Every country should choose its own path, and it is up to each nation to decide which way they should go. But I believe that the economic history of the world sends a clear message about which economic models and policies create prosperity and which ones create stagnation, unemployment and social problems. My book The Guide to Reform contains many of these lessons. The Nordic countries, which I naturally know the best, are a very useful showcase, and here I will focus on them, with a specially detailed look at Sweden. Continued…
Libera!
A survey of the Lithuanian economy conducted by the Lithuanian Free Market Institute (LFMI) shows that eurozone problems do not leave anybody cold. Lithuania failed to join the eurozone in 2007 because it missed the inflation criteria by only 0.06 per cent. At the time, it was considered a big political failure. However, given the present vulnerability of the eurozone, it may look like a windfall success. The national currency, the litas, is pegged to the euro under currency board arrangements, so the litas remains very closely linked to the euro.
In the LFMI survey, first launched back in 1997, estimates and forecasts of the main economic indicators are provided by experts – owners and chief executives of businesses from various industries, heads of company accounting and financial departments, and economic and financial analysts. In contrast to the official survey, this is not a representative sample that provides official statistics. Instead, it is based on the principle of rational expectations, and has proved itself to be beneficial to the users of aggregated statistical data. Individuals who are actively involved in the market and analyse its trends have the most information about economic processes and use all the information available to them in their professional activities.
Seeking to elicit the causes of market participants’ expectations (which appeared to have deteriorated, according to the survey), this time we asked our respondents to indicate the most significant sources of uncertainty and risk for the Lithuanian business sector in 2012. Those experts polled could choose one or two answers from the list.
Two thirds of respondents think that the euro problems and the related risk of an export slump are the major sources of uncertainty and risk for companies today. Worsening forecasts for the growth of foreign trade in 2012 also reflect this risk. Import growth has been predicted to reduce from 14 to 12 per cent in 2012. Six months ago, exports were expected to rise by 14 per cent in 2012, but in the current survey, the forecast was cut to 11 per cent. One third of Lithuanian exports is directed towards the eurozone countries, and the domestic market is shrinking due to emigration.
Twenty-nine per cent of those polled consider potential changes (increases) in taxes to be a serious source of uncertainty. The remaining 25 per cent reported that the election year 2012 and the populist decisions of politicians would be a significant source of disquiet. Only 10 per cent of respondents indicated a contraction of the domestic market and shrinkage in domestic consumption as the main sources of incertitude for business.
For more data from the survey visit: 29th Survey of the Lithuanian Economy.
On 9 August 2011, just days after Standard & Poor’s downgraded the credit rating of the United States, it raised Estonia’s rating from A to AA-. S&P cited its confidence in Estonia’s ability to “sustain strong economic growth” among the factors contributing to its decision. How can a rating agency trust a tiny country when the overall picture is worsening at such speed?
The reason is simple – a different (more strict) approach to public finances, and a favorable economic climate. Estonia is not influenced by the bond markets – the country simply does not have any government bonds issued and the government has reserves twice as big as the country´s overall debt level. Continued…
Every financial panic is unique in its details but they all have the same root cause. Too many people are looking for a free lunch in a futile zero-sum game. Basically the various actors – bankers, investors, borrowers, civil servants, politicians and the public – are enticed by moral hazard in different disguises. They are fooled by shortsighted greed in the unsustainable chase for ever higher returns on overabundant capital. Responsible, value-creating plus-sum players are engulfed in the frantic zero-sum play but should come out stronger after the dust has settled. More control is no panacea but increasing and enforcing transparency can never be wrong. Honesty and openness are after all the preconditions for value-creating plus-sum games. Continued…
Since the start of the financial crisis and recession, there has been a renewed interest in the ideas of Austrian economics by scholars, public intellectuals, and even the media. For the first time in a long time, the analytical framework of Austrian economics is being taken note of, if not taken seriously, by a variety of opinion makers. This is, of course, a good development.
However, at the same time, this popularity has led to many people using the “Austrian” label to refer to their views on issues beyond those involving the analytical framework they bring to economics. In particular, “Austrian” has become the near-equivalent of “free market” or “libertarian” not only indirectly, but directly through the use of terms such as “Austro-libertarian” to describe particular policy preferences or broader worldviews. The result is that, despite the additional publicity, what Austrian economics IS has often been distorted into something it is NOT. Continued…
“Detlev Schlichter’s book Paper Money Collapse develops a concise, clear, and at the same time deep economic analysis on the current elastic monetary system and why it is incompatible with a free market economy. I strongly recommend this book to anyone interested in financial crises, economic recessions, and the future of capitalism.” —JESÚS HUERTA DE SOTO, Professor Of Political Economy, King Juan Carlos University (Madrid)
“The government can always pay.”
