The Edmund Burke Institute will be closed for August. Consequently this site will not be updated much for the next month, or so. It is even possible that our break will be extended into early September. But we will be back! In the meantime we hope that everybody has fun.
However before we go there are two recent posts elsewhere to which we would draw attention.
The first was an excellent piece by our friend Patrick Manning prompted by the ongoing inquiry about the origins of the banking crises here in 2007. Mr Manning makes the point that however unwise were the policies pursued by the various governments in the years before the crisis, the real problem
was not in Dublin but in Frankfurt.
Indeed it cannot be emphasised too much that this was not an Irish made crisis. It was rather a crisis which was exported into Ireland by the central bankers who imposed a completely inappropriate interest rate regime on Irish the economy. Tax breaks for hotels and so forth were merely the icing on the cake of the disaster. But Mr. Manning is correct to stress that the property bubble was caused by low interest rates.
For the purposes of understanding why this is so economists can be divided very roughly into four groups. There are followers of Keynes (1883-1945). There are followers of Milton Friedman ( 1912-2006). There are those who try to meld the insights of Keynes and Friedman together. And there are followers of the Austrian school, which has its origins the work of Karl Menger ( 1840-1921) in late nineteenth century Vienna, but which was first fully developed by Ludwig Von Mises ( 1881-1973) .
Keynesians believe that the crucial element in any economy is the level of demand within it. They believe, further, that this level of demand can and should be adjusted by the government borrowing money and using it to encourage economic activity so as to insure that, as they would put it, resources are not wasted and that there is little or no unemployment. The followers of Milton Friedman think that the crucial element is the amount of money in circulation. They believe that if the central bank slowly but steadily increases the money supply then the economy will grow in a fairly predictable manner. Both Keynesians and Monetarists believe, and this is putting the matter extremely crudely, that the economy is rather like a balloon and that the inputs they have inserted into the balloon will act equally all the across the inner surface of circumference of the balloon. For both Keynesians and monetarists all sectors of the economy expand at the same rate when subject to the kind of stimulation that they deem to be appropriate. Keynesians and monetarists only really differ about what inputs work most effectively.
The Austrian analysis is radically different, because they do not see the economy as a balloon, and they do not believe that air blown into it makes it expand in a sustainable way. Indeed they think that all such attempts to grow the economy are fraught with danger. For them different parts of the economy react differently to economic stimulation. Austrians focus on the central role played by interest rates. Austrian economists think that changes in interest rates change not simply the cost of borrowing, but by changing peoples understanding of the time value of money alter the sort of projects that that businessmen think are going to be profitable. For Austrians high interest rates make long-term projects less likely. “Sure, why would anyone want to build a new milking parlour if you can get the same return leaving the money in the bank?” Conversely, and this is what happened in Ireland from 2000 until the crash, low interest rates mean that those taking business decisions bring forward projects the payoff of which is only in the long term. Low interest rates make it appear that high risk long term projects are less risky than is really the case. For Austrians low interest rates are misleading. They create bad investment decisions.
In Irish terms low interest rates – and the state of euphoria that they induced- explain why apparently rational businessmen and bankers persuaded themselves that the demand for houses in ( say) East Galway was going to be far higher than was ever really likely to be the case. The ghost haunting the rotting remains of such ill judged projects is called The Euro.
It was well said on Mr. Manning part to point all this out. His piece can be found on his “Thicker than Talk” blog which is included in the “Irish conversation” section of our links.
When we added the Abbeville Institute to our links we had no idea that the dispute over the Confederate battle flag ( which we are not fool enough to illustrate! ) would play out in the way that it did. Nevertheless we are glad that we added the link- if only because it allows us to urge those who visit us to read Professor Clyde Wilson’s recent reflections on the issue entitled “Our noble banner.” Professor Wilson, who has recently retired from The University of South Carolina where he taught history, is a controversial fellow. Not everyone will agree with what he says. But intelligent debate is surely a crucial part of democracy.
See The Abbeville Institute in our American links section for this stimulating, even provocative, piece.