Tag Archives: Austrian economics

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.”

Notes – The 2014 Rothbard Graduate Seminar (#economics, #gradstudies)

Last year I attended the Rothbard Graduate Seminar at the Ludwig von Mises Institute in Auburn, AL as an observer. The following are notes I typed while listening to lectures and discussions between faculty and graduate students. They have been edited for clarity, organization and in some cases privacy.
Lecture 1, Praxeology, David Gordon
Praxeology is the science of human action, uses deductive methodology, begins with axiom of man acting, deduced with supplementary postulates (Rothbard uses action axiom, Mises never refers to “Man acts”, he refers to the concept of action)
Supplementary postulates: leisure is desired over work, there are a variety of economic resources
Economics is the best-developed branch of praxeology: Crusoe economics (isolated human action), catallactics (economics of exchange) including barter and money
The study of violent intervention in the market, socialism and interventionism, are also part of praxeological analysis, as well as “games”, but these have not been well-developed (no systematic treatises?)
Examples of praxeological reasoning— every action uses means to achieve an end; every action is a choice between alternatives; the actor always chooses his highest valued alternative
Methodological individualism— only individuals act, not groups or societies or nations or classes, however this doesn’t imply that nations and classes don’t exist
On Austrian Methodology” by Robert Nozick, an interesting article
Methodological Individualism has been used to deflate various ideologies such as nationalism, statism, etc.
Why should we do economics this way (praxeology)?
Popular objection: principles of praxeology are supposed to be synthetic (truth about the world) and a priori (knowable by simply thinking about them), but you can’t learn about the world just by thinking about it, the meaning of concepts is conventional, people just decide to use words a certain way, you can’t make something true about the world just by defining words, other a priori truths are logical and tautological that say nothing new about the world
Rothbard’s answer: concepts come from experience, action isn’t an arbitrary construction but rather an abstraction from experience, if we get the concept from experience we know action exists, then anything we deduce from that applies to the world, deduction transmits truth from premises to the conclusion, if the premises are true the conclusion is true
Tautology objection: rests on an equivocation
Rothbard’s objections to the mainstream: they construct mathematical models and then test predictions derived from the models; math substitutes functional relations for causation, also introduces the false assumption of continuity but human action occurs in discrete steps, he objects to the testing because there is no way to perform controlled experiments as all phenomena are occurring simultaneously, and there are no quantitative laws of human action, human action is the product of choice
Questions:
1.) In property rights theory, how can joint ownership (or government ownership) of a resource be explained if “only individuals act”?
2.) How do we know the experience of action is true? Don’t we need a prior theory to interpret the empirical experience of action as action?
3.) Can Austrian economics be translated into math? If not, does this suggest it is not rigorous or coherent?
4.) Why is the Austrian ERE a useful abstract tool for studying elements of reality in isolation, but the “equilibrium” economy of mainstream thought is not?
Discussion session:
Rothbard’s book (Economic Controversies) had great depth, not just covering epistemology and economic theory but historical commentary, etc., this book is also digestible, repetitive so you get the same concept dissected from different angles, straight to the point, challenges the mainstream orthodoxy, accessible to the layperson, Rothbard starts with realistic premises and deduces from there which makes this approach even more empirical (econometric models falsify the real world), his criticisms are very thorough and you want to smile after you read them which is unique in reading academic papers. Rothbard isn’t ashamed to say there is meaning and truth.
Methodological individualism applies only to the concept of action, it does not exclude the idea of something like a “cosmic consciousness”, there is a difference between ontological and methodological claims; praxeology is not a metaphysical system, it simply takes the world as we find it
Mathematical annotation is more precise than verbal logic, but one problem is how do you convert initial premises into mathematical annotation (and back when a conclusion is reached)?
“Academic choice”, public choice analysis applied to the incentive structure of academia and how this influences their search for truth
Lecture 2, Methodological Debates, Jeff Herbner
Every academic discipline is defined by its method and scope (boundaries).
Rothbard— Each subject matter has a proper method; neoclassical approach— there is only one scientific method.
Praxeology’s divisions:
  1. Theory of Isolated Person (autistic exchange)
  2. Theory of Voluntary Exchange
    1. barter
    2. medium of exchange (catallactics)
      1. unhampered market
      2. violent intervention
      3. violent abolition of market
  3. Theory of Games
  4. Theory of War
  5. Unknown
Neoclassical divisions:
  1. Rational choice model
    1. Market participants
    2. Political participants
    3. Social participants
  2. Behavioral economics
Economics— voluntary associations w/ economic calculation (UME, HME)
Sociology— voluntary associations w/o economic calculation (family, church)
History— contingent, concrete conditions of action blended w/ theory
Ethics— personal action, interpersonal action, voluntary and involuntary
Politics— involuntary associations (gangs, states)
Praxeology— logic of action, economizing, underneath all 5
