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

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.

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.

Economics in One Lesson

This short book, written by Henry Hazlitt, is one of the most concise yet easily comprehensible introduction to sound economics ever written. Hazlitt has the ability to take a commonly accepted idea and then to prompt the reader to think about that accepted idea, eventually showing that what may be commonly accepted is also thoroughly nonsensical. Though it was written in 1946, the vast majority of the fallacies which Hazlitt explodes are still commonly accepted today, and virtually everyone has something they need to learn from it.

Read it here: Economics in One Lesson.

Consumption and the Economy

It has become a highly entrenched orthodoxy in public opinion, public policy, and academia that consumption is fundamentally good for the economy. If the economy is not doing well, then it is because consumers are not doing their job well enough, and the solution is that consumption needs to be increased. If individuals are not willing to increase their consumption, then it falls to the government to increase its consumption by increasing expenditures; and typically deficits as well, because if the government were to pay for its increased consumption at the time through increased taxes, then that would further discourage individuals’ consumption. You can find this belief in people from Paul Krugman to George W. Bush. This orthodoxy is rooted in the General Theory of Employment, Interest and Money (which can be read online here), written by John Maynard Keynes, who is today considered the father of “modern economics.”

However, modern mainstream economics —more correctly known as the neoclassical synthesis, because it incorporates most of the formal structure of classical economics along with supposed Keynesian “insights” into how economies work on the macro level— has failed. It failed to predict this recession, and it has failed in trying to correct the flaws in the economy that have led to this recession. A major reason why it has failed is because of this view of consumption.

The crux of the debate over the nature of consumption is Say’s Law, often called the law of markets. In essence, Say’s Law states that the goods and services an individual supplies to the market also constitute that individual’s demand for other goods and services, or simply that people buy real goods and services and sell real goods and services in exchange for the ones that they buy. Your production determines how much you can consume, because the total amount of goods and services in the economy is simply the sum of the production of each individual. Money simply acts as a method of indirect exchange, but at the end of the day, it is real goods and services that are being produced, consumed, and exchanged. Money, and particularly changes in the quantity of money, can have interesting effects on the real economy, but we can never lose sight, as Keynes does, of the fundamentally “real” nature of the economy: the actual production and consumption of goods and services.

The major implication of Say’s Law is that there can never be a general “glut” or overproduction of all goods and services, or conversely, there can never be a lack of aggregate demand, or under-consumption: the reason being that the price mechanism of the market —where the actions of every individual in the market, through the goal of maximizing profit by buying in the cheapest market while selling in the dearest, result in prices that ensure an economic equilibrium— creates an equilibrium in which supply and demand are equal. The whole body of thought that is Keynesianism, however, rests on the belief that Say’s Law is false. Keynes’ reasoning for this belief was that he observed that, in the real world, prices could be “sticky,” or resistant to change. If some shock occurred in the economy that would encourage people to save more, such as a recession, and if prices for consumer goods did not fall in response to this change, then one could expect to see a general surplus of goods and services in the economy. Say’s Law assumes that prices can change.

However, there is one more important assumption that Say’s Law is based on, and that assumption is that the market in consideration is a free market, with the absence of government regulations, interventions, and special privileges for certain individuals or groups. The world in which Keynes was writing did not have a free market. For example, during the Great Depression, President Hoover quickly embarked after the stock market crash to ensure that wages would not fall, even though prices in the economy were falling all around. He met with business leaders and encouraged work sharing, all in the name of preventing wages from falling, because he believed, in a proto-Keynesian manner, that if wages were to fall because of the falling demand for businesses’ products, which was in turn a result of the falling demand for those products, then the fall in wages would cause a further decrease in demand and would result. This hypothetical scenario, where a small fall in demand could completely destroy the economy, is called a deflationary spiral. A deeply held belief in this possibility is a major way that Keynesians try to justify massive government spending and inflation in periods of economic turbulence. And so it came to be that through Hoover’s policies of propping up wages, and through the efforts of the unions through their special governmental privileges which enabled them to prop up, increase, and prevent their wages from falling, the economy ended up in a situation in which the price of labor was no longer easily changeable in a downward direction. The result in the deflationary economy of the depression was, as expect, a large surplus of labor, generally known as unemployment, which reached unprecedented levels during the Great Depression.

Therefore, because the labor market is so important to the economy as a whole, given that most people rely on selling their labor to make an income and the fact that all goods and services require labor to be produced, the sabotage of the price mechanism in the labor market had drastic economic results. So what is the solution to such a problem? The answer is quite simple, and should have been to Keynes as well: it is that the government should stop restricting the movement of prices in the market and should stop enabling other organizations, such as labor unions, from doing the same. Keynes, however, a liberal of his day, did not want to attack the unions or prevent them from doing as they pleased, and so his proposed “solution” was to print money and use government spending to raise prices in the economy, which would then cause any wages that stayed constant to drop in real terms. Inflation would lower any prices that did not move up proportionately with the rate of inflation. The excess of labor caused by prices being too high would be reduced and employment restored.

Keynes’ “solution,” however, fails not only to address the underlying problem in the economy, but it also entails a course of action with a host of its own problems. While writing and arguing against what he considered the fallacies of the laissez-faire economists, he argued against the current economic policies present in the world, rather than actual free market economies, of which there were none. He fails to realize that a free market would in fact be stable and equalizing, where there could be no lack of aggregate demand because it would be in the interest of the individuals in the markets to lower their prices until they could sell all of their products. He inspired fear of deflation, and a love of inflation and government spending, all of which continue to damage our economies and our study of economics to this day. Consumption may be the final purpose of all economic activity, but saving and capital accumulation is a vital process to the production of consumer goods. Keynes not only thought that saving was unimportant, but destructive in itself; contradictory he could be on the subject, however. Many of today’s economists continue in this tradition: “consume more, save less, and the economy shall prosper” goes their mantra. We are, however, all the poorer in more sense than one because of this grand mistake.