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Barbeque Logic and Economics December 2011 Economic Foundations Economic Foundations Copyright © 2010-2011 Analyst Strategy Group, LLC. All rights reserved.

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Presentation on theme: "Barbeque Logic and Economics December 2011 Economic Foundations Economic Foundations Copyright © 2010-2011 Analyst Strategy Group, LLC. All rights reserved."— Presentation transcript:

1 Barbeque Logic and Economics December 2011 Economic Foundations Economic Foundations Copyright © Analyst Strategy Group, LLC. All rights reserved.

2 Why Economics Matters Economic Schools The Austrians Have it Right Practical Application – Barbeque Logic Economic Foundations

3 Copyright © Analyst Strategy Group, LLC. All rights reserved. Why Economics Matters The market is not an invention of capitalism. It is an invention of civilization. -- Mikhail Gorbachev Economics is extremely useful as a form of employment for economists. -- John Kenneth Galbraith The only function of economic forecasting is to make astrology look respectable. -- John Kenneth Galbraith And I know this happens because I took economics, and I’d like to explain it to ya, but I flunked that course. -- Lewis Black If ignorance paid dividends, most Americans could make a fortune out of what they don’t know about economics. -- Luther H. Hodges The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics. -- Thomas Sowell

4 Copyright © Analyst Strategy Group, LLC. All rights reserved. Why Economics Matters How can society’s entire deposit of scarce physical and intellectual resources be assembled so as to minimize cost; make use of the talents of every individual; provide for the needs and tastes of every consumer; encourage technical innovation, creativity, and social development; and do all this in way that can be sustained? Llewellyn H. Rockwell, Jr.

5 Copyright © Analyst Strategy Group, LLC. All rights reserved. Why Economics Matters [Economics] is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence. All present-day political issues concern problems commonly called economic. All arguments advanced in contemporary discussion of social and public affairs deal with fundamental matters of praxeology and economics. Everybody thinks of economics whether he is aware of it or not. In joining a political party and in casting his ballot, the citizen implicitly takes a stand upon essential economic theories. Ludwig von Mises

6 Why Economics Matters Life Marriage Stewardship Defense Immigration Crime Education Environment Healthcare Economy Spending / Taxes Jobs / Productivity Copyright © Analyst Strategy Group, LLC. All rights reserved. Feelings-Oriented Principles-Oriented Feelings-Oriented Analytically-Oriented

7 Why Economics Matters Poor people can’t help others Love others as we love ourselves We must respect the dignity of each person Stewardship is applied economics Will America default on our debt? Foreign? Domestic? Are we headed for inflation or hyperinflation with QE3? What role should government play in managing the economy? How do I protect my retirement savings? America’s standing in the world is fading as our economy declines Can America defend American values? Is our country at risk from our borrowing, debt, and spending? What happens to America in a global economy? Copyright © Analyst Strategy Group, LLC. All rights reserved. How will you feel if you can’t feed your family? How frightened will you be if you or your spouse is laid off? Why don’t more people care about the environment? Will Social Security and Medicare be there to take care of me?

8 Why Economics Matters Copyright © Analyst Strategy Group, LLC. All rights reserved.

9 Why Economics Matters Economic Schools The Austrians Have it Right Practical Application – Barbeque Logic Economic Foundations

10 Keynesian Post-Keynesian New-Keynesian Economic Foundations E = C(Y – T) + I + G Supply Side Monetarists  Y /  G = 1 / (1 – MPC) Public Choice Game Theory Experimentalist Copyright © Analyst Strategy Group, LLC. All rights reserved.

11 Economic Schools MAIN CONCERN GOAL ACTOR DRIVER MECHANISM GUIDANCE EDUCATION Business Cycles Employment Control/Manage Economy Government (via direct force) Fiscal Policy Spending Taxing Complex Mathematical Models PhD Req’d LONDON SCHOOL Inflation Price Stability Control/Manage Economy Federal Reserve (via indirect force) Monetary Policy Interest Rates Currency Complex Mathematical Models PhD Req’d CHICAGO SCHOOL Private Property Market Pricing Individual Liberty Maximize Production Individuals Human Behavior Free Trade Entrepreneurship No Math / Easily Understood Relationships Common Sense AUSTRIAN SCHOOL ATTRIBUTE SCHOOL Copyright © Analyst Strategy Group, LLC. All rights reserved.

