I've decided to move this blog and simultaneously to rename it. Find the new blog here:
http://newgoldstandard.wordpress.com/
Saturday, September 18, 2010
Wednesday, August 4, 2010
The Antiregulation Case
My article "The Antiregulation Case" is one of today's Mises dailies.
"The Deepwater Horizon crisis has sparked the next battle in the never-ending war of ideas between the proponents of government intervention and the defenders of laissez-faire. The tactics in this battle are familiar, the trenches well-established, and the troops well-drilled. The whole scene invokes a sense of déjà vu. The last major battle is still continuing, though it started years ago with the realization that the grand financial edifice built upon years of cheap credit was falling to pieces.
In this continuing tradition, the proponents of government regulation and intervention have put forth many comparisons between the financial collapse and the Deepwater Horizon crisis.[1] The problems they see were identical in each case — large, profit-seeking corporations, in the absence of regulations, made risky decisions that then resulted in harm to others. Their solution is simply to regulate these companies. . .
Read the rest here.
"The Deepwater Horizon crisis has sparked the next battle in the never-ending war of ideas between the proponents of government intervention and the defenders of laissez-faire. The tactics in this battle are familiar, the trenches well-established, and the troops well-drilled. The whole scene invokes a sense of déjà vu. The last major battle is still continuing, though it started years ago with the realization that the grand financial edifice built upon years of cheap credit was falling to pieces.
In this continuing tradition, the proponents of government regulation and intervention have put forth many comparisons between the financial collapse and the Deepwater Horizon crisis.[1] The problems they see were identical in each case — large, profit-seeking corporations, in the absence of regulations, made risky decisions that then resulted in harm to others. Their solution is simply to regulate these companies. . .
Read the rest here.
Friday, July 23, 2010
Deficit Spending: The Many Wrongs of Robert Reich Pt. 2
Now focusing on Robert Reich's failure to realize that large government deficits hurt rather than help the economy (2).
According to Mr. Reich, the "1.5 dip" recession "should cause deficit hawks to stop squawking about future debt" and "Herbert Hoover's ghost seems to have captured the nation's capital. We're back to 1932 (or 1937) and the prevailing sentiment is government can't and mustn't do anything but aim to reduce the deficit, even though the economy is going down."
First of all, Mr. Reich is being rather economical with the truth about Herbert Hoover. He is implying Hoover Hoover wanted balanced budgets instead of "fiscal stimulus." Hoover, contrary to the myths, did not believe in laissez-faire, free markets, or the "liquidationist" proposals for recovering from economic crises. He never believed in any of these, not before he was president, not in the beginning of his presidency, and not at the end of his presidency.
Herbert Hoover ran the largest peacetime deficits of any president who came before him. He explicitly repudiated all of the laissez-faire and "liquidationist" proposals for economic recovery. He embarked on a massive scheme of government intervention to hold up wages, keep employment up, to use the government to "fix" the market.
To quote Hoover in 1932: "We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic . . . Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom . . . We determined that we would not follow the advice of the bitter-end liquidationists."
FDR is usually credited with coming after the "laissez-faire liquidationist Hoover" and "fixing" his lack of intervention in the economy with his New Deal. In fact, FDR's platform in running against Hoover consisted of reining in government spending, deficits, and intervention. The "New Deal" was a creation of Herbert Hoover, and we never had a great depression like the Great Depression until we had the Hoover "New Deal" and the FDR New Deal.
We can, in fact, say that the government is currently channeling the ghost of Herbert Hoover. Just take a look at a graph of the federal deficit. Hoover's deficits, the highest peacetime deficits in history then, barely show up when this graph has to show the deficits of the Bush and Obama administrations. Obama is channeling Hoover 700-times over with his "New Deal" type policies. (For a more extensive historical analysis of Hoover's "New Deal," see the third part of Murray Rothbard's America's Great Depression, available free).
The assumption in Mr. Reich's indictment of the deficit hawks is that government deficits directly help economy recovery, while reducing the deficit harms economic recovery. Many people hold this view and therefore see the issue as a trade off between the economic benefits of a better economy and the economic damages done by increasingly large government debts.
In reality, there is no such trade off. Government deficits are unequivocally damaging to economic recovery in every way possible. The attempt to justify the opposing view springs from the faulty notion that reductions in consumer spending are necessarily bad for the economy. Therefore, as this "economic depression as lack of aggregate demand" theory goes, to "support" the economy the government has to make up for any reduction in consumer spending.
This fallacy is based off of the focus placed on a single, simple tautology: that the total amount of money income is equal to the total amount of money spent. All "consumptionist" fallacies come from the use of this tautology, which obviously must be true in monetary or nominal terms, and by trying to ascribe to this fact a significance which it does not have. A fall in consumption expenditures in monetary terms does not mean that real income will necessarily fall, or that any real aspect of the economy will fall.
That total consumption is falling is totally irrelevant to the proper working of the economy, and merely indicates either a shift to more saving and investment or a demand for higher cash balances, neither of which is harmful. In fact, if people on the market are actively demanding more investment or higher cash balances, any attempt to prop up consumption spending prevents adjustment to these changed conditions and draws out the discoordinated period of time, extending the length of the economic depression.
In fact, to the consmptionist, a fall in income that results from a fall in consumption supposedly leads to further drops in consumption, resulting in a vicious cycle from which the economy cannot recover unless the government intervenes to either prop up spending or prevent monetary income from falling. This view, of course, does not explain how civilization could have possibly developed before the coming of Hoover, FDR, and Keynes and the support for massive government deficits to "stimulate" the economy.
What deficit spending does accomplish is a three-fold distortion of the economy, and therefore a three-fold compounding of the economic problems facing a depressed economy. The first distortion is the spending of the government itself. Every penny the government spends affects prices and production on the economy in a manner inconsistent with the ultimate demands of market participants. Since economic recovery can only occur when prices and production are coordinated and aligned with the demands of market participants, government spending is a retardant to economic recovery and growth.
The second distortion accomplished by governmental deficit spending is the eventual appropriation of taxes to pay for the increased level of spending. At some point, every penny the government spends has to either come from taxes or inflation (inflation will be discussed in part 4). Taxes distort the economy by taking income from certain individuals in the economy and thereby adversely affecting their consumption and production plans, adding uncertainty to people's present day actions and thereby dampening the kinds of activities essential to rehabilitating economic activity.
The last distortion is the effect on the interest rate caused by government borrowing. When the government enters the loan markets, it has a completely unfair advantage. It is the only entity in the economy with a guaranteed source of revenue, and therefore it can easily attract lenders. It can also offer whatever interest rates it wants to because it has this unchecked potential for raising future revenue (even if it has to inflate to get this revenue).
This position in the economy causes the government to attract the savings in the economy, diverting them from use in actually useful, valued investment projects. This is particularly damaging in a depression because the causes of an economic depression stem from a lack of savings in the economy to complete lengthy and capital-intensive projects in the economy. The usual response after an economic crisis hits is for people to save more, thereby relieving some of the pressure on the shaky investment projects. Deficit spending simply adds to the pressure.
With no upside to governmental deficit spending and a host of difficult problems that result from it, the fact that the deficit is higher than it ever has been is cause for alarm, and more importantly, a change in policy. Let us kick out the ghosts of Hoover and FDR and return to a policy based on the reality of economics, that associated with Andrew Mellon and the liquidationist, laissez-faire proposals for economic recovery.
According to Mr. Reich, the "1.5 dip" recession "should cause deficit hawks to stop squawking about future debt" and "Herbert Hoover's ghost seems to have captured the nation's capital. We're back to 1932 (or 1937) and the prevailing sentiment is government can't and mustn't do anything but aim to reduce the deficit, even though the economy is going down."
First of all, Mr. Reich is being rather economical with the truth about Herbert Hoover. He is implying Hoover Hoover wanted balanced budgets instead of "fiscal stimulus." Hoover, contrary to the myths, did not believe in laissez-faire, free markets, or the "liquidationist" proposals for recovering from economic crises. He never believed in any of these, not before he was president, not in the beginning of his presidency, and not at the end of his presidency.
Herbert Hoover ran the largest peacetime deficits of any president who came before him. He explicitly repudiated all of the laissez-faire and "liquidationist" proposals for economic recovery. He embarked on a massive scheme of government intervention to hold up wages, keep employment up, to use the government to "fix" the market.
