Die Nasionale Ontwikkelingsplan en Grondonteiening

Posted on April 15, 2014 by Piet le Roux

imgnews24_logo[1]In die afgelope Sondag se Rapport wys ek op die ooreenkomste tussen die jongste grondhervormingsplanne van minister Gugile Nkwinti en die veelgeprese Nasionale Ontwikkelingsplan van minister Trevor Manuel.

Soos lesers van hierdie blog en ChrisLBecker.com reeds vanaf Junie 2012* weet: die Nasionale Ontwikkelingsplan is glad nie so ‘n blink plan nie.

Rapport se berigte verlede week oor Gugile Nkwinti, minister van landelike ontwikkeling en grondhervorming, se grondhervormingsplan is verontrustend, maar dis nie nuut nie.

Twee derdes van dié plan is reeds deel van die nasionale ontwikkelingsplan (NOP). Dit is dus onwaarskynlik dat, as eersgenoemde ons ondergang is, laasgenoemde ons redding kan wees. Waarom hanteer ons Nkwinti se dokument so anders as dié van Trevor Manuel se NOP? Waarom kap ons Nkwinti so maklik, maar beskou Manuel as die groot hoop?

Lees die res hier.

*Hier is skakels na wat ons tussen Junie 2012 en Maart 2013 geskryf het.

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The Born Again Jobs Scam: The Ugly Truth Behind “Jobs Friday”

Posted on April 11, 2014 by Russell Lamberti

by David Stockman

The mainstream recovery narrative has an astounding “recency bias”. According to all the CNBC talking heads, the 192,000 NFP jobs gain reported on Friday constituted another “strong” report card.

Well, let’s see. Approximately 75 months ago (December 2007) at the cyclical peak before the so-called Great Recession, the BLS reported 138.4 million NFP jobs. When the hosanna chorus broke into song last Friday, the reported figure was 137.9 million NFP jobs. By the lights of old-fashioned subtraction, therefore, we are still 500k jobs short—notwithstanding $3.5 trillion of money printing in the interim.

The truth is, all the ballyhooed “new jobs” celebrated on bubblevision month-after-month have actually been “born again”jobs. That is, jobs which were created during the Fed’s 2002-2007 bubble inflation; lost in the aftermath of the September 2008 meltdown; and then “recovered” during the renewed bubble inflation now underway.

Stated differently, back when the NFP jobs count first clocked in at 137.9 million in the fall of 2007, the talking heads assured us that we were in a permanent “goldilocks economy” thanks to the brilliant management skills of the Fed. So here we are nearly 7 years later, still a half million jobs short, and the talking heads are gumming once again about the same old illusory “goldilocks”. Who actually pays these people to bloviate!

Setting aside the utterly superficial recency bias, its not hard to see the dire reality lurking in the actual trends.

Read the rest of Stockman’s incisive analysis here

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New land reform proposals in South Africa

Posted on April 7, 2014 by Piet le Roux

In what must read like something from a parallel universe to non-South Africans (and non-Zimbabweans, for that matter), South Africa’s department of Rural Development and Land Reform last week released its latest proposal for land reform. Far from limiting itself to the restitution of property rights violated under previous governments, the proposal instead aims at “deracialising the rural economy” and “democratizing the allocation and use of land across gender, race and class.”

You can read the FINAL POLICY PROPOSALS ON “STRENGTHENING THE RELATIVE RIGHTS OF PEOPLE WORKING THE LAND” for yourself, but here’s the gist of it. According to the draft proposal, it is born of

the necessity to address historical land hunger, which could be absolute in most instances; and, extreme concentration of land ownership and control in a few hands, on the other hand.

In Section D, called “What is to be done”, the following measures are put forward:

The historical owner of the land automatically retains 50% of the land, while the labourers on the land assume ownership of the remaining 50%, proportional to their contribution to the development of the land, based on the number of years they had worked on the land.

[...]

The Government will pay for the 50% to be shared by the labourers, but the money will go into an investment and development fund (IDF) to be jointly owned by the Parties constituting the new ownership regime.

