1. Undergraduate Economics Association
9/18/2012

2. ALLIED MINDSTORM University Challenge
3-Part Challenge
Applications Accepted
Starting 8/30
www.alliedmindstorm.com/universitychallenge/information
Presented by Allied Minds, Inc.
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3. European Union in Crisis
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4. Problems with Big Governments
The following views and opinions do not represent
the BU UEA and the perspectives of its members.
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5. The Definition of ‘The State’
Max Weber: Douglass North & John John A. Hall & G. J. Ikenberry
Wallis
A state has a 'monopoly of 1) The state organizes other 1) Set of institutions
the legitimate use of physical organizations. manned by own
force in the enforcement of 2) States support private personnel.
order.‘ ordering of relationships. 2) Center of Territory.
3) Monopolizes rule making.
Politics as a Vocation Defining the State The State
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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.
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7. The Problems of Big Government
1)Money
2)Continuous Intervention
3)Soaring Debt!
4)Business Cycles
5)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
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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 Provided by St. Louis Fed: research.stlouisfed.org
“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)
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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
D1 hidden tax on the poor.
Quantity
• “Governments never learn. Only
Undergraduate Economics Association people learn.” – M. Friedman
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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
Milk producers
Government Factors of
make fewer Government
finds milk production make
profits. tries to control
important. fewer profits.
They leave to factors of The Trend
Government They leave. Milk
produce other production. Continues
imposes production and
things. Imposes price
maximum price factors of
Milk production control on them.
on milk. production are
falls.
low.
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11. Undergraduate Economics Association
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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
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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.
Undergraduate Economics Association “And we all fall down…”
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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.’
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15. Undergraduate Economics Association
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16. Business Cycles
Richard Cantillon Ludwig von Mises F.A. Hayek Murray Rothbard
(1680 – 1734) (1881-1973) (1899-1992) (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.
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17. Business Cycles
Austrian Theory of the Business Cycle: Quantity theory of money
Confounded?
• Ludwig von Mises noted his discontent
against the quantity theory of money. 1st Stage: mv > pt
• Once Government increases the money
supply to improve the economy, three 2nd Stage: mv = pt
stages take place.
3rd Stage: mv < pt
• 1st Stage: Money supply rises faster than
the increase in price. People are not Example: Germany Hyperinflation.
scared.
• 2nd Stage: People are starting to get S1
anxious as they notice the inflation seems Value
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. D1
D2
The Economy Goes Bust!
Quantity
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18. Business Cycles
Hayekian Triangles:
• The Keynes and Hayek debate was the
Consumption
pinnacle of economics in the 20th
1
century.
• Hayek devised the triangles to explain
the ‘structure of the economy’ and Stages of Production
‘consumption’. (1)
• Why do people save? To consume in
2
Consumption
the future!
• When entrepreneurs see interest rates
fall, they think that people are saving
more. Stages of Production
• They invest more, and the stages of
production rise. (2)
• Thus, when people start to spend, the
entrepreneurs are ready!
Consumption
What happens when there is credit
expansion?
Stages of Production
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19. Business Cycles
Credit Expansion:
• When the FED artificially stimulates the
Consumption
economy, then….
 Investors think that people are saving
and try to invest in capital.
 Consumers see interest rates are low Stages of Production
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.
Provided by Ibtimes.com
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20. Collective Corruption
The Problems: Definition:
• Fiat money produced by the government buys • “…the logical result of government
friends. interventionism in the field of money
• When stimulus is spent they benefit the rich at the production—can explain why public
expense of the poor. opinion accepts adherence to an
• The highest in power do not ask for a change economically and socially destructive fiat
because they benefit greatly from the corruption. money regime” – T. Polleit (Fiat Money and
• The system will never change! Collective Corruption)
Economy goes into a Stimulus goes to the By the time it reaches the
recession followed by a wealthy first, benefitting poor, they can’t use the
stimulus. the people who made money because prices
serious errors. have risen.
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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
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22. Questions, Comments, Opinions?
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