Search

This paper looks at twenty first-century dollarization in Latin America. We emphasize that dollarization is a complex reform that can be implemented in many different ways. We draw three important lessons from these experiences: (1) keeping the central bank after dollarizing is an unnecessary institutional vulnerability that facilitates compulsive de-dollarization, (2) public opinion offers the most important defense of dollarization against populist attempts at reversal, and (3) even if dollarization is not supported with structural reforms (or such reforms are reversed), it remains superior to the counterfactual of no reforms with persistent, high and volatile inflation.

Argentina’s experience with inflation targeting started in 2016 and ended in 2018, lasting a total of only 25 months. In this paper, we study the reasons why this monetary regime failed in Argentina. We argue that the main reason for its failure was an internal inconsistency in how the central bank implemented inflation targeting, and a negative credibility shock accelerated that said inconsistency in December 2017.

This paper studies the relationship between mass immigration in Argentina and the rise of Juan D. Peron (the iconic Argentine populist leader) in the mid-20th century. We find no evidence suggesting that mass immigration to Argentina from 1876 through 1925 explains Peronism directly or indirectly, such as through a reaction to immigrants or their descendants. Instead, a weak institutional framework and domestic conditions independent of immigrants’ role in Argentine economics and society explain Peronism's rise.

While Buchanan is best known for the economics of politics and constitutions, his seminal contributions to this field are but one branch of his more underlying methodology and approach to doing social science. Buchanan’s fundamental project was to re-orient economics and social science toward an analysis of symbiotic exchange (catallactics) rather than of antiseptic allocation (optimization). The most definite statement of this contribution lies in Buchanan’s 1963 presidential address to the Southern Economic Association, “What should economists do?” which was later expanded into a book of the same title. This paper seeks to draw attention to several of Buchanan’s more recent but lesser known articles where he fully develops this theme. He calls on economists to rediscover Adam Smith’s “elementary notion” about the division of labor and the extent of the market, and he professes the notion of “generalized increasing returns” as a mechanism for economists to rediscover their Scottish Enlightenment roots within the neoclassical framework. In this same vein, we also discuss how Buchanan’s rediscovery might apply to two prominent and ongoing twenty-first century issues, trade restrictions and populism.

This paper summarizes Horwitz’s contributions in Microfoundations and Macroeconomics: An Austrian Perspective and evaluates its connection with recent contributions in Austrian macroeconomics. The paper emphasizes the connection between relative price, monetary equilibrium, and monetary policy. The paper pays particular attention to the implications of Horwitz’s denomination of capital theory as a “missing link” in economic theory.

This paper provides new estimates of the effects of left-of-center populist regimes on economic developments in the 21st century in Latin America. In contrast to earlier research, we take account of the price shocks that may also have affected economic development during these regimes’ time in office. In general, we find that left-populist regimes reduced per capita real income in both the short and long run, after accounting for those price shocks.

In order to identify an entrepreneurial opportunity, calculation is required. The entrepreneur must do more than simply perceive an opportunity to do something new to create value in the marketplace. Insofar as alternative possible actions exist, the entrepreneur must choose between them. And even as the chosen opportunity is pursued, he must choose between alternative modes of production and organization in the ongoing combination of resources. The details of the kind of calculation required have been left mostly implicit in the literature. This article borrows from the finance literature to suggest a general and universal framework for such calculation and to offer one possible more specific method for using that framework for ongoing entrepreneurial judgment calls. We describe the familiar context in which entrepreneurial decisions occur and reiterate the importance of understanding the nature of capital in such a context of subjective value, uncertainty, and entrepreneurial imagination. We describe the familiar universal present value arithmetic and how it applies to entrepreneurial calculation. Finally, we take a deeper look at this framework, providing an example of one method of analysis used in financial management.

This paper defends the relevance of Austrian Business Cycle theory (ABCT) within a fiat money regime, by providing an answer to whether a constant rate of credit expansion necessarily leads to a boom-bust cycle. We claim that this scenario has two potential outcomes, (1) a change in money demand brings the economy back towards equilibrium or (2) the economy will shift to a sub-optimal but still sustainable path. We identify capital heterogeneity effects and the Ricardo effect as distinctly Austrian explanations for an upper turning point, even in a fiat money regime.

Concerns about immigrants’ impact on US institutions are not new. We find such concerns in the correspondences and writings of Benjamin Franklin, Thomas Jefferson, and Alexander Hamilton. M...

