gdp's Comments

Economic Thought : My view of libertarianism

Fri, 22 Oct 2010 20:15:44 +0000

I don\\\'t think anybody disagrees with that point; I just don\\\'t see the use in bringing it up. To me, there are different types of wrong.

Marx was behind his times, Mises was ahead of this times. Everybody will be wrong. The question is are they wrong in their interpretation of present theory, or are they wrong in their progression of theory.

I am not a full-fledge anarchist, anyways, due to different reasons than Mises. If I claim that I am not an anarchist, then I cannot claim that I am minarchist either. I consider myself a \\\"pragmatist\\\". That is, what is the most rational social outcome given what exists today.

Economic Thought : My view of libertarianism

Fri, 22 Oct 2010 19:19:44 +0000

Mises does because he believes certain things cannot be provided by the market; i.e. national defense, security, et cetera. I agree an anarchistic utilitarianism is better, but on a whole I don\\\'t consider Mises inconsistent (just ahead of his times).

Economic Thought : My view of libertarianism

Fri, 22 Oct 2010 18:10:04 +0000

Basing it off Mises\'s description of utilitarianism in Theory and History pp. 55–61, I am basically a Misesian utilitarian. However, I think that utilitarian is really the wrong word to use. The fact is that the consequence of freedom is higher utility, but Misesian utilitarians would never accept coercion in order to maximize utility. It, therefore, can be said that although I do not believe in natural rights, I do believe that subjective morality and ethics can positively guide human behavior (much like it can negatively guide human behavior, as well).

So, I do not (I am trying to avoid the use of the apostrophe, since for some reason this code translator adds back slashes whenever I do) necessarily discard the moral approach to libertarianism. I just do not recognize it as universal.

Economic Thought : Murphy-Krugman Debate

Fri, 22 Oct 2010 03:14:34 +0000

I think the idea is to make him look bad, since it\\\'s a charity event. I think Krugman is a good choice for a defender of Keynesianism, since he is at the vanguard of the school\\\'s non-academic façade. In regards to Murphy, there may be better scholars (Salerno, Garrison, Rizzo, et cetera) — although, Murphy\\\'s academic work is actually very good (I think he is judged too much by his non-academic articles) —, but Murphy is one of the better public speakers.

Economic Thought : Speaking about market failure...

Wed, 20 Oct 2010 05:05:50 +0000

Yea, I definitely need an oversight commission now, to make sure this waste of gas never happens again. I mean, imagine if animal spirits take over, and everyone starts driving aimlessly.

Economic Thought : Do Markets Fail?

Mon, 18 Oct 2010 20:45:58 +0000

The concept of equilibrium is valuable in the sense that it allows you to recognize and illustrate the consequences of pricing above and below equilibrium (surplus and shortage, respectively). The concept of general equilibrium, borrowing the definition from John Hicks (1934), is a theory of exchange (and one which has been developed over time). In the broadest sense, general equilibrium theory supposes that prices tend towards equilibrium, but I think this is inconsistent with the notion that any particular equilibrium model is static.

This inconsistency is actually highlighted by Hicks,

What, however, Walras does not make really clear is whether any exchanges do or do not actually take place at the prices originally proposed, when those prices are not equilibrium prices. If there is no actual exchange until the equilibrium prices are reached by bidding, then Walras\\\' argument is beyond reproach on the score of logical consistency, though it may be called unrealistic. (The market then proceeds under Edgeworth\\\'s principle of \\\"recontract,\\\" or provisional contract.) But if such exchanges do take place, then, in general, the final equilibrium prices will be affected by them.

Hayek attempted to correct this lacuna by introducing the concept of \\\"dynamic\\\" general equilibrium, but it makes more sense to dispense of general equilibrium theory altogether. Instead of seeing markets as tending towards equilibrium, the relationship should be seen as one in which supply and demand are consistently changing, where the relationships are not mechanistic, and where the primary motivation is not to reach equilibrium but to maximize utility/profit.

The best way to approach the dynamic nature of human interaction and coordination is therefore to forget about general equilibrium models (not equilibrium, mind you), and see it as a process in constant disequilibrium.

