Category Archives: Economics

The Externally-Directed Life Of Independence

The New Yorker profiles Mr. Money Mustache this week, and he’s got a paradoxical assertion about free living and motivation:

He needed to create a persona that conveyed extreme confidence. “Nobody listens to me in real life, but on the Internet everyone does,” he said. “People need to be told to get to work on things. They need a boss so they stop making excuses.”

Review – Class (#sociology, #class, #society)

Class: A Guide Through The American Status System (buy on Amazon.com)

by Paul Fussell, published 1983

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

“A touchy subject”

Is class “America’s forbidden thought”? Does class bring up “unpleasing” notions? Does class exist in America?

While things may have been different in 1983 when this book was first published, for most of my life I have heard a lot about class– in literature, reading history, in the news and in conversation with friends, family, colleagues and strangers. The divisions that are most common are “upper class”, “middle class” and “working class”. Oh, and “the rich”. We don’t seem to have “lower classes”, and it isn’t always clear what the difference is between “the rich” and “upper class”, or even the well-to-do “middle class” and the “upper class”, or the barely-hanging-in-there “middle class” and the “working class.” We often hear about “the poor” but no one seems to have ever seen or spoken to one. The homeless don’t count.

These are primarily economic distinctions but, then, America’s economic identity has loomed larger than much else throughout time so that stands to reason. But Paul Fussell is more concerned with the elements of class which are connected to choice, call it taste, and so am I. Class is a confusing and complex subject and I don’t think Fussell manages to precisely and objectively define the term before launching into his observations, yet somehow this doesn’t prevent him from hitting his mark.

There’s so much to the idea of class and yet what has always fascinated me is the behavioral aspect of it. How a person of a certain class will tend to behave whatever his economic standing, whatever his occupation or role, whatever his level of education or wherever he grew up. Is there something genetic to class? It may be.

Segmenting the classes

Fussell identifies nine primary American classes despite the typical sociologists system of five:

  1. Top out-of-sight
  2. Upper
  3. Upper middle
  4. Middle
  5. High proletarian
  6. Mid-proletarian
  7. Low proletarian
  8. Destitute
  9. Bottom out-of-sight

The first three constitute a group, the next four constitute a second group and the last two constitute the final group. There are several interesting things to note about this arrangement. First, Fussell sees many similarities in behavior between the absolute top and the absolute bottom which is why they are similarly named (for modern, statistically-inclined socialists, read “top 1%” and “bottom 1%”). Second, the arrangement of classes 2-4 highlight the tendency of those closer to the top to see themselves as more average while acknowledging the penchant of those closer to the middle to identify more closely with the top out of aspirational exasperation and paranoia.

Third, there is a glaring emphasis on crude commonality and the reality that much of the American populace looks, lives and behaves in a peasant-like fashion. While the proletarians were historically disenfranchised, undifferentiated masses providing cheap labor in industrialized urban environments, the truth is these people were and always will be peasants at heart and Fussell, joyously, acknowledges this in his class distinctions. The lack of buffer between destitution and proletarianism also shows how, whether they’re aware of it or not, those who look “down” on them from “above” can rarely tell the difference between a stable prole and a lost one.

While he comes up with 9 categories, in reality Fussell spends an inordinate amount of his time discussing the habits and tastes of proles, another, smaller fraction typifying the “uppers” and the remaining moments pointing out how anxious the few middle class people are between these two poles.

Class safari

Through an exploration of appearance, living space, consumption habits, intellectual pursuits and speech Fussell tries to narrow in on specific details that can help us see class clearly. As you read through this material, two things happen: one, you become retrospectively more observant of the behavior of others you’ve witnessed without special note and two, you flinch each time you realize you’ve done something prole yourself.

This might be a good place to collect some of my favorite observations and append my comments.

Our former lower-middle class, the new high proles, now head “the masses”… they are identifiable as people things are done to. They are in bondage to monetary policy, rip-off advertising, crazes and delusions, mass low culture, fast foods, consumer schlock.

To that I’d add food pyramids (government nutritional diktat), public education and (increasingly related) a lifestyle of indebtedness. And “social engineering” broadly understood.

Imagine being under the constant eye of the foreman, a figure who has absolutely no counterpart in middle-class society [and] being required to bring a doctor’s note if they are absent a day…the degree to which your work is overseen by a superior suggests your real class more accurately than the amount you take home from it.

Interpreting class as a choice, I think it is even truer to observe whether one’s supervisor feels the need to ask you for that note or not, for example. The truly lower class person is held in check and formally “made honest” by the routine of the doctor’s note (even if he’s making one up or paying the GP off to scribble out a stack of notes for his use). The low-skilled worker who is nonetheless classy at heart never raises this suspicion from his supervisors and would probably find the exercise offensive and detrimental to the trust he has in his managers.

This idea of a spectrum of supervision is an interesting one. We can see the self-made entrepreneur at one end of the band and the on-the-job-transient at the other. Curiously, major corporate executives probably belong close to the transient, being supervised closely by the regulatory-legal apparatus and, nominally, by a board of directors and shareholders… some “kings of the world” they are! Elite politicians are clearly upper class in this sense, inhabiting a space close to the entrepreneur, but perhaps even further for those who have truly made it– the Clintons, Roosevelts and Al Sauds and others who are beyond scrutiny and control.

At the bottom of the working class, the low prole is identifiable by the gross uncertainty of his employment.

What I think Fussell is referring to here are people like construction workers, whose only hope of holding steady work is that the bubble of the day keep on inflating. When it pops, these types usually experience grave setbacks and may even take up or return to a life of petty crime to get by.

