The day Europe goes bankrupt

by Prince Michael of Liechtenstein

Behavioral scientists have observed that man as a species has developed an ability to ignore threatening or negative information. We tend not to look closely at bank statements showing debt or disturbing results of medical tests. Surprisingly, people with higher IQs are even more prone to this mental displacement than the less gifted. Such behavior could be called the ostrich principle. This does a serious injustice to the ostrich, which as any zoologist will confirm, does not stick its head in the sand when danger looms.

So with apologies to ostriches, we will still use this term to describe the shocking and nearly universal ignorance of the problem of Implicit Pension Debt.

By Implicit Pension Debt (IPD), we understand pension obligations that governments, including regional and local authorities, have incurred toward current and future pensioners. Most tax and accounting codes require companies to report such implicit debts on the liability side of the ledger as obligations. Not so with governments, whose accounting practices would under normal circumstances be considered as falsifying public accounts.
Six European countries have an implied pension debt exceeding 300 percent of GDP

One of the Maastricht Treaty criteria for adherence to the euro stipulates that public debt should not exceed 60 percent of gross domestic product. Anything above that level – and this is borne out by empirical data – is detrimental to sustainable economic development. Unfortunately, official figures already show the average debt-to-GDP ratio in the eurozone hovering close to 90 percent. Germany is also breaking the rules with a ratio of about 70 percent.

Now comes the shocking but consciously or subconsciously suppressed data about implicit pension debt. According to a recent study, six European countries – Austria, Finland, France, Germany, Italy and Poland – have an IPD exceeding 300 percent of gross domestic product. This includes three of the European Union’s four largest economies. Ten more European countries have ratios between 200 and 300 percent.
And the kicker? The data cited above are based on the present value of future pensions as of 2006. More up-to-date figures probably won’t be available until the end of 2017, when Eurostat is supposed to start publishing accrued-to-date pension entitlements statistics in its new European System of National Accounts.

Some of the European Union’s biggest economies could get crushed by pension debt

Back in 2006, two French journalists, Philippe Jaffre and Philippe Ries, published a novel called Le Jour ou la France a fait fallite (“The Day France went Bankrupt”). The book is brilliant in its foresight. It describes how France’s public debt inexorably rises until the day comes when creditors refuse to grant additional loans. The country’s debt is downgraded by the rating agencies and domestic banks, due to their high exposure to government bonds, become insolvent. The French economy stops working as wages go unpaid and the financial system collapses. To restore financing, creditors demand drastic measures. The novel culminates with Sotheby’s moving into the Louvre and auctioning its treasures, including the Mona Lisa.

In hindsight, one can only admire the two authors’ forward-looking realism. What they failed to anticipate, however, was the audacity of the European Central Bank. Through two mechanisms – quantitative easing (particularly the buying of government bonds) and the “target system” credit facilities – monetary policymakers have converted the debt of some high-spender countries into a liability of the entire eurozone.
Delayed collapse
The target system means that the ECB funds trades. For example, an exporter in one country is paid through his central bank. The ECB then gives a credit to this central bank and debits the importing country. The problem, however, is that Germany has now piled up 800 billion euros in target credits with the ECB. It will never be able to recover this sum, as the debtor countries will not be able to cover their debits. Thus, such transactions amount to hidden transfer payments with artificial money. Their effect is to delay financial collapse, at the cost of making the situation even worse.
The issue is no longer when France goes bankrupt, but when Europe does. The level of debt declared in the national accounts is already worrying. With implicit pension liabilities a multiple of that, it appears that a systemic implosion is unavoidable.
Just printing money is not a sustainable solution. A more sensible response would be to reduce the state’s role in the economy and to drastically streamline the regulations and controls that are stifling business. But nobody in power is proposing this, and even if they did, it might already be too late.
National insolvency could be triggered by an incident or accident, which in turn could lead to a European or even global contagion

The ostrich principle is irresponsible because it ignores the possibility of fiscal collapse and its economic, social and political consequences. What would these be?

In free societies with respect for constitutional principles, governments would need to sell off their assets – especially real estate and shares in state-owned companies. The Louvre auction is a dramatic example. But it would also mean a sweeping reorganization of the economy that would leave less room for the state and more for business.
More likely, the ostrich principle will continue to apply. In that case, national insolvency could be triggered by an incident or accident, which in turn could lead to a European or even global contagion.
In this worst-case scenario, political decision makers might decide to take the path of least resistance and confiscate or socialize private wealth. The effect of such autocratic measures would be to destroy prosperity and social cohesion, under the hypocritical banner of equality and justice.
To boost revenue for the profligate public sector, income controls might also be introduced. Europe would proceed – as Friedrich Hayek forecast – on the “road to serfdom.” Thirty years after the fall of the Berlin Wall, we will have arrived back at the economic and social model of East Germany.

