I have read some works by Milton Friedman, Ludwig Von Mises, Adam Smith, and Ayn Rand; and they all seem to be correct!
What are the primary philosophical differences between these individuals, especially Milton Friedman and Ludwig Von Mises.
Furthermore, what distinguishes that Austrian School from classical-liberal economics, or free-market economics?
I am a thinker and a student of history, political science, trends, and international relations, but economics is my weakness. I intuitively know that free market economics is correct, and history demonstrates that. But within the very general "free-market economics," what are the different variants? What are the great debates between free market economic thinkers? What are the different schools of economics that consider themselves to be free-market oriented?
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I am seeking to start a private equity fund with the intent of "betting" against the commercial real estate and retail sectors in the United States. As the basis of our business plan will be rooted in economic theory to justify why betting against these sectors through short-selling etc will be feasible, I must fully understand why these sectors are doomed to collapse. I need some answers fast. I believe that economics, as with most mathematical problems, has one correct answer and many false answers. I do not view economics as matter of different opinions, but rather as a science in which there is one correct school of economics with all others being incorrect. I am a firm believer in the power of the free, deregulated market to sustain a high standard of living and elevate societies from poverty to wealth. I blame the actions of government for the current economic crisis (manipulation of interest rates, high taxes, federal reserve system, abolition of gold standard, inflationary spending etc.). What I am getting at here is this: I intuitively know that the answers to our current economic crisis can be found in the literature and philosophies that support free market economics. However, within free-market economics and/or libertarian economics are many different variants. In seeking to predict future trends one must adhere to the correct school of economics. Are there are free market economists or thinkers out there that can explain to me some of the different schools of economic thought within 'free-market economics' and give me the differences between them? Can anybody provide me with a compelling argument for a single school of economic thought within laissez-faire economics that is the most accurate school thus conceived of? Any help would be greatly appreciated. Feel free to respond to this post of just email me.
Any insight would be greatly appreciated.
Thanks,
Stephen Estes
University of Southern California
Me being relativly new to this stuff empahtise with Stephen. Stephen go to the bookstore check out some of the books for beginners and start there.
Hey Steve,
there is a big difference between Friedman and Mises. Friedman believed that a fiat paper money system can be managed by a central bank using a formula. Mises on the other hand would disagree with this. Mises believed that a money system should only be based on comodities--that being gold and silver. Friedman, also believed that the govrnment had the right to impose a fiat paper system on its citizens. Something that Rand and Mises would disagree with. Friedman once in and interview made himself the distinction between his and Rand's concept of what a violation of a right was. He said that while he believed that it was immoral for one citizen to violate the rights of another citizen, Rand believed that it was immoral to force anyone to do anything--citizen to citizan and government to citizen. You see, Rand believed that the government had no right to tell the people what to use as money. This is why Friedman made the distinction between his view and Rand's view of a violation of rights. In order for a paper system to work, it has to be imposed by law, which Ayn Rand saw as coerisive and therefore wrong. If the government stayed out of the business of making money, then the people would naturally turn to prescious metals as money. Friedman, was a free market man that, i believe made the mistake of thinking that a money sytem could exapand at a rate forever.
@Stephen: I think the general answer to your questions is, "economic ideas don't help us predict the future, they really only help us understand what happens, in hindsight." Now, this isn't completely true, since we can predict that, for example, rent control measures will result in housing blight. But what we can't predict is how market participants will respond to rent control measures, in detail. Maybe a city passes rent control but then a major real estate interest moves in and lobbies city council and repeals the portions of the rent control measure that mattered while leaving the "window dressing" to appease the masses. So, it's not enough to look at the superficial news of the day and draw conclusions like, "San Francisco passed a rent control law, so economics tells us that we will certainly make money shorting stocks of major real estate interests in San Francisco." It's just not that easy.
liberty student has pointed out Taleb (I haven't read his book Black Swan but I have watched interviews and read some of his articles) and Taleb's diagnosis of most people's portfolios is that they are way over-exposed to risk. As he puts it*, we have dentists who spend as much time day trading as they do drilling teeth... but dentists should be drilling teeth and leaving the day trading to day traders. If you are a professional investor, it may make sense to expose your assets to greater risk than the man on the street.
However, keep in mind that your assets are always at greater risk than they superficially appear to be. I learned this lesson at the price of about $4K back in the dot-com bubble. I invested all my assets (about $8K) into the NASDAQ in April 2000 (very tip-top peak of the tech bubble). I sold a few years later (needed the money for bills), losing about 50% of my assets. This was my first, very painful foray into the market. Not only did I overexpose myself by "going all in", but I was exposed to risks I didn't even know I was exposed to (inflationary bubbles).
Inflationary bubbles are far from the only "hidden risk" in the market. Take insider trading, for example. Insider trading is a chimera invented by state-monopolized stock exchanges. In reality, insider trading is a privilege enjoyed by the elite but which is denied to the common market participant. Insider trading is really the whole point of having an exchange, like a stock exchange. By using early information for profit, information is dispersed into the market as rapidly as possible. If stock exchanges were a truly competitive industry, I doubt that insider trading would get you excused from an exchange. Yet the very fact that not all participants are, in effect, prohibited from insider trading greatly increases the risks of investing in the stock market for those who are not on an inside track.
Take the BP stock, for example. Someone posted on here about a month or two back that they had $100K in assets and their stock broker had advised them to buy some BP stock. I recommended that poster fire his stock broker immediately! Look at the BP mess... you have a mysterious explosion, you have political jiu-jutsu going on between Washington and London over a connection between BP and the Lockerbie bombing (this sounds like CIA-leaked intelligence to me), and then there's all this arm-wrestling going on in the media between two competing interpretations of the spill, one minimizing and the other maximizing the consequences of the leak. And a stock broker is recommending that a commoner buy into this stock that is obviously being played by insider Whales????