But what I think many (middle class? high proles?) would think of here is the crude characterization of the cold workings of a competitive market place, where the poor working stiff minds his own business and then loses his job in a sudden, mass layoff. Or where the boss just doesn’t like you, because you talk back or look at him funny or remind him of someone he hated in high school, so he fires you.

This doesn’t really happen in real life. Assuming a company is a viable going concern and not a fraud or otherwise mismanaged (in which case ALL staff jobs are at risk, prole and management alike), most prole occupations are secure with good behavior and dedication to the cause. While the bogeyman of job security is trotted out now and again, implicitly or explicitly, either in the case of a significant behavioral breach or as a means of putting the piss into the team and reminding them who is in charge, it’s all in “good fun.” Most employers aren’t that capricious because competition goes both ways and they can quickly lose much more than a staff member if they treat people like crap all the time.

a cheap way to achieve a kind of distinction is to be thin… flaunting obesity is a prole sign, as if the object were to offer maximum aesthetic offense to the higher classes and thus exact a form of revenge.

One flight across the country nowadays is all you need to remind you what class you’re in. If you can comfortably sit in an economy airline seat for 5 hours, there’s an excellent chance you are middle class at least.

legibility of their dress is another sign… T-shirts or caps with messages on them you’re supposed to read and admire… When proles assemble to enjoy leisure, they seldom appear in clothing without words on it.

Another example is the way proles turn unhealthy lifestyles into faux-pride brands, such as “Big Dog”. And the penultimate in legible clothing is the wearing of sports jerseys in public, conspicuously and most frequently outside of sporting events and arenas or as a form of semi-formal dress wear. In fact, I was rather dismayed to see Fussell miss this one, but then a correspondent reminded me: “Sports jerseys as casual wear were unthinkable at  the time of ‘Class’. If there were to be a new edition, one would have to assess virtually the entire country as prole.”

So true.

On baseball caps:

The little strap at the rear is the significant prole feature because it demeans the buyer and the user, making him do the work formerly thought the obligation of the seller, who used to have to stock numerous sizes.

This was such a quaint observation looking back. Gone are the days of the plastic adjusto-strap. “Lids” nowadays are characterized by a bowl cut with a sewn in elastic band thus making them all “one-size-fits-all” which looks as believable as a one-size-fits-all dress shirt would. The funny thing is that some proles have adopted the perpetual wearing of the merchandising stickers as a sign of pride, as if to suggest this “lid” just came off the shelf (or better– was just sneakily removed from it without the vendors notice). Many other proles have graduated on to capless attire, headwear having degenerated so much amongst the lower classes that you can now spot a prole by his lack of cranial adornment (typically with an odd, early-balding molting pattern on the dome signifying poor diet and careless lifestyle choices) and similarly you can spot an ambitious member of the lower middle class by his decision to wear a simple, out-dated hat for the look and thrill of wearing it rather than because it is considered respectable or polite to cover one’s bird’s nest.

And for the she-prole, there is nothing that shouts “I am sexy and interesting” at a party or while walking a yippie, twerp man-repellant dog around the neighborhood like the flourescent trucker hat which could only be complete, of course, with the throwback old-school plastic prole adjusto-strap.

you could probably draw a trustworthy class line based wholly on the amount of sugar consumed by the family

And thus, one of the most important and yet overlooked motivations of the “paleo diet” movement beyond health. In a society experiencing high prole drift, it seems only natural that those with class would take a stand anywhere they can in drawing clear class boundaries.

This is such a great book with so many things to quote and comment on, I simply don’t have the time. Maybe I will follow this post up eventually with another round of “Class” wits but for now the media above should suffice. This book is a clear 5/5.

Book Blog – “Economics: A User’s Guide” Part 2 (#economics, #history, @Cambridge_Uni)

Economics: A User’s Guide, by Ha-Joon Chang, published 2014 (Buy from Amazon.com)

A contrarian’s view of the history of capitalism?

In the second chapter, HJC attempts to demonstrate how capitalism has changed from the time of Adam Smith and his “The Wealth of Nations”, to the present global economy, with the implication being that our understanding of economics should change along with the tide of history. HJC claims that both “economic actors” (those who engage in economic activities) and “economic institutions” (the rules regarding how production and other economic activities are organized) have changed. Further, HJC defines “capitalism” as,

an economy in which production is organized in pursuit of profit, rather than for own consumption (as in subsistence farming, where you grow your own food) or for political obligations (as in feudal societies or socialist economics, where political authorities, respectively aristocrats and the central planning authority, tell you what to produce)

Already, an Austrian economist would pick several points of contention. The first is the idea that “economic actors” could be anyone other than individuals. HJC is going to argue that various collective organizations and identities such as labor unions, corporations and governments are “economic actors” but the Austrian economist, laboring under methodological individualism, would be quick to point out that while individuals composing these groups may identify with and be psychologically motivated by their affiliation with such a group, it is ultimately the individuals themselves who act (both in choosing such an identity, and in making decisions under such an identity or as a representative of such an identity) which is an important epistemological distinction for clarifying the meaning of economic observations.

The second point would be to clarify the definition of capitalism itself. While HJC simplifies capitalism as an economy in search of profit, there is much more to the definition and the way capitalism differs from alternatives (such as feudal economies and socialism) that it is worth exploring the nuances in depth.

Capitalism is distinguished most of all by the fact that the means of production are privately owned. This means a person gets to be a capitalist one of two ways– by saving part of one’s income and thereby creating additional capital with which to invest, or by being loaned or otherwise granted capital by people willing to bet on the entrepreneurial talents of such a person at which point they can prove or disprove their ability. In capitalism, capital is “mobile”– it moves from person to person over time, always accumulating in the hands of those who are most capable with it, that is, in the hands of those who are most talented at realizing profit by efficiently serving consumer demands. It tends to leave the possession of those who waste it or fail to steward it well, and enter the hands of those who not only prize it but can do something valuable with it.

