Trying To "Talk Like An Austrian" - Part 1

My dad emailed me this article (link follows) from Barron's where they're talking to famous smart, rich guy Jeremy Grantham. An email exchange with my dad about it prompted me to want to put this post together in which I'm going to try to "talk like an Austrian" (economist).

Grantham Interview - October 13, 2008



Grantham seems to be pretty shrewd. He was making various dire predictions over a few years. And he’s certainly managing a lot of money - $120 billion (according to the Barron's article) is a pretty huge pile (and assuming he’s on some sort of percentage cut management fee, he’s making a lot).

And a lot of what he says makes sense to me (which means it's consistent with that certain other stuff that I've been reading which I credit for being accurate and helpful for making sense of the present economic environment).

But as with so many of these fellows (smart, rich guys who predicted some sort of general dislocation/crisis in the world's financial markets and economies), there is plenty that he didn't say that I wish he would have said (because it's my view that it would be very beneficial to the human civilization if more smart, rich guys said things like this). Especially towards the end of the article where Grantham is asked how he thinks we (economic actors) got into the mess in the first place.

And he says:

I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained -- but we end up with an army of left-brained immediate doers.

So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.

This may or may not be true.

But it's far from the best -- defined as most accurate -- to the question. And I wish he would give the best answer to the question.

I wish he quoted or alluded to Ludwig von Mises and/or Austrian economics.

Specifically on Mises' “cluster of errors” concept (see, e.g., this article by Murray Rothbard expounding on Mises analysis).

Mises says the causes of the “cluster of errors” is the misinformation delivered to capital markets by the Federal Reserve’s monetary inflation, not a right-brain/left-brain problem of executives running financial firms.

That monetary inflation causes entrepreneurs engaged in forecasting to believe that capital available for investment is cheaper than it actually is. This lures them into more capital-intensive projects than is appropriate given the state of the “real” world.

And eventually the investments prove to have been unsound (when losses are realized through an inflation in the costs of ordinary things, including labor and raw materials, etc., and the failure of the revenue generated by the capital-intensive projects to exceed the costs of the projects themselves). And so then the bad investments need to be liquidated (because there’s been real errors in the allocation/expenditure of wealth).

But governments don’t want that to happen (because when prices go down and businesses fail, interest groups scream and cry out for help), so they intervene, try to prop up prices, try to keep the losses incurred in the bad investments from being realized (an impossible task). This is what is happening now. Massive government intervention. Which can not undo the bad investments. (The omelet hath been scrambled. The milk hath been spilt.)

Carried to its logical conclusion, this process will spread the pain/losses of the bad investments made by the entrepreneurs who were deceived by the Federal Reserve's monetary inflation around the entire economy/populace. A process which will take much longer than is necessar and that also will hurt scores of innocent people who had nothing to do with either the monetary inflation or the malinvestments (think poor folks and folks living on fixed incomes (old folks)).

By the way, the government intervention path is also immoral.

So that's a massive double whammy against government intervention -- it won't work and it's immoral.