[...]

All labourers who would have worked on a farm for ten consecutive years (but less than twenty-five years) of disciplined service, based on the regime of duties and responsibilities historically obtaining on the farm, the worker-dweller must be entitled to ten percent share-equity on the land, based on its market value.

[...]

Should the worker/dweller wish to leave the farm, after ten years of disciplined service, having earned the ten percent share-equity ownership of the land, he/she should be compensated to that extent, over and above whatever other rights were due to him or her, as an employee.

Inevitably, a disjointed version of the labour theory of value also makes its appearance:

That labour power was never fully compensated for, in the form of wages. That much is clearly demonstrated by the vast difference between the affluence of the farmer and the abject poverty of the farm-worker.

The relative equity stakes recognize this full contribution, which the exploitative wages have denied the workers for all of those years. The contribution by the government is an attempt at restoring the dignity of the worker.

Two points need to be made.

1. The proposals have almost nothing to do with land restitution (which would have been a good thing) and almost everything with land redistribution (which is also fundamentally in conflict with redistribution restitution of property, since redistribution is at a complete odds with a respect for property).

2. The specific proposals are not very important. Instead, it is the thrust of the document which is most telling and which one would ignore at one’s own peril. As should be obvious to most readers, the proposal is incoherent, full of errors ranging from math* to economics to history to grammar and to the basic requirements of argumentation. In the end, one must understand that this document is a reflection of conventional wisdom and widely held policy convictions in (and even outside) of government.

*Consider the graph below, found on page 19 of the report. The pie chart adds up to 150%, suggesting that after land reform a farm will be worth 1,5 times what it was worth before the reform. Which is still not enough, when considering, for example, that each “disciplined” worker who has worked on a farm for 10 years “must be entitled to ten percent share-equity on the land, based on its market value.” Under this latter provision, a farm with 50 workers who have worked there for 10 years will see workers own 500% of the farm. Of course, all of this just demonstrates how unclear and ill thought through the whole document is (which takes us back to point 2 above).

Farms are worth 150% after land reform.

Farms are worth 150% after land reform.

 

 

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Mises and the Diminished A Priori

Posted on April 3, 2014 by Russell Lamberti

Excellent piece by David Gordon at Mises.org regarding Rothbard’s and Machlup’s differing interpretations of Mises’ methodological approach to economic theory (the a priori aspect of Mises’ praxeology). In “Mises and the Diminished A Priori“, Gordon assesses recent claims (cited by Peter Boettke) by Gabriel Zanotti and Nicholas Cachanovsky that Machlup’s interpretation was arguably superior to Rothbard’s and that the dominance of the Rothbard interpretation may have been a setback for the progress of the Austrian tradition and in terms of getting it accepted in the mainstream.

From Gordon’s piece:

Even if I am right that our authors present a distorted view of Rothbard’s interpretation of Mises, the decisive point in the controversy lies elsewhere. When Mises speaks of a priori knowledge in economics, what does he mean? To say that an a priori statement in a theory is one not subject to testing makes an incomplete claim. One needs also to ask, why is the statement immune from testing? One answer, that of Machlup, is that the statement is a mere convention: no claim is made for the truth of the statement in itself. Mises again and again makes clear that he does not look at matters in this way. He thinks that his a priori claims are incontrovertibly true, not just artifacts of a theory.

This is an excellent article for those interested in methodology and economics and the deductive logical approach of the Austrian tradition.

See also Joseph Salerno weighing in on the issue here…and some of my thoughts on Rothbard, Mises, a priori, and methodological issues are here, here, here, here, and here.

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Regulatory Meddling in the Credit Industry Never Ends Well

Posted on April 2, 2014 by Russell Lamberti

Yesterday, Tuesday the 1st of April 2014, marked the day when “credit amnesty” kicked in for millions of South Africans. The dispensation requires credit bureaus by law to expunge consumer credit history on accounts that had been in default and a judgement taken out on them. In simple terms, black-listed consumers who took on too much debt and failed to repay it properly will have this negative information wiped away.