The theoretical alternative to capitalism is socialism, or public ownership of the means of production. Leaving aside the questionable nature of the concept of “public ownership”, socialism relies on some kind of political decision-making apparatus to not only determine who should be the public mandatories in charge of directing the means of production, but also to intuit the “public good” insofar as it is a goal that can be aimed at with the central production plan. In socialism, one can not become a director of the economy without being selected for such a role by the political authority. And it is inconceivable that one could “accumulate capital” by saving because the political authority would control consumption patterns and determine how much of the productive output each individual receives, maintaining control of any excess (savings) to deploy as it sees fit.

Under capitalism, the very fact that all the means of production are privately owned implies 1.) that the current amount of capital is always “optimum” for present purposes because every individual can freely decide if he’d prefer to save more or save less and 2.) that every exchange increases the total wealth of society because it is voluntarily entered into. This simply isn’t so under socialism. In fact, the Austrians believe it is impossible to succeed in either endeavor because the absence of money prices means that socialist economies suffer calculational chaos when it comes to judging the value of various arrangements and exchange patterns amongst alternatives. That’s a larger topic for a later post, though. For now, it is sufficient to point out the major (but not necessarily all-encompassing) nuances of capitalism not given any heed by HJC’s definition.

The errors of definition and reasoning exhibited by HJC in discussing a wide range of historical changes which have occurred in market economies since Adam Smith’s time provide too many objections to raise in one post. Instead, it is enough to leap to his conclusion and comment further, when he says:

competition among profit-seeking firms may still be the key driving force of capitalism, as in Smith’s scheme. But it is not between small, anonymous firms which, accepting consumer tastes, fight it out by increasing the efficiency in the use of given technology. Today, competition is among huge multinational companies, with the ability not only to influence prices but to redefine technologies in a short span of time (think about the battle between Apple and Samsung) and to manipulate consumer tastes through brand-image building and advertising

Let’s tease this apart.

First, price always has two components– supply, and demand. The number of firms producing a particular good or service, and the ways in which they produce this good or service, influence price on the supply side. The number of consumers eager to purchase the good or service, and their eagerness to purchase this good or service at the expense of other goods and services they could obtain with the same quantity of money, influence the price on the demand side.

The idea that both consumer tastes and technological means of production were “given” at some point in time are to completely misconstrue not only the facts of economic history, but also their significance. All firms, whether in Adam Smith’s era, modern times or somewhere in between make choices not only concerning which markets to compete in but also about which vendors to utilize, what technological recipes to use in production, what quality and quantity to produce of a given good or service and how to market these goods and services to the buying public. It may appear relatively primitive or limited in looking back from today’s economic circumstances to the past, but that doesn’t change the nature of production, competition and consumption itself. None of this was given or fixed. Any firm which might decide to enter or exit a market could influence the price by its increasing or decreasing the overall supply. HJC’s claim is akin to suggesting that prices were either arbitrary, or that markets failed to clear and there was a continual shortage or excess of certain goods and services. It suggests that prices never even changed, after all, how could they if all firms were small and alike and none had any influence? It couldn’t be the consumers changing demands, their tastes were “given” (by whom? for what purpose?). This is a revisionist history without accuracy or merit.

The labeling of branding and advertising as a “manipulation” of consumer tastes is also a cause for concern in clearly understanding the issues. Manipulation has a pejorative sense, that it is somehow illegitimate or involves exploitation or deceit. Branding and advertising both serve useful economic purposes. A brand helps to designate to a customer what kind of quality to expect from a given product or service under that brand (for example, Porsche is reputed as a high-quality brand, whereas Chevy is reputed as a low-quality brand– the fact that different brands exist help car buyers quickly choose between vehicle quality). It might also connote certain features or other characteristics common to a brand identity (using Porsche and Chevy again, Porsche is known as luxurious and performance-inspired, while Chevy is known as “all-American” and economical). In other words, a brand contains information which consumers consider valuable to know about products and services they intend to purchase.

Advertising provides similar informational value. Individuals have certain needs but do not know, omnisciently, what products and services are available to meet their needs. Advertising seeks to communicate to individuals which of their needs can be met by a given product or service. It might also communicate information about how the product or service compares to competing offers. Additionally, advertising might communicate solutions to problems individuals might not even realize they have until they see the advertisement!

This last bit is probably what HJC is aiming at with his description of changes in the economic history of capitalism. But this claim, too, is invalid. There is nothing inherently suspect or illegitimate about a business creating awareness of new needs and new ways of acting that can fulfill those needs as compared to any other influential source (friends, family, introspection, etc.) And businesses can not force individuals to adopt these desires and needs as their own and as valid– that’s something the individual must decide for himself.

The aim of this characterization is to suggest that while competition exists on its face, it isn’t “real” or “legitimate” competition– that individuals are actually faced with a strongly restricted frame of reference about what they want and how they can get it as well as what they must pay to acquire it that is actually constructed by a small group of very large firms. This is a veiled accusation of monopoly and a backdoor argument for government intervention in market places to reassert “consumer sovereignty.”

It is from this erroneous foundation that HJC proceeds to re-tell the “true history of capitalism”, the one he claims most economists don’t want you to know about.

Book Blog – “Economics: A User’s Guide” (#economics, #heterodox, @Cambridge_Uni)

Economics: A User’s Guide, by Ha-Joon Chang, published 2014 (Buy from Amazon.com)

Who is Ha-Joon Chang?