Praxeology and Ethics— public policy (economic science is value free, but economic policy is value laden and requires assumptions or principles about ethics and what is desirable to make conclusions), critique of ethics, political philosophy, welfare economics
Misesian Economics— a.) economic theory b.) economic history (understanding economic action in the past) c.) applied economics (predicting economic effect in the future based on proposed economic cause, i.e., policy)
Neoclassical Economics— economic model and empirical testing
Questions:
1.) Is the division in economics between calculating and non-calculating, or financial calculation and non-financial calculation? How are non-calculating actors choosing if not by some form of calculus?
2.) Who has best developed Games and War theories of praxeology?
3.) Why aren’t Austrians trying to develop comprehensive treatises in these fields?
4.) What is the application of game theory?
5.) How do you know when a circumstance is new and requires an extension of the existing theory, or when it is “unoriginal” and can be explained by the previous body of theory? How do we know when existing theory can’t explain a new phenomenon or historical incident? How is this explanation different from the pragmatist argument about a lack of common principles?
6.) Who, if anyone, is worth reading right now outside of the Austrian tradition, and why?
7.) How can “proportionality” be administered in a judicial punishment setting without treading into utilitarianism or other non-subjectivist value systems?
Lecture 3, Austrian Microeconomics, Peter Klein
Price theory, production theory, the theory of the firm, some parts of capital theory, etc., constitute “Austrian micro”
It is not mainstream micro minus calculus and some graphs plus “spontaneous order” and “radical subjectivism”, etc.; this is a misconception of the contribution of Austrian econ
Mengerian economics— focused on mundane topics, not esoterica; shares subjective utility and marginal analysis of Walras and Jevons; not simply verbal version of neoclassicism, emphasized cause and effect real market behaviors and thus “causal-realist”
Fundamentals of Austrian micro— economics as the analysis of action (praxeology); teleology, means and ends; economic goods which are concrete (real prices of real goods, not abstract prices of conceptual entities) and are limited and desirable, split into consumer and producer goods (direct and indirect serving of human needs); time, implied by action, itself a scare means and the notion of time preference; production is rearrangement, not creation ex nihilo, takes time and uses stages
General insights on valuation include emphasis on discrete, marginal units, not abstract categories, as well as attention to demonstrated preference
Menger’s utility theory— the value of particular means, marginal utility being the value of the highest-ranked end that cannot be achieved if a unit is lost, law of diminishing marginal utility (not a psychological concept, a logical concept focused on individual use of each unit not the benefit)
Contrasts with neoclassical utility theory— consumers in NCM are choosing among heterogeneous bundles, choosing between total utility of each bundle; marginal rate of substitution is rate at which consumer substitutes unit of good X for unit of good Y (slope of indifference curve) vs. causal-realist where substitution occurs at the margin and demonstrates that the marginal utility of X is greater than the marginal utility of Y w/ no separate income or substitution effects; indifference can not be demonstrated in action and is therefore not a scientific concept (focus is on explaining actions, not states of being)
Price determination— analysis of the marginal pairs (see Greaves, paper by Egger) states that prices are set by pairs of buyers and sellers; characteristics of the equilibrium price, determined exclusively by individuals’ subjective valuations, subjective valuations of buyers and sellers matter, not set unilaterally by sellers, the real prices actually paid in market transactions
Prices and knowledge— buyer and seller valuations can include speculative demands (they don’t need to know in advance what equilibrium price will be), prices as signals (Hayek)
Factor pricing— Austrian theory of imputation, rental prices imputed backwards to the ???
Applications and extensions— no distinction between production and “distribution” (Piketty), wealth is “distributed” in the act of production, it is not produced and then arbitrarily distributed by capitalists, government, etc.; rent = unit price of services of any good (Fetter); production functions, but no cost curves; firm as an organization, not a productive unit
Discussion section:
Kirzner and Schumpeter restrict entrepreneur to nothing but alertness, the Misesian approach is more expansive and includes everyone in some capacity acting as an entrepreneur
Mises in Human Action talks about the entrepreneur as a leader, who is far-seeing, comes from Weiser, who also mentored Schumpeter; Mises was uncharacteristically fuzzy and unclear on his writings on the entrepreneur, occasionally he refers to the “promoter” (ideal type) involving leadership, having a quicker eye than the crowd, etc., but typically he refers to the function of entrepreneurship
Kirzner is talking about alertness to opportunities for profit, but entrepreneurs create goods, capital, companies, etc., not “opportunities for profit”, opportunity implies objective configurations of resources that allow for a decision or action or take place, but is this analogous in the business world? Or is “opportunity” a metaphor? Do we need the construct of “opportunity” to explain what entrepreneurs do?
Kirzner’s equilibrium is the condition under which no unfound profit opportunities exist
Mises vs. Knight on judgement— Mises never refers to Knight in this context, judgement is more of a black box for Mises than for Knight
Questions:
1.) If Austrian econ is not distinct, why do mainstream thinkers argue so violently with Austrians?
