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Articles by Karl-Friedrich Israel

Why Official Inflation Measures Don’t Work

May 23, 2020

Listen to the Audio Mises Wire version of this article. Modern macroeconomics has made price stability the primary objective of monetary policy. It is assumed that central banks can ensure price stability by skillfully managing the money supply, thereby creating the conditions for economic growth and prosperity. In order to provide a safety buffer against …

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Why Official Inflation Measures Don’t Work

May 23, 2020

In theory, it is possible to adjust inflation measures to account for the many constant changes in prices resulting from changing demand, quality, and innovations. But it’s essentially impossible to execute these adjustments accurately. This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros. Original Article: “Why Official Inflation Measures Don’t …

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Why Has There Been So Little Consumer Price Inflation?

May 11, 2020

Prices of consumer goods have grown rather slowly in spite of sizable money supply growth. Why is there a gap? This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros. Original Article: “Why Has There Been So Little Consumer Price Inflation?”

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Why Has There Been So Little Consumer Price Inflation?

May 11, 2020

Listen to the Audio Mises Wire version of this article. Every once in a while economists want to go out on a limb with their models and publicly make forecasts on what the future rate of price inflation will be. The current COVID-19 lockdown is no exception. Many economists have warned us of potentially very …

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The Income Effect Reconsidered

April 16, 2019

ABSTRACT: There is an avoidable tension in a recently presented argument against the income effect from the perspective of Austrian or causal-realist price theory. The argument holds that a constant purchasing power of money is a necessary assumption for constructing an individual demand curve for a specific good, and hence that price changes along the …

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The Euro Shows That a Fiat Money System Is More Expensive than We Thought

January 23, 2019

The traditional argument for fiduciary media and ultimately unbacked fiat money was based on the costs of production. The real resources otherwise used for gold mining and minting could, under a fiat standard, be used for other productive purposes and thus enrich society as a whole. The argument goes back at least to such great …

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In the Eyes of the State

December 11, 2018

Last September a very informative paper was published by the neoconservative Atlantic Council. In connection with this institution are such important public figures as Collin Powell, Condoleezza Rice and Henry Kissinger. The paper, written by John T. Watts, summarizes the main conclusions drawn at this year’s Sovereign Challenges Conference in Washington, DC. The text allows for a deep look into some of the minds of the American elite and their allies. Its reading is therefore highly recommended. The inclined reader, however, should sometimes overlook empty phrases and distracting rhetoric to get to the heart of the matter.
At its core, it’s about maintaining power. According to Watts, the big problem is “disinformation”, which

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Schumpeter’s Review of Frank A. Fetter’s Principles of Economics

August 1, 2018

Translator’s Note: This review of Frank Fetter’s textbook by Joseph A. Schumpeter was brought to my attention by Dr. Matthew McCaffrey of the University of Manchester, who suggested a translation. It was originally published in German in volume 17 of the leading Austrian journal in economics in the early 20th century: Zeitschrift für Volkswirtschaft, Sozialpolitik …

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What Is Optimal Monetary Policy, Anyway?

February 16, 2018

Ever since the important contributions of new classical economists Finn E. Kydland and Edward C. Prescott during the 1970s and 80s, modern macroeconomics seeks optimal rules for monetary policy. Indeed, Milton Friedman had previously emphasized the importance of a binding rule for monetary policy. He recommended a constant but moderate expansion of the money stock over time as well as the abolition of fractional reserve banking in order to improve the central bank’s control over the money stock. Neither of these two measures has ever been implemented over an extended period of time.Creating Rules for Monetary PolicyMany modern macroeconomists have come to reject the idea of a constant growth rule in favor of a more complex rule that incorporates feedback effects from

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How Much Do Central Banks Cost Us?