Born in South Korea in 1963, Ha-Joon Chang is currently a professor of economics at the UK’s University of Cambridge. He gained his PhD after successfully completing a thesis on “industrial policy” under British Marxist Robert Rowthorn, which advocated a “middle way” between central planning and free markets.

In a section on his personal website entitled “Economists Who Have Influenced Me“, Ha-Joon Chang states,

Many people find it difficult to place me in the intellectual universe of economics. This is not surprising, given that I have been influenced by many different economists, from Karl Marx on the left to Friedrich von Hayek on the right.

Of Austrian economist FA Hayek, Chang further states,

Hayek is very different from the Neoclassical school, even though many Neoclassical economists mention him in the same breath as Milton Friedman, on the basis that he was one of the most influential advocates of the free market. Unlike Neoclassical economists, however, Hayek does not take the socio-political order underlying the market relationship as given and emphasizes the ultimately political nature of our economic life. This is a big contrast to the Neoclassical view, which thinks that economics and politics can be, and should be, separated. Indeed, if you read Hayek’s book, Individualism and Economic Order, you will see that he is very critical –sometimes even abusive – of Neoclassical economics.

And with regard to Marx, Ha-Joon Chang claims,

With the collapse of communism, people have come to dismiss Marx as an irrelevance, but this is wrong. I don’t have much time for Marx’s utopian vision of socialism nor his labour theory of value, but his understanding of capitalism was superior in many ways to those of the self-appointed advocates of capitalism. For example, when free-market economists were mostly against limited liability companies, Marx saw it as an institution that will take capitalism on to another plane (to take it eventually to socialism, in his mistaken view). In my view, 150 years after he wrote it, his analysis of the evolution of labour regulation in Britain in Capital vol. 1 still remains one of the best on the subject. Marx also understood the centrality of the interaction between technologies (or what he called the forces of production) and institutions (or what he called the relations of production), which other economic schools have only recently started to grapple with.

On the dreaded Keynes, Chang admits,

Despite having been educated and taught in Cambridge, I have not been very ‘Keynesian’ in my approach to economics. This is not because I disagree with Keynesian thinking, but because I have mainly done my research on ‘micro’ issues, such as trade and industrial policy. However, I have come to be drawn more into ‘macro’ issues in the process of thinking about the recent financial crises, especially the 1997 Asian crisis and the 2008 world crisis. In thinking about these issues, John Maynard Keynes, Hyman Minsky, and Charles Kindleberger have been big influences.

According to biographical information in his book “Bad Samaritans”, Chang grew up in relative poverty as the son of a South Korean finance minister. He has written a number of books on the subject of economics, specifically with regard to economic history, global economic development and global trade patterns. Henceforth in my book blogs I will refer to him as “HJC” to save myself time.

Because of HJC’s intellectual background, pre-eminent social and intellectual position and large and established bibliography of thought, his ideas are worth studying and critiquing as a representative of a popular strand of “economic” thinking supported across countries and institutions.

Introduction

My purpose in this book blog is to apply my own understanding of economics (informed, to date, by a mainstream US college education in the subject as well as intense and ongoing self-study in a variety of alternative theories) to the methods and arguments provided by HJC in this introductory economic work of his and in so doing arrive at conclusions about the soundness of his thought. In particular, because HJC represents a strain of “new thinking within the mainstream” and my personal convictions lie with what is known as the “Austrian school”, I want to empathetically highlight the areas where the two schools are in agreement, as well as try to explain wherein the differences lie.

Let’s get started!

“Why Are People Not Very Interested In Economics?”

HJC wonders why economics is an unpopular subject:

95 per cent of economics is common sense – made to look difficult, with the use of jargons and mathematics.

This is actually a point the Austrians make– that good economics involves simple logical deductions within the grasp of any reasonably intelligent person and that the introduction of jargon and higher math is used to keep laypeople out and make the discipline unintelligible to the uninitiated. HJC says that economics doesn’t appear to be relevant to most people’s lives and that the issues that they believe economics deal with, such as international currency movements, government budgets and foreign aid debates, are not things people believe they can comment on or think about competently without economic training.

On the other hand, HJC laments the “megalomania” of many economists who would just as soon argue that economics is the most relevant intellectual discipline in that it seems to explain everything, and more. HJC critically cites the success of titles like “Freakonomics” and the braggadocious quality of many economic book titles that purport to show how economics is behind anything that can be imagined.

HJC sees a more limited role for economics in human thought, though still an important and useful one, which raises two specific issues: is economics a science and, to the extent it is, what is economics actually about?

Is economics a science?

HJC is pretty clear on the matter:

economics can never be a science in the sense that physics or chemistry is [because] human beings have their own free will, unlike chemical molecules or physical objects.

He also adds that,

people have been led to believe that, like physics or chemistry, economics is a ‘science’, in which there is only one correct answer to everything

Instead, HJC argues that

What is needed is to learn economics in such a way that one becomes aware of different types of economic arguments and develops the critical faculty to judge which argument makes most sense in a given economic circumstance and in light of which moral values and political goals (note that I am not saying ‘which argument is correct’).

Let’s consider these claims one by one.

The first claim, that economics can never be an (empirical) science like physics or chemistry is something that Austrians would again agree with. The Austrian view of the epistemology of economic science strictly prohibits the use of inductive logic derived from empirical observation and research. The reason for this is that in “hard” sciences like physics, the effect is known but the cause is unknown. Physics, as an example, is a study of effects in search of causes. Various factors deemed to be the significant causal agent dictating a particular result can be tried in a series of controlled experiments and then conclusions can be arrived at by the experimenter based on the manipulation of the variable factor and the observed changes in the experimental data.