To quote Hoover in 1932: "We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic . . . Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom . . . We determined that we would not follow the advice of the bitter-end liquidationists."
FDR is usually credited with coming after the "laissez-faire liquidationist Hoover" and "fixing" his lack of intervention in the economy with his New Deal. In fact, FDR's platform in running against Hoover consisted of reining in government spending, deficits, and intervention. The "New Deal" was a creation of Herbert Hoover, and we never had a great depression like the Great Depression until we had the Hoover "New Deal" and the FDR New Deal.
We can, in fact, say that the government is currently channeling the ghost of Herbert Hoover. Just take a look at a graph of the federal deficit. Hoover's deficits, the highest peacetime deficits in history then, barely show up when this graph has to show the deficits of the Bush and Obama administrations. Obama is channeling Hoover 700-times over with his "New Deal" type policies. (For a more extensive historical analysis of Hoover's "New Deal," see the third part of Murray Rothbard's America's Great Depression, available free).
The assumption in Mr. Reich's indictment of the deficit hawks is that government deficits directly help economy recovery, while reducing the deficit harms economic recovery. Many people hold this view and therefore see the issue as a trade off between the economic benefits of a better economy and the economic damages done by increasingly large government debts.
In reality, there is no such trade off. Government deficits are unequivocally damaging to economic recovery in every way possible. The attempt to justify the opposing view springs from the faulty notion that reductions in consumer spending are necessarily bad for the economy. Therefore, as this "economic depression as lack of aggregate demand" theory goes, to "support" the economy the government has to make up for any reduction in consumer spending.
This fallacy is based off of the focus placed on a single, simple tautology: that the total amount of money income is equal to the total amount of money spent. All "consumptionist" fallacies come from the use of this tautology, which obviously must be true in monetary or nominal terms, and by trying to ascribe to this fact a significance which it does not have. A fall in consumption expenditures in monetary terms does not mean that real income will necessarily fall, or that any real aspect of the economy will fall.
That total consumption is falling is totally irrelevant to the proper working of the economy, and merely indicates either a shift to more saving and investment or a demand for higher cash balances, neither of which is harmful. In fact, if people on the market are actively demanding more investment or higher cash balances, any attempt to prop up consumption spending prevents adjustment to these changed conditions and draws out the discoordinated period of time, extending the length of the economic depression.
In fact, to the consmptionist, a fall in income that results from a fall in consumption supposedly leads to further drops in consumption, resulting in a vicious cycle from which the economy cannot recover unless the government intervenes to either prop up spending or prevent monetary income from falling. This view, of course, does not explain how civilization could have possibly developed before the coming of Hoover, FDR, and Keynes and the support for massive government deficits to "stimulate" the economy.
What deficit spending does accomplish is a three-fold distortion of the economy, and therefore a three-fold compounding of the economic problems facing a depressed economy. The first distortion is the spending of the government itself. Every penny the government spends affects prices and production on the economy in a manner inconsistent with the ultimate demands of market participants. Since economic recovery can only occur when prices and production are coordinated and aligned with the demands of market participants, government spending is a retardant to economic recovery and growth.
The second distortion accomplished by governmental deficit spending is the eventual appropriation of taxes to pay for the increased level of spending. At some point, every penny the government spends has to either come from taxes or inflation (inflation will be discussed in part 4). Taxes distort the economy by taking income from certain individuals in the economy and thereby adversely affecting their consumption and production plans, adding uncertainty to people's present day actions and thereby dampening the kinds of activities essential to rehabilitating economic activity.
The last distortion is the effect on the interest rate caused by government borrowing. When the government enters the loan markets, it has a completely unfair advantage. It is the only entity in the economy with a guaranteed source of revenue, and therefore it can easily attract lenders. It can also offer whatever interest rates it wants to because it has this unchecked potential for raising future revenue (even if it has to inflate to get this revenue).
This position in the economy causes the government to attract the savings in the economy, diverting them from use in actually useful, valued investment projects. This is particularly damaging in a depression because the causes of an economic depression stem from a lack of savings in the economy to complete lengthy and capital-intensive projects in the economy. The usual response after an economic crisis hits is for people to save more, thereby relieving some of the pressure on the shaky investment projects. Deficit spending simply adds to the pressure.
With no upside to governmental deficit spending and a host of difficult problems that result from it, the fact that the deficit is higher than it ever has been is cause for alarm, and more importantly, a change in policy. Let us kick out the ghosts of Hoover and FDR and return to a policy based on the reality of economics, that associated with Andrew Mellon and the liquidationist, laissez-faire proposals for economic recovery.
Thursday, July 22, 2010
The Many Wrongs of Robert Reich
Today's target: Robert Reich, and his article "We're in a One-and-a-Half Dip Recession." The absurdity of the title immediately caught my eye (I'd like to see a graph with one-and-a-half minimum points), as I sorted through the Huffington Post's daily articles looking for a true gem of ignorance--a task they make quite easy. Surely Mr. Reich has some reasoning for naming this a "one-and-a-half-dip" recession rather than simply a "double dip" recession, but if he does he fails to share it with the reader.
This is trivial, however, when compared with the actual body of the article. Mr. Reich's main contention is that "The 1.5 dip recession should cause the president to demand a large-scale national jobs program including a new WPA that gets millions of Americans back to work even if government has to pay their wages directly," this, and his general "government must do something!" attitude.
Unemployment is obviously bad, so we could hardly fail to expect someone, some simpleton, ignorant of all cause and consequence, to propose that the government should do anything and everything possible to get rid of it. Indeed, Mr. Reich characterizes opponents to his plans for society as being concerned not with the economy, not with the unemployed, and not with real people, but with supposedly meaningless budget figures and deficit numbers.
The many wrongs of Mr. Reich include his failure to realize that (1) massive government employment projects do not help with the problem of unemployment or with the underlying problems in the economy; (2) his failure to realize that large government deficits hurt rather than help the economy; (3) his failure to realize that unemployment benefits do not help by providing "fiscal stimulus"; (4) and his failure to realize that having the Fed print more money and throw it in the economy distorts, destroys, and sets back the economy.
Analysis time: (1) The root of the unemployment problem is discoordination in the labor markets: the supply of labor exceeds the demand for labor at current wage-rates. With sudden change in market conditions, such as the onset of an economic crisis, the labor-requirements of different industries and of different firms within industries suddenly change, requiring that workers move from industries where they are less urgently needed to those where they are more urgently needed. Industries whose consumer demand fall are rendered less profitable, and they correspondingly cut down on production and the amount of labor they employ. Other industries have increased consumer demands and a concomitant increase in profitability, encouraging them to increase production and their employment of labor.
The objection that a "general fall in consumption" makes all industry unprofitable and therefore drives employment in all industries down is untenable because it ignores the relevance of changes in prices in determining profit and loss. If a firm invests $100 in a production process to make 10 widgets, but can only get $8 for each widget, thereby making its revenue $80, or $20 less than its expenses, a superficial analysis will declare that this widget-making firm suffered losses. In reality, the purchasing power of the monetary unit, as determined by general changes in prices, has to be taken into account. If in this same example the purchasing power of the dollar rose by 30% over the firm's period of production, then the firm has made a "real" profit, even if it looks like a nominal loss. Math: ($80)(130%)=$104 which is greater than $100, which is a profit (abstracting from originary interest which is beyond the scope of this article).
If consumption on all goods falls because of a general increase in people's demand for money to increase their cash balances (usually denigrated as "hoarding"), then the purchasing power of money rises, all other things equal. Consumption at some level has to continue to occur regardless of how bad the economic crisis is, and therefore even with a potential reduction in nominal revenue across all sectors of the economy and all firms, the phenomenon of real entrepreneurial profits always persists, as adaption to the changing balance of consumer demand between different goods and services continues.
However, if prices are falling across the board, then all prices have to follow suit. Especially important is the price of labor, or wage-rates in the economy. As has already been pointed out, the problem of unemployment is that supply and demand for a particular labor service are unequal at the current wage-rate. The solution is obviously that the current wage-rate is not correct and has to be lowered for employing the unemployed to become profitable. That wage-rates fall in nominal terms, however, does not necessarily mean that those workers are poorer as a result, because as we have already seen, the purchasing power of money is rising/prices for consumption goods are falling, leaving real wage-rates generally intact.