2.) Did the anglo-American Austrians, etc., self-consciously identify with the “Austrian school” or did we lump them in post hoc? If so, what did they refer to themselves as?
3.) When challenging Keynesianians and other mainstream opponents, Austrian critics often accuse them of “not understanding economic calculation”. Is this criticism accurate? Why or why not?
4.) Would it be better to distinguish between “offers” and “prices”, where “offers” are ratios of exchange advertised but not consummated, hypothetical, whereas “prices” represent historical data of consummated exchanges between buyers and sellers?
5.) Is Kirzner’s “capital-less entrepreneur” really a description of professional managers, and if it is, is it a legitimate analysis or does it still lack connection to reality?
6.) Is “public choice” an analysis of entrepreneurship in socialism, or in privatization within socialism?
Lecture 4, Taxation and Public Finance, Mark Thornton
Rothbard’s approach: nature of taxation; technical corrections to mainstream analysis; theories of “just” taxation; neutrality of taxation; approaches to tax reform
Interventionism: autistic (ruler tells the ruled what to do); binary (e.g., taxation, transfer of property from owner to intervener); triangular (ruler tells two ruled how they can interact with each other, e.g., prohibitions and regulations)
Impoverishment caused by taxation is in proportion to the amount of taxation, not the form the taxes take
Taxes can not be passed on to consumers because of competitive pricing of supply and demand
Taxation distorts market outcomes in two ways: the withdrawing of resources from the economy, and the redistribution of those resources across the economy
“Benefit principle”— pay taxes in accord with the benefits you receive
“Ability to pay principle”— pay taxes in accord with your relative wealth
There are no scientifically valid principles of taxation, there is no conceptually possible neutral tax
Discussion section:
How to explain countries where majority of taxes are paid by a minority of people, as Calhoun’s analysis suggests the majority bear the costs for a small minority to benefit from? The answer could be additional implicit subsidies such as protections from the State in terms of liability or regulation that they see taxation as payment for
Can the State make investments? Rothbard is writing against the idea of “social investment” such as infrastructure spending, and he is writing in terms of capital structure— they’re not integrated into economic calculation, they’re not part of the capital structure; counter-example, State-owned oil production
Questions:
1.) Why doesn’t taxation create business cycles due to mass misallocation of resources?
2.) When taxes are “shifted backward” to suppliers through lowered net revenue, aren’t consumers STILL paying the tax due to lower supply and lower quality of remaining supply versus free market outcome?
3.) Why can employers shift taxes to employees if businesses can’t shift taxes to consumers?
4.) In the marketplace, how is price discrimination explained in reference to the benefit principle?
5.) Does the lack of scientificness of taxation principles imply the irrationality and injustice of government in general?
6.) “Over” and “under” exploitation of a government owned resource… relative to what? How do we know how much the free market would exploit it?
Lecture 5, Monetary Theory, Joe Salerno 
Money as a medium of exchange— trade requires barter in the absence of money, creating high search costs due to the double coincidence of wants
Money as unit of account— used to express prices and record debts, simplifies relative price comparisons
The value of money— measured as the inverse of the price level measured against an arbitrary basket of goods (i.e., 1/P), what does one unit of money buy?
The (neo-)classical dichotomy— the theoretical separation of nominal and real variables; Hume and classical economists suggested monetary developments affect nominal variables but not real variables; if money supply doubles, for example, all nominal variables, such as prices, will double; in the short run, supply and demand determine the value of money, in the long run cost of production determines the value of money
The neutrality of money— proposition that changes in the money supply do not affect real variables
Purchasing Power Parity (PPP)— relies on the “law of one price” which establishes that arbitrage opportunities eliminate differences in value of common goods in different markets; exchange rates are supposed to be ratios of price levels between two economies
Discussion section:
What Has Government Done To Our Money?” is Rothbard’s explanation of how an economy “progresses” from commodity to fiat money, because Mises said that a true fiat money is a historical question given that every episode in the past has been a form of “credit money” based on expectations about an eventual return to a commodity money that predated it
Questions:
1.) For a relative price to be a useful data, wouldn’t it have to be collected from a real exchange (i.e., barter exchange)?
2.) Do mainstream models explaining fiat money violate Occam’s Razor?
3.) If velocity of money is increasing, isn’t the “velocity of hoarding” increasing at the same rate because all money balances must be held by somebody at some time?
4.) If IEOR policy is causing banks to “hoard” bank balances and this is non-expansive, is this money “neutral” to the economy or what effect is it having? What role does it serve? (Compare to Jingjing’s question on corrupt Chinese official cash balances)
Lecture 6, Professional Strategies, Career Advice and Current Research Topics, Peter Klein
 [I did not take any notes during this discussion.]
Discussion section:
[I did not take any notes during this discussion.]
Questions:
1.) What about pursuing a career as a “private lecturer” by establishing yourself as an authority on Austrian economics with a crisp website?
2.) How can Austrian economist career hopefuls improve their career by thinking in terms of their “personal brand”?
Lecture 7, Monetary Policy, Jeff Herbener
