Just got back from this event at LSE in London. I quite enjoyed his lecture despite his deficiency in English language (poor thing misspelt my name when signing his book even though I spelt out every letter :). He seems a charismatic, certainly appeared passionate about the subject of Austrian Business Cycle Theory. The theatre was packed.
He started by explaining ABCT, then emphasized the utmost impossibility of central banks to carry out monetary policy (socialist calculation - LvM), legal problem of bank deposits (mentioned Tories’ initiative in UK to recognised deposits vs loans) in FRB and finished it off by proposing his “bail-out” transitional scheme from fractional reserve banking to 100% backed money with no legal tenders, final step being the complete privatisation of money. 1h40m lecture with 20m Q&A.
Audience Q&A session was a mix of “yes, get rid of FRB”, “surely society needs central banks, just change the managers”, “gold didn’t help us in 1930s” and “you seem to forbid commercial banking and leave investment banking only”. Hopefully these misinformed and mislead people will educate themselves in economics of freedom after his lecture. I’ve seen some people nodding at even his most radical propositions.
Overall, great to see an Austrian speaking in public about things that matter the most.
Why does De Soto conflate his own theories of money and banking with that of Hayek? The argument in favor of 100% reserves is not an Austrian one, per se, and it’s definitely not the argument made by Hayek. Hayek stated, on many occasions, that the issue of fiduciary media is absolutely essential for satiating the demand for money as money, and that it ease’s the secondary phenomena associated with depressions. Also, it’s somewhat disturbing that a well-known Austrian economist, such as De Soto, openly endorses bank bailouts and heavy financial regulations (he says that the repeal of Glass-Steagall was a “tragedy”).
Why does De Soto conflate his own theories of money and banking with that of Hayek?
Does he? He doesn’t appear so in his lecture, and I don’t remember him attributing any of his conclusions to Hayek. Yes, he attributes many of his premises to Hayek (e.g. capital theory, Ricardo effect, et cetera), but I don’t remember him going as far as to claim that his and Hayek’s conclusions were identical. It is true, however, that it seems as if Huerta de Soto ignores much of Hayek’s literature that argues for an elastic currency (see: Huerta de Soto [2006], pp. 723–727); i.e. Huerta de Soto is very selective of what he quotes from Hayek.
Also, it’s somewhat disturbing that a well-known Austrian economist, such as De Soto, openly endorses bank bailouts and heavy financial regulations (he says that the repeal of Glass-Steagall was a “tragedy”).
Out of interest, where does he endorse the bank bailouts? Regarding Glass-Steagall, I believe that the only part that de Soto really emphasizes is the seperation of commercial and investment banking.
Yes. He claims that the Austrian position is that business cycles are caused by fractional reserve banking, which is simply incorrect (fractional reserve banking, in itself, does not yield business cycles, which are caused by arbitrary alterations in the ratio of demand between consumption and investment (inter-temporal disequilibrium). If the banking system creates money in order to satiate the demand for money as money, or if it alters the supply of loans to consumers and producers by the same degree and in the same direction then it cannot yield business cycles). He cites a quote by Hayek where Hayek says that the only way to prevent businesses cycles is to extend the Peel’s act to bank deposits, but he neglects to mention that that was merely one out of three necessary conditions (the other two conditions were: flexible prices, and correct anticipation of future price fluctuations, Prices and Production, pp. 304). He also said that such a regulation would necessarily fail because banks would innovate and find ways around it (pp., 412).
The first Austrian economist to explitly endorse 100% reserves was, to my knowledge, Murray Rothbard. Additionally, he continues to mention the “Ricardo effect” which is entirely incoherent and has been invalidated. Real wages don’t rise because labor becomes relatively cheap. Real wages rise because the total supply of capital increases as a result of additional savings and investment. If his logic were correct, then we could increase total investment by arbitrarily elevating wage rates, and we could increase wage rates by destroying a significant portion of the total supply of capital.
Towards the end. He claims that his bailout solution is the most pragmatic and realistic course of action, though not the optimal route. And he literally endorses Glass-Steagall.
They cannot possibly devise a method that allows them to do this which is why the modern ME theorists ignore this problem altogether. Besides, talking about altering supply of loans between consumers and producers “by the same degree and in the same direction” is still an aggregate/macro analysis, which ignores the micro-effects that are at the core basis of the Austrian Business Cycle theory. You can’t possibly get the new money created via loans into precisely those hands that wish to hold it due to the nature of how the new money comes about. The idea is totally absurd.
Where do you get this from? If you read his work, he uses the “Ricardo effect” to explain how and when it becomes more (or less) profitable to employ labor saving tools/machines. This is perfectly coherent with Austrian capital theory.
Well then, where do you see anything that implies that real wages rise because labor becomes relatively cheap?
He’s saying something totally different. real wages are rising because prices are dropping for consumers goods. This induces them to seek labor saving devices. Devices that before were less profitable then labor, now become more profitable. That’s all.
What you’re saying is that the causal relationship is as such: (a) higher real wages → (b) capital accumulation. But basic economic theory, including Austrian economic theory (Bohm-Bawerk) says that the causal relationship flows in the opposite direction, namely that the demand for labor and the productivity of labor, at the margin, will rise when the total supply and sophistication of capital increases. In other words, rising real wages does not cause capital accumulation; capital accumulation causes real wages to rise. If real wages rise without the introduction of additional capital, or more sophisticated capital, we get involuntary unemployment. The Ricardo effect implicitly assumes that capital and labor are for the most part substitutable factors of production rather than complimentary factors of production.
An implication of this theory is that trade unions and minimum wage laws increase capital accumulation. And finally, profit is not the result of how much labor and capital you employ, or how you organize the various factors of production into certain combinations. Profit or interest (excluding entrepreneurial profit) determines how much capital and labor you will employ, and how you organize the factors of production into certain combinations (insight from Hayek’s Pure Theory).
Obviously, that would be absurd. I am not saying that and neither would such a prominent Austrian such as de Soto.
I agree.
But here is how the Ricardo effect is not in violation with basic economic and Austrian theory. The Ricardo Effect in this context pertains to a transition state, one that affects entrepreneurial decisions, and not to an equilibrium state analysis. When consumers increase their savings by restricting their immediate consumption, it is a matter of fact that the decrease in aggregate demand for final goods mandates a reduction in their prices. So initially, real wages are increased. Again, this is a temporary phenomenon; People have already previously received their wages but then did not consume all of it. They are now able to get those same goods with less money. This is not in contrast to capital theory, quite the contrary, it is one of its predictive outcomes. This temporary rise in real wages further induces entrepreneurs to replace labor with capital goods. This is just another additional effect tending toward the lengthening of the structure of production. It is simply one more microeconomic explanation for the behavior of entrepreneurs and how they react to a rise in voluntary savings.
Obviously real wages will rise permanently due to the increase in voluntary savings and after the capital structure is readjusted.