Government work or unemployment projects that take unemployed workers and give them artificial employment at the expense of taxpayers, either present or future (through deficit spending), do not relieve any of the problems of unemployment. Au contraire, they actively prevent labor from moving from unprofitable uses to profitable uses by stratifying workers in newly made unprofitable uses. The senselessness!
It also cannot be argued that these government projects help relieve the suffering of the unemployed during the recovery or transitional period while the economy "recovers." The assumption is that these unemployed people can simply not find any work at all. The ludicrousness of this assumption is clear if we just think of who would not employ several dozen unemployed workers if these workers were willing to work for just one cent per hour. Obviously, if every unemployed person in the market were willing to work for such a low wage, there would be no unemployment left. Unemployment is almost always simply a sign that wages need to fall, at least in nominal terms. And unemployment is always voluntary in that a person remains unemployed because they do not like the types of jobs offered or the wages they pay.
The economy does not "recover" until economic resources have been returned to their most profitable uses (a process that never stops, hence the consistent phenomenon of entrepreneurial profits. Yet, during an economic depression, factors of production such as labor are particularly maladjusted to reality). If the government make-work programs are implemented, economic recovery can never occur because the labor diverted into these projects is not in its most highly valued uses as determined by market conditions! You can't just employ people in artificial projects until the economy recovers for this reason, the government merely creates permanent economic depression that will only end when the artificial projects end, and then the problems of maladjustment still have to be corrected by transitions of factors of production (mostly labor) away from the artificial make-work project and into actually useful jobs.
And of course, this is all without even mentioning the negative effects of taxation or deficit spending required to fund these projects.
Next post, we'll move on to the issue of deficit spending.
This is trivial, however, when compared with the actual body of the article. Mr. Reich's main contention is that "The 1.5 dip recession should cause the president to demand a large-scale national jobs program including a new WPA that gets millions of Americans back to work even if government has to pay their wages directly," this, and his general "government must do something!" attitude.
Unemployment is obviously bad, so we could hardly fail to expect someone, some simpleton, ignorant of all cause and consequence, to propose that the government should do anything and everything possible to get rid of it. Indeed, Mr. Reich characterizes opponents to his plans for society as being concerned not with the economy, not with the unemployed, and not with real people, but with supposedly meaningless budget figures and deficit numbers.
The many wrongs of Mr. Reich include his failure to realize that (1) massive government employment projects do not help with the problem of unemployment or with the underlying problems in the economy; (2) his failure to realize that large government deficits hurt rather than help the economy; (3) his failure to realize that unemployment benefits do not help by providing "fiscal stimulus"; (4) and his failure to realize that having the Fed print more money and throw it in the economy distorts, destroys, and sets back the economy.
Analysis time: (1) The root of the unemployment problem is discoordination in the labor markets: the supply of labor exceeds the demand for labor at current wage-rates. With sudden change in market conditions, such as the onset of an economic crisis, the labor-requirements of different industries and of different firms within industries suddenly change, requiring that workers move from industries where they are less urgently needed to those where they are more urgently needed. Industries whose consumer demand fall are rendered less profitable, and they correspondingly cut down on production and the amount of labor they employ. Other industries have increased consumer demands and a concomitant increase in profitability, encouraging them to increase production and their employment of labor.
The objection that a "general fall in consumption" makes all industry unprofitable and therefore drives employment in all industries down is untenable because it ignores the relevance of changes in prices in determining profit and loss. If a firm invests $100 in a production process to make 10 widgets, but can only get $8 for each widget, thereby making its revenue $80, or $20 less than its expenses, a superficial analysis will declare that this widget-making firm suffered losses. In reality, the purchasing power of the monetary unit, as determined by general changes in prices, has to be taken into account. If in this same example the purchasing power of the dollar rose by 30% over the firm's period of production, then the firm has made a "real" profit, even if it looks like a nominal loss. Math: ($80)(130%)=$104 which is greater than $100, which is a profit (abstracting from originary interest which is beyond the scope of this article).
If consumption on all goods falls because of a general increase in people's demand for money to increase their cash balances (usually denigrated as "hoarding"), then the purchasing power of money rises, all other things equal. Consumption at some level has to continue to occur regardless of how bad the economic crisis is, and therefore even with a potential reduction in nominal revenue across all sectors of the economy and all firms, the phenomenon of real entrepreneurial profits always persists, as adaption to the changing balance of consumer demand between different goods and services continues.
However, if prices are falling across the board, then all prices have to follow suit. Especially important is the price of labor, or wage-rates in the economy. As has already been pointed out, the problem of unemployment is that supply and demand for a particular labor service are unequal at the current wage-rate. The solution is obviously that the current wage-rate is not correct and has to be lowered for employing the unemployed to become profitable. That wage-rates fall in nominal terms, however, does not necessarily mean that those workers are poorer as a result, because as we have already seen, the purchasing power of money is rising/prices for consumption goods are falling, leaving real wage-rates generally intact.
Government work or unemployment projects that take unemployed workers and give them artificial employment at the expense of taxpayers, either present or future (through deficit spending), do not relieve any of the problems of unemployment. Au contraire, they actively prevent labor from moving from unprofitable uses to profitable uses by stratifying workers in newly made unprofitable uses. The senselessness!
It also cannot be argued that these government projects help relieve the suffering of the unemployed during the recovery or transitional period while the economy "recovers." The assumption is that these unemployed people can simply not find any work at all. The ludicrousness of this assumption is clear if we just think of who would not employ several dozen unemployed workers if these workers were willing to work for just one cent per hour. Obviously, if every unemployed person in the market were willing to work for such a low wage, there would be no unemployment left. Unemployment is almost always simply a sign that wages need to fall, at least in nominal terms. And unemployment is always voluntary in that a person remains unemployed because they do not like the types of jobs offered or the wages they pay.
The economy does not "recover" until economic resources have been returned to their most profitable uses (a process that never stops, hence the consistent phenomenon of entrepreneurial profits. Yet, during an economic depression, factors of production such as labor are particularly maladjusted to reality). If the government make-work programs are implemented, economic recovery can never occur because the labor diverted into these projects is not in its most highly valued uses as determined by market conditions! You can't just employ people in artificial projects until the economy recovers for this reason, the government merely creates permanent economic depression that will only end when the artificial projects end, and then the problems of maladjustment still have to be corrected by transitions of factors of production (mostly labor) away from the artificial make-work project and into actually useful jobs.
And of course, this is all without even mentioning the negative effects of taxation or deficit spending required to fund these projects.
Next post, we'll move on to the issue of deficit spending.
Saturday, June 26, 2010
Educate Thyself in Economics
The following is a passage from Ludwig von Mises' book Bureaucracy:
The most detrimental outcome of the average citizen’s repugnance to a serious concern with economic problems is his readiness to back a program of compromise. He looks upon the conflict between capitalism and socialism as if it were a quarrel between two groups—labor and capital—each of which claims for itself the whole of the matter at issue. As he himself is not prepared to appraise the merits of the arguments advanced by each of the parties, he thinks it would be a fair solution to end the dispute by an amicable arrangement: each claimant should have a part of his claim. Thus the program of government interference with business acquired its prestige. There should be neither full capitalism nor full socialism, but something in between, a middle way. This third system, assert its supporters, should be capitalism regulated and regimented by government interference with business. But this government intervention should not amount to full government control of all economic activities; it should be limited to the elimination of some especially objectionable excrescences of capitalism without suppressing the activities of the entrepreneur altogether. Thus a social order will result which is allegedly as far from full capitalism as it is from pure socialism, and while retaining the advantages inherent in each of these two systems will avoid their disadvantages. Almost all those who do not unconditionally advocate full socialism support this system of interventionism today and all governments which are not outright and frankly pro-socialist have espoused a policy of economic interventionism. There are nowadays very few who oppose any kind of government interference with prices, wage rates, interest rates, and profits and are not afraid to contend that they consider capitalism and free enterprise the only workable system, beneficial to the whole of society and to all its members.