Monetarists— micro efficiency, but macro instability caused by monetary regime; optimal monetary regime would create stability in the price level; requires an elastic money supply to offset forces causing price inflation or deflation to keep price level roughly stable; avoid trade imbalances w/ flexible exchange rates
Monetary Disequilibrium Theory (MDT)— micro efficiency, macro inefficiency; means of payment must accommodate changes in money demand; avoid price deflation from excess demand for money; separate unit of account from general medium of exchange, supplant general medium of exchange with means of payment; competitive issue of means of payment adjust to accommodate changes in money demand;
Banking school FB— micro efficiency, macro inefficiency; money stock and credit supply must accommodate the needs of trade; avoid price deflation from excess demand for money; competitive issue of fiduciary media adjust to accommodate changes in money demand
Currency school FB— micro efficiency, macro efficiency; production of money and money substitutes should be integrated into the social economizing process of economic calculation by entrepreneurs
“Free banking” in Scotland— Rothbard suggests using Vera Smith’s schema of 4 groups (free vs. central banking Banking School, free vs. central banking Currency School) rather than Larry White’s 3 groups; there was no Banking School free banking in Scotland, and the system didn’t work well, numerous bailouts, pyramiding credit on top of Bank of England notes;
Free Market Monetary reform— separate money from the State; abolish fFed, dollar redeemable in gold, legal enforcement of 100 percent reserve on money substitutes;
Ancillary roles for the State— Hayek (Sennholz), abolish all legal disabilities on private enterprise production of money and money substitutes; Yeagar (Timberlake), state defines the unit of account in terms of market-basket of goods, the general medium of exchange is eliminated, private enterprise provides means of payment
Central role for the State— Fisher, state defines a market-basekt of goods for the unit of base money, currency is redemption claim for base money, supply of currency managed to keep price level stable; Friedman, Fed conducts non-discretionary monetary policy to keep the price level stable
Discussion section:
 [I did not take any notes during this discussion.]
Questions:
1.) What “problem” did the MDT respond to? Similarly, did the Monetarist framework develop in response to existing statist monetary regimes or was it to address perceived problems with a theoretical free market monetary regime?
2.) Does the existence of taxation in general complicate or prevent the possibility of private production of the money supply?
3.) Is “balance of payments” thinking by mainstream economists an anachronistic way of thinking in a non-commodity standard money world?
4.) Why do socialist countries have money? How does money function in these economies?
5.) How can the crash and then explosion in the price of gold since ~2000 be explained in Austrian monetary theory?
Lecture 8, Mark Thornton, Comparative Economic Systems
Hoppe’s A Theory of Socialism and Capitalism (1988)— systematic, offers a theory of comparative economic systems, based on the concept of private party
Capitalism— based on property rights; property is the result of scarcity; provides non-violent mechanism for resource allocation; Garden of Eden, property right to your body; original appropriation; contractual exchanges; wealth; absence of systematic aggression; no unemployment (idle resources) problems
Russian-style socialism— socialism par excellence; State owns the means of production; equality vs. anarchy of production; aggression and democracy; less investment, appropriation (black market); calculate the structure of production = waste; Mises (1920) complete vs. relative; East vs. West Germany
Social democratic socialism— “reform”, taking steps at the ballot box; “commanding heights” (the sectors deemed essential by socialist planners for control such as education, utilities, transportation networks, etc.); owners remain caretakers with partial ownership; property owners taxes for redistribution; dominant form in Europe; Sweden
SDS vs. Russian-Style and Capitalism— solves the calculation problem; compared to Russian, less impoverishment, less over utilization of resources, more leisure, more incentive to work, save and invest; but it’s still poor compared to capitalism; both reduce production of talent and skills, increase the production of aggressive and political skills, both increase barter and black market activities
Conservative-style socialism— supports status quo, old order; private property, commanding heights; sin taxes, not income taxes; price controls, unions, prohibitions, not redistribution; regulations and cartels; Nazi Germany, Fascist Italy, Imperial Japan (Prussian social monarchy?)
Similarities between conservative and social-democratic socialism— both have private property and commanding heights; both infringe on private property; both have negative effects on labor, savings, investment, innovation; SDS stresses egalitarianism, CS stresses nationalism; both underperform capitalism
Socialism of social engineering— American pragmatism, technocracy; positivism and empiricism; reality must be verifiable or falsifiable by experience, “socialism might work”; however, empiricists must implicitly assume the existence of non-empirical as knowledge of reality, i.e., logic, math, geometry
Empiricism— must assume some sort of existence of cause and effect; must presume the constancy principle in order to proceed in its investigation, but the constancy principle (there are relationships to be found empirically) is not established, confirmed or falsified empirically, it is a given a priori; life proceeds on the basis of cause and effect; social engineering via empiricism is a giant contradiction
Discussion section:
Crony capitalism is the modern day equivalent of mercantilism
Old wine in new bottles, people can intellectually reject an idea like mercantilism as an historical phenomenon but if it is repackaged in a new brand they might adopt it as sensible