All the more, concerning price formation, prices are formed by the subjective valuations of the buyer and the seller, and neither party are interested or aware of reaching \\\"equilibrium\\\". Rather, both parties are interested in maximizing utility to the best of their ability. As a corollary, the notions of perfect and imperfect competition (products of general equilibrium theory) should also be dispensed with, because seeing the market in this fashion has no bearing on the real nature of society.

Moving on back to the topic of market failure, my analysis pivots on the use of the word \\\"market\\\" actually. The failure was a product of the individual market agents, not the market as a whole. Resource allocation is not a product of the market, but a product of individual market agents planning their own processes of production and consumption. If they inefficiently allocate resources it is based on their own imperfect information, or their own mistakes.

Also, I think Joe\\\'s point is valuable: who decides what is efficient? This neoclassical obsession with efficiency is another stain on economic science. It is as if one can calculate the most efficiency allocation of resources for each individual that operates within a market. There is no doubt that there is inefficiency, but this inefficiency should be presupposed to exist because of the lack of perfect information and the existence of error.

Finally, overall, I think it is important to discard the notion of \\\"market failure\\\" in favor of emphasizing the necessity of de-aggregating failure and recognizing why individuals failed, and not the market as a whole. In the case of business cycles, why did a large number of individuals make the same, or similar, mistakes? Not: why did the market not correct itself?

Economic Thought : A Thought on Garrison's Model

Mon, 18 Oct 2010 17:54:22 +0000

1. Regarding the first point, or money as being productive, I am afraid you’ve missed the point. Also, your assertion that “the only role it plays is to hedge the risk that results from uncertain human action” is astonishingly untrue — money’s only role is to facilitate indirect exchange. Regarding “future risk”, what money does is allow versatility in one’s savings, because of the fact that it eases indirect exchange. However, saving a chair, or saving bricks, would accomplish the same thing, if what we’re talking about is hedging against future risk. Even in a world of perfect information, it would be impossible for a society of high division of labor to coordinate without a price mechanism, because it would be impossible to fulfill the chains of transactions necessary if we lived in a barter economy.

Regarding your example of transportation versus money, Mises refutes the notion between pp. 95–102 of The Theory of Money and Credit (where he addresses the incorrect belief of money as a productive good). The difference is in the nature of money. Whereas the car has the ability to increase one’s productivity, money only allows man the ability to purchase the necessary goods to increase his productivity. One is a facilitator of exchange; the other is a capital good in and of itself. Mises argues that the confusion of money and capital goods stems from the inadequate division of economic goods (he borrows, and expands upon, the three-fold division of economic goods of Karl Knies — consumer, capital, and exchange).

Finally, regarding “[m]oney as an object of the market has value beyond what it can purchase”: I beg to differ. The value of money is in that it is a medium of exchange. That it can hedge against future risk is only because of the fact that it can be exchanged. Point in case, during episodes of hyperinflation, or even high inflation, people prefer consumer and capital assets over exchange goods, for the very fact that exchange goods are no longer useful for exchange.

2. Regarding investment and money, you are conflating savings and investment. An act of saving is not an act of investment (and this is the debate at hand). An act of investment is an act of investing goods into production. Saving money does not accomplish this end. When you save money it means that you believe that a future environment will be more conducive towards investment, or that the utility you will garner from this money in the future is greater than the utility you will garner from it presently. But, this is not an act of investment, it is an act of saving (and this is why the two terms have two separate definitions — definitions you are inexplicably conflating).

On the topic of investment as one of profitable returns, you are ignoring the key detail that what allows interest to be repaid on savings is the fact that others have invested the capital you’ve saved. What makes your savings profitable in the bank is the fact that you have essentially allowed the bank to loan the money to a third party, who will then invest it and ideally produce profitably. The value of money increases always due to external factors, not because of the money itself, and so to say that money is productive is erroneous.

3. I never said that money is saved unreasonably. We are not debating whether or not people save for a reason, but whether or not those savings can be considered an investment. Again, you are confusing the definition of an investment. An investment is a profitable enterprise in and of itself; money does not meet this requirement.

