Right on the Money (#1)

Of all the reasons to read Kant, the most important is to understand Mises, and thus the template for a functional world (however unobtainable). Austrian economics, as formulated in Human Action, consists exclusively of systematically assembled synthetic a priori propositions. Insofar as action is in fact directed by practical reason, the conclusions of organized praxeology cannot be wrong.

It is pointless to ask an Austrian Economist whether he ‘believes’ a rise in the minimum wage will increase unemployment (above the level it would otherwise be). The praxeological construction of economic law is indifferent to empirical regularity, as to anything less certain than rational necessity. Does one ‘believe’ that 2 + 2 = 4? No, one knows it, because the irreducible values of the signs compel the conclusion, and are inextricable from it. There could be no value ‘2’ unless its doubling equaled ‘4’, or any meaning to ‘wage’ unless its doubling reduced demand for labor. Empirically sensitive Austrianism isn’t Austrian at all.

Like game theory, Austrianism applies wherever rational agents seek to maximize advantage. Perhaps, as Moldbug argues, it is comparable to Euclidean geometry — another synthetic a priori construction — embedded, as a special case, within a more general model, unconstrained by the presupposition of intelligible purposes.

The problem with Mises as guru is that Misesian classical liberalism (or Rothbardian libertarianism) is like Newtonian physics. It is basically correct within its operating envelope. Under unusual conditions it breaks down, and a more general model is needed. The equation has another term, the ordinary value of which is zero. Without this term, the equation is wrong. Normally this is no problem; but if the term is not zero, the error becomes visible.

As a matter of historical fact, this is how the neoreactionary departure from pure libertarianism has occurred. It has stumbled upon non-zero curvature in the domain of political economy, and — unable to comfort itself through the dismissal of this discovery — it has precipitated an intellectual crisis, through which it spreads. Whether faithfully Carlylean, or not, it insists upon a generalization of realism beyond expectations of liberal order. Civilization is the fragile solution to a deeper problem, not a stable foundation to be assumed — as a parallel postulate — by subsequent, elaborate calculations.

What does this make of money? Can Austrianism be modified, by systematic transformations, that adapt it to the dark intrusion of neoreactionary realism? That is a question recent discussions have already introduced.

ADDED: Spandrell triggers a related discussion.

May 22, 2013admin 57 Comments »
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57 Responses to this entry

  • James Goulding Says:

    Insofar as action is in fact directed by practical reason, the conclusions of organized praxeology cannot be wrong.

    This is clearly an unwholesome idea. Nick Szabo says,

    All deductive systems, whether those of Euclid or Mises, have a very small Kolmogorov complexity—it’s just the complexity of their axioms. If you don’t understand this go read up on Kolmogorov complexity. It is the existence of far greater complexity in the real world that negates the ability of simple logic to describe the intersubjective world (economics, politics, etc.) The complex world cannot be compressed with negligible lossiness into any simple axiomatic system.

    The use of axiomatic deduction to create “theories of everything”, outside physics, is a pernicious species of totalitarian thought that has led and will lead to totalitarian politics. The entire complex world is compressed into a hypersimplistic system and most of one’s ability to know the social world is lost as a result. Far worse still when it such thought systems are forced on others. Hegelians, Marxists, and many other mental pathologies have gone down this route, and now we may have the modern abuse of praxeology to add on.

    A charitable reading of praxeology is that there are two forms of empiricism, which are vaguely but not absolutely distinct.

    Consider safety tests on a car.

    Experiment: test a red model of the car. It fails, so I conclude that these red cars are unsafe.

    Deduction: test a red model of the car. It fails, so I conclude that red, blue and silver cars of this model are unsafe.

    This is an extreme example, where deduction is practically identical to experiment. Here, an experiment was conducted on an (idealised) object that has properties P = [A, B,…, X, Y, Z], and we deduced something about objects where P = [A, B,…, X, Y, Ω].

    The difference becomes interesting when one deduces, from the same red car, properties of a similar model with different suspension and brakes. Then, we have deduced something about objects where P = [A, B,…, λ, μ, Ω]. Clearly, the resulting claim is less likely to be true—but how much so?

    Austrians, charitably interpreted, argue that deduction generally trumps experiment in economics. Consider the minimum wage. Austrians (and other neoclassicists) would argue the Card & Krueger affect to measure an object with P = [A, B,…, X, Y, Z], but might easily have measured one where P = [A, K,…, G, H, O] or P = [R, Q,…W, I, Z]. Experiments in economics are poorly controlled.

    The enlightened Austrians would argue that although they don’t measure the object of interest directly, over time they have accumulated information about various kinds of price control, so they know all about similar objects that have P = [A, B,…, X, F, Z] and P = [N, B,…, X, Y, Z]. They think it reasonable to deduce from these known cases to the minimum wage.

    It’s difficult to demonstrate where the balance should lie. However, one might consider the high value of Mises and Hayek’s contributions to the socialist calculation debate, and to the view of the market as a process of exploration and efficient use of distributed information. Also, one might apply the heuristic that mainstream, relatively “experimental” economists are funded by central state institutions that are known to be untrustworthy, and whatever the value of uncontrolled experiments in theory, they (more so than deduction) facilitate mendacity.


    admin Reply:

    “This is clearly an unwholesome idea.” — Well, almost clearly. The exception might be if the ambition of economics was so rigorously curtailed that it became suitably scaled for small, robustly reliable quasi-mathematical patches (like minature game-theoretic structures, rather than the cardinal calculation engines Austrians recoil from). This would require that it restricted itself to micro, and sought solely to systematize the reasoning of economic agents, along with their predictable consequences. Macro-economic speculations would be considered essentially corrupt, with the sole Austrian macro proposition being: these aggregates are toxic hallucinations, substituting political interventions for what distributed micro (catallaxy) should do.

    Any agency engaged in cardinal-arithmetic analysis of massive aggregates, on the approximate model of physics (to flip Szabo’s point), is intrinsically illegitimate, insofar as this activity pretends to policy relevance. That’s the final ‘Austrian’ transcendental proposition. Of course, it only takes us back to the starting point of this discussion.


    fotrkd Reply:

    I thought about it for a minute or two, but I’m going to have to be a pedant. I think – unless you are using it in a way I’m missing – you mean induction or inductive reasoning rather than deduction (Conan Doyle/Holmes were wrong) – you induce from the specific to the general and deduce from the general to the specific.


    James Goulding Reply:


    Object 1 — P = [A, B, C, D, E]

    Object 2 — P = [A, B, C, D, K]

    Object 3 — P = [A, B, C, D, Q]

    ———> (Objects 1–3) — P = [A, B, C, D, _ ]

    ———> What is true of each is true of all

    As long as the last property doesn’t exert a critical influence, we can reason efficiently by treating objects 1, 2 and 3 as a group that function in a similar way. If three different kinds of price control (although we didn’t call it a price control originally, just pointed to legal fixing of the exchange-number thingies) all cause shortages and surpluses, then we can infer that price controls in general freeze the market in disequilibrium.

    We thereby reason from the specific (what is true of objects 1, 2 and 3) to the general (what is true of the non-precisively abstracted collection of objects 1–3).