Yet, the reasoning of the advocates of this middle solution is entirely fallacious. The conflict between socialism and capitalism is not a struggle between two parties for a greater share in the social dividend. To see the matter this way is tantamount to a full acceptance of the tenets of the Marxians and the other socialists. The adversaries of socialism deny that any class or group would fare better under socialism than under outright capitalism. They contest the thesis that the workers would be better off in a socialist commonwealth and are, consequently, wronged by the very existence of the capitalist system. They do not recommend capitalism for the sake of selfish interests of the entrepreneurs and capitalists but for the sake of all members of society. The great historical conflict concerning the problem of society’s economic organization cannot be dealt with like a quarrel between two businessmen concerning an amount of money; it cannot be solved by splitting the difference.
Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter. Unemployment of a great part of those ready to earn wages, prolonged year after year, monopoly, economic crisis, general restriction of the productivity of economic effort, economic nationalism, and war are the inescapable consequences of government interference with business as recommended by the supporters of the third solution. All those evils for which the socialists blame capitalism are precisely the product of this unfortunate, allegedly “progressive” policy. The catastrophic events which are grist for the mills of the radical socialists are the outcome of the ideas of those who say: “I am not against capitalism, but . . .” Such people are virtually nothing but pacemakers of socialization and thorough bureaucratization. Their ignorance begets disaster.
Division of labor and specialization are essential features of civilization. But for them both material prosperity and intellectual progress would be impossible. The existence of an integrated group of scientists, scholars, and research workers is an outcome of the division of labor just as is the existence of any other class of specialists. The man who specializes in economics is a specialist like all other specialists. The further advancement of economic science will in the future also be an achievement of men devoting all their endeavors to this task.
But it would be a fateful error for the citizens to leave concern with economic studies to the professionals as their exclusive domain. As the main issues of present-day politics are essentially economic, such a resignation would amount to a complete abdication of the citizens for the benefit of the professionals. If the voters or the members of a parliament are faced with the problems raised by a bill concerning the prevention of cattle diseases or the construction of an office building, they may leave the discussion of the details to the experts. Such veterinarian and engineering problems do not interfere with the fundamentals of social and political life. They are important but not primary and vital. But if not only the masses but even the greater part of their elected representatives declare: “These monetary problems can only be comprehended by specialists; we do not have the inclination to study them; in this matter we must trust the experts,” they are virtually renouncing their sovereignty to the professionals. It does not matter whether or not they formally delegate their powers to legislate or not. At any rate the specialists outstrip them. The bureaucrats carry on.
The most detrimental outcome of the average citizen’s repugnance to a serious concern with economic problems is his readiness to back a program of compromise. He looks upon the conflict between capitalism and socialism as if it were a quarrel between two groups—labor and capital—each of which claims for itself the whole of the matter at issue. As he himself is not prepared to appraise the merits of the arguments advanced by each of the parties, he thinks it would be a fair solution to end the dispute by an amicable arrangement: each claimant should have a part of his claim. Thus the program of government interference with business acquired its prestige. There should be neither full capitalism nor full socialism, but something in between, a middle way. This third system, assert its supporters, should be capitalism regulated and regimented by government interference with business. But this government intervention should not amount to full government control of all economic activities; it should be limited to the elimination of some especially objectionable excrescences of capitalism without suppressing the activities of the entrepreneur altogether. Thus a social order will result which is allegedly as far from full capitalism as it is from pure socialism, and while retaining the advantages inherent in each of these two systems will avoid their disadvantages. Almost all those who do not unconditionally advocate full socialism support this system of interventionism today and all governments which are not outright and frankly pro-socialist have espoused a policy of economic interventionism. There are nowadays very few who oppose any kind of government interference with prices, wage rates, interest rates, and profits and are not afraid to contend that they consider capitalism and free enterprise the only workable system, beneficial to the whole of society and to all its members.
Yet, the reasoning of the advocates of this middle solution is entirely fallacious. The conflict between socialism and capitalism is not a struggle between two parties for a greater share in the social dividend. To see the matter this way is tantamount to a full acceptance of the tenets of the Marxians and the other socialists. The adversaries of socialism deny that any class or group would fare better under socialism than under outright capitalism. They contest the thesis that the workers would be better off in a socialist commonwealth and are, consequently, wronged by the very existence of the capitalist system. They do not recommend capitalism for the sake of selfish interests of the entrepreneurs and capitalists but for the sake of all members of society. The great historical conflict concerning the problem of society’s economic organization cannot be dealt with like a quarrel between two businessmen concerning an amount of money; it cannot be solved by splitting the difference.
Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter. Unemployment of a great part of those ready to earn wages, prolonged year after year, monopoly, economic crisis, general restriction of the productivity of economic effort, economic nationalism, and war are the inescapable consequences of government interference with business as recommended by the supporters of the third solution. All those evils for which the socialists blame capitalism are precisely the product of this unfortunate, allegedly “progressive” policy. The catastrophic events which are grist for the mills of the radical socialists are the outcome of the ideas of those who say: “I am not against capitalism, but . . .” Such people are virtually nothing but pacemakers of socialization and thorough bureaucratization. Their ignorance begets disaster.
Division of labor and specialization are essential features of civilization. But for them both material prosperity and intellectual progress would be impossible. The existence of an integrated group of scientists, scholars, and research workers is an outcome of the division of labor just as is the existence of any other class of specialists. The man who specializes in economics is a specialist like all other specialists. The further advancement of economic science will in the future also be an achievement of men devoting all their endeavors to this task.
But it would be a fateful error for the citizens to leave concern with economic studies to the professionals as their exclusive domain. As the main issues of present-day politics are essentially economic, such a resignation would amount to a complete abdication of the citizens for the benefit of the professionals. If the voters or the members of a parliament are faced with the problems raised by a bill concerning the prevention of cattle diseases or the construction of an office building, they may leave the discussion of the details to the experts. Such veterinarian and engineering problems do not interfere with the fundamentals of social and political life. They are important but not primary and vital. But if not only the masses but even the greater part of their elected representatives declare: “These monetary problems can only be comprehended by specialists; we do not have the inclination to study them; in this matter we must trust the experts,” they are virtually renouncing their sovereignty to the professionals. It does not matter whether or not they formally delegate their powers to legislate or not. At any rate the specialists outstrip them. The bureaucrats carry on.
Thursday, June 10, 2010
Crossing the Line
It is entirely appropriate for BP to be held responsible for the damages it has caused in the wake of the Deepwater Horizon accident and to ask that they pay for those damages. Covering the cost of the cleanup effort along with compensating those who have directly lost their livelihoods is to be expected. However, there are plenty of things that BP is not responsible for and should not be held accountable for: and when they are in fact called on to pay for something that they did not cause, a line has been crossed.
The Obama administration has just claimed that BP will have to pay the salaries of all oil-industry workers laid off because of the federal moratorium on deepwater drilling. That's right, because the government has decided to prevent oil companies from operating as they wish, BP must pay the resulting damages. "Several legal experts said they couldn't think of any law or precedent that would allow the U.S. to try to recover damages from BP on behalf of rig workers thrown out of work by a government moratorium on deep offshore drilling," (from above article) and that's no small wonder: most laws are designed to hold the guilty accountable for their actions, not to hold the innocent accountable for the actions of the guilty. That is the essence of law, and that is precisely what is now being openly discarded by the current administration, which chooses to make others responsible for their damaging decisions.
The Obama administration has just claimed that BP will have to pay the salaries of all oil-industry workers laid off because of the federal moratorium on deepwater drilling. That's right, because the government has decided to prevent oil companies from operating as they wish, BP must pay the resulting damages. "Several legal experts said they couldn't think of any law or precedent that would allow the U.S. to try to recover damages from BP on behalf of rig workers thrown out of work by a government moratorium on deep offshore drilling," (from above article) and that's no small wonder: most laws are designed to hold the guilty accountable for their actions, not to hold the innocent accountable for the actions of the guilty. That is the essence of law, and that is precisely what is now being openly discarded by the current administration, which chooses to make others responsible for their damaging decisions.
Wednesday, March 31, 2010
The Broken Window Fallacy --Video
Disastrous Economic Fallacies --Terror as Stimulus?
This is a link to a very short video (courtesy of the Atlas Institute) that illustrates a point that shouldn't take very long to explain in the first place, and yet one that even Nobel Prize-winning economists like Paul Krugman cannot understand: namely, why the broken window fallacy is in fact a fallacy, or in other words, why destruction is not good for the economy (yes, this point is disputed by some, watch the video).