Moneyweb explains the technicalities [my emphasis]:

Come April 1, regulations for what is called the Removal of Adverse Credit Information and Information Relating to Paid Up Judgments will be passed.

The regulations stipulate that from this date, registered credit bureaus will have two months to remove the above information, which largely relates to the negative credit history of South African consumers.

Once removed, this information cannot be retained on the credit bureau’s register, nor can it be given to credit providers either after or during the two-month period (i.e. from April 1).

After the two-month period has passed, credit bureaus are required to continue to remove information relating to paid-up judgments received by credit providers, who are themselves required to submit these and are not allowed to use adverse consumer credit information for any reason, including credit scoring and assessment.

It is telling that after the much-vaunted National Credit Act of 2007, which was supposed to rein in reckless lending and borrowing, South Africa has embarked on a borrowing binge that has seen the most unhealthy kinds of credit soar. Unsecured lending that we know about alone has rocketed by about R300bn in recent years. Much of this is to government employees because the unsecured lenders deem their paychecks to be more stable. But these borrowers are themselves paid out of a shaky tax base of profits and incomes that too is driven by debt accumulation and from government borrowing. A debt pyramid has been erected on top of more debt.

With the NCA proving to be a soft rulebook, the ANC government has decided that how you fix the problem now is just by wiping the slate clean. Unfortunately, real life is not a make-believe fairyland.

Now, while this is NOT debt forgiveness, it does force the credit bureaus to remove crucial market information and prohibit their clients (credit providers) from accessing that information. The results are predictable. Credit providers will be forced to rely on their own internal credit history information for individuals, but will not be able to access how much credit a borrower is taking on with other institutions. This will create a blindspot in the industry that will lead to credit-worthy people being denied loans, or bad credit prospects being offered too much credit, repeating the cycle of resource misallocation, which foster malinvestment cycles. In very simple terms, the market has just been made less efficient and as a result will be opened up to greater business cycle risk and economic inefficiency. It will be to the overall detriment of growth in South Africa.

The law is not without considerable opposition. As eNCA points out, the law was passed,

…despite protests from banks and opposition parties that branded the move as populist vote-buying.

The ANC voter base, which consists largely of state employees and low-income earners have been swamped with debt in recent years up to breaking point. Indeed, the R12,500pm wage demands by striking platinum miners is largely driven by a need to cover spiraling debt obligations. The issue is firmly political, and credit markets are always prime candidates for political interference at the best of times.

When the credit stops flowing then the government runs out of scope to offer its ambitious populace the bread and circuses that tend to keep a lid on social unrest and regime change at the ballot box or otherwise. A credit-addicted system wants credit and little else. Have now pay later. High time preference. Impatience. Call it what you will, new injections of credit ease the withdrawal symptoms.

But, like all state meddling, the private sector will merely respond in order to minimise risk and maximise efficiency. According to Moneyweb [my emphasis],

…banks have warned that the regulations will heighten their risks and increase the cost of credit, since they will no longer be able to rely on adverse credit information supplied by credit bureaus.

Both Wonga and Real People said that they have reconfigured their credit scoring models to not be dependent on the data being removed. “If nothing else, these regulations will further motivate our search for good quality data,” said Hurwitz.

And in yet another show of how the private sector beats the regulators, it is likely that credit bureaus have already sold the credit history data to the credit providers. So while the credit bureaus have to destroy it, the credit providers have it. BUT, a) they won’t have it going forward, impairing market information, b) not all of them have it (particularly the smaller credit providers), entrenching the big established players, and c) they had to pay for it, which is an added and unnecessary cost of doing business and providing credit. All this can only mean one thing: all else equal, credit will get more expensive.

So in governments never-ending and vain attempts to make credit cheaper, it just made it more expensive by forcing key chunks of information to be destroyed.

Perhaps Rob Davies, minister of Trade and Industry, is not aware that markets function best on information. But then again, he has never displayed a good understanding of markets.

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What’s more dangerous to Zimbabwe than deflation?