    (Objects 1–3) — P = [A, B, C, D, _ ]

    Object 4 — P = [A, B, C, D, Y]

    ———> (Objects 1–4) — P = [A, B, C, D, _ ]

    ———> What is true of all is true of object 4

    Reasoning from the general (what is true of an empirical cluster, objects 1–3) to the specific (this tells us what is true of object 4, a new object that we think we should abstract into the same empirical cluster), we conclude that although we may not be able to experiment on object 4 as easily as we did other members of this empirical cluster—e.g. because the minimum wage is not as drastic as some other price controls, and therefore lost in noise—we can say with fair confidence that object 4 functions similarly to objects with many (but not all) of the same properties, i.e. the minimum wage causes a surplus of labour.

    This process is of course murky, and devolves almost immediately to use of the brain as an intuitive black box, but it is worth spelling out in order to refute the inaccurate claim that deduction is “anti-empirical”, and direct experiment is the only rational approach in every field of inquiry. Deduction simply means that information about macro-level “objects” is often best decomposed into information about (a subset of) these objects’ properties.

    Fotrkd, you may have noticed that “deduction” kind of involves induction and deduction, at the same time. Also, the very idea of “induction”, apart from in the mathematical sense, is useless on its own—merely a prelude to deduction. So although I forgive you, you are being pedantic; the whole process above probably ought just to be called deduction.


    fotrkd Reply:

    Sorry, I fell asleep again. Your induction section is fine. But by adding in a 4th object with the same properties – A, B, C and D – and concluding it “functions similarly to objects with many (but not all) of the same properties” you are not deducing anything (no more than you were deducing anything with object 3 before you concocted your artificial cluster). You are simply saying (or inducing) because x possesses a,b,c and d properties (the particular) it will function similarly to all other objects which possess a, b, c and d properties (the general). You’ve just added in another object.

    fotrkd Reply:

    Just to finish that off (before bed) – the giveaway difference between deduction and induction is not that deduction is anti-empirical but that it doesn’t require empirical verification (which means it cannot involve any form of induction). So while object 4 may possess property e which overrides a, b, c and d and means it empirically/evidentially doesn’t behave like the rest of the cluster – i.e. our inductive reasoning proved inaccurate – a deductive argument would proceed as follows:

    (1) all objects possess property e [general]
    (2) ‘4’ is an object [particular]
    (3) ‘4’ possesses property e [deduction]

    3 follows logically from 1 and 2, requires no empirical verification and can only be falsified by the failure of either 1 or 2.

    James Goulding Reply:

    You are simply saying (or inducing)

    You have interpreted what was intended as a rough sketch as literal mathematics. In reality, inferences are not logical but probabilistic, and there’s also the problem (if taken literally) that these properties don’t seem to fully define the behaviour of the objects.

    I hoped for substantive discussion of the Austrian, “non-experimental and property-based” style of reasoning, not this rather futile linguistic debate about what to call it.

    fotrkd Reply:

    But I said I was being a pedant to start with… It’s also a bit more important than that to the extent the OP is talking about synthetic a priori propositions, which until Kant went to work were as paradoxical as inductive deductions.

    Posted on May 22nd, 2013 at 5:39 pm Reply | Quote
  • Mike Says:

    “it insists upon a generalization of realism beyond expectations of liberal order. Civilization is the fragile solution to a deeper problem, not a stable foundation to be assumed”

    The customary counterpoint is that civilisation emerges from catallaxy. But that’s just dodging the point: how does catallaxy emerge and/or take place when we’re outside of the “Newtonian” envelope? The Rothbardians don’t say. If you can’t take your produce to market (random example) because there are bandits who’ll rob you of it, then anarchy (in both sense of the term) is suppressing trade, ie. catallaxy.

    So how do you get back into that lawful Newtonian envelope? That is to say, what do the Rothbardians plan to do? Shoot the bandits, I suppose. Let’s have a communally-funded bandit-shooting service, say. And so the holes in the Rothbardian account make themselves obvious.

    (At this point, the Rothbardians get into a theological discussion over whether or not a bandit-shooting service qualifies as “government”. And that’s _before_ you get to the free-rider problems of bandit-shooting services, which necessitate taxation, so as to force otherwise-free-riders to pay.)

    So neo-reaction is just the next step after Rothbardian anarcho-capitalism: it diagnoses the problems with Rothbardianism, and acts accordingly. This is the natural conclusion of Moldbug’s “envelope” comment: if we are out of the envelope, we must act accordingly. The first step is recognising and admitting that there is such an envelope. The neo-reactionaries have recognised this, which is why we are neo-reactionaries. Rockwell, Wenzel, Di Lorenzo etc have not. Hoppe, however, has, so he’s a good bridge between reaction and anarcho-capitalism.

    As someone else (was it you?) pointed out, if you remove the dark enlightenment from techno-capitalist neo-reaction, you just have orthodox Austrian paleo-libertarianism. This implies that the “truest” form of neo-reaction is the techno-capitalist sort – the other forms of neo-reaction are rooted in ethnic nationalism or obedience to God.

    Techno-capitalist neo-reaction as a simple “next step” after Austrian paleo would be heresy to anarcho-capitalists (it doesn’t involve abolishing and suppressing government). But of course, the chief priest of Rothbardianism was the first neo-reactionary.

    And so with St. Murray’s imprimatur, we can proceed.


    Thales Reply:

    “As someone else (was it you?) pointed out, if you remove the dark enlightenment from techno-capitalist neo-reaction, you just have orthodox Austrian paleo-libertarianism.”

    A formalization of Natural Law then? After all, formal systems are finite, whereas Natural Law defies formalization precicely because it is not finite.


    admin Reply:

    Once you see it, it’s hard to resist. How could Praxeology and excavated Natural Law not be the same thing?


    survivingbabel Reply:

    The Dark Enlightenment suggests that more is needed to sustain civilization than just efficient markets and a bandit-free expressway. What we’ve discovered is that the people in the civilization must share something in common besides self-interest, even if there is mutual gain. Without a meaningful organizing principle (like faith, blood, or vision of the future), civilization degenerates into pure consumer society, creating generations of selfish, entitled, atomized individuals with no motivation to sacrifice and build for the common good.

    Like other European countries, France has gradually ceased to be a nation (based on nationality, common birth) to become an aggregate of individuals united by their pleasures or the ideas they have of their interests. The former obligation to “serve” has been replaced by the general temptation to “serve oneself.” This is the logical consequence of the principle that founds society solely on human rights, thus on each individual’s interests. – Dominique Venner


    Posted on May 22nd, 2013 at 6:11 pm Reply | Quote
  • fotrkd Says:

    You’ve not left yourself much to do in #2 then! How do you systematically transform something that “consists exclusively of systematically assembled synthetic a priori propositions” whilst leaving it recognisably itself?

    Without doing so you can still use it as a future template and a past indicator against the present “non-zero curvature”, but as the present persists it will become an increasingly less convincing weapon (even, as we’re seeing, for persuading Handle). So I’ll await, intrigued (or should I get Kant from the loft and hunt for clues?)