Are many of the distinctions of totalitarian regimes explained by the path to power? IE, Hitler came to power through the ballot box, Mao led a peasant rebellion, Lenin was elected by the army
Democracy is one of the most stable forms of the State; democracy involves participation of the population, and has a process for slowly implementing policies vs. unitary or limited participation and the ability to make drastic, sudden changes via emperor or dictatorship; democracy tends to hand out favors to large groups of people so it is hard to create an opposition coalition to overturn it
Mises’s three pre-conditions of the division of labor and economic specialization: private property in the means of production, free exchange (for price formation) and ???
Questions:
1.) There seem to be an endless variety of “socialisms” reflecting the unique cultural and historical factors of each society that has suffered them; what are some UNIVERSAL elements of socialism that must be or always are present to be declared a socialist system?
2.) Does technological innovation and economic “evolution” allow for political change or does it work in the opposite order?
Lecture 9, Property Rights and the Public Sector, David Gordon
Ethics and economists— one of Rothbard’s most original contributions is his criticism of the way mainstream economists deal with normative issues; economists want economics to be value free, economics is a science, normative judgments are mere subjective preferences; Rothbard agrees that economics is value free, but he doesn’t think that ethical judgments are mere subjective preferences; mainstream economists are caught in a dilemma, they want to make normative judgments that do more than express their preferences, how can they do so?
Concealed value judgments— some economists think that they can escape the dilemma by endorsing a value-free statement that still leads to normative recommendations; if everybody prefers something, then it should be done (strong Pareto criterion), if at least one person favors something and it makes no one worse off, it should be done (weak Pareto criterion), these principles still involve value judgments; what if everyone has wrong views about what is desirable, or the starting point involves violating someone’s rights?
Unanimity principle— Rothbard thinks that the unanimity principle has had bad results in practice; because unanimous agreement can’t in practice be reached, Buchanan and Tullock settle for less than full unanimity
Rothbard on the State— it is a fundamental mistake to view the state as a voluntary organization; it is a parasitic, predatory gang that seizes resources from the productive; Rothbard follows Oppenheimer and Nock
Public sector— if the State is predatory, then the productivity of the public sector is problematic; the State takes resources by force, thus, its activities cannot be considered productive; government expenditures should be subtracted from, not added to, production statistics; Rothbard’s definition of productivity is intertwined with an understanding of demonstrated consumer preference on the market
Statistics— Rothbard is suspicious of statistics collection; they are not value neutral but are essential to government control
Utilitarianism and property rights— many economists take some version of utilitarianism for granted; it’s argued that recognition of property rights makes nearly everybody better off; this isn’t a value-free claim, but it’s defended as non-controversial; Rothbard objects that this position doesn’t consider the justice of property rights, any stable system of property rights is accepted;
Escape from the dilemma— Rothbard believes the dilemma of the economists can be escaped by developing an objective ethics based on natural law; self-ownership, Rothbard defends the concept by rejecting alternatives, slavery and a system where everyone owns part of everyone else; if you own yourself, then by mixing your labor with unowned resources you own them as well; once you own something you can exchange it and give it to anyone you want, including the right of bequest;
Externalities—
Discussion section:
[I did not take any notes during this section.]
Questions:
1.) Can any philosophical principle be established simply by rejecting alternatives? (Last man standing philosophy?)
2.) What criteria are sufficient for “mixing labor” and taking ownership? If mixing labor with factors of production, why doesn’t this mean workers own them? What makes “mixing labor” effective in one circumstance and not effective in another?
3.) Walter Block claims that it’s okay for libertarians to take from the State, but no one else. Is there any logic to this?
4.) Maybe there is a Coaseian solution for the dismantling of the State— it doesn’t really matter HOW it is privatized, it just matters that it IS privatized?
5.) When your money is taxed, it is stolen, and your money is fungible and spent, so what legitimate claim do you have to fungible, disposed assets that can not be traced?
6.) What about when government functionaries in “marketable” positions are part of unions or agitate for State privilege?
Lecture 10, Current Debates and Critiques, Joe Salerno
[I did not take any notes during this section.]
Discussion section:
Is the term “Austrian” valuable as a marketing concept? “Capital Based Macro”, “Causal Realism”
You don’t want to be the kid at camp who picked their own nickname, names come from the outside
Is there rhetorical value in labeling opponents in sensational ways (“Friedman is a socialist”) or does that hurt your cause more than it communicates information?
Questions:
1.) What might have happened to the Austrian school’s influence if WW2 had never occurred?
2.) What critical lessons have we learned (as a “movement”) from the Salerno/Hulsmann theory of the decline and rebirth of Austrian economics?
3.) Why aren’t there more applied economic works in the Austrian tradition? What would be some priority applications?
4.) What is “Austrian economics in a nutshell” or the Austrian elevator pitch? Why Austrian?