Posted on March 28, 2014 by Piet le Roux

This ENCA article warns of the alleged dangers of deflation in Zimbabwe. Besides not distinguishing (downward) changes in consumer prices from changes in money supply, it has some gems worth pointing out. And it leads me to wonder if two things far more dangerous to the Zimbabwean economy than deflation aren’t economists and financial journalists laying the groundwork for economic interventionism.

The article includes a sweeping statement revealing very little understanding of time and price dynamics.

Sustained deflation can be dangerous for an economy as a widespread decline in prices may lead to consumers delaying purchases.

The above statement confuses GDP for the “economy”: GDP may very well decline in a consumer price deflation environment, but it is another question altogether to argue that a whole economy is put at risk under delayed consumer purchasing (also known as saving).

The article also quotes two economists. According to Godfrey Kanyenze, director of the Labour and Economic Development Research Institute of Zimbabwe,

Fewer people have money to buy the available goods and services. We really need to come up with fiscal stimuli to whip up demand.

Erich Bloch, an economist based in Bulawayo, says that

[price deflation delivers] no benefit or prejudice to the consumer. It’s as bad as continuous inflation.

The writer of the article also quantifies the “excess capacity” of the Zimbabwean economy, whatever that is supposed to mean.

But economists estimate the country is only running at a third of its current capacity, and conditions have failed to improve after President Robert Mugabe’s ZANU-PF party won polls in July last year.

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BOE: “Money creation in the modern economy”

Posted on March 27, 2014 by Chris Becker

The Monetary Analysis Directorate of the Bank of England this quarter published a research report explaining money creation in the modern economy, admitting quite bluntly and openly that commercial banks create deposits in the economy (i.e. create money), by making loans.

Bear with me, this might seem boring, but this will get interesting just now. The common narrative in modern macro-economics and taught in textbooks is that it is the central bank, and only the central bank, that creates money in the economy.

This is only partially correct. It is only correct as it relates to the creation of base money, i.e. physical notes and coin. After central banks have created base money, commercial banks (in South Africa that’s all the institutions listed here, but mostly FNB, Absa, Std Bank, Nedbank) take over the money printing role. They are the creators of broad money, or known as fiduciary media in economics jargon. This money is mostly electronic, digital entries on computers, and is what you spend when you swipe a debit or credit card, or make payment through electronic bank transfers.

This electronic money is created by a bank at virtually no marginal cost, it’s free money. As the Bank of England explains:

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

– Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

– In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

So there you have it, right from the oldest-central-bank-in-the-world’s mouth. Banks print money. In the Austrian literature, this is a commonly known fact that runs from the days of Mises’ Theory of Money and Credit.

The data also shows that banks print by far the most money.

In South Africa in December 2013 there was R106 billion worth of base money in existence, and R2.6 trillion worth of broad money in existence. This means commercial banks have in the history of the rand created 24.5 times more of the total money supply than the Reserve Bank has.

In 2013, the Reserve Bank printed R9.243 billion worth of base money, and the commercial banks printed R204.108 billion worth of broad money (see figure below).

moneyprinting

And, as the Bank of England points out, this money was created out of thin air, by lending more money to government and the public. At least the Reserve Bank has to buy cheap paper and cotton, ink and stamp some security features onto the money they print, so they have a marginal cost to printing new money. The banks, depending on central bank regulations, can create near limitless money at no marginal cost. And when they create new money, it dilutes the value of the rands you have worked hard for, and saved for retirement. It’s an unseen form of redistribution from savers and earners of rands, to printers, borrowers and spenders of rands.

The economic effects of banks printing money is no different to a bunch of opportunists in the townships printing counterfeit money. Whoever has the ability to print money that they are able to exchange for real goods and services in the economy, are going to become wealthy. With this context, does it surprise you that the banking sector has grown so massive relative to the rest of the economy, or that doctors, engineers, and scientists are leaving their fields for banking? It shouldn’t, like a bee’s attraction to honey, they’re only being attracted to where the easy (read: free) money is to be made.

Full BOE report here.