    Posted on May 22nd, 2013 at 6:45 pm Reply | Quote
  • James Goulding Says:

    Man, Economy and State, perhaps the most purely “Austrian” document, is very naïve in places, especially in the Power and Market addendum. Rothbard says,

    [T]he laissez-faire or free-market doctrine does not assume that everyone always knows his own interest best; it asserts rather that everyone should have the right to be free to pursue his own interest as he deems best. Critics may argue that the government should force men to lose some ex ante or present utility in order to gain ex post utility later, by being compelled to pursue their own best interests. But libertarians may well reply in rebuttal: (1) that a person’s resentment at coercive interference will lower his ex post utility in any event; and (2) that the condition of freedom is a vital, necessary prerequisite for a person’s “best interests” to be attained. Indeed, the only lasting way to correct a person’s errors is by persuasive reasoning; force cannot do the job. As soon as the individual can evade this force, he will return to his own preferred ways.

    Rothbard, although a genius in catallactic analysis, has a less plausible notion of coercive game theory than the man on the street. “Everyone should have the right to be free to pursue his own interest as he deems best.”—and if he is Lenin, or Eichmann? This “should” is not very useful at all.

    Nick Szabo, again, puts it well here and here.

    The good news is that one can develop a largely non-coercive system out of a coercive one. Its origin was necessarily coercive and it remains “locally coercive” insofar as its procedural law involves acts like legal arrest, search and seizure, etc., but its substantive law is largely non-coercive, i.e. based on the libertarian principle of non-initiation of force.

    Not utopia, as the traditional English common law (evolved by judges over several hundred years of court cases) largely followed this pattern, and indeed (if we ignore modern legislation) mostly still does.

    Think of protocol layers (or if you don’t know some computer network design, think of the layers that go into building a road: e.g. dirt, gravel, asphalt). The bottom layer is legal procedure, protected by a military where necessary, and involves some coercive acts. But it supports a layer of substantive law—tort, property, contract, and the like—that can and should enforce non-coercion between people.

    Indeed, the moral principle of non-initiation of force, far from being a possible basis of society as Murray Rothbard and David Friedman would have it, is a sophisticated outcome of long legal evolution and a highly involved legal procedure that itself cannot stick to that principle: it coerces people to a certain extent so that they will not coerce each other to a much greater extent.

    So Austrians are no good for political engineering. As far as economics is concerned, I would distinguish several points of interest.

    1. Interventions. The Cathedral enacts a number of interventions that supposedly correct market failures or encourage morally correct behaviour, but are actually Machiavellian. The minimum wage is designed to funnel young people through the Cathedral’s educational organs, but the ingenuous Austrians aren’t hip to the scheme.

    2. Macroeconomics. This is the theory of fiscal and monetary policy, i.e. how central banks supposedly manage the economy in the public interest. If one believes the highly convincing Austrian business cycle theory, then this is all fraudulent, because the central banking apparatus causes almost the entire problem.

    However, as recent discussions here have hinted, given the existence of this Rube Goldberg stealth tax machine, Krugman, Bernanke et al do seem to have legitimate knowledge that Austrians lack, and that is why their predictions are more accurate. After all, central banks engage in extremely complex game theoretic interactions with each other, and with the entrepreneurs who try to predict their behaviour.

    This is not to say that Keynesianism is true and the Austrian business cycle theory is false. By way of analogy, Genghis Khan was a military expert and Stalin knew a thing or two about politics.

    3. Mathematics. The Austrians are not keen on it. See the first excerpt from Hazlitt’s The Failure of the “New Economics” here to see why, or check out this post from Fabian Tassano. Mathematics, like uncontrolled experimentation, facilitates sophism. Nick Szabo, yet again, nails it, although this particular paper isn’t on economics.

    In academic papers, apart from sophism I also find that mathematics is used when the authors need to publish but have little to say.

    4. Ordinal utility. Rothbard says,

    The numbers by which ends are ranked on value scales are ordinal, not cardinal, numbers. Ordinal numbers are only ranked; they cannot be subject to the processes of measurement. Thus, in the above example, all we can say is that going to a concert is valued more than playing bridge, and either of these is valued more than watching the game. We cannot say that going to a concert is valued “twice as much” as watching the game; the numbers two and four cannot be subject to processes of addition, multiplication, etc.

    Other economic schools treat humans as having cardinal utility functions. This isn’t terribly important, but not unrelated to the Austrian skepticism of mathematical economics.

    5. Laissez-faire microeconomics. Although Austrians are correct about many government interventions, their total lack of regard for coercive game theory can cause problems.

    Firstly, if (as is often the case) the state is actually heavily entangled with catallactic processes, to assume away its existence can be arbitrarily unrealistic. Liberalisation schemes in the Third World have failed badly due to anomalously low labour and capital mobility, which is caused by a lack of faith in the permanence of such changes.

    Secondly, Edward Luttwak founded the study of “geoeconomics”, and, e.g., Sanjaya Baru says,

    Both China and Germany have deployed exchange rate policy as a means to enhance their geo-economic power. China’s consistent under-valuation of the Yuan has been widely viewed as a mercantilist intervention. However, few have commented on Germany’s rigid stance on the Euro which has clearly hurt some European economies, just as China’s currency policy has hurt its Asian neighbours, while allowing Germany to remain globally competitive. Implicit in China’s and Germany’s exchange rate policy is a ‘beggar-my-neighbour’ strategy that has helped both countries generate high current account surplus, while shifting the burden of adjustment to neighbouring economies.

    Whether or not this is true, if it were true one wouldn’t hear so from the Austrians.

    Thirdly, in developing countries, legal systems have to develop in tandem with the economy. A Robinson Crusoe economy doesn’t spontaneously generate the laws that would e.g. defend a stock market from predation. The East Asian tiger economies industrialised sucessfully, and are considered to have used a fairly dirigiste “export promotion” strategy. Development may have been in spite of this industrial policy; however, consider that if new domestic industries are encouraged to compete in global markets, the nascent legal and bureaucratic structure can obtain relatively accurate and immediate feedback on its performance, which might not be true if trade was primarily internal.

    Again, such “structuralist” theories may well be untrue, but I find that Austrians are particularly likely to dismiss them without due reflection.


    vimothy Reply:


    On mathematics: It seems a bit rich to accuse mainstream economists of (mathematical) sophism given the spherical cows in a vacuum arguments advanced in the OP. Can Austrians really have it both ways?

    On cardinal vs. ordinal utility: I realise that this is a reactionary blog, but it seems like you haven’t read a textbook since some time in the 19th century! People don’t actually treat utility as cardinal any more.


    James Goulding Reply:

    Vimothy, if accurate inferences are “a bit rich”, tant pis. Please only criticise arguments for their truth value, especially since I have not defended praxeological epistemology (as distinct from mere “deductive reasoning”).

    You are correct about cardinal utility, good catch. On that subject, although it isn’t terribly important, I’m not convinced by Bryan Caplan’s argument here. He says,

    Modern neoclassical economists habitually use “utility functions” to describe individuals’ preferences. For example, they may posit that an individual’s utility U=a*ln(quantity of apples)+(1-a)*ln(quantity of oranges). Rothbard instead preferred to discuss the “value scales” of individuals. For example, an individual’s preferences might be given by {1st apple, 2nd apple, 1st orange, 3rd apple,…}. Both approaches provide an obvious interpretation of “utility maximization”: for neoclassicals, an individual selects the highest feasible value of U, while for Rothbard, a maximizing individual satisfies the highest-ranked feasible preferences on his value scale.