Review – The Panic Of 1819 (#history, #economics, #banking)

The Panic of 1819: Reactions and Policies (buy on Amazon.com)

by Murray Rothbard, published 1962, 2007

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library. Please note, this book is also available as a free PDF on the Mises.org website, which is how I read it [PDF]

Introduction

Rothbard’s “The Panic of 1819” is a lot of things, but the thing it is most is yet another reminder of the old dictum “Plus ca change, plus c’est la meme chose”. Contained in this approximately 250-page reporting of the causes, consequences and social responses to the Panic of 1819 are the same behaviors and political programs that could be found in today’s headlines about corrupt Chinese banking practices, Chicago-school monetarism and Keynesian pump priming, including early recognition that attempts to kickstart “idle resources” logically implies a totalitarian command economy where the government manages all resources (and all people) at all times.

It’s all here, and more. There is nothing new under the sun.

How the business cycle gets started

Early on page 16 the reader is entreated to an excerpt from private correspondence between Pennsylvania politician Condy Raguet and European economist Richard Cantillon in which Raguet tries to clear Cantillon’s confusion as to how fractional reserve banking manages to operate to the point of a catastrophic bubble instead of wobbling and crashing under its own confusing weight:

You state in your letter that you find it difficult to comprehend, why person who had a right to demand coin from the Banks in payment of their notes, so long forebore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not the interest of the first to press the banks and the rest are afraid. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society.

Today’s full reserve Austrian economists, caught between clueless and complacent bank executives, a massively indebted “ownership society” public, Keynesian and monetarist adherents and “free banking” friends who are anything but, simply has no place to turn for safety. He defaults to “enemy of society” status in the ensuing confusion though he seeks only to point out the folly of these fractional reserve systems which inevitably injure all in tying their fates by one string.

The Panic of 1819 followed the War of 1812. During the war, imports and exports came to a halt due to the sea being a battleground and many products which would’ve been imported were kept in their home (overseas) markets to furnish the war effort. As a result, the young States United of America saw the development and growth of domestic manufactures and exportable industries. However, when the war ended and international trade resumed, many domestic manufacturers found they weren’t actually competitive facing world markets (this makes sense because if they had been they probably would’ve developed before the war, not during it in a period of “isolationism”). This created a nascent strain of “protectionist” thinking and monied interests who saw a benefit to adding tariffs on imported products.

The end of the war and the resumption of trade saw a banking boom (fractional reserve) which finally ended in 1819 with the panic. From about 1819-1823 the country was in and out of what could be termed depressed economic conditions. In many ways the early country’s experience mirrored the present day experience from 2008-2009 onward, especially the contentious economic and political debates about how to respond.

Something I found fascinating was what happened to various “macro” economic metrics during the Panic (what we’d call a crash):

The credit contraction also caused public land sales to drop sharply, falling from $13.6 million in 1818 to $1.7 million in 1820, and to $1.3 million in 1821. Added to a quickened general desire for a cash position, it also led to high interest rates and common complaint about the scarcity of loanable funds.

That last bit is especially fascinating to me. I don’t know what the state of federal funded debt was in this time period as Rothbard doesn’t really go into the concept or existence of a “risk free rate” but it is interesting to see “deflation” leading to HIGHER rather than LOWER interest rates. In today’s topsy turvy world, low rates are supposed to be the result of the flight to safety during a depression while high rates are supposed to herald an economic recovery. However, it seems it was just the opposite in 1819.

I found myself charmed by the ability of so many in 1819 to see what was the cause of the bubble and the collapse, even politicians. For example, in an address supporting a “relief bill”, Illinois Senator Ninian Edwards observed:

The debtors, like the rest of the country, had been infatuated by the short-lived, “artificial and fictitious prosperity.” They thought that the prosperity would be permanent. Lured by the cheap money of the banks, people were tempted to engage in a “multitude of the wildest projects and most visionary speculations,” as in the case of the Mississippi and South Sea bubbles of previous centuries.

I enjoyed learning that even medical analogies to describe the cause and effect of monetary expansion and collapse were popular in 1819. One government committee, the Hopkinson Committee, arguing against “debt relief” legislation, noted:

palliatives which may suspend the pain for a season, but do not remove the disease, are not restoratives of health; it is worse than useless to lessen the present pressure by means which will finally plunge us deeper into distress.