To learn more about the intricacies of money and banking, download this free textbook by Professor Murray Rothbard, here. It’s in ebook (.epub) here.

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Anatomy of a Real Recovery

Posted on March 26, 2014 by Russell Lamberti

Austrian Business Cycle Theory (ABCT) has been criticised for 1) misrepresenting the true nature of the boom and reasons for the bust, and 2) for not offering constructive solutions to generate a recovery.

Point 1 is the subject of much debate and has been covered extensively in the academic literature and indeed defended and explained in this blog. ABCT as advanced in various guises by Mises, Hayek, Rothbard, Hutt, Lachman, Hazlitt, Heurta de Soto, Hoppe, Hulsman, Salerno, Bagus (to name some of the major Austrian scholarly contributors) is a stylised theory, essentially, of widespread business error and market distortion resulting from price controls (centrally planned interest rates) and/or state-sanctioned fraud (money printing and bank credit expansion usually under a state-enforced currency monoply).

Since mass error and the effects of monetary central planning and institutionalised monetary fraud are fundamentally complex, ABCT does not, and certainly should not, claim clear and perfect knowledge of cyclical cause and effect, severity and timing. In the real world, where nothing is conveniently held equal, it is highly implausible that every business cycle will conform to neat, stylised propositions. While the core of ABCT is constructed off a base of sound logic (Praxeology), in the practical nuts and bolts of economic analysis understanding business cycles is a mix of theory and history. Often theoretical truths are obscured by other forces that don’t render them wrong, only not easily visible.

We’ve pointed this out in this blog before where technological advances during an artificial credit expansion may render society’s subsistence fund more sustainable than it otherwise would have been, allowing projects to be completed that would otherwise have become unfunded. This is another way of saying that real savings can rise during a credit expansion for an unrelated reason, which can validate investment decisions and reserve consumer purchasing power for the future.

More complexity dwells here. Credit expansion still creates inflationary distortion in markets which can foster mass error. That higher saving may validate investment decisions does not mean those are the right investment decisions. This is particularly true if credit was channeled to politically favoured industries and compounded if private savings and investment channels are highly regulated and distorted as in many advanced economies.

The point is, business cycles are complex, but their essence is mass systemic error bought about regulatory or legal distortions, particularly in the monetary system.

It is true, as per criticism number 2, that Austrians have been light on describing how to recover after the bust, short of saying, “let the market sort it out.” While perhaps strictly correct, it doesn’t win the School much currency in the political malaise after a bust. Arguably though the shunning of the government fix will tend to relegate the Austrian remedy to the trash heap as politicians seek to “never waste a crisis.”

Yet the “let the market sort it out” quip does also gloss over the microeconomics of recovery. In the Keynesian version of events companies are folding and “animal spirits” are flagging, and there seems to be no way for the microeconomic process of recovery to start other than by some “exogenous” jolt of demand stimulus by the government to calm the nerves and get capitalists to soldier on, make stuff, and hire staff. This is the vicious-spiral-into-the-7th-circle-of-hell theory so defining of Keynesian prognoses. It’s also an easy version of events for people to swallow because its basic, plays on fear, and targets a quick fix, despite it being folly to its core.

The Austrian version of events was always less sexy and more, well, realist. Unnecessary lines of production need to be liquidated and sold to those capitalists who have funds to deploy in the recession. ‘Sunk’ capital that cannot be reallocated in such a way must be forgone and go to waste – a real loss of wealth.

Paul Cwik argues that the Austrian story needs to pay far more attention to the post-bust recovery and the microeconomic business process of what drives economic restoration. In his July 2008 paper in the QJAE, “Austrian Business Cycle Theory: A Corporate Finance Point of View”, Cwik states that:

 The main emphasis of the ABCT has been on the theory of the upper-turning point-the artificial expansion of credit, the manipulation of interest rates, the malinvestments committed by entrepreneurs and then the credit crunch and/or real resource crunch.

But, Cwik argues, what’s needed is a greater emphasis and demonstration of,

…how a company can take a failing component from another business and tum it into a viable operation via the liquidation process.