Read the original GIS statement here ->
Opinion: The day Europe goes bankrupt


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Trumponomics is worth a second look

GIS Statement by Prince Michael of Liechtenstein

Trumponomics is worth a second look | The public perception of President Donald Trump’s economic program is that it is a chaotic mix of protectionist measures, tax relief for rich people, uncoordinated increases in infrastructure spending and antisocial cuts in healthcare benefits. However, it may be worth taking a closer look at the administration’s agenda before jumping to premature conclusions.

Alan Greenspan
Alan Greenspan

The United States, along with Europe, has a long track record of Keynesian overspending. This means that the present administration is saddled with a difficult economic, financial and fiscal legacy.
The biggest public focus is now on claims of protectionism. But the mantra of the present administration is not against free trade per se, but against the unfair practices of some U.S. trading partners. Obviously, it would be best for the world to have an unrestricted global exchange of goods and services. Realistically, however, every country will have its restrictions.

China and bilateralism

Unfortunately, behind the praiseworthy aim of fighting unfair practices is the largely unfounded claim – featured prominently in the presidential campaign – that unfair Chinese labor practices have caused the loss of millions of U.S. industrial jobs. No mention was made of the real culprit: failures by American labor unions and politicians, which have resulted in insufficient modernization of industry and improvements in worker skills and productivity.
It is correct that the U.S. has a huge trade deficit with China and that the U.S. imposes fewer restrictions on trade and business in general than China does. However, one must also consider that China’s total purchasing power is still inferior to the U.S., which contributes to its lower import figures. That doesn’t mean President Trump is wrong to insist on fair practices by China, which is something that previous U.S. presidents have done …

Read the full article here ->
Trumponomics is worth a second look


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

China’s Coming Debt Crisis

by Henrique Schneider* for asiasentinel.com

The problem of debt in China is not the bursting of a bubble. It is much worse. As the Middle Kingdom approaches the worldwide record of accumulated debt, productivity losses are becoming increasingly apparent. That is very bad news. Every economy relies of a certain amount of debt. That is an empirical fact. But China’s total debt—the sum of government, corporate and household borrowings—has soared since 2008, and is now almost 300 percent of the country’ gross domestic product GDP. This is far higher than any other emerging market and higher than stablished economies.  Total debt in Japan, the poster child for indebtedness, is 229 percent of GDP, the United States 104.17 percent.

China’s Coming Debt Crisis: Accumulated debt reaches a world record as productivity falls
China’s Coming Debt Crisis: Accumulated debt reaches a world record as productivity falls

In the year 2008, the Chinese government used a massive fiscal injection to insulate its economy against the worldwide crisis. Since then, at least three further stimulus-programs were put in place. Because of China’s policy architecture, these fiscal actions were always in synch with debt expansion.

As government paid for new roads in the provinces, it made provinces build additional public works and banks lend to provinces in order to facilitate these investments. As state-owned enterprises (SOEs) were expected to expand globally, banks were equally expected to render financial help. All these expectations – which still have an overly mandatory component – inflated the debt of all economic agents in the country.

The numbers speak for themselves. While total Chinese debt amounted less than RMB20 trillion in 2002, it passed the RMB160 trillion mark in 2016. By 2009, private household debt was around RMB6 trillion; in 2016 it reached RMB20 trillion. In the same seven years, private corporate debt climbed from RMB9 trillion to RMB30 trillion and government debt went from RMB15 trillion to RMB40 trillion. What about the SOEs? Their debt soared from RMB32 trillion to RMB76 trillion.

Through the relativity prism, all other sectors had much higher debt-growth than the SOEs, which just doubled their stock. But, in absolute terms, it is the SOEs that hold alone almost the half of all debt. And doubling an already high amount of loans and credit from 2009 to 2016 is impressive as such. To further put this into perspective. In the same time-frame, the debt-to-assets ratio of private enterprises decreased from 56 percent to 52 percent. In the SOEs, it spiked from 57 percent to 63 percent.

To complete this picture: The productivity of debt is plunging. In the year of 2008, for each renminbi in credit, an SEO could turn 0.7 RMB in productive work. Today, it is barely 0.25. Also, the overall productivity of labor is stagnating. In some sectors and in the lowest brackets of income, it is even falling.

Many economic scenarios about China are concerned with the bursting of the debt bubble. Since more than half of China’s debt is owned by SOEs and private property developers, as the economy slows and housing prices fall, many of these loans will prove unpayable. Banks report that bad loans are just 1 percent of their assets and their auditors insist that the banks are not lying, but investors price banks’ shares as if the true level is closer to 10 percent. With the failing of SEOs and property as collateral, many provinces will not be able to sustain their debt. The whole system implodes, so goes this version.

This picture, however, might be getting some things wrong. If companies and provinces fail, the Chinese command-and-control economy will have little trouble in saving and bailing-out institutions as well as rolling-over debt. If that does not work, it can redistribute this debt with a massive supertax on the citizens. These two instruments – which are also becoming increasingly acceptable to so-called western economies – should be enough to stop any bursting. But they are not enough to address the problem of productivity-loss. And this problem is not a future scenario. It is already real.