This is a link to a very short video (courtesy of the Atlas Institute) that illustrates a point that shouldn't take very long to explain in the first place, and yet one that even Nobel Prize-winning economists like Paul Krugman cannot understand: namely, why the broken window fallacy is in fact a fallacy, or in other words, why destruction is not good for the economy (yes, this point is disputed by some, watch the video).
Saturday, March 27, 2010
A Letter I Wrote to David Brooks
David Brooks recently wrote an op-ed in the New York Times entitled "The Return of Histroy," in which he argues that economics is, today, fundamentally flawed in its scientistic methodology (that of constructing abstract models that heavily rely on mathematics and believe themselves to be based on empirical evidence). However, his prediction for the future of economics is that economics will hopelessly fail as a science at all, and will become an "art." So I decided to write him this letter, explaining why both the method of "scientism" and simply dropping all scientific technique are both flawed. Here's that letter:
Dear Sir,
In reading your article "The Return of History," I have reason to believe that you are currently unaware of a glaring answer to your question about the future of economics. This answer I refer to is not a victim to the pitfalls of scientism that you mention in economics, namely the fallacy of analyzing "economic man," or the perfectly rational, calculating, utility-maximizing individual. There is an entire economic school of thought that not only recognized all of these errors, but also corrected the foundations of economics, proposing a sound basis for economics: that of the concept of human action. This school of thought also has predicted the Great Depression, the stagflation of the 70's, and other economic crises including the current one. This school of economic thought is the Austrian School.
In the analysis of the Austrian school, economics consists of the study of the fact that human beings have to make choices between various ends. In doing this, it is free from the failure of many economists to recognize that things like love, friendship, and having children are not "uneconomic," but simply choices that people make. People, when making decisions, compare all possible ends that they may desire on one scale of valuations. Choosing to have a child given the cost is not "irrational" to the person making the decision, and it is an error to say that the actor in this case is behaving irrationally, because the purpose of economic analysis is to analyze how people act, not how the economist thinks people should act. In other words, value is subjective.
Because Austrian economics starts with an objective analysis of human action, it does not fall into the hole of thinking that econometric and empirical studies of past data from the marketplace can either prove or disprove an economic theory, on the grounds that the data of the marketplace is a result of specific value judgments held by market participants at a previous point in time. Economics as a science has to look for universally valid laws and, fundamentally, causal relations between variables, and correlation (think: econometrics) does not imply causation. Using reason and the the principle of human action, real economic claims can be derived, not mere models that describe past market performance perfectly, but which fail when it comes to predicting what will come to pass.
Furthermore, psychology and economics are two entirely separate things: economics in the Austrian view studying the results of human action given their individual valuations and preferences, while psychology studies where those individual valuations come from, and currently psychology cannot make definite, universally valid statements about how a specific circumstance can cause all people, at all times, anywhere to make the same choice given their surroundings. Thus, a methodological dualism exists between these two fields, and psychology is not an aid to economics.
It might also be tempting to dismiss the idea of the ability to deduce universally valid laws about human action that would be applicable in any way to the real world. However, the proof that this is indeed possible is present in the results of Austrian economics, whose theories properly explain everything from the basic functioning of markets to the business cycle. Ludwig von Mises' book Human Action is the deduction of all of economics not from empirical studies, but from axioms and basic, realistic assumptions that hold in our economies (such as the valuation placed on leisure time, or the use of money).
With a proper methodology in place, Austrian economics is neither scientism nor an art: universal laws and principles can exist but not be quantifiable and testable. The future of economics relies, one could only hope, on the adoption of the proper, logical basis for the field of study. It would not be the end of the "development" of economics if all attempts at objective laws and causal relations were dropped in favor of an "art of economic." You mentioned F.A. Hayek in your article, and Russ Roberts, but please look more into Austrian economics, not merely for your sake but for the sake of your readers and the future of economics. And besides Human Action, which I recommend everyone to read, you would find another of his works, Epistemological Problems of Economics, interesting in that he defends the basis of Austrian economics in contrast to the competing schools.
Hoping that you have given this some thought,
Eric Perkerson
Dear Sir,
In reading your article "The Return of History," I have reason to believe that you are currently unaware of a glaring answer to your question about the future of economics. This answer I refer to is not a victim to the pitfalls of scientism that you mention in economics, namely the fallacy of analyzing "economic man," or the perfectly rational, calculating, utility-maximizing individual. There is an entire economic school of thought that not only recognized all of these errors, but also corrected the foundations of economics, proposing a sound basis for economics: that of the concept of human action. This school of thought also has predicted the Great Depression, the stagflation of the 70's, and other economic crises including the current one. This school of economic thought is the Austrian School.
In the analysis of the Austrian school, economics consists of the study of the fact that human beings have to make choices between various ends. In doing this, it is free from the failure of many economists to recognize that things like love, friendship, and having children are not "uneconomic," but simply choices that people make. People, when making decisions, compare all possible ends that they may desire on one scale of valuations. Choosing to have a child given the cost is not "irrational" to the person making the decision, and it is an error to say that the actor in this case is behaving irrationally, because the purpose of economic analysis is to analyze how people act, not how the economist thinks people should act. In other words, value is subjective.
Because Austrian economics starts with an objective analysis of human action, it does not fall into the hole of thinking that econometric and empirical studies of past data from the marketplace can either prove or disprove an economic theory, on the grounds that the data of the marketplace is a result of specific value judgments held by market participants at a previous point in time. Economics as a science has to look for universally valid laws and, fundamentally, causal relations between variables, and correlation (think: econometrics) does not imply causation. Using reason and the the principle of human action, real economic claims can be derived, not mere models that describe past market performance perfectly, but which fail when it comes to predicting what will come to pass.
Furthermore, psychology and economics are two entirely separate things: economics in the Austrian view studying the results of human action given their individual valuations and preferences, while psychology studies where those individual valuations come from, and currently psychology cannot make definite, universally valid statements about how a specific circumstance can cause all people, at all times, anywhere to make the same choice given their surroundings. Thus, a methodological dualism exists between these two fields, and psychology is not an aid to economics.
It might also be tempting to dismiss the idea of the ability to deduce universally valid laws about human action that would be applicable in any way to the real world. However, the proof that this is indeed possible is present in the results of Austrian economics, whose theories properly explain everything from the basic functioning of markets to the business cycle. Ludwig von Mises' book Human Action is the deduction of all of economics not from empirical studies, but from axioms and basic, realistic assumptions that hold in our economies (such as the valuation placed on leisure time, or the use of money).
With a proper methodology in place, Austrian economics is neither scientism nor an art: universal laws and principles can exist but not be quantifiable and testable. The future of economics relies, one could only hope, on the adoption of the proper, logical basis for the field of study. It would not be the end of the "development" of economics if all attempts at objective laws and causal relations were dropped in favor of an "art of economic." You mentioned F.A. Hayek in your article, and Russ Roberts, but please look more into Austrian economics, not merely for your sake but for the sake of your readers and the future of economics. And besides Human Action, which I recommend everyone to read, you would find another of his works, Epistemological Problems of Economics, interesting in that he defends the basis of Austrian economics in contrast to the competing schools.
Hoping that you have given this some thought,
Eric Perkerson
Thursday, March 18, 2010
Theory and Empiricism
It is all too common a trait to attempt to dismiss an economic claim on the grounds that the economic claim in question applies “only in theory,” and not in the real world. It is argued that economics makes an array of assumptions which are fantastically impossible, and therefore, in spite of what may be sound reasoning from those premises, has no relation to the events of the real world. And to be fair, this is true of some schools of economics, such as the neoclassical school, with models assuming perfect competition, perfect information, and whatnot.
However, Austrian economics makes no such otherworldly assumptions: economics is treated as a subset of praxeology in the Austrian school, and is therefore based on the action axiom, or the simple fact that people act with certain goals in mind. That is a statement that cannot simply be dismissed as not applying to the real world. There are a few auxiliary postulates, but these merely guide the progression of economics; and are likewise real features of the world, such as the fact that leisure is one of the things that people value. The otherworldly assumptions of the neoclassical school have no equivalent in Austrian economic theory, which indeed focuses on the aspects of the real world such as a lack of perfect information that the neoclassicals assume away.
