Undergraduate Economics Association 9/18/2012

1. Undergraduate Economics Association9/18/2012

2. ALLIED MINDSTORM University Challenge 3-Part Challenge Applications Accepted Starting 8/30 www.alliedmindstorm.com/universitychallenge/information Presented by Allied Minds, Inc.

3. European Union in Crisis

4. Problems with Big Governments The following views and opinions do not represent the BU UEA and the perspectives of its members.

5. The Definition of ‘The State’ John A. Hall & G. J. Ikenberry Set of institutions manned by own personnel. Center of Territory. Monopolizes rule making. The State Max Weber: A state has a 'monopoly of the legitimate use of physical force in the enforcement of order.‘ Politics as a Vocation Douglass North & John Wallis The state organizes other organizations. States support private ordering of relationships. Defining the State

6. Brief History of the State • First real recognizable state: Mesopotamia, 3000 BC • How the State Formed: • Marxists and Leninists claim ‘The State’ was created to enforce social classes. • Oppenheimer claimed military conquests on settled agricultural population. • Other Theories: • Ecological: Farmers tied to the land close to rivers. Easy prey for coercion. • Religious: Coercion accepted because it was for the divine.Responded to demands from supernatural.

7. The Problems of Big Government Money Continuous Intervention Soaring Debt! Business Cycles Collective Corruption "If a government were put in charge of the Sahara Desert, within five years they’d have a shortage of sand."- Milton Friedman, PhD, Nobel Laureate

8. Money Inflation Classical Definition: The Increase in the Money Supply Contemporary:Increase in the general price level of a basket of goods in the country over a specific time. Examples: Song Dynasty (Jiaozie) Continental Congress (around 1781) Stockholm Banco. Gresham’s Law “Bad Money Drives out Good Money” OR “Money overvalued artificially by government will drive out of circulation artificially undervalued money” – M. Rothbard (What Has Government Done to Our Money) Provided by St. Louis Fed: research.stlouisfed.org

9. Money • Purchasing Power • Since the inception of the FED in 1913, the purchasing power has been constantly falling. • H. Hazlitt – The Inflation Crisis and How to Resolve it. S1 Value S2 Provided by ObservationandNotes • Increasing money supply puts more money in the economy and decreases the value of it. • Savings decrease in value. This is a hidden tax on the poor. • “Governments never learn. Only people learn.” – M. Friedman D1 Quantity

10. Continuous Intervention • Once you control one thing, you must control the other. • When government intervenes in the economy, it has unintended consequences. • These are understood too late, and it involves more intervention. • Until the economy is considerably under government control or socialism. Producers of Factors of production make fewer profits. They leave. Milk production and factors of production are low. Government finds milk important. Government imposes maximum price on milk. Government tries to control factors of production. Imposes price control on them. The Trend Continues Milk producers make fewer profits. They leave to produce other things. Milk production falls.

12. Soaring Debt! US Debt: $16, 425, 816, 500, 262 • Debt has increased magnanimously over the past 20 years. • Eventually, debt has to be redeemed. • Around $10 trillion of the debt is owned by China! • When the debt must be redeemed then there will be panic and instability. • Onward to BU Economist: • Lawrence Kotlikoff

13. Soaring Debt! Laurence Kotlikoff: “The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.” • Writer of Jimmy Stewart is Dead: Ending the World’s Ongoing Plague with Limited Purpose Banking. • Debt actually stands at $202 trillion!!! • For the gap to be closed you must “double our taxes”…….permanently. • Entitlements to baby boomers will have to be paid. • “The annual cost of these entitlements will total about $4 trillion in today’s dollars.” • Ending Scenario: • Countries notice that the debt will never be paid. Debt will be called in. • Interest rates for government bonds will rise. • Taxes will have to rise rapidly to pay for debts. • Money will have to be printed to keep everything going. • “And we all fall down…”

14. Soaring Debt! • Limited Purpose Banking (LPB): • Banks should do what they were created to do…Store money and financial intermediation. • Banks would utilize mutual funds. • People would come and choose where their savings would go and what risk to accumulate. • Banks do not hold ‘any financial assets and they’d borrow except to finance their mutual funds operations.’ • Federal Financial Authority (FFA) would ‘rate, verify, supervise custody, disclose and clear all securities purchase, held and sold by LPB mutual funds.’

16. Business Cycles F.A. Hayek (1899-1992) Ludwig von Mises (1881-1973) Richard Cantillon (1680 – 1734) Murray Rothbard (1926-1995) What Causes Business Cycles? • Economic theory states that prices should equilibrate. Then why do prices suddenly fall dramatically and violently? • Are markets susceptible to the risk of continuous failure? Is capitalism good, but a deadly force as well? • Is government the problem? Or is ‘irrational exuberance’ a worry? • Minimalist government theorists propose a theory: Austrian Theory of the Business Cycle.

17. Business Cycles • Austrian Theory of the Business Cycle: • Ludwig von Misesnoted his discontent against the quantity theory of money. • Once Government increases the money supply to improve the economy, three stages take place. • 1st Stage:Money supply rises faster than the increase in price. People are not scared. • 2nd Stage: People are starting to get anxious as they notice the inflation seems to be continuing. Fears of never ending inflation are taking place. • 3rd Stage: Everyone notices that the amount of money keeps rising indefinitely. People panic and try to exchange for goods and services. • The Economy Goes Bust! Quantity theory of money Confounded? 1st Stage: mv > pt 2nd Stage: mv = pt 3rd Stage: mv < pt Example: Germany Hyperinflation. S1 Value D1 D2 Quantity

18. Business Cycles • Hayekian Triangles: • The Keynes and Hayek debate was the pinnacle of economics in the 20th century. • Hayek devised the triangles to explain the ‘structure of the economy’ and ‘consumption’. (1) • Why do people save? To consume in the future! • When entrepreneurs see interest rates fall, they think that people are saving more. • They invest more, and the stages of production rise. (2) • Thus, when people start to spend, the entrepreneurs are ready! • What happens when there is credit expansion? 1 Consumption Stages of Production 2 Consumption Stages of Production Consumption Stages of Production

19. Business Cycles • Credit Expansion: • When the FED artificially stimulates the economy, then…. • Investors think that people are saving and try to invest in capital. • Consumers see interest rates are low and start to spend. (‘Get Rich Schemes’ – M. Rothbard) • The economy goes through unsustainable growth and a bubble is created. • Investors do not have enough resources to invest. • Eventually, everyone notices that consumption doesn’t rise to predicted amounts. The bubble bursts. • Capital markets usually affected – M. Rothbard. • Just like the Housing Bubble. Consumption Stages of Production Provided by Ibtimes.com

20. Collective Corruption • The Problems: • Fiat money produced by the government buys friends. • When stimulus is spent they benefit the rich at the expense of the poor. • The highest in power do not ask for a change because they benefit greatly from the corruption. • The system will never change! • Definition: • “…the logical result of government interventionism in the field of money production—can explain why public opinion accepts adherence to an economically and socially destructive fiat money regime” – T. Polleit (Fiat Money and Collective Corruption) Economy goes into a recession followed by a stimulus. Stimulus goes to the wealthy first, benefitting the people who made serious errors. By the time it reaches the poor, they can’t use the money because prices have risen.

21. THANK YOU! The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. - F.A. Hayek vs If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid. – J. M. Keynes

22. Questions, Comments, Opinions?