”

Comment by Daniel O’Brien – blog author:

These numbers seem to indicate that the U.S. economy is not in extreme financial stress in the fall of 2012 to the degree that it was in the fall of 2008.  These findings suggest that although serious financial issues are facing the U.S. economy and the U.S. consumer, at this time the U.S. is not experiencing a period of extreme financial stress.  If one political party in the U.S. was basing its 2012 election campaign on jobs and economic growth potential being lost, it may just be that some significant numbers of swing voters among the American public at large was not feeling or perceiving enough personal, kitchen table level economic stress to motivate them to change the party in presidential power.





Of “loose money and credit generated by the Fed”

25 11 2008

Jeffrey A. Tucker, editor of Mises.org (http://mises.org/) has written an article titled “Business Cycles, Not Our Fault”  In this article, Tucker argues that the real cause of the current calamity in the U.S financial system is “loose money and credit generated by the Fed”.  It is an interestingly relevant and thought provoking article.  Some relevant exerpts are presented below.  The full article can be found at the following web address: http://mises.org/story/3226 

“Business Cycles, Not Our Fault”

By Jeffrey A. Tucker, November 21, 2008

“We are told that the economy has tanked because foreigners invested too much in the US, that foreigners saved too much money, that we all lived beyond our means, that greedy capitalists fed our materialist instincts until we popped, or any combination of the above. Or maybe business cycles are just like weather, cold one season and hot the next. Regardless, it is the government that must come to the rescue with the usual combination of cockamamie schemes.”

“Discovering the Austrian business cycle theory, then, is a revelation, because through it, you learn how the whole business traces to loose money and credit generated by the Fed. The money is pumped into the capital-goods fashion of the day, in this case housing. The whole sector becomes overbuilt and unsustainable and it turns, tanking many other affected sectors. The only answer to the problem is not more of the poison that caused the problem but a real liquidation.”

 

Source: Welker’s Wikinomics website (www.welkerswikinomics.com)

“Lord Lionel Robbins wrote in 1934. His book called The Great Depression, ….. (in it he) presents the Austrian theory in a very precise way, and documents how the Fed and the Bank of England inflated the money supply and loosened credit in the latter half of the 1920s, leading to the bust. His is a cautious treatise in some way.”

“After all, he was blaming the central bank — not exactly a position that was politically wise — and we aren’t just talking about the equivalent of a blogger today. He was Lionel Robbins, the most influential economist in Britain until Lord Keynes stole the show with his whiz-bang policy ideas. And why? Robbins counseled letting the bad investments wash out of the system. Keynes thought you could use the state to rev the bad back to life.”

“The Theory of Money and Credit” by Ludwig von Mises (First edition, 1912)

“As another example, and really the definitive one, Ludwig von Mises himself was writing all throughout the late twenties and early thirties about the business cycle. He nails it all in essay after essay: the credit expansion, the malinvestment, the folly of counter-cyclical policy, the dangers of protectionism and reflation, and so much more. These essays could all be written today, and what is also impressive is Mises’s focus on theory. He never makes empirical claims that aren’t backed up by an attempt to explain the theoretical apparatus behind the analysis.”

 Economist Ludwig von Mises (1881-1973)

“All of this leads up to Rothbard’s America’s Great Depression, the book that is often cited as the one to show that the episode was caused not by the market but by the central bank. It is getting all new attention today. But if you follow his citations, they lead right back to Garrett, Robbins, and Mises — three of the observers of the time who saw precisely what was happening. They had to be ignored by the New Dealers, for they utterly demolish the case for stabilization policy.”

 

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For other information on economics that is running counter to the present stream of thought in regards to appropriate and needed government policy actions in response to current economic crises around the world, I encourage you to visit website for “The Ludwig von Mises Institute” (http://mises.org/).

Have a great Thanksgiving Holiday!  Here is an appropriate economic cartoon for your holiday meditations.

 

 

 

 

 

 

 

 

Source: Economist Stefan Karlsson’s Blog (here)

Mount Kilimanjaro, Tanzania, African Continent (19,340 feet in elevation)