4. I find it amusing that you accuse me of being “too caught up with physical goods”. It is exactly the fact that you are impervious to this that disallows you to see the characteristic differences between money and capital goods, and what makes the former only valuable as a means of exchange and the latter valuable as a means of production. Going on, you are blatantly confusing meeting satisfaction as a means of investment — ignoring, therefore, the differences between consumption (the ultimate satisfaction) and investment (production for increasing the means one has to satisfy his desires). As such, consuming more food that is necessary to allow you to produce is consumption, as opposed to production. Again, I find it shocking that you are forgetting these basic economic tenets.

5. My argument regarding Austrian business cycle theory is that if it works one way, it works the other way too. In other words, if expansion is the supply of money creates distortions, so does a reduction in the supply of money (ceteris paribus). Holding money without it being lent is an act of reduction in the volume of expenditure, or congruous with a reduction in the supply of money in an economy. It will create distortions. This represents disequilibrium between the identity of S=I (which, I still hold is not really a central tenet of Say\\\'s Law — this, as has been pointed out before, was an oversimplification of Say\\\'s Law on Keynes\\\'s part).

Economic Thought : Question: Law of Cost of Production

Mon, 18 Oct 2010 06:44:33 +0000

To clarify, my usage of \\\"relative\\\" marginal utility is erroneous. It is the marginal utility of the good plus the amount of money saved that makes the cheaper good more satisfactory to the consumer. Nevertheless, my argument remains the same.

Economic Thought : Question: Law of Cost of Production

Sun, 17 Oct 2010 06:23:05 +0000

Wladimir,

Thank you, and for the most part I agree with the analysis. But, a couple of points, if I may:

1. I don\\\'t think that any of the above makes the consumer irrelevant. I understand that no matter how high the marginal utility of Good A, if technological advances and competition led to a reduction in the cost of production of Good A the price will follow (regardless if for the consumer marginal utility is high). Furthermore, I completely agree. However, it is the relative marginal utility of Good A₁ and Good A₂ that drives the need for competition. Assuming equal quality and that Good A₁ is cheaper than Good A₂, it follows that the consumer decides to buy the cheaper good based on his own subjective evaluations. If the consumer did not choose the cheaper good, then cutting prices (despite a reduction in the cost of production) would be irrelevant.

2. Concerning \\\"cost of production\\\" versus \\\"marginal utility\\\", it seems to me that Reisman is conflating the two. In Böhm-Bawerk\\\'s example what drove the cost of the final product was not the cost of production, but the marginal utility of the less valued good. I think this ultimately leads Reisman to come to an erroneous conclusion when he suggests that the classical labor theory of value can be saved if its applied as Böhm-Bawerk\\\'s \\\"law of cost of production\\\" is applied; but in the latter the price is decided on subjective value, while in the former the price is formed by objective imputed costs of the factors of production (viz., labor).

Economic Thought : Question: Law of Cost of Production

Sat, 16 Oct 2010 21:35:11 +0000

Good to know. ;)

Economic Thought : A Thought on Garrison's Model

Thu, 14 Oct 2010 02:52:46 +0000

Two notes of interest:

1. Mises’s pure time theory of interest has been challenged by George Reisman is Capitalism. Reisman presents what he calls net-profit theory of interest. I think it’s worth exploring. Although I haven’t yet taken a look at it, it’s interesting because I tend to agree with Reisman in regards to his dismissal of the notion that capital investment is subject to marginal returns (in fact, he compares Mises’s and Rothbard’s adherence to this notion to Keynes’s marginal efficiency of capital). I also agree with Reisman that productivity will continue to grow regardless of time preference, and that the volume of productive activity will continuously increase, even with shifts in time preference towards present consumption (this is based on the premise that as the volume of economic goods grows, the absolute amount of capital goods will also increase, independent of changes in time preference).

2. I wonder who Garrison’s intellectual influences were. Hayek is well-known for his general equilibrium approach, and is also known for failing to provide a coherent and consistent version of dynamic equilibrium. Mises and Hayek differed on economic model, where the former was far more Mengerian (dynamic market efficiency). It seem as if Garrison has failed to synthesize Hayekian capital theory with the Misesian notion of the dynamic market — I think once this synthesis takes place, we can begin making headway in capital theory again.

