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Frank Shostak

Frank Shostak



Articles by Frank Shostak

“Cost Cutting” Is Necessary to Expand Real Investment

4 days ago

Some commentators regard cost cutting by companies in order to secure profits as a major threat to the economy. They hold that if everyone tries to cut costs and save more, demand for goods and services from retrenched workers will fall, which in turn will hurt corporate revenues and thus profits. This allegedly sets in motion new …

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Diversification versus Risk

6 days ago

It is widely held that financial asset prices fully reflect all available and relevant information, and that adjustments to new information is virtually instantaneous. This way of thinking which is known as the Efficient Market Hypothesis (EMH) is closely linked with the modern portfolio theory (MPT), which postulates that market participants are at least as …

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Fail: Quantitative Methods Presume That Human Action Is Reflexive

11 days ago

Most economists consider the use of sophisticated mathematical and statistical methods key to understanding the complexities of economics. By means of mathematical and statistical methods, an economist establishes relationships between variables. For example, personal consumer outlays are related to personal disposable income and interest rates. Most economists would present this relation as a mathematical function: …

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No, Technology Shocks Aren’t Behind Recurring Business Cycles

13 days ago

Economic fluctuations, also known as business cycles, are seen as being driven by mysterious forces that are difficult to identify. Finn Kydland and Edward C. Prescott (KP), the 2004 Nobel laureates in economics, decided to attempt to find out what these forces were.1 They hypothesized that technology shocks are a major factor behind economic fluctuations and …

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Will More Easy Money Strengthen the Ailing Economy?

21 days ago

In the Wall Street Journal article from February 21, 2020 “The Central Bank Advised to Use Tool Kits Aggressively during Trouble,” it is suggested that a group of top Wall Street economists recommend that central banks consider a more aggressive monetary stance to counter future economic slumps. Because of the very low level of interest rates in countries …

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Why Sweden’s Negative Interest Rate Experiment Is a Failure

23 days ago

According to the Financial Times’s February 20 article “Why Sweden Ditched Its Negative Rate Experiment,” economists are pondering whether Sweden’s central bank experiment with negative interest rate was a success. Sweden’s Riksbank, the world’s oldest central bank, introduced negative interest rates in early 2015. The reason given by central bank policymakers for the introduction of …

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How Government Spending Destroys Wealth

March 2, 2020

The US budget had a deficit of $32.6 billion in January compared with a deficit of $13.3 billion in December and a surplus of $8.7 billion in January 2019. The yearly growth rate of government outlays rose by 22.2 percent in January from 7 percent in the month before and 6.7 percent in January of last year. The …

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How Fractional Reserve Lending Makes Money Disappear

February 24, 2020

According to the popular way of thinking, it is held that banks are responsible for the expansion of lending also known as credit, and given that economic prosperity is associated with an increase in credit, they are seen as crucial to the economic well-being. But are banks the true source of credit? Real Credit Is …

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Some Problems with Worker Productivity Stats

February 18, 2020

According to the US Labor Department, worker productivity in the non-farm sector increased at an annual rate of 1.4 percent in the fourth quarter of 2019 after declining by 0.2 percent in the previous quarter. For the year, productivity increased 1.7 percent, up from 1.3 percent in both 2017 and 2018. It was the best …

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Government “Fixes” for the Trade Balance Are Worse Than Any Trade Deficit

February 14, 2020

In December 2019, the US trade account balance stood at a deficit of $48.9 billion, against a deficit of $43.7 billion in November and $60.8 billion in December 2018. Most commentators consider the trade account balance the single most important piece of information about the health of the economy. According to the widely accepted view, …

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Humans Have Goals. And They Value Goods and Services Accordingly.

February 10, 2020

Why do individuals value bread less than gold, when bread is obviously more “useful” than gold? To provide an answer to this question economists refer to the law of diminishing marginal utility. Mainstream economics explains the law of diminishing marginal utility in terms of the satisfaction that one derives from consuming a particular good. For …

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How Keynesian Ideas Weaken Economic Fundamentals

February 3, 2020

Whenever there are signs that the economy is likely to fall into an economic slump most experts advise that the central bank and the government should embark on loose monetary and fiscal policies to counter the possible economic recession. In this sense, most experts are following the ideas of the English economist John Maynard Keynes. …

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Savings vs. Money: Which Is More Important?