    Both approaches seem quite similar; so similar, in fact, that neoclassical economists might call them identical. But Rothbard noted some underlying differences, and concluded that the “value scale” approach was the right one. Why? According to Rothbard, the mainstream approach credulously accepted the use of cardinal utility, when only the use of ordinal utility is defensible. As Rothbard insists, “Value scales of each individual are purely ordinal, and there is no way whatever of measuring the distance between the rankings; indeed, any concept of such distance is a fallacious one.” […]

    As plausible as Rothbard sounds on this issue, he simply does not understand the position he is attacking. The utility function approach is based as squarely on ordinal utility as Rothbard’s is. The modern neoclassical theorists – such as Arrow and Debreau – who developed the utility function approach went out of their way to avoid the use of cardinal utility.

    It seems to me that Rothbard prefers his “value scale” because he thinks that any claim about utility more bold than, “if someone would trade A for B, he prefers A to B” cannot be checked against self-evident human behaviour. Since human brains and their goals are scarcely understood, it is necessary not to make unwarranted assumptions.

    The claim that individuals select “the highest feasible value of U” seems susceptible to this critique, even though it doesn’t imply cardinal utility. Neither of these approaches is definitively correct or incorrect, since they just are competing models, but to convince me Caplan would have to furnish excerpts from a non-Austrian, neoclassical theorist who models humans as having such a utility function and actually writes something more useful and enlightening than the passages of Rothbard that he claims are full of “ad hoc concessions”. Otherwise, I’m inclined to regard “U” as a needless elaboration of Rothbard’s delightfully simple value scales.


    vimothy Reply:


    I’ll certainly try to criticize statements for their truth value. It’s
    not always easy to know what people are saying, though (perhaps this
    simply reflects my limited intellectual resources), and even where it
    is, it can be hard to tease out the truth when arguments rest on
    contradictory premises..

    I took your comment to be a (measured, fair) attempt to account for
    the difference between Austrian and mainstream economics, or to
    benchmark Austrian positions against the mainstream. So I read your
    criticism of mathematics in economics in that light. Mainstream econ is
    sophistic implies that Austrian econ is not, at least in this
    dimension, given the context. But how can you say, if this is what you
    do say, that,

    1, Austrian economics works fine and in fact cannot be wrong, at least
    as long as we’re assuming spherical cows in a vacuum; and,

    2, Mainstream economics is a sophistic cargo cult, which only has legs
    to the extent that economists assume spherical cows in a vacuum?

    If this is not your argument, consider it a hypothetical question, an
    attempt to tease out the true nature of the disagreement between
    Austrians and neoclassicals, in the spirit of your original
    comment. If it’s fair to call mainstream economists sophists, is it
    also fair to call Austrians sophists too? Perhaps even more so?
    Perhaps not?

    On the utility question, I think that you are right in that this isn’t
    terribly important, but Caplan is right — Rothbard doesn’t know what
    he’s criticizing. Utility functions are designed to represent ordinal
    scales and contain no more or less information than the underlying
    primitive relationships, by construction.


    James Goulding Reply:

    If it’s fair to call mainstream economists sophists, is it also fair to call Austrians sophists too? Perhaps even more so? Perhaps not?

    OK, I see your point.

    I think it unfair. Firstly. mainstream economists preside over a fraudulent and harmful central banking system, and Austrians do not. If you don’t agree about this, I strongly recommend that you read Hazlitt’s fisking of Keynes, and Moldbug’s articles on maturity transformation. I am inclined to view mainstream economics as distributed Machiavellism, whereas the Austrians, like anyone, are merely fallible.

    Secondly, although praxeological epistemology is false, what Austrians actually do is mere deductive reasoning. Their economic thought is superior to their philosophical thought, and the former is rather more important in practice.

    Of course, mainstream economists aren’t wrong in every respect, and in certain cases (i.e. on point #5 above) may be superior to Austrians.

    Posted on May 22nd, 2013 at 7:01 pm Reply | Quote
  • vimothy Says:

    Let me try to tie my objection in together with Handle’s comments, which are quite sensible, by quoting Krugman:

    So, at this point America and Japan (and core Europe) are all in liquidity traps: private demand is so weak that even at a zero short-term interest rate spending falls far short of what would be needed for full employment. And interest rates can’t go below zero (except trivially for very short periods), because investors always have the option of simply holding cash….

    Under these circumstances, normal monetary policy, which takes the form of open-market operations in which the central bank buys short-term debt with money it creates out of thin air, have no effect. Why?

    Well, the reason open-market operations usually work is that people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process.

    But if rates are zero, there is no cost to liquidity, and people are basically saturated with it; at the margin, they’re holding money simply as a store of value, essentially equivalent to short-term debt. And a central bank operation that swaps money for debt basically changes nothing. Ordinary monetary policy is ineffective.

    That’s a summary of the basic story from mainstream monetary econ. If it’s wrong, what’s the reason that it’s wrong?


    Nick B. Steves Reply:

    It’s not wrong. The most attractive risk adjusted rate of return for many investors is 0% less “inflation”. Save your money for infinity years and you’ll get: NOTHING… It doesn’t get any more bearish than that.

    But you say it as if it supposed to be a good thing


    Mike Reply:

    The problem is not with the reasoning but the implicit premise that you can print capital goods.


    admin Reply:

    You print people into such a state of euphoria that they pull capital goods out of a hat (or whatever it is that those dirty producers do)


    vimothy Reply:

    I don’t see that this really is an implicit premise of the liquidity trap. Consider a simplified economy where there are two types of financial asset, money, which pays no interest and bonds, which do. The interest rate on bonds is therefore the opportunity cost of holding money. In order for me to want to hold money as opposed to bonds, there must be something that compensates me for the lost interest income. That something is liquidity: money has liquidity properties lacking in bonds. So money has a type of non-pecuniary return. In equilibrium, the marginal return on bonds and the marginal non-pecuniary return on money have to cancel out, so that I am indifferent between the two.

    This implies that the quantity of money and the nominal interest rate on bonds are jointly determined. If have more money than I want, I will use it to buy bonds, driving down the interest rate. If I have less, then I will buy bonds, driving the interest rate up. (This is also a description of a central bank “open market operation”).

    When the interest rate on bonds is at zero, there is no opportunity cost to holding money. In such a situation, when the central bank increases the supply of money, money does not become less scarce. We’re already at the point of saturation.

    That’s not say that the central bank can create capital goods by issuing money or that it is a good thing to be at the zero lower bound or anything like that. (Friedman made a famous argument that it was a good thing to be at the zero lower bound, which you might enjoy, in, “The Optimal Quantity of Money”). It means that the nominal return on bonds measures the degree to which liquidity is scarce. If the nominal return is zero, then liquidity is not scarce. If liquidity is not scarce, then central bank operations that swap bonds for non-scarce money will have no effect. Hence, in a liquidity trap, conventional monetary policy is useless.


    Mike Reply:

    “I don’t see that this really is an implicit premise of the liquidity trap.”