Economies relying on debt and artificially low interest-rates tend to report aggregate growth while stagnating or even shrinking on a microeconomic level. But without the microeconomic growth of labor and capital productivity, there is no wage growth, no expansion of the private capital base which invests in the future and no establishment of a solid middle class. In an emerging economy, as China is, this could even lead to a middle-income trap. If a crisis hits or a bubble bursts – two events that are possible but not probable for China in the next couple of years – without productivity growth to compensate, asset values deflate and the effects of debt become even more pressing. This is the real bad news behind the actual debt situation in China.

Read the original article at 
asiasentinel.com: China’s Coming Dept Crisis


*Henrique Schneider is chief economist of the Swiss Federation of Small and Medium Enterprises. 

Österreichisch oder Austrian?

von Henrique Schneider*

Universität Wien um 1900
Universität Wien um 1900


Österreichisch oder Austrian?
Im Dunstkreis Wiens ereignete sich zwischen den Jahren 1880 und 1930 ein Big Bang moderner Wissenschaft. Kein Wunder: Jene Stadt war das kosmopolitische Zentrum nicht nur der österreichisch-ungarischen Monarchie. Am Donauufer wurde ernsthafte Wissenschaft im Diskurs mit der Realität betrieben.
Zum Vergleich: Deutsche Universitäten stilisierten sich in ewiger Wiederholung historischer Ideen oder verstanden sich als ein entrücktes Athen. Oder waren schlicht provinziell. Insbesondere hatten sie kein Interesse an eine Auseinandersetzung mit dem Kontext der wissenschaftlichen Tätigkeit, d.h. mit der gesellschaftlichen Realität.
In Wien – und Graz – war die Situation anders. Manche Universitätsprofessoren waren Minister, Abgeordnete und Senatoren; und umgekehrt. Die Zersetzung der Doppelmonarchie sowie die multikulturelle Einbettung der Gesellschaft mit der Universität darin, stellten ganz andere Fragen an die Wissenschaft. Alle, ob Geisteswissenschaften, Naturwissenschaften oder Jurisprudenz (damals ein Sammelbecken, für alles, was Sozialwissenschaft war) mussten sich mit praktischen Antworten beweisen.

Sozialwissenschaftliches Big Bang

Es ist daher kein Zufall, dass sich die meisten Fragestellungen des 20. Jahrhunderts in Wien als erste öffneten. Sigmund Freud kreierte seine Psychoanalyse. Er wollte eine Antwort darauf finden, warum der Mensch an sich zugrunde geht. Und er fand es für sich heraus. Das Individuum – schon alleine dies soll aufhorchen lassen – ist entweder schweren Gemüts oder leidet an seiner frühen Sozialisierung.
Der Wiener Kreis wollte die Wissenschaft just von diesen Einwirkungen immunisieren. Und erklärte gleich kausalistischen Protokollsätze zur einzigen zulässigen wissenschaftlichen Methoden. Erklärungen, Geschichten und juristischen Erwägungen hätten in den Wissenschaften keinen Platz. Brisant ist: Von den Protokollsätzen ausgehend entwickelte der Wiener Kreis eine Art logischer Kollektivismus als Gesellschaftsmodell.
Vom Wiener Kreis haben sich Popper und Wittgenstein abgespaltet. Popper entdeckte die Wissenschaft als dynamische Praxisgemeinschaft und Wittgenstein entdeckte die Sprache als Produkt menschlicher Interaktionen. Das Individuum im Austausch mit anderen wurde zum Paradigma schlechthin.
Just in diesem Zusammenhang entstanden die zwei österreichischen Denkschulen in der Ökonomie. Der Austro-Marxismus las Marx durch eine bestimmte Brille. Ob es ihn nicht mehr gibt oder einfach zu einem Mainstream in der aktuellen österreichischen Politik geworden ist, soll hier einmal offen gelassen werden. Was es heute in Österreich nicht mehr gibt, ist die Österreichische Schule der Nationalökonomie.