Cwik goes on to show in the paper,

how the Austrian theory can make superior recommendations for policies (through the usage of the liquidation process) to help stimulate economic recovery.

Here are Cwik’s concluding implications:

The second implication is that the analysis (explaining how fixed capital equipment has to be sold-off at reduced prices in order to transform the malinvesments into legitimate capital equipment) does not seem to explain the duration of the recession phase. There are two stumbling blocks that tend to reduce the smooth transition of the fixed capital into productive structures. The first is that capital is not an amorphous mass, a homogeneous blob of “K.” Capital goods have differing degrees of specificity, complementarity and substitutability. It is not simply a question of lowering the price and then plugging the machine into another production process. The project in the example illustrated above was self-contained, but in the real world, such projects are rare. Typically, a firm’s projects need to be integrated into other existing firms. Austrians have long argued that merely investing capital does not lead to economic growth, but correctly arranged capital structures guided by the market process are the mechanism for growth. Rearranging prices is simply not enough to pull an economy out of a recession. Some of the more specific capital may have to be thrown away-scrapped-if no other firm could make a profit from it. A liberalization of merger and acquisition laws could improve the situation. Furthermore, the elimination of other obstacles found in bankruptcy laws could help expedite the transfer of malinvestments into productive ventures.

The third implication (and also second stumbling block) is that savings are needed in order to facilitate this transformation process. In order for the second firm to purchase the capital equipment from the first firm, the purchaser will need the funds to complete the transaction. Newly created credit will only start the boom/bust cycle again. Increasing real savings (a reduction in consumer goods in favor of investment goods) expedites the transformation process. This observation means that in order to stimulate an economy, savings need to be increased. A government interested in helping an economy out of a recession has to then do the following: first, not interfere with the price adjustment process; second, not reinflate the money supply; and finally, try to increase the amount of savings in the country. It could do this through liberalizing its laws to allow for increased savings to flow in from abroad and it could also cut taxes on domestic savers. By increasing the amount of savings, the amount of malinvestments that could be transformed into profitable investments increases. Increasing the amount of savings available for investment can shorten the duration of a recession.

This is a short but highly insightful paper that gives excellent nuance to ABCT and the market’s recovery process. The full article is here (pdf).

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A Guide To South Africa’s Economic Bubble And Coming Crisis

Posted on March 24, 2014 by Russell Lamberti

By Jesse Colombo

As Africa’s wealthiest major economy, South Africa has played a key symbolic role in the emerging markets boom that has transformed the global economy in the past decade. Unfortunately, like most other emerging economies now, South Africa is experiencing an economic bubble that shares many similarities to the bubbles that caused the downfall of Western economies in 2008. Though South Africa has received a significant amount of attention after its currency fell sharply in the past year, there is still very little awareness and understanding of the country’s economic bubble itself and its implications.

The emerging markets bubble began in 2009 after China embarked on an ambitious credit-driven, infrastructure-based growth plan to boost its economy during the Global Financial Crisis. China’s economy immediately rebounded due to the surge of construction activity, which drove a global raw materials boom that benefited commodities exporting countries such as Australia and emerging markets. Emerging markets’ improving fortunes attracted the attention of international investors who were looking to diversify away from the heavily-indebted Western economies that were at the heart of the financial crisis.

Record low interest rates in the U.S., Europe, and Japan, along with the U.S. Federal Reserve’s multi-trillion dollar quantitative easing programs, caused $4 trillion of speculative “hot money” to flow into emerging market investments over the last several years. A global carry trade arose in which investors borrowed cheaply from the U.S. and Japan, invested the funds in high-yielding emerging market assets, and earned the interest rate differential orspread. Soaring demand for emerging market investments led to a bond bubble and ultra-low borrowing costs, which resulted in government-driven infrastructure booms, dangerously rapid credit growth, and property bubbles in countless developing nations across the globe.

Read the rest of the article here.