We provide an initial assessment of the Federal Reserve's policy response to the COVID‐19 contraction. We briefly review the historical episode and consider the standard textbook treatment of a pandemic on the macroeconomy. We summarize and then evaluate the Fed's monetary and emergency lending policies through the end of 2020. We credit the Fed with promoting monetary stability while maintaining that it could have done more. We argue that the Fed could have achieved stability without employing its emergency lending facilities. Although some facilities likely helped to promote general liquidity, others were primarily intended to allocate credit, which blurs the line between monetary and fiscal policy. These credit allocation facilities were unwarranted and unwise.

We study a case that applies hermeneutics to social sciences, in particular to the Austrian school of economics. We argue that an inaccurate treatment of hermeneutics contributed to an epistemological downgrade of the Austrian school in the economic scientific community. We discuss how this shortcoming can be fixed and how a proper hermeneutic application to the Austrian school explains why this school of thought is neither positivist nor postmodern.

The growing literature on Bitcoin can be divided into two groups. One performs an economic analysis of Bitcoin focusing on its monetary characteristics. The other one takes a financial look at the price of Bitcoin. Interestingly, both of these groups have not given much more than passing comments to the problem of whether or not Bitcoin has the right monetary rule in order to become a well‐established currency. This paper argues that Bitcoin in particular, and cryptocurrencies in general, do not have a good monetary rule and that this shortcoming seriously limits its prospect of becoming widely used money.

In a recent contribution to this journal Saverio Fratini (Review of Austrian Economics, 2019) offers a critique of our work on Austrian Capital Theory on the grounds that our conception of capital and “roundaboutness” does not appear to provide adequate support for the Austrian business-cycle theory. In this comment we explain why we think this criticism is wrong.

This paper applies Kirzner’s theory of entrepreneurial alertness to central banking. As opposed to entrepreneurs operating within the market, central banks can operate outside the market by defining its structure and regulations. We label as “super-alertness” the particular type of Kirznerian alertness that central banks are required to have to successfully achieve stable monetary equilibrium.

This paper uses Austrian capital theory to illustrate why empirical work can be elusive in typical Austrian themes. It explores the nature of the problem and different alternative solutions to empirical challenges. The paper also discusses the Austrian literature's epistemological approach to empirical work to shed light on the controversial relationship between Austrian theory and empirical testing. Finally, the paper offers examples of how Austrian and mainstream economics can find a common empirical ground.

This paper discusses the implications of considering capital in financial or market value terms rather than as a collection of productive assets. We emphasize potential areas of research from this conception of capital.

This paper uses a Synthetic Control Analysis to examine the economic effectiveness of dollarization in Ecuador. We address common concerns surrounding the adoption of dollarization as a policy and provide several solutions to those concerns. We find that dollarization resulted in significant higher levels of income without clear evidence of worsening in social health variables such as infant mortality, poverty, and income distribution.

This chapter studies the challenges a cryptocurrency faces to become a common means of exchange. In particular, the paper discusses the scalability constraint that limits the number of transactions a cryptocurrency may be able to verity per unit of time, the network effect in goods that function as money that increases the cost of new currencies to gain market share, and the implications of the fixed monetary rule present in most cryptocurrencies that departs from an elastic optimal monetary policy. Potential solutions for each case are also discussed.

We study a case that applies hermeneutics to social sciences, in particular to the Austrian school of economics. We argue that an inaccurate treatment of hermeneutics contributed to an epistemological downgrade of the Austrian school in the economic scientific community. We discuss how this shortcoming can be fixed and how a proper hermeneutic application to the Austrian school explains why this school of thought is neither positivist nor postmodern.

We provide an initial assessment of the Federal Reserve's policy response to the COVID-19 contraction. We briefly review the historical episode and consider the standard textbook treatment of a pandemic on the macroeconomy. We summarize and then evaluate the Fed's monetary and emergency lending policies through the end of 2020. We credit the Fed with promoting monetary stability while maintaining that it could have done more. We argue that the Fed could have achieved stability without employing its emergency lending facilities. Although some facilities likely helped to promote general liquidity, others were primarily intended to allocate credit, which blurs the line between monetary and fiscal policy. These credit allocation facilities were unwarranted and unwise.

Much of the mystery attaching to the concept of capital in economics can be avoided by treating capital as a three dimensional entity, the dimensions being quantity, time and value. The literature on the subject is notable for different treatments focusing on just one or two of these dimensions to the neglect of the others. The most neglected dimension in economics is value. Yet notions of capital that lose sight of this dimension are seen to be incoherent. In this paper we undertake to place the three dimensions in sharp relief while explaining the conceptual dangers of such neglect. A consistent attention to the value dimension provides an indispensable bridge to the notions of capital that function in everyday usage and, thus, contribute to an understanding of economic decisions and economic policies that involve the concept of capital.