The crucial point here is that, if the reasoning from these premises is sound, then if what they assume is true, then so is the theory. To quote Ludwig von Mises, “All the propositions established by the universal theory hold to the extent that the conditions that they presuppose and precisely delimit are given. Where these conditions are present, the propositions hold without exception.” This is unquestionable: to question it would be to question reasoning itself, an endeavor for which there can be no recourse. A sound theory of money, for example, is descriptive of the real world if the real world economy being analyzed uses something seen as money according to the theory.
What is often proposed as being an alternative to theory is empiricism, where one attempts to “test” economic theories in the “real world” to either falsify or verify them, with no recourse to the theories themselves. It is posited that if a theory cannot be falsified, it cannot be considered true, or descriptive of reality, and that theories can be demonstrated to be false using empirical evidence. This is the most brought up criticism of Austrian economics by both academic economists and by the public in general, if they are aware of Austrian economics at all, that is.
However, this criticism is entirely based upon long-standing myths in economic thinking. In reality, it is impossible to verify or refute an economic theory on the basis of empirical evidence. An economic theory describes how an economy works, and the process by which anything functions does so because there are certain causal relations that exist. However, by looking at empirical data, there is no way to determine causation in a complex system such as society. This leads us to the first reason why it is impossible to test theories in economics: there is no way to conduct a controlled experiment in a complex system where no variables can be controlled. A change in one variable can never be shown empirically to result in a change in another variable.
The second reason why it is impossible to test economic theories is because the fundamental data at the base of the economic system have no basic constant relations between one another. For example, no one would ever propose that a rise in the price of potatoes of 50% will always and everywhere result in a decrease in the quantity demanded of potatoes by 50%. In physics and chemistry, such constant relations do exist and experimentation is the method by which they are determined. In economics, the personal values of individual people determine such things as the demand for potatoes, and these personal values are arbitrary, subjective, and changing. No one would ever stop and think that a certain condition will cause for all people and at all times the exact same response in everyone. People react different to the same conditions.
Knowledge of these important facts about the foundation of economic science, the Austrian school of economics does not attempt to make quantitative predictions about economic variables, but instead tries to describe how the economy works in general, i.e. at all times and for all places and people. A remarkable body of thought has then been developed from simple, axiomatic propositions, and the best evidence for this is in the great economic treatise by Ludwig von Mises Human Action. It should now be evident that the most fundamental assumption of most people on economics, that economic ideas and theories need to be proven with empirical evidence, has no basis and is impossible to comply with. Instead, a logical, or apriori, method is the only method suitable.
However, Austrian economics makes no such otherworldly assumptions: economics is treated as a subset of praxeology in the Austrian school, and is therefore based on the action axiom, or the simple fact that people act with certain goals in mind. That is a statement that cannot simply be dismissed as not applying to the real world. There are a few auxiliary postulates, but these merely guide the progression of economics; and are likewise real features of the world, such as the fact that leisure is one of the things that people value. The otherworldly assumptions of the neoclassical school have no equivalent in Austrian economic theory, which indeed focuses on the aspects of the real world such as a lack of perfect information that the neoclassicals assume away.
The crucial point here is that, if the reasoning from these premises is sound, then if what they assume is true, then so is the theory. To quote Ludwig von Mises, “All the propositions established by the universal theory hold to the extent that the conditions that they presuppose and precisely delimit are given. Where these conditions are present, the propositions hold without exception.” This is unquestionable: to question it would be to question reasoning itself, an endeavor for which there can be no recourse. A sound theory of money, for example, is descriptive of the real world if the real world economy being analyzed uses something seen as money according to the theory.
What is often proposed as being an alternative to theory is empiricism, where one attempts to “test” economic theories in the “real world” to either falsify or verify them, with no recourse to the theories themselves. It is posited that if a theory cannot be falsified, it cannot be considered true, or descriptive of reality, and that theories can be demonstrated to be false using empirical evidence. This is the most brought up criticism of Austrian economics by both academic economists and by the public in general, if they are aware of Austrian economics at all, that is.
However, this criticism is entirely based upon long-standing myths in economic thinking. In reality, it is impossible to verify or refute an economic theory on the basis of empirical evidence. An economic theory describes how an economy works, and the process by which anything functions does so because there are certain causal relations that exist. However, by looking at empirical data, there is no way to determine causation in a complex system such as society. This leads us to the first reason why it is impossible to test theories in economics: there is no way to conduct a controlled experiment in a complex system where no variables can be controlled. A change in one variable can never be shown empirically to result in a change in another variable.
The second reason why it is impossible to test economic theories is because the fundamental data at the base of the economic system have no basic constant relations between one another. For example, no one would ever propose that a rise in the price of potatoes of 50% will always and everywhere result in a decrease in the quantity demanded of potatoes by 50%. In physics and chemistry, such constant relations do exist and experimentation is the method by which they are determined. In economics, the personal values of individual people determine such things as the demand for potatoes, and these personal values are arbitrary, subjective, and changing. No one would ever stop and think that a certain condition will cause for all people and at all times the exact same response in everyone. People react different to the same conditions.
Knowledge of these important facts about the foundation of economic science, the Austrian school of economics does not attempt to make quantitative predictions about economic variables, but instead tries to describe how the economy works in general, i.e. at all times and for all places and people. A remarkable body of thought has then been developed from simple, axiomatic propositions, and the best evidence for this is in the great economic treatise by Ludwig von Mises Human Action. It should now be evident that the most fundamental assumption of most people on economics, that economic ideas and theories need to be proven with empirical evidence, has no basis and is impossible to comply with. Instead, a logical, or apriori, method is the only method suitable.
Monday, March 8, 2010
An Open Letter to President Obama
Don Boudreaux, posting on the blog CafeHayek, wrote this earlier today:
An Open Letter to President Obama
by Don Boudreaux on March 8, 2010
in Health, Prices, Reality Is Not Optional, Seen and Unseen
8 March 2010
Mr. Barack Obama
President, Executive Branch
United States Government
1600 Pennsylvania Ave., NW
Washington, DC 20500
Dear Mr. Obama:
CBS radio news this morning ran a clip of one of your recent speeches. In it, you criticize insurance companies because they “ration coverage … according to who can pay and who can’t.”
My first thought was “not exactly; coverage is rationed according to who pays and who doesn’t.” Ability to pay isn’t the same thing as actually paying, and what insurers care about is the latter. Many folks – especially young adults – have the ability to pay but choose not to do so. They get no coverage.
But further pondering of your point leads me to look beyond such nit-picking to see fascinating possibilities. Not only insurers, but all producers who greedily refuse to supply persons who don’t pay should be set aright. Now I’m sure that you don’t ration the supply of the books you write according to any criteria as sordid as requiring people actually to pay for them. But our society is full of people less enlightened than you.
For example, the typical worker rations his labor services according to who pays and who doesn’t. That must stop. Oh, and supermarkets! Every single one rations groceries according to who pays. Likewise with restaurants, clothing stores, home-builders, furniture makers, even lawyers! You name it, rationing is done according to who pays. Indeed, my own county government has been corrupted by this greedy attitude: if I don’t pay my taxes, the sheriff takes my house – effectively booting me out of the county merely because I didn’t pay for its services.
Preposterous!
I look forward to your changing this selfish and unfair system of rationing that for too long now has kept Americans impoverished.
Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030
An Open Letter to President Obama
by Don Boudreaux on March 8, 2010
in Health, Prices, Reality Is Not Optional, Seen and Unseen
8 March 2010
Mr. Barack Obama
President, Executive Branch
United States Government
1600 Pennsylvania Ave., NW
Washington, DC 20500
Dear Mr. Obama:
CBS radio news this morning ran a clip of one of your recent speeches. In it, you criticize insurance companies because they “ration coverage … according to who can pay and who can’t.”
My first thought was “not exactly; coverage is rationed according to who pays and who doesn’t.” Ability to pay isn’t the same thing as actually paying, and what insurers care about is the latter. Many folks – especially young adults – have the ability to pay but choose not to do so. They get no coverage.
But further pondering of your point leads me to look beyond such nit-picking to see fascinating possibilities. Not only insurers, but all producers who greedily refuse to supply persons who don’t pay should be set aright. Now I’m sure that you don’t ration the supply of the books you write according to any criteria as sordid as requiring people actually to pay for them. But our society is full of people less enlightened than you.