I thought that pain pill and hangover analogies were something recent and peculiar to adherents of the Austrian school but critics knew of these rhetorical flourishes even two hundred years ago, at least!

On the topic of “flight to safety”, I did make note of one paragraph which seemed to suggest that while interest rates on bank debt and other commercial lending may have risen, interest rates fell dramatically on tax-backed (ie, “guaranteed”) government issues, for example:

“A Pennsylvanian” pointed to United States and City of Philadelphia 6 percent bonds being currently at 3 percent about par– indicating a great deal of idle capital waiting for return of public confidence before being applied to the relief of commerce and manufacturing. Thus, in the process of criticizing debtors’ relief legislation, the “Pennsylvanian” was led beyond a general reference to the importance “confidence” to an unusually extensive analysis of the problems of investment, idle capital, and the rate of interest.

This theme of “idle capital” was remarked on more than once in the text and by various parties with differing viewpoints. This is a particular fetish of Keynesians and monetarists who cite the existence of “idle capital” as an excuse for government to raise public spending to “put it to work.” It is fascinating to see these early Americans predicted Keynesianism by almost 150 years!

Another thing I found remarkable was the prevalence of either state-owned banks (federal, with the Bank of the United States, or individual states) or strong political pushes to establish these banks in response to the ensuing depression and the stress this created on the banking system. In other words, nationalization of the banking industry as a political prop to collapsing FRB institutions is nothing new:

The Alabama experience highlights the two basic measures for monetary expansion advocated or effected in the states: (1) measures to bolster the acceptance of private bank notes, where the banks had suspended specie payment and where the notes were tending to depreciate; and (2) creation of state-owned banks to issue inconvertible paper notes on a large scale. Of course, the very fact of permitting non-specie paying banks to continue in operation, was a tremendous aid to the banks.

People refer to the United States economy and monetary system at various points in time being “free market”, and while it’s true that tax rates and business regulations were generally less cumbersome near the nation’s founding than today, it is also true that there has been a virulent strain(s) of interventionist thinking and policy-making from very early on. It wasn’t until 1971 with Richard Nixon’s closing of the gold window that the US currency finally went fully inconvertible, and yet already in 1820 (if not earlier), people were calling for inconvertible paper currencies issued by state-owned banks. Some free market!

The whole episode seems to beg a question that, sadly, Rothbard did not explicitly address or explore, namely, Why did banks need to be chartered by the government in the first place? Although there were calls during the response to the economic crisis for various forms of occupational licensing and business regulation (aimed at stemming the flood of superior imports damaging local industries), the reality is that any other business but banking, such as butchering, baking, sawmilling, leather tanning, import/export, etc., did not require special permission granted by a session of the local legislature, state or federal. Why was banking different, requiring an act of congress to get the enterprise going?

Besides the fact that many such banks seemed to be public-private partnerships which included state “capital” injected into them, the only answer I have managed to come up with so far that makes any sense is that the banks were all set up on a fractional reserve basis, and a blessing by the government served to either 1.) grant legitimacy to an illegitimate institution or 2.) create the pretense and wishful thinking of providing some kind of “legal oversight” to what everyone at the outset understood to be an essentially criminal organization operating with a special legal privilege or 3.) both.

Because every bank had to be chartered, when the FRB system inevitably hit a bump in the road as it did in 1819 and many banks wished to suspend redeemability of their bank notes to stem outflows of specie, their status as creatures of the public legal mechanism meant they could run to the legislature for permission to violate their own contracts– and they almost always got the permission granted. Now, for example, if angry pitchfork-wielding townsfolk show up to break into the vault, take their gold and lynch the bankers, the Sheriff might step in with his posse to make sure everyone remembered their role.

Keynesians and monetarists and Chinese bankers

Continuing the theme of “everything new is old”, I was struck by commentary from a Pennsylvanian congressman named Henry Jarrett suggesting that government relief money might serve to prime the pump of the economy:

An inconsiderable sum of money, for which the most ample security could be given, being loaned to a single individual in a neighborhood, by passing in quick succession, would pay perhaps a hundred debts.

Kind of sounds like George W. Bush urging Americans to go shopping after 9/11, in order to get confidence in the economy back. It’s a crass Keynesian tactic inspired by a confused understanding of the relationship between production, consumption and the role of money in the economy.

It was also interesting to see how many people back then could sense there was a problem with the way the banking system operated, but were confused into thinking banking in and of itself was illegitimate, rather than simply the practice of issuing a greater supply of banknotes than the amount of specie held in reserve. Consider a campaign circular for a candidate for Congress from mid-Tennessee, who said:

banking in all its forms, in every disguise is a rank fraud upon the laboring and industrious part of society; it is in truth a scheme, whereby in a silent and secret manner, to make idleness productive and filch from industry, the hard produce of its earnings

If you substitute “banking in all its forms” with “fractional reserve banking”, you’ve got a pretty accurate description of the nature of the problem.