January 29, 2020

Conventional wisdom holds that savings is the amount of money left after monetary income was used for consumer outlays. Hence, for a given outlay, an increase in money income implies more savings and thus more funding for investment. This in turn sets the platform for higher economic growth. Following this logic, one could also establish …

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What We Really Mean When We Talk About Values and Prices in the Marketplace

January 24, 2020

In the popular way of thinking, people are characterized as if a scale of preferences is hardwired in their heads. Regardless of anything else, this scale remains the same all the time. This thinking does not characterize human beings but robots. The humanoid robot chooses goods because the valuation scale has told him to. The …

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How to Avoid Secular Stagnation

January 21, 2020

In his January 10 interview on Bloomberg TV, former US Treasury secretary Larry Summers expressed concern that despite the aggressive lowering of interest rates by major central banks, economic activity does not appear to be responding. Summers suggested that something is not quite right. He is of the view that the Alvin Hansen’s secular stagnation …

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The Bank of England’s Governor Fears a Liquidity Trap

January 17, 2020

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat …

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More Money Creation Won’t Create More Economic Growth

January 13, 2020

The view that more money can revive an economy is based on the belief that money transmits its stimulatory effect through aggregate expenditure. With more money in their pockets, people will be able to spend more and the rest will follow suit. Money, in this way of thinking, is a means of payment and funding. …

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Money, Expectations, and Economic Growth

January 6, 2020

In various writings, Milton Friedman argued that there is a variable lag between changes in money supply and its effect on real output and prices. Friedman held that in the short run changes in money supply will be followed by changes in real output. However, in the long run changes in money will only have …

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Economic Stats Won’t Tell Us What Really Causes Recessions

December 31, 2019

Most economists are of the view that by means of economic indicators it is possible to identify early signs of an upcoming recession or prosperity. What is the rationale behind this opinion? The National Bureau of Economic Research (NBER) introduced the economic indicators approach in the 1930s. A research team led by W. C. Mitchell …

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To Be Useful, Data Needs Theory

December 28, 2019

For most so-called practical economists, information regarding the state of an economy is derived from data. Thus, if an economic statistic such as real gross domestic product or industrial production shows a visible increase, it is considered indicative of a strengthening of the economy. Conversely, a decline in the growth rate is regarded as weakening. …

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Good Economic Theory Focuses on Explanation, Not Prediction

December 18, 2019

In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality? According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible …

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Why Central Banks Aren’t Really Setting Interest Rates

December 11, 2019

Mainstream thinking considers the central bank a key factor in the determination of interest rates. By setting short-term interest rates, the central bank, it is argued, can influence the entire interest rate structure by creating expectations about the future course of its interest rate policy. In this way of thinking, the long-term rate is an …

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Easy-Money Policies Don’t Solve the Problem of Idle Resources

December 7, 2019

It is widely believed that resources that are utilized in normal times to promote economic prosperity become underutilized during recessions. Some experts hold that what is required are policies which will increase the availability of credit. On this Ludwig von Mises wrote in Human Action, Here, they say, are plants and farms whose capacity to …

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Exports: Currency Devaluation Won’t Grow the Economy

December 2, 2019

A visible weakness in economic activity in major world economies raises concern among various commentators that world economies have difficulties recovering despite very aggressive loose monetary policies. The yearly growth rate of US industrial production stood at minus 1.1 % in October, against minus 0.1% in September, and 4.1% in October last year. In the …

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Capital Accumulation, Not Government, Is the Key To Technological Innovation

November 26, 2019

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with governments playing a limited role. Many commentators regard …

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Don’t Want a Liquidity Trap? More Saving Is the Answer

November 19, 2019

With interest rates in many countries close to zero or even negative, some commentators are of the view that monetary policy of the central banks are likely to become less effective in navigating the economy. In fact it is held that we have most likely reached a situation that the economy is approaching a liquidity …

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Why Friedman Is Wrong on the Business Cycle

November 13, 2019

According to an article in Bloomberg on November 5, 2019, Milton Friedman’s business cycle theory seems to be vindicated. According to Milton Friedman, strong recoveries are just natural after particularly deep recessions. Like a guitar string, the harder the string is plucked down, the faster it should come back up. Bigger recessions should lead to …

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Why Government Should not Fight Deflation

November 9, 2019

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. This weakens the overall flow of spending and in …

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More Government Spending Won’t Make the Economy Grow

October 25, 2019

A key factor that constrains people’s ability to generate goods and services is the scarcity of funding. Contrary to popular thinking, funding for consumption and production is not about money as such, but about real savings. Note that various tools and machinery or infrastructure that people have created is for one purpose. That purpose is …

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