Economics, by contrast, is a science whose causes are known (human action) but whose effects are often mysterious, because multiple causal factors can occur simultaneously in the lead up to an observed result. For example, the price of two pounds of chuck roast at the supermarket involves a negotiation between a group of suppliers of chuck roast and a group of buyers of chuck roast and these suppliers and buyers are unique and uniquely motivated at a given time and location. The method of the economic sciences, then, must be the “gedanken experiment” (thought experiment) in which a conceptual reality is held in mind and the logical implications of changes in one factor at a time are deductively explored. This is impossible when studying human action, that is, economic activity, because it is never that one thing only changes and it is never guaranteed that the same reaction will occur by the people observed because of the nature of free will.

It is in fact curious that HJC makes this specific point because later on he seems to contradict himself when he says,

we need to look at history because we have the moral duty to avoid ‘live experiments’ with people as much as possible.

The questionable moral claim of having a duty to avoid human experimentation in economic matters “as much as possible” aside, this quote suggests that HJC believes economic theory can be derived from historical (experimental, empirical) data and observations despite earlier claims to the contrary. This is one of many confusions and muddled writing/thinking that the book suffers from. It also begs the question, well-known to Austrians, of what interpretations of the significance of various historical data could tell us on their own without any kind of intermediating and pre-selected theory applied to them.

History, as a discipline, is a process of careful selection of particular facts for a particular purpose. The past provides us with a nearly infinite quantity and quality of data to choose from. It is the task of the historian to pick from this quantity only the data that is relevant to examining a particular historical question. To do this, the historian must already be versed in valid theories from the applicable branches of science to which his question belongs. For example, a historian studying the incidence, severity and consequences of disease would need to understand human biology and epidemiology. Or a historian studying the history of money in France circa 1750-1850 would need to already understand monetary theory (a branch of economics) as well as other theoretical knowledge pertaining to the historical episode (for example, a theory of the State in general and a theory of post-Medieval French statism in particular).

We can not validate an economic theory by looking at the historical record. All we’d manage to do is to assume that which we’re trying to prove and thereby fool ourselves.

This gets us to the second claim. To reiterate, while it is true that economics is not a science “like” physics or chemistry (pertaining to the necessary differences in methodology), it is NOT true that economics is not a science in that it offers one right answer to a given question. If economics can not offer objective truths about universal causal relationships, then it would not be a science, it would be a canon of opinion and not worth studying any more than studying people’s opinions on the superiority of vanilla versus chocolate ice cream is worth studying. It would not be productive to write books about economics, it would be pointless to try to explain economics to other people and ultimately, any arguments or claims about one economic phenomenon or another would be arbitrary. This would be the position of philosophical nihilism in the realm of economics.

It’s hard to believe that this is what HJC personally believes or is advocating because it would then make most of the rest of what he has to say about economics empty of content and meaning. It would also make puzzling comments such as “95% of economics is common sense” as nihilism in any realm is typically not the common sense position, not to mention that the concept of “making sense” implies rationalizeable facts about reality. Yet, this is what this man, who is an economics PhD and responsible for instructing others in the philosophy, claims is the “state of the art.”

And thus we arrive at the third claim about economics which is almost the most puzzling of all. We’re admittedly early on in the book so I hope HJC is going to spend some time explaining the meta-epistemology of how one can know which circumstances call for the application of which economic arguments but it is already seeming like a muddled concept because we’ve rejected the idea that we can look at history as a source of theory about economics, and we’ve rejected the idea that economics is devoid of any content and meaning whatsoever and thus “non-scientific.” This would only leave one alternative to mind, that of logical deduction from axiomatic assumptions to arrive at conclusions which must be true.

It’s worth noting at this time that the Austrian school provides a special comment to this concept that economic arguments must be chosen and applied based on a specific moral or value-based perspective. The Austrians argue that to be scientific (“objective”), economics must be wertfrei, or value-free. That is, the knowledge of economics is not dependent upon the economist’s class, creed, race, nationality, personal preferences or other personal identifications. It is dependent upon logic which universally belongs to all mature human beings and is necessarily embedded in the biological structure of the mind.

Economics is not a tool for furthering a particular interest group’s agenda. It describes causal relationships between specific phenomena, ie, “If X, then Y” and it comments on whether specific ends aimed at can be achieved with specific means employed– NOT whether the ends aimed at are “good”, “right”, “holy”, “moral”, “desirable”, “valuable,” etc. For example, economics can help us understand the consequences of certain actions undertaken by human beings, but it can not tell us if those consequences are good, bad, etc. It simply tells us, “If you do this action, it will lead to this consequence, all else equal.”

I think this is a very different position than the one taken by HJC in the text and I look forward to exploring this idea and its implications in contrast to HJC’s claims further on as it seems inevitable he’s going to have to come back and explain this more eventually.

So what is economics?

From HJC’s comments so far, it’s unclear if he believes economics is a science. But because the book doesn’t end here, we’ll operate from the assumption for now that he believes it is a science. The question then becomes, what is the proper scope of economics as a science?

Here HJC levels his criticism mostly at popular, mainstream and “neoliberal” economists following what is termed neoclassical economics. Citing a contemporary (and former critic) of Keynes, Lionel Robbins, HJC says,

Robbins defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’

He claims that most economists

define their subject in terms of its theoretical approach, rather than its subject matter

based off of Robbins’ logic. In other words, economics is a study of “rational choice” and focuses on the calculations entertained by people choosing between specific means to achieve specific goals in a variety of circumstances (choosing a spouse, choosing what to eat, choosing where to work, choosing what to invest in).