It’s also worth quoting at length the argument of “An Anti-Bullionist”, who thought that the economic crisis of 1819 was caused by specie money specifically, rather than abuse of specie money via fractional reserves. In its place he sought to create a fully inconvertible paper currency issued by the government which would of course be “well regulated” and serve to protect the economy from the inevitable deflationary death spiral of the specie system he believed he was witnessing. Shades of later monetarist thinking abound:

His goal was stability in the value of money; he pointed out that specie currency was subject to fluctuation, just as was paper. Moreover, fluctuations in the value of specie could not be regulated; they were dependent on export, real wages, product of mines, and world demand. An inconvertible paper, however, could be efficiently regulated by the government to maintain its uniformity. “Anti-Bullionist” proceeded to argue that the value of money should be constant and provide a stable standard for contracts. It is questionable, however, how much he wished to avoid excessive issue, since he also specifically called a depreciating currency a stimulus to industry, while identifying an appreciating currency with scarcity of money and stagnation of industry. One of the particularly desired effects of an increased money supply was to lower the rate of interest, estimated by the writer as currently 10 percent. A lowering would greatly increase wealth and prosperity. If his plan were not adopted, the writer could only see a future of ever-greater contractions by the banking system and ever-deeper distress.

Even chartalists will be happy to see that early proponents of the “American System” of nationalist public-private industry were representing their views in the debates of the early 1820s, for example:

Law pointed to the great amount of internal improvements that could be effected with the new money. He decried the slow process of accumulating money for investment out of profits. After all, the benefit was derived simply from the money, so what difference would the origin of the money make? And it would be easy for the government to provide the money, because the government “gives internal exchangeable value to anything it prefers.”

Why even have a private industry? Or money, for that matter?

Luckily, advocates of laissez-faire existed in this time period, too, and they were not silent. Commenting on one proposal to deal with “idle capital” by Matthew Carey, the “Friends of Natural Rights” wrote:

The people of the United States being in a very unenlightened condition, very indolent and much disposed to waste their labor and their capital… the welfare of the community requires that all goods, wares, mechandise and estates… should be granted to the government in fee simple, forever… and should be placed under the management of the Board of Trustees, to be styled the Patrons of Industry. The said Board should thereupon guarantee to the people of the United States that thenceforth neither the capital nor labor of this nation should remain for a moment idle.

[…]

It is a vulgar notion that the property which a citizen possesses, actually belongs to him; for he is a mere tenant, laborer or agent of the government, to whom all the property in the nation legitimately belongs. The government may therefore manage this property according to its own fancy, and shift capitalists and laborers from one employment to another.

Finally, I don’t seem to have made a good note of the specific passage that caught my attention in this regard but I chuckled when reading the description of the operations of the average bank before collapse. These bankers would set up a new bank and pay only a fraction of capital with specie, the rest would be constituted by additional promissory notes from other banking institutions (which were themselves fractional). The bankers would pay themselves dividends, in specie, while the bank operated, and issue themselves and their friends enormous loans with which they’d purchase real goods and services, all while the real specie capital of their bank depleted. When crisis hit and they could not redeem their depositors’ money, they’d get legal permission to suspend redemption, ask for infusions of new capital from state authorities and/or set up a brand new bank whose purpose was to steady the previous institution. Ultimately, the bank would collapse and this too would work in their interest because they’d already hauled off the specie via dividends to themselves, and many of them were debtors of the bank who now had loans due in a worthless currency that was easy to obtain.

It reminded me a lot of the present Chinese state capitalist model.

Conclusion

“The Panic of 1819” is not light reading and for some readers it may not even be interesting reading. It depends a lot on how fascinating you find in depth examinations of “minor” historical economic events.

But that doesn’t mean it isn’t surprising, well-written (for all the facts and data, Rothbard still manages to weave together a narrative that helps the reader appreciate the nuances of the various factions and viewpoints of the time) and at times, depressingly relevant. People who care about economic and financial history and unique, formative episodes in the early history of this country, will find a lot of insights and curiosities in this work. I strongly recommend it.

Public Choice Theory In Action (#publicchoice, #economics)

“The councilman is coming! The councilman is coming!”

This comes courtesy of a Los Angeles, CA-based reader:

LA

 

After the city destroyed our front strip while putting in a totally unnecessary crosswalk to appease the theater next door, it sat barren for multiple months, collecting trash and dog shit.  But now that a city councilman is coming on Monday to dedicate the senseless crosswalk, the city has had a crew working non stop the past two days on beautifying it.  Apparently one of the workers told Mr. G– that it couldn’t look that way for the councilman; somehow we mundanes survived living with it, though the suffering was no doubt immense.

Mr. G– adds:

Don’t forget they are taking down our no parking signs that have graffiti and then putting them back up after the douche bag leaves.