Österreichische Schule

Möglicherweise hat es sie auch, ausserhalb des Privat-Seminars Ludwig von Mises’ nie gegeben. Zumindest nicht in jener Homogenität, die der Name impliziert. Denn die Österreichische Schule entstand nicht geplant von einer kleinen Gruppe von Individuen. Sie entwickelte sich über die Zeit und war geprägt von vielen, die dezentral einige ähnliche Grundsätze teilten – und sich auch kontrovers über sie stritten. Diese Grundsätze sind in etwa:
Es geht in der Wirtschaftswissenschaft gänzlich um Individuen. Privateigentum und Eigentumsrechte sind unentbehrliche Grundlage des individuellen Lebens. Handlungen haben Konsequenzen – sowohl positive als auch negative, kurzfristige wie langfristige, offensichtliche und weniger offensichtliche. Der Wert eines Gutes beruht auf der subjektiven Einschätzung eines Individuums darüber, inwieweit dieses Gut der Befriedigung seiner Bedürfnisse dient. Preise spiegeln auf freien Märkten die Wertschätzungen der Akteure wider, signalisieren sowohl Knappheit als auch Überschüsse und sind unerlässlich für die effiziente Zuteilung von Ressourcen. Geld ist nicht neutral. Gleichgewichte gibt es nicht oder selten; Märkte sind offene Prozesse. Die Kreativität des Individuums ist zentral.
Nicht alle Grundsätze sind von Anfang an da gewesen. Einige kamen hinzu, andere gingen verloren. Und Überhaupt gibt es viel mehr Differenzierung und Nuancierung. Denn als sich Menschen wie Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises oder Friedrich August von Hayek u.v.a.mit einigen dieser Grundsätze auseinandersetzten, wussten sie nicht, dass sie eine eigene Schule etablieren würden.

Austrian Economics

Aber die Stellung Wiens sollte sich bald verschlechtern. Spätestens mit dem Anschluss an Deutschland verlor der Stephansplatz seine Bedeutung. Im nationalsozialistischen Reich untergeordnet und im Nachkriegseuropa bestenfalls marginal, konnte sich dort weder der freie Diskurs noch eine Spitzenwissenschaft etablieren. Die meisten Vertreter der österreichischen Schule mussten emigrieren, einige kamen um und der ‚brain drain’ brachte sie nach Genf, Zürich, Istanbul, London oder New York.
Die österreichische Schule wurde aus Österreich vertrieben – und kann sich wohl bis heute dort nicht mehr etablieren. New York wurde zu ihrem neuen Sammelbecken. Dort wurde sie zur „Austrian School of Economics“. Am Schatten der Freiheitsstatue etablierten sich Hayek in Chicago – erfolgreich, aber mit einer Abwendung von der Ökonomie und Hinwendung zur Staatstheorie – und Mises – zunächst weniger erfolgreich in New York. Aber auch in anderen Städten der USA wirkten Austrians, zum Beispiel Gottfried von Haberler und der etwas schillernde Joseph Alois Schumpeter in Harvard, Fritz Machlup und Oskar Morgenstern in Princeton oder J. Herbert von Fuerth in Washington.
Mit der Zeit kamen verschiedene US-amerikanische Ökonomen zur Austrian School. Leute wie Henry Hazlit, Vernon Smith (Nobelpreis 2002), James Buchanan (Nobelpreis 1986) und viele andere mehr, fanden Möglichkeiten, die „Austrian“ Grundsätze in ihren Forschungsprogrammen aufzunehmen oder gar, sie zu einem eigenen Forschungsvorhaben auszuweiten.
Mises – nach Anlaufschwierigkeiten – fand in New York Schüler, unter denen sich besonders Murray N. Rothbard, Israel M. Kirzner, Leonard Liggio später auch Joe Salerno oder Mario Rizzo bewährten. Als Mises 1973 hochbetagt starb, hatte er zuvor noch den Beginn einer bemerkenswerten Renaissance der Österreichischen Schule in der Gestalt der Austrian School in Economics erleben können.

Und heute?

Auch heute ist die Österreichische Schule noch eine Nische. Notabene, eine US-amerikanische Nische. Wer Austrian Economics an einer Universität oder Forschungsinstitution lernen will, muss dies wohl in den USA tun. Think Tanks wie das Mises-Institute oder einzelne Universitäten wie George Mason (mit Peter Boettke), Chapman oder Columbia offerieren Programme mit Austrian-Theorien. In Europa gibt es nur wenige Individuen, die heute Austrian Economics lehren. Und Academy gibt es nur eine.
Als einzige Institution in Europa offeriert die Liechtenstein-Akademie einen vollständigen „Lehrgang in Austrian Economics“. Die Studieninhalte werden dabei so aufgezogen, wie die österreichische Schule begonnen hatte: An der Diskussion politischer, gesellschaftlicher und philosophischer Zusammenhänge. Es ist die Komplexität einer Gesellschaft, welche der Austrian Economics Raum gibt. Und diese Komplexität ist heute genauso virulent wie sie am Ende des 19. Jahrhunderts war. Course Program
Steht die Österreichische Schule möglicherweise vor einer Renaissance in Europa? Es ist auffallend: Immer mehr Vermögensverwalter bekennen sich zu Austrian-Grundsätzen in ihren Investitions-Strategien. Und das ECAEF in Liechtenstein, das Mises Institut in Deutschland, Gruppierungen in Italien, England, Spanien oder Frankreich gewinnen an Profil und an Bedeutung.
Jedes Individuum kann und soll sich am Diskurs um diese Komplexität beteiligen. Dafür gibt es die Institute und Vereine. Eine gewisse Einübung in die Theorien Mengers, Mises und Hayeks kann nur hilfreich sein – ob österreichisch oder Austrian.