    You’re not looking far enough down the rabbit hole.

    (To wit, “fixing” an economy means, inter alia, more investment, repricing bad investments, and getting relative prices correct. Printing money distorts relative prices and does not create investment goods. All this mumbo jumbo about “liquidity traps” and nominal lower bounds is just a distraction.)


    vimothy Reply:

    I don’t agree that “fixing” an economy requires more investment. It depends on the economy. The US economy could do with, inter alia, higher private saving and a lower current account deficit. And more jobs. And less un-skilled Mexicans. I don’t think that the problem is lack of investment. Other economies have other issues. In any case, we haven’t discussed that here — the question is rather, Dude, where’s my hyperinflation? One answer seems to be that we’re actually got hyperinflation. Another answer seems to be that we’re going to get hyperinflation at some point. My argument is that there’s no link between the type of money created by the central bank and inflation at the zero lower bound.

    Posted on May 22nd, 2013 at 7:19 pm Reply | Quote
  • vimothy Says:

    Also (honest question), re: the a priori approach discussed in the OP, what’s the difference between Austrian economics and any mainstream theoretical model? Competitive GE theory, for e.g., is as Euclidean as you like.


    Posted on May 22nd, 2013 at 8:58 pm Reply | Quote
  • spandrell Says:

    Something tells me we are as likely to solve the money question here as we are of solving he reality of the Trinity. Some things are just too arcane. Moldbug’s financial theories come to mind.


    Handle Reply:

    Exactly. Some concepts are difficult, complicated, and counterintuitive, much as we would like them to be otherwise. Monetary economist is one of them. We especially don’t like that, because it gives free reign to government to do its mischief. But it can’t be wished away. Imagine a bunch of physicists complaining about issues with Newton’s Gravitation and discovering General Relativity in a comments thread.

    And, while the math is hard, General Relativity is actually a simple theory in the sense of being “reducible to a small set of equations”. It doesn’t have to take intelligence actors into account.


    admin Reply:

    Solving the reality of the Trinity was going to be next.


    Posted on May 23rd, 2013 at 1:45 am Reply | Quote
  • Handle Says:

    1. Think of the Economy more like an Ecology. The analogy is imperfect (no “trade” save for symbiosis, but competition, scarcity, complex network of relationships, etc.) Ecologies face a kind of robust negative-feedback resilience in the medium-run, but chaotic wild-swings in the short run, both from endogenous built-in tendency dynamics (boom-bust “population cycles”), and exogenous disruptive shocks like weather, geological, and even astronomical events.

    If you are living in such an ecology, it is inevitable that someone will say “The wild swings are intolerable. Perhaps we can replace the roller coaster with a steady train. Maybe we can create a kind of managed zoo-park preserve, where a benevolent and intelligence caretaker can develop and implement a monitoring and control system to smooth out the ups and downs.” The park caretakers may be incompetent, but nature, red in tooth and claw, was hardly clearly superior per se.

    2. Back of the envelope calculation: It would have taken the entire global economy to produce the level of information technological activity that goes on at 1% of world GDP today only … 13 years ago. There are server farms coming online today that no Manhattan Project could have brought into existence when Bush v. Gore was in the Supreme Court. If every human being alive fifty years ago did nothing all day but arithmetic operations it would produce as much output in a year as anyone can purchase today for only $17.

    I could go on. My point is that no one has any good idea how to account for this in “inflation”. The government-model (in every country) “basket of goods” doesn’t count “Gigaflops”, because every human’s basket has been containing exponentially more Gigaflops for years. Lots of Austrians, or Jim Donald, like to point to ShadowStats to say that the CPI is too low. But arguably there has been deflation on an unimaginable scale and it is far, far too high. Your fiat currency has gained a trillion fold in informational capacity and for a day’s labor you purchase a storage device to hold a legally free digital copy of every bit of content humanity created prior to the 1930’s. The relative scarcity of computing to conventional tangibles has undergone a revolution that no one has rationalized in our monetary analysis.

    3. Admin mentioned earlier the rapid-clawing back Debt-GDP ratio after WWII? How did they do it? This is a well known case in Political Economy. Well, there was demographics and the (relative to years of deprivation) post-war boom. But mostly it’ was price controls, rationing, punitive top income tax rates, and unexpected inflation. When you add it all up, it was the government using deceit and central planning to con people into gifting huge amounts of labor to the war effort without compensation. Slavery by Fraud. Real slavery, or at least the draft, was more honest. But we roll more sophisticated in 20C. Hey, all fair’s in war, especially when you win!

    The basic outline is that the government had to encourage as much “voluntary” war-related labor supply as possible out of the non-deployed population. So it could just bid up the price of labor until unemployment was 0% right? Wrong, that would be ruinously expensive, require even more debt-issuance (which could threaten credibility, even in war-time) and also produce huge amounts of inflation when it unleashed all that cash on the marketplace. Also, it would make the GI’s bitter that the older guys who stayed in the rear were making it out easy with huge government checks and their girls.

    So, the Feds imposed wage controls, and that way could encourage full labor participation in government employment at a much cheaper rate. Getting out from under those wage-controls by offering fringe benefits, like family health-care, is how America got into the mess that led directly to Medicare, Mediacaid, and Obamacare – so there’s that.

    Still, this raised people’s wages a lot, which would have generated war-time inflation. More important, it would have bid up the resources the government needed to buy for the war-effort. So the government imposed price-controls on those as well, which led to shortages. So the government insisted that almost 100% of all the most important markets be diverted to the government or war-related corporations, with a tiny, price-controlled pittance being reserved for lottery rationing among the populace.

    So, the bottom line is that Households were awash with (borrowed and newly-printed) cash they couldn’t spend on anything. Or save in banks at any meaningful return, because the government imposed controls on consumer interest rates, so it could keep government borrowing costs down regardless of the Debt-to-GDP ratio, which it declined to publish, and which the media declined to care about. “American Pravda” indeed.

    And what the government did to ensure that the cash was sterilized and borrowing costs kept low was to introduce the Liberty Bond program and make it a social stigma not to participate. Which is why, even in the midst of the penury of war, almost 80 million savers put in an average of $2,000 each in 1940’s money!

    Here was the deal – War bonds (the last sold in early 1946, I think), were 2.9% percent (annual) ten year bonds. Years ago, an old neighbor still had one of the original cardboard cutouts, where you could pop in 75 quarters ($18.75) in return for a bond promising you $25 in ten years. A total nominal return of 33% Actual experienced decadal inflation rates for purcahsers?: Jan 1942-52: 68.8%, 43-53: 57.4%, 44-54: 54.6%, 45-55: 50%. So everybody lost 17-35% of their savings in real terms, and, remember, this was the highest interest paying program (to fraudulently encourage additional “voluntary” consumer lending), so no matter how they loaned their money to the government, which you totally had to, you took a big real hit.

    Now, maybe you can blame this on the Korean-war inflation, which is kind of valid – except they controlled prices then too. And not only that, but they allowed people to roll-over their liberty bonds into new 10 and 20 year bonds by encouraging an expectation of lower inflation in the future, which, of course, didn’t arrive, and, also of course, was wildly popular.