H/t Justin Stanford

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Latest Quarterly Journal of Austrian Economics

Posted on March 20, 2014 by Russell Lamberti

Here are the article summaries and links to full papers in the latest QJAE.

The Marginal Efficiency of Capital
Edward W. Fuller

ABSTRACT: The purpose of this paper is to explain the marginal efficiency of capital. The net present value diagram is derived and used to illustrate how the interest rate regulates the intertemporal allocation of resources. The net present value diagram is then used to show that the marginal efficiency of capital contradicts the net present value method of ranking investment projects. The net present value diagram is integrated into the capital-based framework to demonstrate that the interest rate cannot regulate the intertemporal allocation of resources in Keynes’s theory of investment.

KEYWORDS: John Maynard Keynes, marginal efficiency of capital, net present value, economic calculation, interest rates, interest rate sensitivity, intertemporal allocation of resources, banking, business cycles, capital-based macroeconomics

How Entrepreneurship Theory Created Economics
Christopher Brown and Mark Thornton

ABSTRACT: Richard Cantillon is credited with the discovery of economic theory and was the first to fully consider the critical role of entrepreneurship in the economy. Cantillon described entrepreneurship as pervasive and he casted the entrepreneur with a pivotal role in the economy. Using a sample of models from Cantillon’s Essai, we provide evidence that his theory of entrepreneurship was the fundamental tool by which he constructed economic theory and that absent his theory of entrepreneurship his theoretical constructions fail. We believe this discovery both highlights the importance of entrepreneurship and contributes to our understanding of the nature of economic theory.

KEYWORDS: Richard Cantillon, entrepreneurship theory, economic geography, labor markets, intrinsic value, circular flow model, price-specie flow mechanism

Driving the Market Process: “Alertness” Versus Innovation and “Creative Destruction”
Samuel Bostaph

ABSTRACT: This paper summarizes and compares the theories of entrepreneurship of Joseph A. Schumpeter and Israel M. Kirzner as presented in their major scholarly contributions to economic analysis. It is argued that Kirzner’s theory of entrepreneurial action as “the driving force of the market” contributes greatly to a fundamental understanding of the market process. In contrast, it is argued that Schumpeter’s theory that entrepreneurship is the agent of “creative destruction” of an ongoing state of general equilibrium is spurious. It is also argued that his view that entrepreneurship is the internal force for the economic development of any economy, market or non-market, reveals a seriously inadequate understanding of both the market process and the economics of nonmarket economies.

KEYWORDS: entrepreneur, entrepreneurship, market process, Austrian School

Legal Monocentrism and the Paradox of Government
Jakub Bo?ydar Wi?niewski

ABSTRACT: In this paper I shall argue that, in contrast to its monocentric counterpart, only the institutional framework of legal polycentrism can overcome the problem of the so-called “paradox of government”—that is, establish effective and robust governance structures without simultaneously empowering them to overstep their contractually designated tasks and competences. To accomplish this, I shall critically evaluate the logical consistency of the solutions advanced in this context by the proponents of legal monocentrism, based on the claim that institutional constraints in the form of democratic elections or checks-and-balances can place working constitutional limitations on the power of a coercive monopolist of law and defense.

KEYWORDS: legal polycentrism, institutions, paradox of government, rule-following, rule of law, checks and balances, critical rationalism

Sunk Costs and Contestable Markets
Mateusz Machaj

ABSTRACT: The aim of this paper is twofold: to reformulate the concept of contestable markets in the context of property boundaries, and to recapitulate the characteristics of “sunk costs.” The first section outlines the idea of contestable markets developed in the 1980s and contrasts it with the perfect competition model. The second section explains the notion of sunk costs as entry barriers in the contestable markets framework. The third section summarizes the relation between costs and prices. The fourth section separates sunk costs from fixed costs and formulates main propositions on their nature. The fifth section deals with the contestable markets model, where sunk costs are perceived as an inefficient barrier to market entry. The sixth section modifies contestable markets theory in compliance with the “Austrian” theory of competition.

KEYWORDS: contestable markets, sunk costs, market competition, freedom of entry, price system, property rights

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