12 Core Principles Role of Government Flatten the Business Cycle Increase Gov’t Spending to Maintain Demand During the Lows of the Business Cycle Increase Taxes to Curb Demand During the Highs of the Business Cycle Maintain High Employment by Stimulating Demand History De facto policy s Displaced by Monetary Theory in Late 1970s Due to Inability to Explain Inflation AND High Unemployment Rebirth/Resurgence in 2007 via Government Bailouts to Combat Recession Role of Individual Spend and Consume Borrow if Necessary to Maintain Consumption Avoid Savings and Investing (being a rentier) Copyright © Analyst Strategy Group, LLC. All rights reserved.

13 Core Principles Role of Government Coordinate Monetary Policy with/through the Federal Reserve Manage/Control Inflation to a Target Rate Manage/Control the GDP Growth Rate History Displaced Keynesian Theory in Late 1970s Conquered Inflation in the 1980s and 1990s Losing Favor Due to Ineffectiveness Combating the Current Recession Role of Individual Spend and Consume Borrow to Maintain Liquidity Avoid Savings and Investing Copyright © Analyst Strategy Group, LLC. All rights reserved.

14 Core Principles Role of Government Protection / Securing of Indiv Natural Rights Independent Judiciary to Enforce Contracts Stable Currency Government Intervention in the Market Process is Always and Everywhere Destructive History Central to Price Theory Debates in the Late 1800s Strong Argument Against Socialism in the 1920s / 1930s Fell into Background 1930s to 1970s Mild Resurgence in the Late 1970s Increasing Interest Today due to Failure of both London and Chicago Theories Increasing Interest Today due to Alignment with Liberty Movement Scientific Interest due to Alignment with Complexity Theory Role of Individual Produce – Entrepreneur or Employee Innovate Take Risks Save and Invest Copyright © Analyst Strategy Group, LLC. All rights reserved.

15 Economic Champions LONDON SCHOOL AUSTRIAN SCHOOL CHICAGO SCHOOL Allan Meltzer John Maynard KeynesMilton FriedmanJohn Kenneth Galbraith Ludwig von Mises Friedrich Hayek Murray Rothbard Anna SchwartzRobert ReichLeonard Read Don BoudreauxHenry Hazlitt Paul KrugmanBarack ObamaAlan Greenspan Paul Volcker Ben BernankeRichard Nixon George W. Bush Copyright © Analyst Strategy Group, LLC. All rights reserved. Government Spending Taxing Federal Reserve Interest Rates Currency Individuals Free Trade Entrepreneurship

16 Economic Schools LONDON SCHOOL CHICAGO SCHOOL AUSTRIAN SCHOOL Copyright © Analyst Strategy Group, LLC. All rights reserved. Government Spending Taxing Federal Reserve Interest Rates Currency Individuals Free Trade Entrepreneurship So Which School Has it Right?

17 Copyright © Analyst Strategy Group, LLC. All rights reserved. Why Economics Matters Economic Schools The Austrians Have it Right Practical Application – Barbeque Logic Economic Foundations

18 The Austrians Have it Right Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved.

19 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. If A, then B AB Academic Case #1 If A, then B; if B, then C If A, then C ABC Academic Case #2 If A, then B; if B, then C; if C, then D If A, then D ABCD Academic Case #3 Reality ‘Simplified’ B A C D If A, then D?

20 Complexity Predictability Copyright © Analyst Strategy Group, LLC. All rights reserved. 95% If A, then B A 8% A If A, then B? B 80% A If A, then B B B

21 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Probability If A, then B AB If A, then B is 99% probable AB Newtonian Quantum At 80% probability – after only 3 interactions, the accumulated probability is about [ 80% x 80% x 80% = 51% ] At 99% probability – after 70 interactions, the accumulated probability is about [ 99% x 99% x … x 99% = 49% ] What is the PROBABILITY stimulus (A) will produce outcome (B) in a system that encompasses millions of actors and billions of interactions even assuming a % interactional probability?