This is a statement that has no basis in fact. Any rational analysis will quickly expose it to be a fallacy. Economic theory, economic history, and plain good old horse sense can demonstrate effortlessly that this statement is an illusion. Yet, it is today a widely held and deeply cherished illusion in the world of finance (and, incidentally, the world of politics). In fact, it has become one of the defining myths of the modern fiat money era. It has for decades provided portfolio managers and bankers with an imaginary refuge from the turbulent world of capitalist “creative destruction”, a ‘safe haven’ where their nerves and capital could rest. The ‘free lunch’ might not have been a feast – only the ‘risk-free rate’ was to be had – but it was better than nothing and anyway a welcome break from capitalism and entrepreneurship. And by the way, if you leverage your government bond portfolio sufficiently with the help of central-bank-provided, zero-cost fiat money, the returns could still be quite handsome.
The fate of myths is that they sooner or later clash with reality. Then they are exposed as myths, which requires a painful giving-up of beloved certainties, a readjustment of paradigms and an abrupt change in behaviour. This is what we have been witnessing in European sovereign bond markets and will soon observe outside Europe as well. To believe that this process would stop with Greece or even Italy, as seemed to be the consensus in the summer of 2011, was naïve. That it would stop with France or even be contained within the European Monetary Union is the present hope of government bond investors and government-bond issuers, i.e. politicians. It is equally naïve and it received a meaningful dent last week in form of the worst auction result for German government debt (Bunds) ever. Continued…
The rejection of the realities of socialism does not imply unreserved approval of our own way of life; quite the contrary. For good or ill Marxism is a vital part of our cultural heritage, and we should watch and learn from this vast social experiment in which an explicit and in many ways seductive rule system was applied without any consideration for traditional values. A sober analysis will disclose familiar features of our Western culture in its reckless efforts to solve the equation of human coexistence once and for all. Criticism of Communism, fascism and suchlike is always cultural self-criticism.
Max Weber was the first to perceive the link between political freedom and a free economy but the most convincing presentation of this case can be ascribed to Friedrich von Hayek (The Road to Serfdom, 1944). The widely differing cover stories of fascism and socialism conceal an identical collectivist core: contempt for individual liberty and disgust with democracy. Hayek concludes with an almost clairvoyant conception of a liberal and decentralized Community of European nations. Politics has been defined as the art of preventing people from interfering in their own affairs. In socialist countries existence tends to become totally politicized, and it is of the very essence of democracy that government intervention in the private sphere is kept to a minimum. Everyone should have the inalienable right to get unhappy in his own inexplicable way.
Alexis de Tocqueville (1805-59) has the following to say (in Democracy in America) about the ability of a future democratic society to repress its citizens and to demote them to dependent serfs: “The power of the state is absolute, detailed, regular, considerate and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood… the government provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?”
de Tocqueville blames the principle of equality, which we already have marked as an obstacle on the road to social development. If equality is not balanced with freedom and cooperation with competition, even a democratic society stagnates and crumbles.
Primitive solidarity
Primitive societies exhibit a heavy and suffocating superstructure, a complex web of ritual rules in marked contrast to the harsh game of pure economics. The fruits of individual effort generally belong to the extended family, if not to the whole tribe. In the less developed countries, a prosperous man easily falls victim to this archetypal group solidarity; a horde of ‘distant relatives’ suddenly descends on him demanding a slice of the common cake. In imitation of Pierre Proudhon (1809–65), one of the the fathers of anarchism, they contend that clinging to personal property is equal to theft.
In primitive tribal communities anyone was allowed to claim a desired object, but the claimant then had to assume a reciprocal commitment. Our deep-rooted egalitarian reflexes cry out against significant differences in income and property. The upshot has been the surreptitious socialization of personal responsibility which is advancing in all democracies with Sweden in the van.
The wantok system in Papua New Guinea exemplifies the streamlined social security of a tribal society, as well as its shortcomings in an imposed national state. Wantok is Pidgin English for “one talk” viz. the same language. A wantok is a kinsman who is obliged to help a poor relative after “one talk” − a complementary interpretation of wantok. A civil servant is not only bound to give preference to his wantoks; he is also expected to steal or embezzle to supply their needs. On payday a wage earner is pestered by work-shy relatives who insist on their share.