Informationen:

*Henrique Schneider ist Chef-Ökonom an der Swiss Federation of Small and Medium Enterprises und Mitglied der Liechtenstein Academy.

Eugen-Maria Schulak, Herbert Unterköfler: “Die Wiener Schule der Nationalökonomie – Eine Geschichte ihrer Ideen, Vertreter und Institutionen”. Bibliothek der Provinz, Weitra 2009

Liechtenstein-Akademie: www.ae-laf.com

European Center of Austrian Economics: www.ecaef.li

Friedrich A. von Hayek

A short Appreciation by Kurt R. Leube*

It is 2017, and lest we forget one of the most seminal minds of our times, we should briefly recall the important work of Friedrich A. von Hayek who died 25 years ago, on March 23, 1992.

Born 1899 in Fin-de-Siecle Vienna, Friedrich A. von Hayek grew up in a family that could lay claim to an academic tradition of well over three generations. With mixed success in several schools, he voluntarily joined the Austro-Hungarian Army in March 1917, served as an artillery officer at the Piave front and in November 1918 returned disillusioned, exhausted, and hopeless into a collapsing Habsburg Empire. Hayek enrolled in the University of Vienna and, obtained his law degree in 1921, decided to go for a second doctoral degree in Political Science and started to work under Ludwig von Mises’ directorship in an office for the settlement of pre-war debts. As the most eminent scholar of the 3rd generation of the Austrian School of Economics, Mises (1881-1973) soon became Hayek’s mentor and in 1927 they succeeded in founding the ‘Austrian Institute for Business Cycle Research’ that soon gained high academic reputation under Hayek’s and later Oskar Morgenstern’s leadership. Not only his first book Monetary Theory and the Trade Cycle (1929) but also his second Price and Production (1931) soon set a lasting standard in modern business cycle theory. One of its most striking characteristics is Hayek’s insight that any shortage of capital immediately causes a crises. While classical economic theory never elucidated what causes such a shortage, Hayek made it clear that any overinvestment leads to scarcity of capital, unavoidably compelling a decline in investment and hence leading to the loss of a part of the real capital, produced because of the excessive investment rate.

The vibrating intellectual climate of interwar Vienna provided the stimulating background for many scholarly groups, circles and schools, among them the Vienna Circle of Philosophy, the Vienna School of Psychoanalysis, or Ludwig von Mises’ private seminar”. The famous Mises-Seminar that von Mises conducted in his Chamber of Commerce office was the nucleus of the 4th generation of the Austrian School. Far more than half of these 25 young scholars became world-famous in their respective academic fields – however only after they have left Austria. This “brain drain” had devastating consequences for the intellectual life in Austria and Germany.
Impressed by Hayek’s new business cycle theory, Lord Robbins invited him to lecture at the London School of Economics in the winter of 1931. These 3 lectures proved so successful that he was offered the position of ‘Tooke Professor of Economic Science’ shortly thereafter. At this time, when Lord Keynes’ new theories began to dominate academic and political life Hayek was immediately drawn into a fundamental debate with Keynes and his followers. Due to their inflationary tendency Hayek opposed these theories vigorously and thus became the leading intellectual force against them. However, in view of a recession with widespread unemployment and the dawn of WWII, Hayek’s approach was politically pushed to the sidelines and overshadowed by the Keynesian Revolution.

Despite the fact, that Socialism seems politically established in the form of the welfare state, Although, Hayek contributed three essays to the so-called ‘Calculation Debate’ of the 1930s which forever shattered the theoretical foundations of Socialism. For him the price system is the only mechanism that communicates information and enables us to adapt to circumstances, which neither any planning authority nor we can ever comprehend in its totality. These essays were later collected in his Individualism and Economic Order (1948).
His intensive work on the insoluble economic and moral problems of Socialism, the terror of fascism and the outbreak of World War II forced him to write The Road to Serfdom (1944). Hayek clearly showed there not only the ideological links between Socialism and Fascism. He also and clarified that no variety of socialism, no matter what its name or modified in whatever trendy way, provides any adequate provisions for the preservation of economic and political freedom. Although, Herman Finer tried hard to denounce The Road to Serfdom as ‘a piece of perverted and pompous logic’, it became a bestseller of the late 1940s and markedly influenced Winston Churchill or George Orwell.

The work on The Road to Serfdom led Hayek to concentrate on methodological problems. The ‘Counter-Revolution of Science’ (1941) and ‘Scientism and the Study of Society’ (1942/43) contain probably the most effective refutation of the false notion that the methodology of the natural sciences can be utilized to explain social phenomena and human action. These two essays and Hayek’s ‘The Use of Knowledge in Society’ (1945) are key to the understanding of his work. Especially in the latter Hayek showed how the independent interaction of millions of individuals, each possessing only bits and pieces of knowledge about the totality, creates circumstances that cannot be known by anyone or conveyed to any central authority. It is this unorganized knowledge of the ‘particular circumstances of time and place’ that will bring about a spontaneous social order. The price system is therefore the only mechanism that communicates information and enables us to adapt to circumstances of which we know nothing. Our whole modern social order and well being thus rests on the possibility of adapting to processes that we do not know.