For example, the typical worker rations his labor services according to who pays and who doesn’t. That must stop. Oh, and supermarkets! Every single one rations groceries according to who pays. Likewise with restaurants, clothing stores, home-builders, furniture makers, even lawyers! You name it, rationing is done according to who pays. Indeed, my own county government has been corrupted by this greedy attitude: if I don’t pay my taxes, the sheriff takes my house – effectively booting me out of the county merely because I didn’t pay for its services.
Preposterous!
I look forward to your changing this selfish and unfair system of rationing that for too long now has kept Americans impoverished.
Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030
Sunday, February 28, 2010
Response on Praxeology
I was just recently given this critique of praxeology, to which I wrote a response.
Here is the critique:
"Praxeology is founded on the premise that "humans act," & by "act," they exert their will with the intent to accomplish goals. Because this is taken as axiomatic - that is, because this proposition is taken as an independent, stand-alone, self-evident truth - by the Austrian school, it is argued that a whole system of thought can be derived from this axiom purely through deductive means, akin to any given branch of pure mathematics.
The problem is though, that this "axiom" is anything but self-evident. Many cognitive scientists believe that the will, intent, & goals are just illusions pre-fabricated by our brains, & indeed, Praxeology just assumes outright that we have free will. Now, whether or not those cognitive scientists are correct is beside the point - the fact that it's even *possible* that the action axiom is wrong means that if it's true, it's an *empirical* fact, not an axiomatic one. As such, Praxeological methodology is rendered invalid, & thus the study of human action, as well as of economics in general, must be conducted through largely inductive (empirical) means, like any other science.
Now, there's another angle to this, namely, Goedel's Incompleteness Theorem. The Incompleteness Theorem states that in any axiomatic system, there are always going to be true conclusions relevant to said system which can't be derived from the axiom(s). This means that Praxeology is subject to the Incompleteness Theorem. In other words, if the proposition that humans act is an axiom, then not everything which is true about human action can be derived from Praxeology; if, however, the proposition that humans act is an empirical fact, then everything which is true about human action can be inferred as an implication of said fact.
Not only does that mean that an empirical "Praxeology" would be more complete than an *a priori* one, but an *a priori* Praxeology is squarely at odds with reality, as it leads to the conclusion that not every implication of the proposition that humans act is really an implication thereof. And this isn't a flaw that can be contained to whatever conclusions that Praxeology can't reach, e
ither, for if one methodology leads to a partially accurate but false result, & another, radically different, methodology, leads to a true result, then it can be concluded that there is a rather profound flaw in the former methodology that casts a shadow on the whole enterprise.
To put it another way, conceiving of human action as axiomatic (assuming that from it you can derive all of its implications) leads to the conclusion that the action axiom cannot predict all of its own implications, & indeed, that only a radically different methodology *can,* so Praxeology is thoroughly self-refuting.
So there you go, two logical proofs that Praxeology is bunk."
Here is my response:
In response, I would first point out that in no way does praxeology assume "free will." Where our perceived goals and motivations come from is not the realm of inquiry of praxeology and is unrelated to the conclusions based on praxeologic methods. It does not matter if our will is an illusion, because praxeology studies only the results of what happens when and if people do act. The impetus to action is a different area of study. The criticism that "praxeology is actually empirically based" can apply equally to pure mathematics in this sense, because mathematics assumes such things as numbers into existence. One can argue equally well that this assumption is not "axiomatic," but that is simply pointless semantics. Wherever the idea comes from, it cannot simply be refuted in the world we live in, regardless of whether it might not be true in all conceivable universes.
Secondly, praxeology and economics by no means strictly limit themselves only to those things which can be deduced directly from the action axiom: there are many auxiliary postulates and assumptions involved. For example, we could study praxeology without the assumption that human beings value leisure time to some extent, but that would largely make such study useless. This assumption gives us all of the information we have on how labor is relevant to our economy. Goedel's Incompleteness Theorem certainly holds true: this is not in dispute, but it is irrelevant because so-called "praxeological economics" as practiced by the Austrian School is not "purely" axiomatic. It is simply based in an axiomatic framework. There is not some huge debate between defenders of "apriori praxeology" and "empirical praxeology" as holistic systems, as far as I'm aware, because no one simply defends a pure "apriori praxeology" as being the end of all praxeological study. The "empirical" assumptions give most of the breadth of praxeology qua economics, and that is recognized widely, I believe, by those calling themselves "praxeologists." The crucial point is that the auxiliary assumptions involved treated appropriately within the axiomoatic framework provided by the action axiom. Some are held loosely because they apply to our day and age and some are so universal to be considered universal truths in and of themselves, such as the proposition that human beings value leisure to some extent (which can be demonstrated through biology, for instance).
And all of this is not to say that "praxeology is bunk": all of the various implications of an axiom must be true, even if there are other things existing in our reality which are not direct implications of that particular axiom. Simply because one thing is incapable of explaining everything does not mean that the things it does explain are false. And Austrian economics does not limit itself to "pure," axiomatic praxeology. Murray Rothbard, the defender of "extreme apriorism," to use his own term, writes in a footnote of the first chapter of his Man, Economy, and State, that only the first chapter is solely derived from the implications of the action axiom: the remainder of the 1500 page book is dedicated to studying the implications of the subsidiary assumptions that give meaning to the study of economics.
The crucial point is that this is done within an axiomatic framework, and the "empirical" subsidiary assumptions work together with the action axiom instead of against it. They are not "empirical" in the loose sense of the word which is usually used (for example, Okun's "Law" is empirical in the loose sense, yet is entirely unacceptable from the praxeological methodology), and they are constructed in such a way that they apply universally. Okun's "Law" is empirically supported in a way, but it is much more unstable given changes in the day and time and lacks any real sort of "universality" unlike the proposition that people value leisure to some degree. One proposition here is fundamental (leisure) and one is not (Okun's "Law"), and seeing both as "empirical" without distinction is missing the point.
Here is the critique:
"Praxeology is founded on the premise that "humans act," & by "act," they exert their will with the intent to accomplish goals. Because this is taken as axiomatic - that is, because this proposition is taken as an independent, stand-alone, self-evident truth - by the Austrian school, it is argued that a whole system of thought can be derived from this axiom purely through deductive means, akin to any given branch of pure mathematics.
The problem is though, that this "axiom" is anything but self-evident. Many cognitive scientists believe that the will, intent, & goals are just illusions pre-fabricated by our brains, & indeed, Praxeology just assumes outright that we have free will. Now, whether or not those cognitive scientists are correct is beside the point - the fact that it's even *possible* that the action axiom is wrong means that if it's true, it's an *empirical* fact, not an axiomatic one. As such, Praxeological methodology is rendered invalid, & thus the study of human action, as well as of economics in general, must be conducted through largely inductive (empirical) means, like any other science.
Now, there's another angle to this, namely, Goedel's Incompleteness Theorem. The Incompleteness Theorem states that in any axiomatic system, there are always going to be true conclusions relevant to said system which can't be derived from the axiom(s). This means that Praxeology is subject to the Incompleteness Theorem. In other words, if the proposition that humans act is an axiom, then not everything which is true about human action can be derived from Praxeology; if, however, the proposition that humans act is an empirical fact, then everything which is true about human action can be inferred as an implication of said fact.
Not only does that mean that an empirical "Praxeology" would be more complete than an *a priori* one, but an *a priori* Praxeology is squarely at odds with reality, as it leads to the conclusion that not every implication of the proposition that humans act is really an implication thereof. And this isn't a flaw that can be contained to whatever conclusions that Praxeology can't reach, e
ither, for if one methodology leads to a partially accurate but false result, & another, radically different, methodology, leads to a true result, then it can be concluded that there is a rather profound flaw in the former methodology that casts a shadow on the whole enterprise.
To put it another way, conceiving of human action as axiomatic (assuming that from it you can derive all of its implications) leads to the conclusion that the action axiom cannot predict all of its own implications, & indeed, that only a radically different methodology *can,* so Praxeology is thoroughly self-refuting.
So there you go, two logical proofs that Praxeology is bunk."
Here is my response:
In response, I would first point out that in no way does praxeology assume "free will." Where our perceived goals and motivations come from is not the realm of inquiry of praxeology and is unrelated to the conclusions based on praxeologic methods. It does not matter if our will is an illusion, because praxeology studies only the results of what happens when and if people do act. The impetus to action is a different area of study. The criticism that "praxeology is actually empirically based" can apply equally to pure mathematics in this sense, because mathematics assumes such things as numbers into existence. One can argue equally well that this assumption is not "axiomatic," but that is simply pointless semantics. Wherever the idea comes from, it cannot simply be refuted in the world we live in, regardless of whether it might not be true in all conceivable universes.