Economic Thought : A Thought on Garrison's Model

Thu, 14 Oct 2010 02:51:44 +0000

Any response to this post has to be multi-directional, because you make a number of basic premises that have to be addressed individually. These premises are as follows: money is productive, holding money is an investment, and that the accounting identify S=I holds. I don’t believe that any of these three assertions hold true upon further inspection.

First: “money is productive.” I haven’t read Hutt, and so I don’t know in what context your quote of him is actually written in. However, I challenge the notion that money is “as productive as all other assets, and productive in exactly the same sense.” This strikes me as a two-way confusion — the misconception of the role of money in an economy and a distorted form of the belief in the homogeneity of capital. An asset is an economic good which produces value. Money does not produce value. Money is a commonly exchanged commodity which serves as a means of exchange. In other words, it allows the individual to purchase the means of production necessary to create wealth, but it does not create wealth in and of itself.

In what can money itself be invested in to produce? Does the investment of money directly lead to the production of more capital goods, or consumer goods? No. Money’s only use is as a medium of exchange (Mises [1912], pp. 42–40). It gives the holder the ability to exchange money for actual capital goods or consumer goods, and in the former case the ability to purchase goods that he can then directly invest. Alternatively, the holder of money can lend this money out to someone with the knowledge and capability to purchase the correct means of production and invest them along a profitable line of production. However, the fact remains the same — the productive assets are the capital-goods which money buys.

Second: “holding money is an investment.” Holding money is not an investment. The investment is the loan (in this case risk-bearing entrepreneurship). An investment is an action which garners profitable returns, and so stashing money underneath your mattress is not an investment. You may hold money to invest in the future, but the investment is clearly the action that takes place in the future (not the act of holding money itself). This is because holding money does not produce anything (you simply believe that a certain quantity of money will be more useful in the future than in the present — notable is that this does itself infer that all future action is an investment, as you could just as well also consume in the future with your held money).

The case is the same with any other economic good. Take, for example, a machine that allows you to fabricate soccer balls faster and cheaper than your competition. The machine is only productive if you put it to use. Holding the machine and saving it for the future does not produce anything until you actually put it to use at that point in the future. Just the same, you may alternatively consume the machine by taking a baseball bat and smashing it to pieces. Or you may loan the machine out, and the new partial owner will put it to use towards production for you.

Third: “the accounting identify S=I holds”. Agreeing that Walrasian general equilibrium and Marshallian partial equilibrium theory, and whatever synthesis is now predominate amongst mainstream economists, is erroneous, and that the Mengerian-Misesian dynamic market process model is superior, I disagree that in a world of disequilibrium there will be equilibrium between savings and investment. Now, my line of reasoning is not just that opposite of what you propose and I address above. My line of reasoning is based on my view of a dynamic structure of production in a money economy, and the knowledge that productive activity only takes place when an economic good is used to produce more economic goods (an increase in wealth), or toward that end.

At any point in time, the structure of production is coordinated by the price mechanism, in the sense that the price mechanism transmits information concerning the supply and demand of different economic goods available across the market. These prices reflect upon a given quantity of money, and assuming that time is static we should also assume that this quantity of money is static. Fluctuations in the quantity of money in an economy, either affected through changes in quantity itself or changes in velocity, distort the price mechanism, as it fluctuates to reflect these changes in the quantity of money. It follows that this in turn distorts the structure of production. This is what is essentially behind the Austrian theory of the business cycle.

Now, imagine that individual A holds quantity of money X. For whatever reason, including economic uncertainty, quantity of money X held is not lent out and consequently not invested. Yes, while quantity of money X still exists (unless it has been physically destroyed, which in this case we assume it has not) and in the future individual A can still use quantity of money X to pit towards whatever means he’d like (whether consumption or production/investment), between the time that quantity of money X is held and quantity of money X is used that money has ceased to circulate (reduction of its velocity to zero). This forces the prices to adjust to reflect this decrease in the quantity of money (in circulation).