October 11, 2017

A classic argument for central bank controlled fiat money goes like this: a commodity such as gold is very costly to produce. All the resources, capital, and labor devoted to mining gold for monetary purposes could be employed elsewhere in the economy, to the benefit of society, if only we had a fiat standard.This argument is by no means conclusive. We would not stop producing Champagne either, just because sparkling water is cheaper. However, there is an undeniable grain of truth in it. At firrst glance it seems we could save a lot of resources under a fiat standard. But do we really?Business Accounting for Central BanksThe euro provides a suitable case study to go after this question. How much does it actually cost to produce the euro and to conduct enlightened monetary

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What Trump Means: A European Perspective

March 2, 2017

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Global Economy6 hours agoKarl-Friedrich IsraelGet This Book/Digital Text
Members of the European political and media establishment seemed to be sure that the 45th president of the United States would be Hillary Clinton, or at least they were desperately hoping so. The days after the election one could hear clamor of indignation from top journalists and politicians alike. It almost felt as if the European project had lost shoulder to shoulder with Clinton, now that America, Europe’s most powerful ally, would be ruled by an “inhuman right-wing populist,” an outspoken critic of the European Union, and a sympathizer of the UK Independence Party. And after all he says “America first.” For the European establishment, this is an outrageous position to hold for an American president.General secretary of the ruling Socialist Party in France, Jean-Christophe Cambadélis, has compared Trump to the Front National’s top candidate Marine Le Pen and noted that the French Left knew full well about the challenges ahead. French prime minister Manuel Valls emphasized that Europe needs to close its ranks, take responsibility and respond to the events on the other side of the Atlantic Ocean, adding that he does not believe in “the triumph of simplicity and demagoguery.

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Five Reasons for Central Banks: Are They Any Good?

February 22, 2017

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The FedMoney and BankingIn a time when Federal Reserve reforms are discussed more openly than ever before, it seems appropriate to also think about the more fundamental question of whether central banks are needed in the first place. In 1936, Vera C. Smith (later Lutz) published her doctoral dissertation The Rationale of Central Banking written under Friedrich A. von Hayek at the London School of Economics. Smith reviewed the economic controversies around central banking from the nineteenth to the early twentieth century in France, Belgium, Germany, England, Scotland, and the United States.Smith made very clear that central banks are not the result of natural developments in the banking sector, but come into existence through government favors.So what are the justifications for central banks? Smith identified five main arguments for central banks from an economic point of view. Although Smith has written with a gold standard as the underlying monetary system in mind, it is interesting to look at these arguments with the benefit of hindsight more than 80 years later. Has any one of the arguments actually made a strong or even conclusive case for central banking?One: Uniform Distribution of RiskThe first argument runs as follows.

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Inflation May Be Causing a Long-Term Rise in Unemployment

October 20, 2016

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Money and BanksMoney and BankingOne of the most discussed topics in modern macroeconomics is the alleged trade-off between price inflation and unemployment. The Phillips curve became, in one form or another, the linchpin of modern monetary policy since the 1960s when Nobel laureates Paul Samuelson and Robert Solow presented the curve as a politically exploitable “menu of choice”: either high price inflation and low unemployment, low price inflation and high unemployment, or any point in between the extremes — just like that, à la carte.Economists Milton Friedman and Edmund Phelps argued against this naïve interpretation, which has since then established firm roots in public discourse. They explained the trade-off as a short-run phenomenon. When expansionary monetary policies lead to unexpected price inflation, employment can be stimulated if indeed wages increase slower than other prices in the economy. In this case the relative costs of labor diminish and more people are employed as a consequence. In the long run, however, there is no effect as inflation expectations adjust to actual inflation rates over time, and relative wages return to their equilibrium level.