The perennial question ‘What is Capital’ has been getting some attention recently. Although the distinction between capital as a financial construct and capital as a collection of physical production-goods is well known, we argue that the former concept is undepreciated. The two concepts are often conflated in practice, and the relationship between them is seldom well understood. We spell out the financial concept of capital emphasizing its importance as an indispensable instrument of calculation and accounting. We consider some views of human, social and other capital and how we differ from them. We present reasons for rejecting the notion of an aggregate production function in standard growth theory (which uses the notion of an aggregate stock of physical capital) and as recently used by Thomas Piketty in his well-known work.

Concerns about the institutional impact of immigration, particularly in the United States, are not new. We can trace them back to Benjamin Franklin, Thomas Jefferson, and Alexander Hamilton. More recently, in response to a literature that questions the desirability of current immigration restrictions, Borjas (J Econ Lit 53:961–974, 2015) speculates that immigrants coming from countries with poor institutions could reduce substantially the institutional quality in the United States to a point where it could negate all economic gains associated with immigration in terms of GDP and income. Using the Economic Freedom of North America index since 1980, we find no evidence to corroborate Borjas’s concerns. However, we find mixed evidence that immigration increases minimum wages and union density.

Austrian capital theory tried to capture the intuitive and basically undeniable importance that time plays in economic life, but arguably was diverted down a blind alley with Eugen von Böhm-Bawerk’s average period of production, a purely physical measure of ‘roundaboutness’—the length of the production process. For the general case, such a measure is a chimera. But the intuition is strong, and the idea survived and reappeared at various points in the history of capital theory. Almost unknown to economists, an alternative value measure of roundaboutness has existed at least since John Hicks’s formulation of his average period (AP) in 1939, which, coincidentally, was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him “Duration” (D). Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what it was that the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle.

The time is right for a reexamination of Austrian capital-theory. We attempt to capture the essence of Carl Menger’s approach to capital, highlighting the important distinction between goods and the valuable services they yield (implying that goods are valuable only because they yield valuable services) and highlighting also the importance of money in facilitating exchange and production and in providing the means to value them. We look at the capital-theory of Bohm-Bawerk and suggest that, in many respects, this was a wrong turn, although it did set in motion valuable efforts to clarify the importance of the heterogeneity of productive-resources and their growing complexity over time. We examine the production-function, micro and macro, and show that it is logically untenable and useless as an instrument for empirical investigation, and that this has been known for decades. Of the Austrians after Menger, only Mises followed Irving Fisher in focusing on valuation. He did so in the context of explaining the importance of calculation. Mises’s approach to capital has been insufficiently understood and appreciated. By way of conclusion we draw from our considerations to provide a research agenda in Austrian capital theory.

We test the existence and extent of capital flows as an offset to monetary policy in Argentina from 1992–2014. After providing an analysis of Argentina’s past and current economic conditions, a theoretical framework of the offset and sterilization mechanisms will be provided. Then, with the use of VAR and IRF analysis, it is shown that a one standard deviation shock to monetary policy (measured by changes in net domestic assets) is offset between 27 %–32 % by responsive capital flows (measured by changes in net foreign assets). Furthermore, the results indicate that the Argentine government more than sterilizes shocks to capital flows through compensation of expansionary monetary policy. Offsetting- und Sterilisationsmechanismen in Argentinien (1992–2014) Zusammenfassung Wir testen die Existenz und das Ausmas von Kapitalflussen, welche in Reaktion auf Anderungen der argentinischen Geldpolitik der Jahre 1992–2014 entstanden sind und diese konterkariert haben. Nach einer kurzen Analyse der aktuelle...

This Element presents a new framework for Austrian Capital Theory, starting from the notion that capital is value. Capital is the value attributed by the valuer at any moment in time to the combination of production-goods and labor available for production. Capital is the result obtained by calculating the current value of a business-unit or business-project that employs resources over time. It is the result of a (subjective) entrepreneurial calculation process that relates the flow of consumptions goods to the value of the productive resources that will produce those consumptions goods. The entrepreneur is a ubiquitous calculating presence. In a review of the development of Austrian Capital Theory, by Carl Manger, Eugen von Böhm-Bawerk, Ludwig von Mises, Friedrich Hayek, Ludwig Lachmann as well as recent contributions, the Element incorporates the seminal contributions into the new framework in order to provide a more accessible perspective on Austrian Capital Theory.

This paper examines whether the institutional quality of immigrants’ origin countries matters when testing the relationship between immigration and the US states’ economic freedom scores. Our results show that, in the short run, the relationship between economic freedom and immigrants from countries ranked in the second quartile of the Fraser Institute’s Economic Freedom of the World report is negative and statistically significant, but it is not economically significant. In the long run, the relationship between economic freedom and immigrants from countries ranked in the bottom quartile of the EFW report is positive and statistically significant, but it is not economically significant. For other immigrant groups coming from countries that rank higher in terms of economic freedom, the relationship is negative but is not statistically significant or is weakly significant. Our results are robust to various specifications.