    At no point in any of this did anybody feel like they were being conned or forced to gift a fraction of their labor and savings to the government. It was all indirect, delayed, hidden, and obscured. So much so that the government itself wasn’t quite sure what it was doing – it was just “plugging holes in the dike” like the OPA-folks used to say about their endless, desperate ad hoc improvisations.

    USG-20C – the con’s so good, even the con-artist is unaware of it, and sleeps with a clear consience. And everybody thinks everybody else is the mark and the dupe. As “Whispering Saul” said in 1979, “If you sit in on a poker game and don’t see a sucker, get up. You’re the sucker.” By 1955, everyone at the table could get up. But they think they’ve had fun at the casino, and they’ll be back. After the depart without their money, USG gets to sit back down – it’s his game after all.


    admin Reply:

    It’s frustrating that any talk of the American Fascist Tradition sounds absurdly overwrought, even though it’s no more than dispassionate description, as your account makes clear. Given the overwhelming cultural headwinds against any strictly technical usage of ‘fascism’, it would be helpful to have a non-cumbersome substitute vocabulary, in order to discuss this history realistically. It should be possible, for instance, to provide a rough quantitative estimation of the state’s capacity to command sacrifice, which is itself a reasonable proxy for the fascist ideal. What kind of language could be used to explore this, without it sounding like vacuous Godwinning? (I wouldn’t want you to get your Darkest Enlightenment on the cheap.)


    Handle Reply:

    “Command” is an interesting word here with two meanings. One more passive, “merely to acquire, someway or another”, and one more active “To order or direct under coercive penalty”. The connotation and emotional valence of “Communism”, “Totalitarianism” and “Fascism” (even “Socialism” in the US) all create images of the latter, active meaning. The affiliation is so negative as to be mock-able for hysteria – hence Godwining.

    But what about the former meaning? USG commands it’s sacrifices, without doubt, but it’s power does not come out of the the muzzle of a gun. How crude! So how does it get them? Sacrifice is a religious term. How does any religion get them? In a word – Mythology. You’re doing pretty well if you can convince people that either they’re not really making sacrifices or that they want to make them. You’re doing better if you get both. You’re doing best if you don’t even realize that’s what you’re doing to people. And you’ll take over the world if your entire society is geared towards incentivizing the production of globally-first-rate con artists. So much more sophisticated than the gulags.

    Sometimes you can’t hide that there’s some kind of con going on, and somebody’s going to take the fall eventually (e.g. Social Ponzi schemes), so the best trick is to make people think they’re in on the con and somebody else is the mark. Works every time. (I’d be remiss to not include a link to the Mamet-quoting brilliant Last Psychiatrist essay here (ht Nick Steves).

    Instead of “Optimizing for Intelligence” our society says “Maximize for Swindlers”. Instead of “Fascism” you have Phantism, or, really, Gameism. Hint – you’re not the PUA player, you’re the one getting played. The Greek is “Apateon” – “crook, fraud, swindler, cheat, knave, beguiler, shark, victimizer, faker, rook, etc… ” sounds about right. And the Greeks should know! We’re the Trojans in this Apateocracy or Apatearchy.

    The cleverest, most persuasive, charming, charismatic, and seductive con-men, deployed to every Cathedral outpost with their own subject-matter-specific official bullhorn. There are huge gains and enormous ROI to being an effective liar these days, which is why everyone is trying to hard to learn how to be the most effective and convincing liar they can be. Or else hiring them. But there is no shortage of volunteers for the Cathedral trying to show off their skills. Krugman says he blogs for free! But his currency is not USD or BTC. He gets paid; believe it.

    And like all novices, liar-aspirants worship their hero champion liars not for the truth of their arguments but their skill in lying. Well, there is some truth to anything effective – the truth about your audience. Naturally, it’s a very dark one.


    admin Reply:

    The language of confidence trickery works very well — as does the (closely related) language of magic. “Lying”, yes, or conjuration.

    Posted on May 23rd, 2013 at 5:33 am Reply | Quote
  • admin Says:

    “… although praxeological epistemology is false …”
    — the most defensible Austrian point: the crucial epistemological subject is not the economics profession, but the market (through price discovery). Austrian economics exists primarily to critique epistemological pretensions, rather than to replace them. Its canon of constructed knowledge is subordinated to this negative task.


    James Goulding Reply:

    Yes, I think their epistemology has to be understood in the context of its time. Since I believe rival schools tended to undervalue deduction during Mises and Rothbard’s prime, in defense of such as ideas as socialism, perhaps it was necessary to overstate the case for property- and not whole-object-based, non-experimental economic reasoning. “Don’t try socialism, because we already know that markets are a necessary means of integrating information.”

    This reminds me of Coase’s theorem, a crude rendition of which is misapplied by people like David Friedman.

    A charitable interpretation is that Coase overstated the case for market-based solutions to externalities, or made this possible, in order to defend economic freedom from the etatist, regulatory state that was developing at the time.


    fotrkd Reply:

    Austrian economics exists primarily to critique epistemological pretensions

    So perhaps a (Later) Wittgensteinian approach to employing Austrianism? The current economic situation looks like it could be explained by x but on closer inspection (returning to basic, logical principles) we realise we’ve fallen into error (or pretension). But rather than asking the broad ‘where’s my hyper-inflation?’ type questions (to which Austrianism should remain silent) we need to look for micro level indicators. Can it be applied to enough specific, real-world examples to demonstrate its worth in the short-term and build a consensus that in the long run it will be borne out more broadly across the economy? And hence retain its neoreactionary power? Is that a practical possibility?


    admin Reply:

    All my inclinations tend to ‘yes’, but what if the coldly realistic answer is ‘no’?


    fotrkd Reply:

    Then it goes the way of neocameralism(?) and you have to wait patiently to deploy it? And in the meantime find something else with which to blow the house down? Pesky present…

    vimothy Reply:

    the most defensible Austrian point: the crucial epistemological subject is not the economics profession, but the market (through price discovery).

    I’m not sure that it’s always so easy to distinguish between the market and the economics profession. (Friedman once described economics as “an engine not a camera”). What do Austrians say, for example, when the market draws on economic theory in aid of price discovery? Suppose contingent claims analysis suggests the US is broke; it’s debt crashes. Suppose there are markets that presuppose some kind of economic theory — the classic example of which might be options markets and Black-Scholes. In such cases, who, whom?


    admin Reply:

    OK, this is good, but it’s not a coincidence that the examples you pick are financial sector price-setting (rather than competitive-market, price-taking) businesses. If economists are calculating the way to price a ‘rocket-science’ financial product, they aren’t doing price discovery, and are in fact substituting expertise for market signals almost as blatantly as central bankers do. By further coincidence, they’ll quite probably circulate between financial sector positions and regulatory agencies, perhaps even political office. It’s not impossible that they could entirely forget where the boundary between the market and the government lies …


    vimothy Reply:

    I suppose that what I don’t understand is what it is you mean when you say “the market.” Price discovery by the market surely involves people making judgements about the prices of goods or assets, and these judgements can be informed by economic theory. Should I lend money to Portugal? If so, at what rate? Obviously, I need some kind of idea about what corresponds to a lot of debt, what corresponds to an adequate return given the risk of default, how those two might interact, and so on. Leave it to the market and don’t rely on the false expertise of the rocket scientists; okay. But you’re just kicking the can down the road. Someone ultimately has to make a decision, or nothing will ever happen. So how do they then go about doing so?


    admin Reply:

    The ‘someone’ who makes a decision, so that something happens economically, is the entrepreneur. ‘Enterprise’ and ‘the market’ are complementary concepts, mutually implying each other. So what distinguishes the entrepreneur, and the economist? Most basically, enterprise is essentially practical. To be an entrepreneur it is necessary to take economic action, which is also to bear risk, and this is indistinguishable from the process of price discovery. An economic theory of prices, and an entrepreneurial discovery of prices, might indeed interconnect (in either direction), just as a geographer might be an explorer, or inversely. There’s no reason for Austrians to preclude economic theory as a guide to enterprise, but it’s the practical risk that does the real ‘epistemological’ work.