Genetic encumbrance
Technological progress accompanied by a general increase in prosperity has never been an automatic or continuous process because it inevitably comes up against deep-seated genetic blockages. The economic stagnation in former high cultures can hardly be blamed on some external cause such as the exhaustion of natural resources; the carriers of culture probably lost their way in a maze of social and political conflict. The economy imitates nature; it is always in dynamic, praxeological balance, and unless we are capable of actively advancing the game it will slide back under the weight of very natural human indolence and ruthlessness, ill will and spite.
In repressive societies, the lack of economic self-regulation necessitates bureaucratic intervention at every stage. Soviet socialism succumbed to an ever-increasing complexity of decision-making, which made for delays upon delays until the economy was approaching rigor mortis. Similar mechanisms can be blamed for the rigidity and downfall of many ancient, over-centralized states. Typically, the elite channeled disproportionate investment into imposing building projects. The pyramids of Egypt, the ziggurats of Sumer and Babylonia, the great wall of China and the temples of the Mayas all served the self-justification of the ruling nomenclatura – repression by monuments.
The division of labor through free commerce involves a rational and self-organizing interplay between people, reaching far beyond the instinctive and genetically rooted norms of the kin group. The rules of the game are and must be different from those in the family, the parish or the political party. Thus, the coldly calculating undertone of business transactions is in constant conflict with ingrained epigenetic directives.
Unfortunately, economic efficiency seems to presuppose a certain amount of inequity in the community; the prevailing inequality is one of the prime movers of the market economy. A clear and realistic formulation of the overriding political goals is therefore needed before we can design rational mechanisms for meddling with the outcome of the economic game. This is easier said than done. Private ownership and tribal solidarity are in perpetual conflict in our minds. Our extended prehistory has imprinted communal sharing on the human mind. This epigenetic rule is in permanent conflict with the accumulation of private property – at heart we are all socialists.
In The Swedish Model Reassessed, Nima Sanandaji offers a novel historical perspective on the development of the Swedish economy. Contrary to the commonly-held view, he believes the success of Swedish society is not due to the welfare state. Rather, it is a Johnny-come-lately: expansion of public welfare started only around 1970. By 1985, taxes exceeded 50% of GDP, and by the mid 1990’s Sweden had dropped from one of the top positions to a mid-level rank in terms of wealth and economic growth.
Sanandaji’s key insight is the primacy of the prevailing values. Honesty, frugality, and thrift were part of Swedish culture even before the Reformation, which institutionalized basic virtues. This moral capital, arduously built up over centuries, has sustained Sweden (and the other Nordic countries) through many vicissitudes and supported entrepreneurship, inventiveness, and economic growth. It also brought Swedish emigrants in the United States well above average financial benefits. Continued…
Slovakia should refuse an increase in the size of EFSF (European Financial and Stabilization Facility) and enlargement of the scope of its competences for following reasons:
- The solution of sovereign debt crisis based on redistribution of debts in the form of EFSF proved to be ineffective over the period of last 18 months. The „disease“ continues to spread to other countries and even the catastrophic scenario had come true – the European Central Bank has to help to Italy with its enormous debt. Current situation cannot be considered as a liquidity problem, but the problem of solvency of indebted countries and financial institutions who are their creditors. Solving the „solvency problem“ by increasing the debt with liquidity loans will worsen the situation and endangers other members of eurozone and their access to financial markets (see the case of Italy)
- The politicians had not been mandated by the voting public to bring about the fiscal centralization, which follows the debt union.
- The suggested solution introduces the unsubstantiated transfers of wealth from taxpayers in one country to the owners and creditors of financial institutions who credited the troubled countries.
- Indirect rescue (bailout) of financial sector in the form of EFSF and ECB operations, which is misleadingly interpreted as a rescue of „irresponsible countries“, will lead to growth of nationalistic tensions in the EU and so creates risks for its long-term stability and endangers the existence of the common market with the free movement of goods, people and capital.
- The historical experience shows, that the main precondition for long-term stability of monetary union is an existence of a credible commitment not to bail out a member of the union in fiscal troubles from the means of other members. The long term stability of eurozone and the euro currency would contrary to what is believed by the creators of EFSF benefit from the bankruptcy of Greece, which is being prevented by EU leaders at any cost. For this reason saying No to the increase of EFSF does not mean the end of the monetary union.
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