In contrast, HJC offers his definition of economics:

My belief is that economics should be defined not in terms of its methodology, or theoretical approach, but in terms of its subject matter, as is the case with all other disciplines. The subject matter of economics should be the economy – which involves money, work, technology, international trade, taxes and other things that have to do with the ways in which we produce goods and services, distribute the incomes generated in the process and consume the things thus produced – rather than ‘Life, the Universe and Everything’ (or ‘almost everything’), as many economists think.

In other words,

what we want from economics is the best possible explanation of various economic phenomena

It’s hard to argue with the idea that economics should be defined by its subject matter like any other science. Of course, the preceding paragraphs in the book up to this point are a litany of potential subject matter according to HJC versus those he criticizes in the neoclassical mainstream, which seems to beg the question.

And HJC even makes a point about subject matter that Austrians would sympathize with, namely that

The economics profession, and the rest of us whose views of the economy are informed by it, need to pay far more attention to production than currently [because] production is the ultimate foundation of any economy

This is a criticism leveled by Austrians at Keynesians with regards to macroeconomics, namely that there is an undue focus on consumption patterns and an incorrect emphasis on consumption (“aggregate demand”) as the driving energy of an economy without study or consideration of the productive activity necessary to enable it.

As a matter of comparison, it’s worth considering the thoughts of Austrian economics patriarch Ludwig von Mises on the questions of whether economics is a science and, if so, how to define it. The following passages are from Mises’ 1949 “Human Action“:

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.

Thoughts so far– economics is a science, it is the youngest of sciences, it revealed new knowledge about observed market phenomena and this knowledge was separate and distinct from existing sciences (that is, economics is not a branch of a then-existing science, such as psychology). Mises continues,

Philosophers had long since been eager to ascertain the ends which God or Nature was trying to realize in the course of human history. They searched for the law of mankind’s destiny and evolution. But even those thinkers whose inquiry was free from any theological tendency failed utterly in these endeavors because they were committed to a faulty method. They dealt with humanity as a whole or with other holistic concepts like nation, race, or church. They set up quite arbitrarily the ends to which the behavior of such wholes is bound to lead. But they could not satisfactorily answer the question regarding what factors compelled the various acting individuals to behave in such a way that the goal aimed at by the whole’s inexorable evolution was attained.

Whether or not we define economics by its methodology, it is clear that in Mises’ mind, the discovery of a valid method for economics was one of the critical pillars of its emergence as a science. Prior observers witnessed mass phenomena, but had no method for explaining how component behavior led to the mass phenomena. Again, Mises continues,

Other philosophers were more realistic. They did not try to guess the designs of Nature or God. They looked at human things from the viewpoint of government. They were intent upon establishing rules of political action, a technique, as it were, of government and statesmanship. Speculative minds drew ambitious plans for a thorough reform and reconstruction of society. The more modest were satisfied with a collection and systematization of the data of historical experience. But all were fully convinced that there was in the course of social events no such regularity and invariance of phenomena as had already been found in the operation of human reasoning and in the sequence of natural phenomena. They did not search for the laws of social cooperation because they thought that man could organize society as he pleased.

If there are no “regularities in the sequence and interdependence of market phenomena”, that is, no universal scientific laws of cause and effect, then any social schemer’s vision for reforming society should be possible. The only thing that could get in the way of such a scheme would be purposeful obstruction or moral flaws in the individuals in society with whom the scheme is concerned. Instead, says Mises,

The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be–this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.

Now we’re getting into the juicy part of the epistemological differences of the Austrians and an economist like HJC. First, Mises is describing the history of philosophy here. He is talking about the historical emergence of economics as a scientific discipline a couple hundred years ago (writing in 1949, he would be relating events that took place from approximately 1749 onward, and he is purposefully glossing over the proto-economic thought of groups like the Spanish scholastics as well as various contributions made by those in the Eastern philosophical traditions) and the impact on social thought and social events that followed. Consider, for example, HJC’s reference to Adam Smith’s “The Wealth of Nations”, which put forth one of the first serious philosophical challenges to the then predominant “mercantilist” thought of contemporary political economy, a “technique of government and statesmanship” as Mises termed it.

Second, consider how radical this emergence was then, and how radical it is in the face of what HJC is saying now. As we will see very shortly, HJC provides a revisionist “history of capitalism” and spends most of his effort trying to make the claim that much or most of what is historically appreciated as the capitalist industrial development of the Western world did not occur via free markets and free trade, but rather through a series of calculated tariff and other regulatory structures, “techniques of government and statesmanship.” The Misesian/Austrian argument, then, is not that Western capitalism was developed through state intervention but that the remarkable economic development of the West took place in spite of these “techniques of government and statesmanship” which were implemented in ignorance or disregard for the existence of “regularities in the sequence and interdependence of market phenomena”.

Finally, then, note that Mises is directly supporting the claim that economics is a science with discoverable, constant laws of cause and effect (like physics) and therefore “one truth” in answer to a given question, but that the methodology of economics is not based on empirical experimentation (unlike physics) and that it was the radical departure from “ought” and the new focus on “is” that allowed economics to emerge as an objective and true science. This is somewhere close to the polar opposite claim HJC is making when he argues that economics involves learning to figure out which of many competing intellectual school’s claims should be applied as an explanation to a given set of observed economic phenomena based on their pre-existing moral or value systems (“oughts”).

And Mises does HJC one better:

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action,praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.

Now this is powerful stuff and, based on HJC’s lampooning earlier in the chapter of “Economics: A User’s Guide”, the author would likely find this perspective quite challenging at first. As HJC laments, economists seem to think that economics explains “life, the universe and everything.” To this point, Mises replies, “No, economics does not explain this– but praxeology comes close.”