    Posted on May 23rd, 2013 at 12:47 pm Reply | Quote
  • Nick B. Steves Says:

    This is all just too good to be tucked behind the comments link at an obscure “oriental” blog!

    I’d barely gotten my head wrapped around Darkest Enlightenment, before this shows up.

    Handle’s summary of why things didn’t go into the shitter after WWII is superb. He forgot to mention Bretton-Woods, and (probably related) the US entry as the world’s only fully intact industrial power. But yes, the LvMI/Austrian school doesn’t tell us everything we can possibly know about economics. In fact, it would probably tell us that a large fraction that appears to be “known” is in fact an illusion or at least a localized mirage.

    Yes, the US went Jack Boots over its population then, and upstanding Americans one-n-all said pass the Astroglide. Our very “existence” was, we believed, was at stake. Yes, people can put up with a whole lot of crap in defense of their “existence”. But what, I ask, can bring us back from the brink this time? We’ve done a smashing fine job at scouring the world of Hitlers over the past 75 years.

    This smoothing out of economic fluctuations, quaintly the “business cycle”, seems quite crucial to me. It seems to be what KFM (Keynes-Fischer Macroeconomics) was designed to do. This was of course taken full retard by Greenspan as early as 1987… and taken retarderer ever since by he who came after him.

    But Greenspan in 1987 had A LOT of monetary room to maneuver. The Bernanke has sold the last remaining bit of this wiggle room down the river. All that remains is to print money to prop up most-favored asset classes… and hope for the best.

    Krugman’s claim to fame is not so much a defense of QE, but that we must meet This Depression with all the fiscal stimulus we can muster… and then double it.

    But what is borrowing? It is, always and everywhere, an advance on your future paycheck. You are getting more money today for the promise of future payments tomorrow. Obviously, you take that bet if you can put the money to good use, i.e., that you can use it to make back the principal plus interest you owe and then a marginally attractive bit more. If you can’t do this, then borrowing is going to make you poorer (although you may feel very rich today).

    So what is true on the micro scale is at least partially true on the macro scale. All that gov’t borrowing in WWII (and cheerful patriotic austerity and pathetic yields on War Bonds) paid off. We survived. The “Business” survived… and actually got quite lucrative for a generation afterwards. Everyone in the entire world wanted dollars and what they would buy.

    But since the Reagan era, and in spades since the Dubya era, we are borrowing more and more with less and less promise of GDP growth. We borrowing at insane levels just to keep old and otherwise unproductive people fed and Sandra Fluke on birth control pills. Killing Hitler is good for business. We can make some money on that… and we did. But paying for fat people’s diabetes care? That’s not an investment. Okay, technically it’s an investment with a negative return. You don’t get rich off of that. You think USG is some sorta charity?

    But we still gotta pay it. I say “we”. My kids and theirs will gotta pay it. And they’ll either pay for it with depreciated dollars (like Weimar or at least Ford-Carter), or multi-generational economic malaise (like the Japs).

    So we can pontificate all we want about the (some) Austrians are getting this or that wrong, or how they cannot make predictions, or how Keynesianism seems so far to be working okay, or how far mass delusion might go in keeping the lead balloon aloft… but eventually… some stranger is going to come to the island and innocently but crudely point out that one or more of the islanders has blue eyes just like him.

    Markets will get very rational very fast on that day. May make for a good buying opportunity… Keep some powder dry.


    TGGP Reply:

    Austrians have been attempting to make such claims for a while, rent’s due.


    Nick B. Steves Reply:

    Yeah, yeah, well that’s what they said at Carlyle’s funeral too. (figuratively speaking)


    James Goulding Reply:

    Nice article—’tis true.

    I would add that mainstream economists also exhibit anti-epistemology, in the sense described by Bryan Caplan here.

    The problem for the Austrians is that the counter-intuitive mechanisms of etatism that characterise our financial system vastly complicate economics, such that analysts cannot rely so heavily on deduction and its tiny Kolmogorov complexity. To understand central banking, and not just vanilla catallaxy, we would need its talented practitioners to tell all, i.e. to audit the Fed, but of course that would be contrary to their game-theoretic interests.

    A more outlandish solution would be to create a bespoke MMORPG, and then simulate the global financial system, hopefully without allowing the players to catch on.


    Posted on May 23rd, 2013 at 9:17 pm Reply | Quote
  • TGGP Says:

    There is no “intellectual crisis”, because praxeoloy was never that important. You never saw Mencius engage in any sort of logical proofs from the action axiom, it was just a justification for his politics and the dismissal of empirical evidence. And his transition away from Austrianism involves not merely the need for a coercive authority (which was always part of his blog) but a shift in economic policy closer to the German Historical School and the cameralists (or at least away from laissez faire). The existence and importance of violence is not some new “discovery” either.

    “It is pointless to ask an Austrian Economist whether he ‘believes’ a rise in the minimum wage will increase unemployment (above the level it would otherwise be)”
    Is that true even in the case of monopsony?

    If Austrian Economics restricted itself to micro, it would also have to discard Austrian Business Cycle Theory (no big loss) and having anything to say about monetary economics.


    Posted on May 24th, 2013 at 2:37 am Reply | Quote
  • admin Says:

    “Is that true even in the case of monopsony?” — How could it possibly not be true? (Not a rhetorical question.)

    “If Austrian Economics restricted itself to micro …” — that really doesn’t matter much, one way or the other. What matters is that the world restricts itself to micro. Or at least, that certain free patches of it do.


    TGGP Reply:

    The textbook problem with a monopoly is that (in the absence of price discrimination), the profit-maximizing price is well above marginal cost. That means deadweight loss, because there are people who won’t purchase an additional unit even though they’d be willing to pay more money than it costs the monopolist to produce it (and they’d be willing to do so just to get that incremental profit). The case of monopsony is similar, wages will be inefficiently low because the employer would lose more money paying their existing employees higher wages than they would gain from the additional employees. Minimum wage legislation could increase total employment by raising the quantity of labor supplied, and while the employer would like to pay them even less they still bring in marginal profit. This may not be a very realistic situation, but it’s theoretically possible. Walter Block discusses it here. Much of his objection is related to calculations of utility, not employment per se.


    admin Reply:

    Isn’t the entire discussion of monopsony bizarrely divorced from reality? How could it arise except under totalitarian socialist conditions?