22 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Human Variability Impulsive Irrational Delayed Response [Adam] Smith wisely distrusted disposition-effected, loss- averting, confirmation-biased, hyperbolic-discounting, and otherwise foible-infected humans with the power to order others about. -- Donald Boudreaux Man is dominated by self-love but not without some concern for others, able to reason but not necessarily in such a way as to reach the right conclusion, seeing the outcomes of his actions but through a veil of self- delusion. -- Adam Smith

23 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Fallacy of Linear Relationships versus negative feedback loop negative feedback loop A acts as its own governor! A is both the cause and effect of itself! positive feedback loop

24 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Illusion of 20/20 Hindsight D D is the result of A A D is the result of X X D is the result of Z Z

25 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Fallacy of Aggregates * Image courtesy of Hawoong Jeong The Economy GNP GNI Aggregate Demand Aggregate Savings Unemployment Multiplier Velocity Trade Deficit Aggregate Price CPI

26 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Fallacy of Aggregates The Economy If Austrians had their way, the government would never collect another economic statistic -- Llewellyn H. Rockwell, Jr. Aggregates are merely subjective observations of a complex system They have no predictive power

27 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. Characteristics Holonic – Holarchical structure Absence of imposed centralized control High connectivity between actors Non-linear causality of peers influencing peers Benefits Adaptability Evolvable Resilient Boundless Novelty Disadvantages? Non-optimized Non-controllable Non-predictable Non-understandable Non-immediate

28 Complexity Copyright © Analyst Strategy Group, LLC. All rights reserved. The Austrians Have it Right! Control/Manage Economy Control/Manage Economy Individual Liberty Maximize Production Complex Mathematical Models No Math / Easily Understood Relationships LONDON SCHOOL CHICAGO SCHOOL AUSTRIAN SCHOOL Free Trade Entrepreneurship Interest Rates Currency Spending Taxing Complex Systems Are Non-controllable Non-predictable Non-understandable Holonic/Holarchical ! High connectivity ! No centralized controls !

29 Copyright © Analyst Strategy Group, LLC. All rights reserved. Why Economics Matters Economic Schools Complexity – The Primary Concern Practical Application – Barbeque Logic Economic Foundations

30 Practical Application – Barbeque Logic Copyright © Analyst Strategy Group, LLC. All rights reserved. Guiding Principles Make it PERSONAL Ask questions; tell stories Appeal to COMMON SENSE And remember… Specific Strategies Focus on the INDIVIDUAL (private property, liberty) Focus on BEHAVIOR and human DIGNITY (free trade) Celebrate the benefits of INNOVATION and CREATIVITY (entrepreneurship) Highlight IMMORAL use of FORCE Expose impacts on the FORGOTTEN MAN Expose the illusion of UNDERSTANDING and the absurdity of PREDICTIONS

31 Practical Application – Barbeque Logic Copyright © Analyst Strategy Group, LLC. All rights reserved. CLAIM: Executives are paid too much; it’s unfair that their employees make so much less than them. Example #1 – Unfair Compensation

32 Practical Application – Barbeque Logic Copyright © Analyst Strategy Group, LLC. All rights reserved. CLAIM: The rich are getting richer while the poor are stagnant or getting poorer. Example #2 – Rich getting richer

33 Practical Application – Barbeque Logic Copyright © Analyst Strategy Group, LLC. All rights reserved. CLAIM: It’s not right that some people just inherit wealth from their parents while others have to scrimp and work hard just to make ends meet. No one should be allowed to inherit wealth. Example #3 – Inheritance

34 Practical Application – Barbeque Logic Copyright © Analyst Strategy Group, LLC. All rights reserved. CLAIM: America just doesn’t make things anymore. Our economy would recover if only we started making stuff again – lot’s of good-paying jobs. Example #4 – Manufacturing

35 Practical Application – Barbeque Logic Copyright © Analyst Strategy Group, LLC. All rights reserved. CLAIM: The government should invest in green energy because it will reduce our dependence on foreign oil. CORRELARY: Power companies should provide subsidies for anyone wanting to go solar. Example #5 – Investing in Green Energy

36 Barbeque Logic and Economics Economic Foundations Economic Foundations Copyright © Analyst Strategy Group, LLC. All rights reserved. Thomas Ryan


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