Deeply concerned about the vanishing of individual freedom, Hayek in 1947 organized an international conference of economists, philosophers and historians to discuss and exchange ideas about the nature of a free society and the means to strengthen its principles and intellectual support. This important meeting in Switzerland turned out to be instrumental for the foundation of the ‘Mont Pelerin Society’, an international group of classical liberal scholars.

By the end of 1949 Hayek left the London School of Economics, spent the spring term of 1950 in Fayetteville (AR) and began to teach at the University of Chicago in the fall of the same year. Among his many works published during his 12 years in Chicago only two books shall be singled out. Although, the preliminary ideas for his The Sensory Order (1952) date back to the early 1920s, when Hayek, struggled whether to become a psychologist or an economist is contains his most original and important ideas. This book is a discourse in theoretical psychology and was inspired by the philosophical works of Moritz Schlick and his second-degree cousin, Ludwig Wittgenstein. The second book to be mentioned is Hayek’s classic The Constitution of Liberty (1960) – truly one of the most important books of our time. Here Hayek refines his idea of ‘spontaneous order’ and laid down the ethical, legal and economic principles of freedom and free markets. While for the majority of social philosophers the chief aim consists of setting up an ideal social order through utopian reforms, Hayek’s task is the identification and explanation of rules that enable men with different values and convictions to live together in freedom and a minimum of coercion. These general rules develop through the voluntary and spontaneous interaction of individuals thus forming a social order that permits each individual to fulfill his aims. Hayek spontaneous order is distinguished from the constructivist approach, which interprets all social orders as the product of conscious planning and design.
In 1962 Hayek joined the University of Freiburg/Breisgau and stayed there for seven years. Among his many works, only two books can be mentioned. His Studies in Philosophy, Politics and Economics (1967) contain his important essays on ‘The Results of Human Action but not of Human Design’ and ‘The Intellectuals and Socialism’. His Freiburger Studien (1968) is a collection of important German essays, including his seminal ‘Competition as a Discovery Procedure’ and ‘Kinds of Order in Society.

After becoming professor emeritus in Freiburg Hayek accepted a professorship at the University of Salzburg. In spite of his poor health and intellectual isolation, Hayek nevertheless was able to produce a number of significant works, among them his trilogy Law, Legislation, and Liberty. Here Hayek argues that a spontaneous social order and an organization are totally different and that their distinctiveness is closely related to the two different kinds of rules that prevail in them. There are rules set forth to achieve a certain goal or an end. And there are those rules, which develop spontaneously and only guide processes without aiming at a certain outcome. Hayek also proved that the misleading yet politically popular term ‘Social Justice, can have meaning only in an organization where strict distributive rules apply, but cannot be used as a measure for income distribution in the spontaneous order of free societies. In 1977 he published his truly revolutionary Denationalization of Money where he argued that inflation can be avoided only if the monopolistic power of issuing money is taken away from central banks under government control.

Condemned as theoretically outdated and politically far off base, in 1974 and much to his own surprise Hayek was awarded the Nobel Prize in Economics. Probably to act politically correct he had to share the Prize with a complete adversary, the Swedish socialist Gunnar Myrdal. In his Nobel lecture on ‘The Pretense of Knowledge’ Hayek refuted once again the erroneous assumption of the politically popular but theoretically flawed assumption of Keynesianism.

At the age of 78 he decided to leave Austria and moved back to Freiburg where he continued to lecture, write and travel extensively until the late 1980s when he became ill and never fully recovered. Thus, he could not complete his last book The Fatal Conceit (1989) in which he hoped to develop further his theory of cultural evolution and expose once more the ‘errors of constructivism’ Due to his inability to manage the enormous manuscript, regretfully this book has been edited at times with a heavy hand and thus cannot considered his best.

His work arose and developed from a comprehensive approach to various disciplines that condition and influence one another. His publication list contains well over 40 books and some 260 scholarly essays and articles. Hayek was not only awarded honorary degrees from universities all over the world; he was also the subject of many honors and prestigious orders. As a scholar, a teacher, and a fatherly friend, he came as close to the vanishing ideal of a gentleman as perhaps human frailty will ever permit. He died in Freiburg/Br. on March 23, 1992.


* Kurt R. Leube is Professor (emeritus) und Research Fellow (emeritus) at the Hoover Institution, Stanford University and Academic Director of ECAEF (European Center of Austrian Economics) in Vaduz, Principality of Liechtenstein.