The two-tiered nature of the political/legal system creates a system of personal privilege. As George Carlin put it, "It's a big fuckin' club and you ain't in it!" When you venture out into the market, you should do so cautiously and skeptically. You should assume that anything that anyone says is a self-serving pump-and-dump lie, even (or especially) if you paid for it. Remember that no other commoners have any better idea about insider actions than you do. To avoid stepping on insider landmines, steer clear of heavily politicized markets and industries except where you can logically identify a "sure thing" (and the BP disaster is an excellent example of something that is not a "sure thing"). I recommend Marc Faber's reasoning regarding the inevitability of imminent, massive inflation as a model of this sort of reasoning. He basically looks at the economic/political situation as if he were the government and identifies all its options to get out of its current financial problems. He then eliminates each one-by-one leaving only one possibility: inflation! Betting on inflation is simply speculating that the government will predictably do what it cannot help doing. This approach is can be applied to any market situation by simply putting yourself in the shoes of the actor you are analyzing and determining his options. If you can eliminate all but one option, then it's a safe bet he will take that action and it might make sense to bet on that, especially if you can identify a reason that other market participants are deluded (inflation is one of the best examples because of the widespread success of central bank propaganda).
You really have to be a student of all aspects human behavior, not just voluntary exchange (economics). It's not enough to identify "one right school of economics". I see no reason you should artificially restrict yourself to Austrian economics... the primary value of Austrian economics is in rightly understanding money and banking, in my opinion. When it comes to the rest of economics, Austrianism doesn't say things that are that wildly different than what everybody else says. Economics provides no shortcuts... studying it will only show you that much more firmly why there are no shortcuts.
Marc Faber and Jim Rogers are two investors that epitomize the sort of "student of humanity" approach to investing that I find attractive. Rogers has personally traveled a large part of the world, on the ground (not just jet-setting through the big cities). He uses this "down in the trenches", unvarnished understanding of the world-as-it-is-rather-than-as-it-is-presented-to-be to come to his own conclusions about who is really doing what and why. There are innumerable opportunities to make money in the market doing honest trading without "insider information", if you are circumspect enough to steer clear of the traps and landmines that make state-monopolized exchanges far more dangerous than private, competitive exchanges would be.
Most important, stay humble and know what you know... your losses will remind you of what you thought you knew but did not. Your profits are the reward for careful study and prudent exchange.
Clayton -
Maybe it was Marc Faber... but pretty sure it was Taleb
Stephen:
I completely agree that commercial real estate in the US is doomed but REITs have been ridiculously resilient. Before you do consider shorting them I'd recommend reading this lengthy but excellent piece: http://www.zerohedge.com/article/conundrum-commercial-real-estate-stocks-cre-%E2%80%9Cnear-depression%E2%80%9D-why-are-reit-shares-still-so-h
By the way, if you are starting a private equity fund and require an equity/commodity/bond/ analyst let me know.
- Chris
You can't beat the market!
http://en.wikipedia.org/wiki/Random_walk_hypothesis
"I'm not a fan of Murray Rothbard." -- David D. Friedman
I read your wiki posting, now you read my mises daily
http://mises.org/daily/2641
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
I read it, and I consider the article a satisfactory explanation of what I was suggesting, but I don't consider the counterargument convincing.
Consider this: mutual funds don't beat the market. Index funds are a better source of ROI.
can you explain how mutual funds exist in the marketplace?
Yet every profitable business does it on a daily basis.
An index fund is just another kind of mutual fund... where the stocks mix is picked by the board at Dow Jones or wherever. Apparently the board of Dow Jones has been imbued with the prophetic spirit of God (or Market or whatever you want to call Him).
"Beating the market" is different than making a return.
if by 'beating the market' you mean an entrepreneur can ,for a period of time, earn a profit higher than the rates that other entrepreneurs are earning in their endeavours, then it seems you deny that the profit and loss statements of various firms show variance.
Nigraham, that would be right if Clayton had claimed some businesses beat the market. Instead, he claimed every businesses with a positive return does.
Edit; If you were replying to Neoclassical's "you can't beat the market!", you're right if he meant "at any point in time".
Now, if we can assume the latter statement is what Neoclassical meant, then I must say not only is it very interesting, it reaches the nub of the issue under discussion. It would imply, when recognised explicitly, that neoclassical economists who hold the same thesis as he does must abide by an ergodic hypothesis regarding time and statistical averages of economic data. In statistical physics, we use such a hypothesis when analysing and computing averages of the properties of particles, and it is pragmatic since the bulk average of properties over many particles is easier to compute, while the time average of a particle undergoing a "random walk" over time is easier to measure(of course the measurements are actually in bulk for a number of particles over a period of time, but I digress).
Now the assumptions underlying the application of this hypothesis are recognised as reasonable in the analysis of phenomena, when we can assume our particles to be fairly homogenous to a good or exact approximation, or in the other words, when their heterogeneity cannot actually produce divergences in the measurements we make of both data. In that case, it becomes useless. It would seem to me, just the "empirical insight", recognised by Austrians, that forms a part of their deductive apparatus from which their conclusions are derived; that humans are essentially unequal in regards to producing different products, not withstanding the fact that this is the formative factor producing a commercial society and the division of labour, would essentially negate the usefulness of such a statistical treatment? Would be interested in your thoughts Neoclassical, and if I've interpreted you correctly.
P.S. I hope you stick around.
"When the King is far the people are happy." Chinese proverb
For Alexander Zinoviev and the free market there is a shared delight:
"Where there are problems there is life."