This paper studies the effectof commodity prices and economic crisis on the 21st century Latin American left-leaning populism. Our results shows that higher economic prices are correlated with more populism conditional on countries already being under a populist regime. We do not have conclusive statistical evidence of the effect of economic crisis on populist regimes.

Argentina’s experience with inflation targeting lasted only 26 months. In this paper, we study the reason why this regime failed in Argentina and the economic context of its implementation. We find that the main reason was an internal inconsistency in how inflation targeting was implemented, and that said inconsistency was accelerated by a negative credibility shock in December 2017. While other events, such as external shocks, also played a role, they are not enough to explain the shortcomings of the inflation targeting experience in Argentina.

In a recent contribution to this journal Severino Fratini (2019) offers a critique of our work on Austrian Capital Theory on the grounds that our conception of capital and “roundaboutness”. In this comment we explain why we think this criticism is wrong.

This paper builds on Padilla and Cachanosky (2018) and examines if immigrants’ educational attainments matter, particularly for immigrants with low educational attainments, when it comes to test the impact immigrants have on the economic freedom of the US states. Except in the area of government transfers and subsidies, we don’t find any evidence to support such hypothesis. In addition, our results indicate that the economic significance associated with immigrants without a high school diploma’s negative impact on economic freedom score for the area of government transfers and subsidies is likely trivial. Our results are robust to various specifications.

Following financial concepts like duration and economic value added (EVA®) we estimate the impact of interest rate movements on firms that are more and less roundabout . We find that firms that are more roundabout, that is, work with expected cash-flows with higher duration , are more sensitive to interest rate movements. To the extent that monetary policy is able to move the discount rate used by investors, monetary policy changes the relative present value of any investment project and therefore affects resource allocation. We show evidence that this effect is present in the U.S. in the years prior to the subprime crisis.

Purpose – Since Baumol (1990), the economic literature has distinguished between two broad categories of entrepreneurship: productive and unproductive. The purpose of this paper is to introduce another subcategory: indirectly productive entrepreneurship. Sometimes, profit-seeking entrepreneurs allocate their talents to indirectly productive activities to mitigate the new costs market participants endure as a result of a government regulation. The resources used to mitigate these costs must be diverted from other uses. Design/methodology/approach – This paper uses the example of cell phone storage outside New York City’s high schools to illustrate an indirectly productive entrepreneurial activity that mitigates the inefficiencies or costs created by a regulation. These costs and the resulting entrepreneurship would not have arisen absent the regulation. Findings – These profit opportunities do not result from market entrepreneurial errors or successes but emerge from inefficiencies or unintended consequences produced by government regulations. When evaluating such entrepreneurship, the question is whether such regulation is desirable from an efficiency viewpoint because such entrepreneurship, while making such regulation less inefficient or less costly, diverts resources from other lines of production. Originality/value – This paper identifies a new category of entrepreneurship: indirectly productive entrepreneurship. This paper also shows that government regulation often deters productive entrepreneurship. However, under some circumstances, regulation can indirectly encourage productive entrepreneurship by creating artificial profit opportunities that would not have existed otherwise.

Purpose A comprehensive understanding business cycles needs to account not only for the allocation of resources over time but also for resource allocation across industries at any point in time. But to properly understand how these “time-distortions” take place and how the price mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production is required. The authors use insights provided by Macaulay’s duration and Hicks’s average period to show that financial duration and related concepts have a direct connection to macroeconomic stability. Design/methodology/approach This study uses a theoretical and conceptual approach. It first presents the connection between average period of production and financial duration and then compares and applies this to macroeconomic business cycle theories. Findings This study points to important implications for macroeconomic policy. It not only claims that a low interest rate contributes to the creation of asset bubbles but also shows the market mechanism through which the real sector is affected. The application of financial concepts to macroeconomic cycles shows the price mechanism through which resources are allocated across industries. Originality/value The financial approach we offer to business cycles is fairly unexplored. As such, this paper offers a novel conceptual and theoretical framework for business cycles.

With two sovereign debt defaults within the last thirteen years, Argentina represents an interesting example of the causes and effects of defaults by sovereign states. Argentina has had a history of economic strife for the last one hundred years, largely due to political and economic instability. This paper discusses the economics of Argentina after the 2001 financial crisis that led to the default in 2014. The paper also explains the main legal aspects for the holdouts versus the Argentina trial over the pari passu controversy and discusses the different reactions to the trial and consequent default.