Automation, innovation and the arrogance of the elite

GIS opinion, by Prince Michael of Liechtenstein

In June 2016, Switzerland held a referendum on whether to introduce a guaranteed basic income (GBI) for all. Under such a system, governments regularly pay out a sum that would cover subsistence to each individual over the course of their entire lives. It was argued that since work was increasingly automated, fewer jobs were available. The measure was rejected by more than 75 percent of voters, despite a strong turnout from the proposal’s supporters.
Billionaire and Microsoft founder Bill Gates made a similar argument to that of the Swiss proposal’s supporters when he suggested the introduction of an income tax on robots, like that on employee wages. Proceeds of this tax would be used to provide a basic income for all to compensate for job losses and to ease inequality.

GIS opinion, by Prince Michael of Liechtenstein

In January 2017, the European Parliament’s legal affairs committee adopted a report on the consequences of the rise of robots and artificial intelligence. The report recommends that the member states adopt a guaranteed basic income for all, to compensate for the loss of jobs due to new technologies.

Sending the wrong message

It is no wonder that liberal Switzerland rejected GBI, since the values of self-responsibility and personal freedom are very strong in its civil society. Government is kept small and is considered a service provider. It is surprising, however, that Bill Gates, who with Microsoft spearheaded innovation and increased productivity in processes, is advocating measures such as GBI.

GBI will not only discourage innovation, but also send the wrong message concerning the work ethic. Certain parts of society might use this benefit to avoid education and work. It could create a new class of long-term government parasites. Living off public subsidies instead of on personal achievements deprives people of a good part of their dignity and sense of responsibility.

GBI will need financing, and it would result in increased taxes on the new means of production. Taxing robots, as proposed, will mean curbing innovation and, in consequence, reducing prosperity, especially for people with lower incomes.
In a post on LinkedIn, entrepreneur and author Anurag Harsh made a convincing case that we need not fear innovation; that robots will still need human guidance and that new jobs will be created. He quoted Henry Ford as saying, “If I had asked people what they wanted, they would have said faster horses.”

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GIS opinion: Automation, innovation and the arrogance of the elite

Alternativen zum Euro in Vergangenheit und Zukunft

veröffentlicht durch Forum Freie Gesellschaft

   In einer Zeit der Alternativlosigkeit besitzen Alternativen einen besonderen Wert. Das gilt gerade für den Euro, der als Wahrzeichen der Krise und Spaltung Europas angesehen werden kann. Im Euroraum betreibt eine zentrale Behörde eine Geldpolitik für 19 Euro-Länder, die 19 verschiedene Fiskal- und Haushaltspolitiken praktizieren. Eine zentrale Behörde setzt einen Zins für 19 verschiedene Wirtschaftskulturen, 19 verschiedene politische Führungen und 19 unterschiedlich wettbewerbsfähige Wirtschaftssysteme fest. Eine amtliche Rechnung für die Euro-Misere stellte die Bundesbank den deutschen Bürgern Ende Oktober 2016 aus. Der Bürger hat verloren, nämlich Zinsgutschriften von annähernd 10 Milliarden Euro. Von 2009 bis 2015 sind diese von 13,8 auf nur noch 4,4 Milliarden Euro geschrumpft. Hinzu kommen erhebliche Ertragseinbußen beim Bausparen, bei Lebensversicherungen und bei Kapitalanlagen. Der Staatsapparat hingegen hat „gewonnen“, nämlich 15 Milliarden Euro durch sinkende Ausgaben für Schuldenzinsen allein 2015 für den Bund trotz steigender Schulden. Treffend kritisierte Sparkassenpräsident Fahrenschon: „Die anhaltende Niedrigzinsphase bringt zunehmend die persönliche Lebensplanung von Millionen Bundesbürgern in Gefahr“. Viele Menschen würden es realistisch sehen, sie könnten nicht zum vorgesehenen Zeitpunkt in Rente gehen.
Die Verwerfungen reichen indes längst weit über Europa hinaus: Westafrika steckt in der Euro-Falle, weil 14 ehemalige französische Kolonien als Angehörige der Währungszone des CFA-Franc mit dem Euro-Beitritt Frankreichs an den Euro gekettet sind – per „nicht veröffentlichungsbedürftigem Rechtsakt“ Nr. 98/683/EG in Brüssel. Millionen Flüchtlinge haben sich aus Mali, Kamerun, Niger, Kongo-Brazzaville, Senegal, Togo, Tschad, Zentralafrikanischer Republik und Elfenbeinküste auf den Weg in Richtung Euro-Gebiet gemacht. Allgemein unterschätzt wird, dass die sehr lockere Geldpolitik der großen Industrieländer in Form der Flüchtlingskrise auf Europa zurückkommt. Bereits der „Arabische Frühling“ wurde – neben dramatisch schlechter Regierungsführung – auch durch die desaströse Geldpolitik der Zentralbanken mit verursacht. So argumentieren Gunther Schnabl, Ökonomieprofessor an der Universität Leipzig und ich in unserem Aufsatz „Geldpolitik, Arabellion und Flüchtlingskrise“.
Henry Ford wird die Aussage zugeschrieben: „Würden die Menschen das Geldsystem verstehen, hätten wir eine Revolution noch vor morgen früh“. Kann es künftig ein besseres Geld geben als das, was wir täglich benutzen?
Alternativen zum Euro
Im Zuge der Euro-Krise wurden eine ganze Reihe von Reform-vorschlägen vorgelegt, die den bestehenden Währungsstandard des Euro im wesentlichen erhalten wollten, aber dennoch erhebliche Änderungen anstrebten. Dazu gehört das Hankel-Modell mit einer erneuerten europäischen Währungsschlange, das Henkel-Modell mit einer Aufteilung des Währungsgebiets in einen harten Nord- und einen weichen Süd-Euro.