Now, this does not necessarily imply that the economy will be negatively affected by this change in velocity. Imagine that this money is stored in a bank, which is perfectly willing to lend it out, but nobody wants it. The rate of interest still accurately reflects on society’s time preference. A different story is if society loses faith in banks, withdraws money, and stores money by means which make it difficult for it to be lent out. Given that the loan market’s rate of interest no longer is accurately derived from originary interest, it does not reflect on society’s time preference — interest rates increase, and certain investments are liquidated. However, in a healthy, growing economy, I’d assume that the first case be the most likely.

Nevertheless, I think it’s counterproductive to dogmatically abide by an identity which was effectively developed as a straw man of Jean Baptiste Say’s actual position (Say’s Law is one of overproduction, more than equilibrium between spending and time preference).

Economic Thought : Reductio ad Anarchia

Thu, 14 Oct 2010 01:22:30 +0000

I am basically an anarchist, but I personally don\\\'t believe that anarchy is feasible in my life time and so I don\\\'t argue for it as a practical solution to today\\\'s problems.

Economic Thought : Reductio ad Anarchia

Thu, 14 Oct 2010 01:21:41 +0000

Bueno, ¡por lo menos no soy el único madrileño libertario! (Oporto, Carabanchel)

A friend of mine attends the Complutense, and while he is right-wing, he was taken aback when a girl called him facha when his cell phone went off (his ring tone was the Spanish national anthem).

Economic Thought : Obama is no Roosevelt

Tue, 12 Oct 2010 18:47:14 +0000

A genuine question: what\\\'s the difference? In terms of modern political science, I really haven\\\'t gone through the major differences between a \\\"republican\\\" form of government and a \\\"democratic\\\" form of government. In fact, the two seem to have been merged into one (a \\\"representative democracy\\\", for example).

From Wikipedia,

In the United States, James Madison defined republic in terms of representative democracy as opposed to direct democracy, and this usage is still employed by many viewing themselves as \\\"democrats\\\".

Economic Thought : Guess Who

Tue, 12 Oct 2010 18:44:31 +0000

Note to self: These types of posts aren\\\'t great unless you have a dedicated base of several commentators.

It\\\'s Ludwig von Mises, Theory and History

Economic Thought : Theories of Value

Tue, 12 Oct 2010 18:40:47 +0000

Also, I figure that Sraffa\\\'s theory of value is at least influenced by the subjectivist movement—after all, Sraffa was influenced by Keynes. I don\\\'t know Sraffa\\\'s economics too well, anyways.

Economic Thought : Theories of Value

Tue, 12 Oct 2010 18:38:52 +0000

I guess the Smith-Ricardo-Marx-Sraffa progression makes sense, but it\\\'s the Ricardo-Marx-Sraffa trio that really scream out \\\"labor theory of value\\\". It\\\'s probably because Ricardo directly influenced Marx, and Sraffa is a \\\"Neo-Ricardian\\\", and because despite of Rothbard\\\'s criticism of Smith, it seems to me that Smith\\\'s implications with his labor theory of value are a far cry of those of Marx.

Economic Thought : Math and the Austrian School

Mon, 11 Oct 2010 16:39:45 +0000

Stickman,

I\\\'m not sure about your rendition of the debate revolving around the seatbelt example. It seems that (unsurprising, at this point) you\\\'ve again missed the point. You can model and test the value of a seatbelt empirically because ultimately the uncontrollable factors that may alter the results of a real-life test are similar. Complex economic phenomenon do not have this advantage.

I must have misread your paragraph, in any event. Now I see that you applied \\\"incentives, cost, benefits, et cetera\\\" to the example of the seatbelt itself. Knowing this, this is simply evidence that you don\\\'t realize the nature of complex economic phenomenon. This is actually amazing to me, since I thought it was more or less widely accepted amongst all academia that one of the problems with economics is that you can\\\'t empirically test relationships like you can in physics or other natural sciences. This is because in real-life you simply cannot control all the dozens, or even hundreds, of dynamic factors (most of which are not mechanistic) which may affect an outcome.

Also, you claim that mathematical models can only account for one factor at a time. This is patently, patently false.

Again, this is not what I wrote. I invite you to re-read what you are responding to.

Anyway, as you feel that I “miss the point” – I certainly believe it is you who continues to do so – I have no real desire to let this discussion run around in circles.