Now is probably a good time to refer to my notes from “Lecture 1” of the 2014 Rothbard Graduate Seminar. For Austrians, praxeology is the broader science studying all human choice (“rational choice” from earlier?), of which economics is a dependent part and probably best developed. Political economy would also be a branch of praxeology, or as Austrians refer to it, the theory of violent intervention in the market (although it’s questionable whether war is a subset of praxeology, or of violent intervention in the market). And within economics, the area best developed and most relevant for the purposes of most people on planet earth, yesterday, today and tomorrow (sorry, Zeitgeisters/Singularityists/Post-Scarcity Societyists) is the branch of economics known as catallactics, or the theory of exchange and especially money exchange.

In future book blogs, these particular issues of methodology and epistemology will undoubtedly be returned to as they form the core disagreement between most economic schools of thought, including HJC, neoclassicalism and the Austrian school. In the next installment, we’ll move on to HJC’s revisionist treatment of the “history of capitalism.”

Book Blog – The Great Deformation, Part III, “New Deal Legends” (#economics, #newdeal #FDR)

Book Blogs are notes about books I’m reading, as I read them. They may or may not be followed up by wholesale reviews in traditional format.

The Great Deformation, by David A. Stockman published 2013 (buy on Amazon.com)

Chapter 8
Stockman doesn’t go into much detail on where the boom ending in 1929 came from, but he does provide an interpretation of why the bust lasted so long and went so deep– the forcible closing off of international trade via protectionist policies and the undermining of the global gold-backed monetary regime by American and European governments alike.

In Stockman’s telling, American president Herbert Hoover was a mostly free enterprise and sound money kind of guy who wanted to avoid inflationist solutions to the economic slump. By 1932 the economy had liquidated the bulk of the malinvestments in excess inventories and capital assets and was ready to turn toward genuine recovery. This process only took as long as it did because ill-reasoned policies like the Smoot-Hawley Act in the United States and similar nationalistic policies in European states along with uncertainty about the British plans to keep the gold-backed pound sterling in place hampered international trade flows. According to Stockman, the United States between 1914 and 1929 had become, much like China circa 1994-2012, a major exporter of capital and consumer goods to the rest of the world particularly in response to trade and economic disruptions of industry and agriculture in European economies during the First World War. The US economy was geared up to provide steel, cotton, cereal grains and other commodities to the rest of the world and had a hard time adjusting output to meet domestic demand when the collapse came in 1929.

Then came FDR and his unique brand of economically inane autarkic nationalist policy. Stockman faults FDR for prolonging, nay, creating, the actual Depression singlehandedly. First, FDR began his presidency by fomenting a banking crisis and declaring a major bank holiday which Stockman saw as unnecessary. As Stockman tells it, the 12,000 some bank failures in the United States during this period mostly occurred in over leveraged regional/rural banks centered around the agricultural and export-oriented areas of the economy representing at most 3% of banking system deposits. Major money center banks in financial centers such as New York never faced a solvency crisis, making FDRs response a solution to a nonexistent problem and therefore a serious problem-creating blunder itself.

Second, FDR torpedoed the London Conference on international monetary mechanisms, throwing the whole system into chaos and instigating another round of protectionist measures at home and abroad. Third, he arbitrarily decided to undermine the USs own commitment to a constant redeemability ratio for the dollar, creating further fear and uncertainty in the economy. And finally, he created a cartel system (National Recovery Administration) which served to freeze prices, arbitrarily shift capital around the economy and buy votes as necessary but did nothing to create the kind of stable conditions preferred by businesspeople and entrepreneurs attempting to make capital investments to serve anticipated consumer demand.

The Depression was a recession that was working itself out despite the protectionist political measures put in place which made adjusting the structure of production to domestic rather than foreign needs, but then FDR came along and made the economy his plaything as he tinkered according to his whims and played powerbroker on the side. That’s what turned the recession into a true Depression.

Chapter 9
Fannie Mae, which was envisioned as a way to revitalize a moribund middle class housing market during the Great Depression by creating a “secondary market” for uneconomic 30 year mortgages at subsidized interest rates, has in the 75 years since its founding led to the total corruption and now nationalization of the home loan market. The creation of the secondary market divorced mortgage underwriting from mortgage servicing as it allowed for mortgages to be easily issued, packaged up and sold to investors as government-backstopped financial products. Further, it resulted in local savings funding local housing investments being transformed into a national and now international market, with the final result being that “Red China” bankrolls $1T+ of the federal home loan market due to balance of payment issues tied to competitive currency issuance.

Social Security, rather than being the crowning social achievement of the New Deal, was its greatest fiscal folly and has created an embarrassing Ponzi legacy that is with us even today. The systems actuarial projections were based on an impossible 5% continual GDP growth rate. The payroll tax used to fund it has proved “regressive” and continues to grow over time, with a current 6.5% of GDP consumed by the tax. The $3T of “trust fund reserves” have been lent out and spent by other parts of the government and represent nothing more than future taxes due.

In so many words, the innovation of deposit insurance combined with the Glass-Steagall act, a bout of inflationary monetary policy which destroyed the profitability of traditional deposit lending under Glass-Steagall and then a round of “deregulations” designed to create new areas of profitability for banks at the expense of growing moral hazard resulted in the utter corruption of the system and the inevitability of a major financial meltdown as witnessed in 2008.

With the outbreak of war in Europe in 1914 and the initiation of a war loan program by the United States government, US farms became the breadbasket of the world. They took on massive debt to expand capital machinery and bring additional acreage into cultivation which resulted in growing farm output prices. When the war ended, the capital investments, including the debt overhang, remained. The financial collapse in the 1930s further exacerbated the situation, leaving farmers as a desperate coalition looking for a political solution to their contractual obligations.