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Alternativen zum Euro in Vergangenheit und Zukunft

Vernon Smith Prize 2016 – The Essays

Vernon Smith Prize 2016 | On February 6, 2017 the winners of last year’s essay competition did defend their papers at a special event in Vaduz (Principality of Liechtenstein). The essays of the three winners can read and downloaded here:

First Prize (€4,000): Karol Zdybel, Poland

Direct Democracy versus Representative Democracy. Cost and Benefits for the Citizenry
(PDF, 229 kb)


Second Prize (€3,000): Alan Futerman, Argentina

The Hayekian Case for Direct Democracy
(PDF, 527 kb)


Third Prize (€2,000): Mark O’Kane, Great Britain

Direct Democracy versus Representative Democracy: Cost and Benefits for the Citizenry
(PDF, 106 kb)

The 9th International Vernon Smith Prize for the Advancement of Austrian Economics was an essay competition sponsored and organized by ECAEF European Center of Austrian Economics Foundation, Vaduz (Principality of Liechtenstein). Topic of 2016: ‘Direct Democracy versus Representative Democracy. Cost and Benefits for the Citizenry!’

The U.S. and China’s ‘free trade’ agendas

GiS Expert View by Henrique Schneider

“Pursuing protectionism is like locking oneself in a dark room,” said China’s President Xi Jinping. “Wind and rain may be kept outside, but so is light and air.” Mr. Xi’s words of warning were directed at the new president of the United States. Meanwhile in Washington, Donald Trump erected new barriers to free trade. Why does Communist China seem to embrace free trade while the capitalist U.S. resorts to protectionism? The answer is simple. In both countries trade, or its absence, is just an instrument of politics. China’s approach to trade is best described as mercantilism. Its government allows for some economic freedom within its borders.
However, it pushes and regulates exports and curbs imports. The more the country exports, the more money it accumulates and the more power it has.
China does allow for some internal trade. But it has a set of “strategic industries” that are ring-fenced by regulation. This regulation makes it almost impossible for foreigners to supply, invest or acquire any stake in them. Also, a large network of state-owned enterprises operates independently from China’s free-trading commitments …

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The U.S. and China’s ‘free trade’ agendas

The twilight of a European dream

GIS statement by Prince Michael of Liechtenstein

United States President Donald Trump is threatening to impose economic sanctions against countries that he claims create unfair trade advantage to themselves by artificially depressing their currencies. His main targets are Germany, Japan and China.

An interesting argument is used in the case of Germany. The U.S. points out that as part of the eurozone, Germany uses a currency that is weak because European economies burdened with immense structural problems are also parties to the system. President Trump’s negative generalization puts Germany in a difficult position and may end up driving another nail into the euro’s coffin.

False diagnosis

The common currency was a fantastic project for enhancing trade within the EU’s internal market. It was a real help for business. So why is the euro being questioned now? The often-heard argument is that for a common currency to work properly, common economic and fiscal policies needed to be in place. Before the euro, Europe’s weaker economies could remain competitive by devaluing their currencies. Now, this avenue is closed to eurozone members. However, this view is superficial and takes a short-term perspective.

The true problem with the euro is that from the onset it has been used as a political tool. Unprepared economies, such as Greece, were invited to join the currency club, ignoring the admission criteria. The internal market’s excessive regulations, meanwhile, did not allow these weaker economies to increase their productivity.
Worst of all, the ceiling on the governments’ budget deficits, set at a maximum of 3 percent of GDP in the Maastricht Treaty, was not respected. Public overspending and waste in most member states have led to the accumulation of vast loads of debt. Germany and France set a bad example by violating the deficit ceiling first.
The European Central Bank (ECB) has made this drama still worse when, disregarding its obligation to be independent of politics, it added fiscal measures, such as buying public debt, to its monetary policy toolbox. The real duty of the ECB was to protect the value of the currency.
The effect of the ECB’s policy of limitless purchases of sovereign bonds has been to delay desperately needed reforms in eurozone countries.

Continue reading -> The twilight of a European dream