You simply are not addressing two main difficulties:

1. The problem of modeling complex phenomenon with dozens, or hundreds, of dynamic variables.
2. The fact that most of these variables do not act mechanistically (which is required for an accurate mathematical model).

To illustrate both points I have brought up the formula: MV = PQ.

Economic Thought : Math and the Austrian School

Sun, 10 Oct 2010 23:04:50 +0000

Stickman,

Firstly, if you don’t see how a lack of maths can result in imprecisions [sic.] in economics, then why pursue a mathematics major?

Because, unfortunately, most advanced modern macro and microeconomics is written mathematically, and so without further education in mathematics it\\\'s very difficult for me to understand what they\\\'re trying to get across. Furthermore, as implied by the opening post, I don\\\'t see mathematics as unnecessary, I just think it can be used to simplify theory in several ways.

Similarly, you’ll forgive me for taking your comments on how I “grossly” overstate the case for maths in economics – a strange claim itself assuming you’ve read my actual post – with a pinch of salt, as long as you describe yourself as weak in this area.

A lack of a degree in mathematics doesn\\\'t make my criticism void. In fact, someone who is less mathematically inclined, or at least someone with a lesser bias towards mathematics, can more clearly see how the role of mathematics has been exaggerated in economic science. An example is the mechanistic quantity of money theory, which has no real application to the market (because, inflation does not occur mechanistically; this might also be a problem with mainstream price formation theory).

Much of your reply simply repeats the “garbage in, garbage out” canard. As I said above: this should hold true for all forms of reasoning and modelling.

I don\\\'t disagree.

To cite your disagreement with someone that has formulated his argument in mathematical terms as evidence against maths itself is, of course, another non sequitur.

You are, unfortunately, misinterpreting my argument. The gist of my argument is that mathematics is nearly useless for modeling a complex, non-mechanistic society/market. Mathematics is only useful for modeling very specific, very individual economic relationships, which are already basically understood (otherwise, the model can\\\'t be constructed, in the first place). But, we see how even a simple model like MV=PQ is wrong when applied to a real economy. Or, even more fundamental to economic science, the imprecision in general equilibrium models.

Also, since mathematics is less well understood than verbal logic written in the English language, it\\\'s more difficult to peer review the logic and see just how consistent it is and how realistic it is in relation to a dynamic world in disequilibrium, and most of the time devoid of mechanistic, mathematical relationships.

And, yes, I’m afraid that I still see it as a red herring. Again, a state of disequilibrium does not invalidate the forces relating different variables.

More evidence that you are simply missing the point. The argument is against mechanistic relationships, not that variables constantly change. Even if the relationships are mechanistic (in some cases, perhaps), the fact is that models are oftentimes used to judge real life events, when they obviously shouldn\\\'t be (because models assume ceteris paribus). This might not be a problem with the math itself (instead, with the application), but math has certainly been more susceptible to this problem, as far as I see it.

To use an example (which may initially been raised by Bryan Caplan?), if functions cannot be continuous then how do supply and demand curves intersect? And yet, we almost certainly know that this is how millions of markets clear every day.

See the debate between Walrasian general equilibrium theory, or even partial equilibrium theory, and Mengerian price formation. Mengerians would not necessarily agree that markets \\\"clear\\\" in the sense that \\\"supply and demand curves intersect\\\". That is not how Mengerians perceive price formation, and Mengerian price formation is a central tenet of Austrian theory (at least, along Misesian lines).

Regarding your last two points, I don’t see how my clarified position equates to historicism.

Historicism/positivism/empiricism. You wrote, \\\"We can only formulate a theoretical model (either mathematically or verbally) based on our experiences\\\" (bolding mine). This, I hold, is invariably and absolutely incorrect.

Haha… I’m sorry to say that I find your dismissal of my seatbelt example very unsatisfactory in of itself. What precisely is “wholly inadequate?”

The answer is in the post you are replying to. Economic phenomenon are subject to a wide variety of different factors, which models can only account for one at a time and theoretically. Complex economic phenomenon cannot be modeled accurately mathematically.

At it’s very heart, this is a matter of incentives, costs and benefits… which have counteracting forces at play.

Right, so what you really mean is, \\\"et cetera, et cetera.\\\" Thank you for making my point.