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The “Lucas Critique” Is Misesian at its Core

August 31, 2016

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Philosophy and MethodologyPraxeologySubjectivismRobert E. Lucas Jr. won the Nobel Memorial Prize in Economic Sciences in 1995 for one of the most celebrated contributions in modern macroeconomics: the Lucas Critique. His article on econometric policy evaluation, originally published in 1976, according to many leading economists sparked a genuine methodological revolution in macroeconomic analysis.1 He emphasized that the underlying coefficients of traditional econometric models are not constant. Hence, these models were inadequate for counterfactual policy evaluation. In other words, these models were inadequate for scientific predictions of the effects of political interventions into the economy, and thus incapable of prognostic comparison of alternative political interventions.The Limits of MacroeconomicsThe traditional Keynesian and Monetarist models of the 1960s and 70s could not scientifically predict whether, for example, an expansion of the money supply would really lead to lower unemployment rates — not to mention the extent of the effect. The problem is that correlations between macroeconomic aggregates like price inflation and unemployment are constantly changing.

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The Fed Launches New Facebook Page

August 31, 2016

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The FedMoney and BankingThe Board of Governors of the Federal Reserve system launched a new Facebook page last week, and UPI reports that the fed’s pronouncements on the new page were not met with universal approval: The page has gained more than 13,000 likes but has been flooded with critical and sarcastic comments, starting from its very first post."Can you guys please help me get some of that QE? I’m trying to buy 16 cars, 4 houses, 2 jets and a yacht," one commenter wrote. "I swear it will stimulate the economy. I’ll spend it all and cycle it back. I know velocity needs to pick up so I’ll make sure to pay lots of models to live in my houses and travel with me. Thanks Fed! You are such a moral and upstanding institution!"Indeed, a quick visit to the page reveals more or less non-stop attacks on the Fed with each new post. The Fed has it’s defenders on the page, as well. It is interesting to consider, however, how the Fed feels it is even constructive or necessary to engage the public through social media. As little as ten years ago, it would be extremely difficult to imagine the Fed even bothering to address the public at all. At that time, the Fed happily remained hidden from public views, and the only scrutiny came from commentators in the financial sector. Most of those, generally gushed over what an excellent job the Fed was doing.

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Keynes’s Critique of Econometrics Is Surprisingly Good

May 5, 2016

Tags History of the Austrian School of EconomicsOther Schools of ThoughtPhilosophy and Methodology

In a recent article we had a brief look at Ragnar Frisch’s (1895–1973) vision of econometric model building. As mentioned, Frisch was the first economist chosen over Mises to win the Nobel Prize in 1969. In fact, there was a second one in the same year. Frisch won the prize jointly with Dutchman Jan Tinbergen (1903–1994), who applied Frischian econometrics for the first time in large-scale macro models by the end of the 1930s.
In the first volume of his investigations into business cycles commissioned by the League of Nations, entitled Statistical Testing of Business Cycle Theories, published in 1939, Tinbergen exonerates the statistician and econometrician from his responsibility and explains:

The part which the statistician can play in this process of analysis must not be misunderstood. The theories which he submits to examination are handed over to him by the economist, and with the economist the responsibility for them must remain; for no statistical test can prove a theory to be correct.

While classical and Austrian economists would agree that an economic theory cannot be proven correct empirically, they would not as easily let the statistician off the hook.

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Ragnar Frisch: The First Nobel Laureate Chosen over Mises

April 13, 2016

Tags Business CyclesHistory of the Austrian School of EconomicsPhilosophy and Methodology

In my first semester as a major in economics at Humboldt University in Berlin back in 2008, I attended a lecture on Nobel Prize winning economists by one of my professors. Another student in the audience asked him whether there were any economists who would have deserved a Nobel Prize, but never got one. His answer was close to the following: “John Maynard Keynes would have almost certainly received the prize, but he did not live long enough for that to happen. Among the economists who potentially could have won the Nobel, but didn’t, I think it is Ludwig von Mises who would have deserved it for his life’s work.”
Most Austrian economists would certainly agree. In fact, Mises died on October 10, 1973, which would, with a bit of good luck, have made five opportunities to win the prize, namely each October from 1969 to 1973.1 Interestingly, Hayek won the prize just one year later in 1974 explicitly for his early works on monetary theory and economic fluctuations, which essentially were elaborations on Misesian business cycle theory.

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