Secondly, praxeology and economics by no means strictly limit themselves only to those things which can be deduced directly from the action axiom: there are many auxiliary postulates and assumptions involved. For example, we could study praxeology without the assumption that human beings value leisure time to some extent, but that would largely make such study useless. This assumption gives us all of the information we have on how labor is relevant to our economy. Goedel's Incompleteness Theorem certainly holds true: this is not in dispute, but it is irrelevant because so-called "praxeological economics" as practiced by the Austrian School is not "purely" axiomatic. It is simply based in an axiomatic framework. There is not some huge debate between defenders of "apriori praxeology" and "empirical praxeology" as holistic systems, as far as I'm aware, because no one simply defends a pure "apriori praxeology" as being the end of all praxeological study. The "empirical" assumptions give most of the breadth of praxeology qua economics, and that is recognized widely, I believe, by those calling themselves "praxeologists." The crucial point is that the auxiliary assumptions involved treated appropriately within the axiomoatic framework provided by the action axiom. Some are held loosely because they apply to our day and age and some are so universal to be considered universal truths in and of themselves, such as the proposition that human beings value leisure to some extent (which can be demonstrated through biology, for instance).
And all of this is not to say that "praxeology is bunk": all of the various implications of an axiom must be true, even if there are other things existing in our reality which are not direct implications of that particular axiom. Simply because one thing is incapable of explaining everything does not mean that the things it does explain are false. And Austrian economics does not limit itself to "pure," axiomatic praxeology. Murray Rothbard, the defender of "extreme apriorism," to use his own term, writes in a footnote of the first chapter of his Man, Economy, and State, that only the first chapter is solely derived from the implications of the action axiom: the remainder of the 1500 page book is dedicated to studying the implications of the subsidiary assumptions that give meaning to the study of economics.
The crucial point is that this is done within an axiomatic framework, and the "empirical" subsidiary assumptions work together with the action axiom instead of against it. They are not "empirical" in the loose sense of the word which is usually used (for example, Okun's "Law" is empirical in the loose sense, yet is entirely unacceptable from the praxeological methodology), and they are constructed in such a way that they apply universally. Okun's "Law" is empirically supported in a way, but it is much more unstable given changes in the day and time and lacks any real sort of "universality" unlike the proposition that people value leisure to some degree. One proposition here is fundamental (leisure) and one is not (Okun's "Law"), and seeing both as "empirical" without distinction is missing the point.
Thursday, January 28, 2010
Small Business and Jobs
Whether it is tax credits to small businesses or some other kind of special privilege that is being extended to them, the focus on “small” business in many economic circles, particularly with speaking of jobs, is huge. If you were to listen to President Obama, you might get the impression that it is only the small businesses that create jobs, while big businesses simply create all of the problems. Legislation is then focused around this belief, which typically gives large benefits to small businesses, while, conversely, large businesses are burdened with heavy regulations and interventions in their operation.
What are the effects of this legislation? Well, the impact on small businesses is to give them a competitive boost and an economic advantage in the marketplace, and the impact on larger businesses is to slow them down, add costs to whatever they try to do, and often to prevent them doing something that they want to do. Both of these effects of the legislation self-fulfill its assumptions. When small businesses are given a governmental helping-hand, it makes them more likely to be hiring new workers and thus creating jobs; when big businesses are punished with heavy regulation, it makes them weaker and prevents them from wanting to take on new risks that would create jobs.
Furthermore, though the effects of this legislation do create jobs if overall they are lessening the overall burden on businesses and hiring practices, often the other burdens that the government puts on other sectors of the economy such as big business stop employment from bouncing back to where it would have been in the absence of increased regulation and intervention. The government cannot claim that it has created jobs by just pointing to the ones they think they created while ignoring the incalculable costs in terms of jobs that they may have also created in the same process.
Moreover, the focus on jobs in “small” business can also be damaging, because it is quite possible (and indeed, is usually the case) that large businesses have the funds and the projects that warrant increasing the amount of labor they use. Small businesses, particularly in turbulent times, do not have this advantage and are not ideal for hiring new workers. Furthermore, they are more likely to fail or collapse, destroying any jobs that they may have been supporting. Big businesses are in general much more stable than smaller businesses.
The most egregious claims are, however, that jobs are somehow things that are in scarce supply that have to be hacked out of existence by some organization, usually claimed by those in the government to be the government itself. This is an absurdity. A job is simply a transaction of labor; the only thing that is scarce is the labor itself. Unemployment, or a “lack of jobs” is nothing more than a distortion, manipulation, or period of transition in the fundamental economic conditions which result in people selling their labor in exchange for a wage, and concomitantly, businesses buying labor for a price. The only thing necessary is to let hiring conditions change to how they need to change and unemployment will quickly vanish, as it is beneficial to no one for there to be unemployment in the economy.
The fundamental thing that needs to change in order for there to be full employment is for the price of labor, or wages, to be as flexible as possible. This is something that most people reject, for one reason or another. Labor unions, minimum wage laws, and regulations concerning hiring and firing practices all serve to make wages and the labor market inflexible, which means that when there is a sudden economic change, unemployment or disequilibrium emerges. Allowing a free market in the labor market is the only conceivable way to ensure full employment in any realistic way. Otherwise, there is no force to equilibrate the forces of supply and demand. Having the government decide to employ everyone who doesn’t have a job does not fix the problem, but arbitrarily and decisively does the exact opposite by permanently preventing labor from going to those lines of economic production where it is most needed.
What are the effects of this legislation? Well, the impact on small businesses is to give them a competitive boost and an economic advantage in the marketplace, and the impact on larger businesses is to slow them down, add costs to whatever they try to do, and often to prevent them doing something that they want to do. Both of these effects of the legislation self-fulfill its assumptions. When small businesses are given a governmental helping-hand, it makes them more likely to be hiring new workers and thus creating jobs; when big businesses are punished with heavy regulation, it makes them weaker and prevents them from wanting to take on new risks that would create jobs.
Furthermore, though the effects of this legislation do create jobs if overall they are lessening the overall burden on businesses and hiring practices, often the other burdens that the government puts on other sectors of the economy such as big business stop employment from bouncing back to where it would have been in the absence of increased regulation and intervention. The government cannot claim that it has created jobs by just pointing to the ones they think they created while ignoring the incalculable costs in terms of jobs that they may have also created in the same process.
Moreover, the focus on jobs in “small” business can also be damaging, because it is quite possible (and indeed, is usually the case) that large businesses have the funds and the projects that warrant increasing the amount of labor they use. Small businesses, particularly in turbulent times, do not have this advantage and are not ideal for hiring new workers. Furthermore, they are more likely to fail or collapse, destroying any jobs that they may have been supporting. Big businesses are in general much more stable than smaller businesses.
The most egregious claims are, however, that jobs are somehow things that are in scarce supply that have to be hacked out of existence by some organization, usually claimed by those in the government to be the government itself. This is an absurdity. A job is simply a transaction of labor; the only thing that is scarce is the labor itself. Unemployment, or a “lack of jobs” is nothing more than a distortion, manipulation, or period of transition in the fundamental economic conditions which result in people selling their labor in exchange for a wage, and concomitantly, businesses buying labor for a price. The only thing necessary is to let hiring conditions change to how they need to change and unemployment will quickly vanish, as it is beneficial to no one for there to be unemployment in the economy.
The fundamental thing that needs to change in order for there to be full employment is for the price of labor, or wages, to be as flexible as possible. This is something that most people reject, for one reason or another. Labor unions, minimum wage laws, and regulations concerning hiring and firing practices all serve to make wages and the labor market inflexible, which means that when there is a sudden economic change, unemployment or disequilibrium emerges. Allowing a free market in the labor market is the only conceivable way to ensure full employment in any realistic way. Otherwise, there is no force to equilibrate the forces of supply and demand. Having the government decide to employ everyone who doesn’t have a job does not fix the problem, but arbitrarily and decisively does the exact opposite by permanently preventing labor from going to those lines of economic production where it is most needed.
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