With the nations farmers the hardest hit by the twin spikes of failing cash flow and high debt burdens, they became a powerful voting bloc that got FDR elected which allowed for the cartelization of the farming industry to take place. The thought was that cartelizing the industry and pushing up farm and farm output prices would result in a return to prosperity as rural buyers bought manufactured products from city centers. With their programs in place, the farming lobby was then willing to trade votes for growth and maintenance of these subsidies and controls going forward into the future.

The “Thomas Amendment” created four options for expanding the money supply via currency issuance or gold or silver content debauchery. This inflationary response was seen as the proper antidote to too much debt and too little money and political authorities of the day figured it would give them a free pass to avoid the pains of the bust following the ill-gotten gains of the boom.

FDR channeled the $2.8B windfall from his emergency dollar “revaluation” against gold into his Exchange Stabilization Fund, which the Secretary of the Treasury was then able to disburse at his discretion, turning him into what Stockman calls a “money czar” much like Hank Paulson and Neil Kashkari during TARP.

Chapter 10
In this chapter, Stockman argues that World War II and the Korean War were the last wars to be mostly financed by current taxation in the US. WWII in particular saw a rise in household saving and a decline in household indebtedness that offset the massive rise in public indebtedness. He attributes this in part to the fact that wartime command economy measures dictated that there was little to consume on store shelves, in part to the fact that the government’s propaganda campaigns for war bond drives were a success and in part because the government had adopted an arbitrary bond yield peg that lowered investment returns in competing assets and made government bonds more attractive as a conservative savings vehicle.

Stockman claims that William McChesney Martin, who headed the Fed through the 1950s, was a “tribune of sound money” and saw it as his mission to restrain credit expansion and tame the inflation rate, rather than to stoke it like modern Fed heads. He also claims that the Fed only lent on liquid commercial receivables during this era, compared with the present where the Fed has become a warehouse for illiquid claims on real assets.

Chapter 11
Stockman argues that President Eisenhower was the “last of the fiscal Mohicans” dedicated to trimming federal budgets and making government spending respectful of tax revenue means. At the same time, a growing chorus of voices on the right and the left begin arguing for a “new economics”, Keynesian government planning of the macro economy, to not only fight recessions but “fine tune potential GDP” during recoveries and booms. This theory comes at the expense of sound money and has a pro-inflation bias.

Chapter 12
Following World War I, Great Britain attempted to return to the pre-war parity between the pound Sterling, gold and the US dollar despite a massive inflation during the war years. At the same time, the British government embarked on an expansion of its domestic welfare programs which ultimately broke the back of the pound culminating in the London gold conference in 1931 which proved the futility of maintaining the old exchange ratios in the face of inflationary chaos.

At the end of World War II, the United States attempted to take the lead with a gold-backed dollar as the world’s reserve currency in a new arrangement, the gold exchange standard, engineered at the Bretton Woods conference in 1944. Of course, the architect of this scheme was the exact same architect of the doomed British plan (monetary and social policy), the imperious Lord Keynes. And rather than a true gold standard, what Keynes wrought was a feeble attempt to hide dollar inflation by creating a scheme where foreign exchange was to be exchanged for dollars, not gold, which was ostensibly suppose to allow additional credit and currency to be pyramided atop the same amount of gold reserves at formal exchange rates.

For a time, this precarious system seemed to work, helped along by the US-led international “gold pool” which sought to exchange gold against currency to calm price increases in the private London gold market.

However, the decision to engage in fiscal expansionism in the US via welfare spending increases and costly wars abroad (ie, Vietnam) all financed by deficit spending rather than real tax increases led to an unhinged inflation and a boiling London gold market. The international gold pool was quickly depleted in a series of panics in the late 1960s, eventually culminating in Nixon’s infamous closing of the US gold window.

This “guns and butter” policy, led by the intellectual disciples of Keynes ensconced in major US universities, was the final nail in the coffin of sound money in the US, and perhaps even the world, and ushered in a new era of freely floating currencies, chronic deficits, massive credit expansion and a seemingly never-ending series of financial and economic bubbles that we are all living with the consequences of today– ironically, the media at the time was fooled into believing this “enlightened” policy had permanently tamed the (government-policy induced) business cycle.

Chapter 13
Milton Friedman, hailed as a staunch libertarian and champion of small government politics and free market economics, gave intellectual blessing to the greatest economic bastardization of all time– the transformation of the gold standard US dollar, once and for all, into the “T-bill Standard”.

Friedman’s erroneous analysis of the cause of the Great Depression — a crashing M1 money supply caused by an overly tight Federal Reserve — led him to faith in a new standard for monetary policy, a simple inflation targeting of 3% per annum, with the market smoothing out the rest. Friedman believed that if the Fed could credibly adhere to a uniform rate of inflation over time, the business cycle could be banished and the economy would be free to grow without abatement and without the restrictive context of a gold-backed currency.

This new policy proved its danger almost immediately with the out of control inflation of the 1970s and opened the door for unending deficit finance by the federal government. And while Friedman had hoped for a series of Fed chairmen who would objectively guide the M1 money supply along this path (a strategy destined to failure because it turns out the Fed doesn’t control M1, market demand for loanable funds does) instead the office has been inhabited by activist acolytes since the tight money days of Volcker.

The current global monetary regime of competitive free floating currencies is truly without precedent and much of the modern US’s largesse was financed by willing mercantilist politicians in foreign trading partner nations. It remains to be seen what happens to this system when one or more countries reach the end of their rope, domestically, and are not longer willing to import the United States’ inflation as they export their wealth to foreigners for consumption.