    TGGP Reply:

    Austrians and other “reactionary” types sometimes portray the status quo as being totalitarian socialism and the sheep just don’t realize it. I have always sided with The Undiscovered Jew against Foseti/Moldbug when comparing the west to communism: Walter Block once said “If you can’t tell the difference between a carpet and a toilet, don’t come to my house”. And if you can’t tell the blindingly obvious difference between America and the Soviet Union, there’s little point having a discussion with you. But back to our conversation, the point of dispute was whether something was THEORETICALLY possible. Now it’s a question of empiricism, which neoclassical economics places more emphasis on.

    Posted on May 24th, 2013 at 4:28 am Reply | Quote
  • RS Says:

    > Lots of Austrians, or Jim Donald, like to point to ShadowStats to say that the CPI is too low. But arguably there has been deflation on an unimaginable scale and it is far, far too high. Your fiat currency has gained a trillion fold in informational capacity

    Umm, marginal utility? This is as crazy as most of your stuff is sane. People want cars and meat.

    It’s not obvious to me what any producer or consumer can do with the level of computing power lately available, other than graphics people and scientists/ engineering researchers with 150+ IQs, such as a high-end aeronautical engineer. What is, say, Walmart going to do with it, or any typical industrial firm that doesn’t do hardcore fluid dynamics research? It’s not going to improve life except via research breakthrus that may or may not happen.

    The internet speed that became widespread ~6-7 years ago is admittedly quite nice, but there seems to be no point in having it be any faster.


    Handle Reply:

    Hold on – I’m not making any of those claims, and nor do I discount the importance of marginal utility. I am merely using a particularly visible example to illustrate some uncontroversial but unsettled related problems with accurately defining and measuring the price level.

    We understand that lots of variables play a part, and that all these variables can change, The analysis hits a variety of challenging obstacles unless we use a model that assumes a lot of things are static when in reality they can be, and are, dynamic.

    The usefulness of the current “basket of goods” model varies according to divergence between the static assumptions and the dynamic realities. We live in very dynamic times. The most popular kludges are using the chaining technique, the much pilloried “hedonic-improvement estimates adjustment”, “Purchasing Power Parity”, and excluding (or proportionally discounting, or using multi-period running averages) goods with traditionally highly volatile prices from the model’s basket. Naturally, all of this is prone to abuse.

    And that’s assuming that the idea of a price level even makes sense – a notion which has received a good amount of fair critique for nearly a century. Personally, I take a pragmatic approach. Given the context and the analysis one is trying to conduct, how useful is any particular metric to make cross-period or cross-context comparisons? There is always a trade-off between a tailored approach to the analysis, and using something like official CPI with which your audience is more familiar and the data is more accessible.

    “Inflation” seems to be a hybrid and something that is empirically real and socially constructed. I would prefer people have a variety of ways to communicate about comparisons of nominal prices over time, but it seems inescapable that the mind favors assuming the existence of a single phenomenon so it can have the linguistic asset of being able to talk about many things as if they were one thing, even if it’s at the expense of definiteness.

    The Internet-Austrians take a schizophrenic approach – at once hyperventilating about “hyperinflation”, which they clearly mean to refer to the price level, yet simultaneously trying to redefine the concept away from price level and towards “monetary base expansion” – a base the definition and measurement of which they cannot even agree upon (they should listen to the market and use Divisia M4).

    They attempt to salvage this mess by implicitly taking Friedman’s Monetaristic approach and assume that the base and the price level become proportionate in the long run. “What other explanation for the price level could there be?” But it’s an artificial “long run” that further assumes no intervening circumstances – of which there are bound to be so many that the concept falls apart.


    Posted on May 24th, 2013 at 6:58 am Reply | Quote
  • Randoms | Foseti Says:

    […] “this is how the neoreactionary departure from pure libertarianism has […]

    Posted on May 24th, 2013 at 8:01 pm Reply | Quote
  • admin Says:

    @ TGGP
    Schematically, Austrianism has evolved in three broad phases:
    (1) The construction of a model economy, inspired by the Old Liberal Order, but idealized as a coherent market system. Within this framework, firm non-cardinal but mathematically certain predictions could be made. If we were constructing an economy inside a computer system (as Goulding has suggested), this apparatus — consummated in Human Action — could be directly transferred.
    (2) ‘Deviations’ from this ideal economy, both from legacy structures and — increasingly — statist innovations, provoked more complex analyses, which treated all non-market interference as perturbations (defined relative to an implicit market norm) whose cascading inefficiencies would eventually succumb to competitive pressure or intrinsic failure and be processed out. Rothbardians tend to think this way. Mises provides the template, with his Economic Calculation the Socialist Commonwealth.
    (3) The triumph of fascist political-economy model over its socialist and liberal rivals in the 20th century is only slowly being intellectually digested, but it requires an Austrian response which has yet to be clearly seen. Under near-universal conditions of actually-existing fascism — characterized by dense regulation, central banking and pure fiat currencies, massive state-corporate collaboration, entrenched welfare systems, and public opinion / macroeconomic management by academic-administrative elites — the presumption of an effective ‘market norm’ becomes almost entirely unsustainable. The whole of society is the ‘deviation’, with relatively pure market dynamics restricted to the black economy (where it is subject to raw police coercion — and phase-2 analytical resources can still be appropriately employed).

    So I am not really arguing with you. Mainstream macroeconomics has been, quite literally, made for this world, which it serves administratively and — secondarily but interconnectedly — as a sophisticated propaganda organ. Since confidence is a crucial economic variable, which the regime openly and even proudly manipulates, it would be sheer mystification to pretend that any of this is ‘science’ (unless the art of mesmerism is). “Since we’re dealing with markets that are being manipulated by central bank policies, there is no such thing as economic analysis anymore.” (Link)


    TGGP Reply:

    Your link at the end is broken. And non-sensical. There are lots of economic analyses of central banking systems. Sargent in particular is known for his work on the time-consistency problem for central banks, and central bank behavior plays a massive (dominant for the situations he’s currently focused on) role in Scott Sumner’s view. Also, Franco tried having his economy run by falangists for a while. When he booted them out for a more liberal order it became known as the “Spanish miracle”. The “German miracle” similarly resulted from discarding Nazi-era regulations. Pinochet followed a similar path as Franco, but took much less time. Even in the U.S there was little love lost for the N.R.A struck down in Schechter (the most fascistic element of the New Deal). Are we living in a laissez-faire economy? Far from it, but nobody really sees fascism as an alternative. You and Noah Smith may both complain about conceiving of the economy as starting from a no-government simple ideal and then adding complications, but that is the dominant conception (though there are loads and loads and loads of such complications). The fears from “The Road to Serfdom” about a slide toward central planning totalitarianism are basically dead (Hayek himself claimed some credit for averting that dystopia). What we have is more like the entropic accretion of goo and cruft on top of an old market system that nobody really denies delivers the goods.


    admin Reply:

    Thanks, link fixed.
    This argument is getting fuzzy — there’s not enough of a tendentious thesis to get your teeth into (it’s just cognitive prep to this point). I’ll do my best to remedy that in the next installment.


    Posted on May 31st, 2013 at 1:00 am Reply | Quote

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