In his October 2009 EWR article, Mr. Maybury outlines the economic model he uses to make investment and economic forecasts and how it differs from the more widely held Keynesian model. The economic model your financial advisor uses may not seem important, but it is in fact crucial. If you have the right economic model you can predict the health and direction of the economy. This is essential when making investment decisions.
From the October 2009 EWR
Suppose a biologist said in public that he could make a mathematical model of the Bitterroot National Forest, including the behavior of all its animals, and using this model, he could make adjustments to the forest so that all the animals would live better and longer. What would happen to his career?
Hopefully, it would end. The 1.6 million acre forest is far too complex for any human to play God without wrecking it.
But that’s the promise of socialism and Keynesianism. Both assume it is possible for the government to do central planning where bureaucrats consult their mathematical models and decide how high interest rates should be, how much money should exist, what the levels of joblessness and production should be, and how high prices should go.
I call this the cult of the mastermind.
The “Austrian” economists point out that the economy is not a machine, it is an ecology composed of living organisms, people. The Austrian school is in the forefront of the effort to expose the madness of the government’s Keynesian and socialist policies.
The early leading lights of Austrianism were from Austria. Best known are 1974 Nobel laureate Friedrich Hayek and his mentor Ludwig von Mises.
In economics, the Austrian paradigm is the philosophical descendant of Adam Smith and the other so-called classical liberals (meaning libertarians).
In politics, Austrianism is the descendant of Patrick Henry, James Madison, Thomas Jefferson and the other American founders.
Austrian economists see the economy…
…not as a machine but as millions of individual thinking, feeling humans, each with a free will and his or her own unique set of needs, wants and desires which change endlessly.
The Austrian says the mastermind idea is crazy. It is not possible for a group of politicians and bureaucrats to know what is best for each individual, or to meddle in our lives without doing harm. Austrians echo Thoreau: “If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life.”
The other four macro paradigms — socialism, fascism, monetarism and Keynesianism — are “statist,” they assume an honorable and competent mastermind is possible. Austrianism is non-statist or anti-statist, and asks, where is the evidence for this assumption?
Read Hayek’s books The Constitution Of Liberty and The Road To Serfdom, and you will see the direct connection between the Austrian model and the two fundamental laws of civilization I often write about: do all you have agreed to do and, do not encroach on other persons or their property. To me…
…the single most important difference…
…between the Austrian model and the statist ones is the emphasis on malinvestment. Austrians do not believe all investment is good. Some is of the wrong type, in the wrong places, doing the wrong things, and it should be corrected. Recessions and depressions are the corrections.
Investment occurs in response to price signals, which are set by supply and demand. When statist masterminds make forced changes to money supply, interest rates, regulations, employment, etc., they alter these signals, causing not investment but malinvestment.
In most cases, the exact results are not predictable. The economy is an ecology, it’s too complex. Adjusting, for instance, the money supply is akin to adjusting the flow of water through the Bitterroot Forest. Some species will benefit, and others will be hurt. More water will help the fish, but hurt the mice and rabbits. Bears that live off the fish might benefit, but the coyotes will go hungry.
We’ve all heard numerous examples of baffling ecological interconnections, so I won’t go further, except to say the human ecology — the economy — is far more complex than any natural ecology. Yet the statist economists think they can do what no competent biologist would dream of trying.
They think they can play God…
… and make the human ecology better.
Throughout history, masterminds who have tried this have always ended up making the economy simpler, so that their mathematical models would work. They’ve been rather like biologists who have brought in bulldozers, flattened the Bitterroot Forest, and planted cornfields — regimentation.
Note that corn is not grown for the benefit of the corn. All statists generally end up in the same place — regimenting the economy for the benefit of the government.
This points to the primary purpose of the US Constitution: to make the government leave us alone so that each person can live his own way. It’s called liberty.
But today, with the help of the statist economists…
…the government has gone renegade and…
…my key point: an investment advisor or broker who does not recognize this will very likely steer your money in unrealistic directions.
Austrians contend that the fundamental reason we have inflations, recessions, bubbles, crashes, depressions, panics, and other economic calamities is that statists will not leave the human ecology alone. Statists like to play God, and when they do this, they always do it badly.
America has never been a pure laissez-faire economy. Right from the beginning, there were tariffs, taxes and other encroachments on the private lives of the people. These intrusions were less than in most other countries, but they were not zero.
As in any other ecology, each intervention created unforeseeable disasters. Each disaster then became the excuse for more interventions.
In the mid-1800s…
…along came socialism
Socialists claim that disasters are inherent to free economies, and the only solution is to have a lot more statist intervention. Hire masterminds who control the money supply, interest rates, production, employment and every other aspect of our lives.
Under the guidance of the socialists, federal encroachments grew, until 1929, when the Federal Reserve (accidentally?) created the Great Depression. The depression then became the mega-excuse for meddling on an unprecedented scale, until today the government’s Keynesians and their big brothers, the socialists, have a stranglehold on practically everything. It would not only take many lifetimes to read all the federal, state and local regulations, it would be impossible to read the new ones as fast as they are enacted.
Law is the foundation of the economy. The economy cannot be stable if the law isn’t.
Another thing separating Austrianism from the statist models, especially the Keynesian, is humility. Austrians admit that we will probably never know enough to intervene in the human ecology wisely.
Investors, beware of Keynesian thinking
In his 1936 book General Theory Of Employment, Interest And Money, Keynes famously suggested a way to restore the country to economic health: pay people to bury money in holes, so that companies will hire others to dig it up.
That’s what the Cash-for-Clunkers program was. Dealers were required to destroy the engines of perfectly good cars, so that autoworkers would be hired to make more.1
In college, for roughly a half century, most investment advisors and brokers have been trained in Keynesianism. This means their advice is based on that kind of thinking. If your investment plan has yielded a big loss, now you know the likely reason. ♦
As you can see, Early Warning Report’s perspective is unique. The financial world is still, like the government, in love with Keynesianism. Now ask yourself, if you use the economic model the government uses to control the economy, then isn’t it reasonable to expect your investments to end up in the same condition as the economy? Does that really sound like the safest bet? Order EWR today to follow an Austrian view on the economy and your investments.
1TIME magazine website, 4 Aug 09.
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