Economics Questions

What have Austrians been wrong about?

Austen — Wed, 08 May 2013 02:36:55 GMT

1. What have Austrians been wrong about in general?

2. What have Austrians wrongly predicted?

3. What have Austrians wrongly predicted that Keynesians have correctly predicted?

Quick Question

Gavin23 — Thu, 09 May 2013 18:25:58 GMT

Hello all got a really quick question hope you can help me out with.

As I understand it many Anarcho Capitalists and even many Minarchists do not support the concept of Intellectual Property. I tend to agree with that.

What is there view then on other intangible forms of property such as various finacial instruments and securities like stocks etc? Would this not count as real property under this line of thinking?

Thanks!

Mises and Rorty quote, Aristotle tidbit, AE confession

vive la insurrection — Wed, 24 Apr 2013 17:35:24 GMT

I was looking through my old laptop and I found these three scraps of thoughts that were by themselves and saved:

‘The endeavors of psychology to dissolve the Ego and to unmask it as an illusion are idle"

-Mises

"hermeneutics, ‘as a polemical term in contemporary philosophy’, is a name for the attempt to set aside epistemologically centred philosophy."

-Richard Rorty

Aristotle in Nicomachean Ethics said that every science should adapt its method to its object, that the object under study should determine the method of studying it.

- Source unkown (maybe my own)

I have no clue where these thoughts and quote came from, but they are almost undoubtably from the same source (be it a book, article, or interview). What they do is show an "ontological irreducability" that tends to get ignored in the onslaught of formalism and positivsm that people seem to take a sadistic pleasure in applying where it need not be applied.

There is no need to study Human Action (or history or psychology) as "man-apes": the category of "human" , "conscience", economic transaction, or "I" are irreducible unique human entities and self-justifing - and are (like it or not) based off of intersubjective relations of intelligibility and understanding - not formalistic causal approaches. This may sound like a crazy-ass Stirnerite / Husserl / Scholastic type of ontology, and it is, but the fact that it gets ignored or written off baffles the shit out of me.

In the sense that the words "objective", "naturalistic", or if they are really stupid "mechanistic" are used (there are obviously many ways to use the words) by "scientism" type of people in the social science - they are merely flavors, and appeals to no authority greater than themsleves and the institutions that support them. Of course, that they have such an appeal: that is, that they are so popular is their biggest strength - but that is the only point they have (and it is a legit and strong point).

Even still, and this is something I realized quite early in my life, whatever statistics or graph a social scientist uses to call a fact - is not a fact: it is a specific orientation with an interpretation of facts that is presented: this leads to the obvious question: why is it done in such a way, and why is it supposed to be my concern?

What I realize:

I am almost certainly not a "Rothbardian-Misean" in the way people of Mises.org are, and I think this post just declared that fact. While I obviously started with Mises.org type of reading for heterodox economics, even early on I noticed certain tensions in my thought (chiefly on the nature of applications of subjectivity, determinism, equilibrium, institutions: basically my inherent Aristotelianism and Lachmannia). EIther way, in total sum over the past 2 - 3 years, I have read "Mises.org" types less than other Austrians, Lachmannites, Post-Keynesians. Not that that means much, because I'm not a professional social scientist or philosopher - and I am still prone to forgetting and even misreading basic basic concepts some times (as I am not utilizing this info for anything other than long term personal amusment).

Other than Lachmann and Weber: in so much as I can gauge and grasp things I have an underdeveloped appreciation for: aspects of the "historical school, Keynes (gasp!), Hayek, Institutional Economics, Post Keynesianism, and certainly George Shackle.

Some rambling thoughts on Keynesian Concepts.

Smiling Dave — Wed, 08 May 2013 11:43:51 GMT

In Skousen's Dissent on Keynes, Chapter 2, John Egger writes:

A five-percent reduction in workers' wage demands
would not stimulate employment, he [=Keynes] argued, because employers would anticipate
a resulting five-percent reduction in the demands for their products and would
simultaneously reduce their demand for labor. As Peter Clarke puts it, "If prices
and wages simply chased each other down a spiral—since 'one man's expenditure
is another man's income'—then in theory there was no means of effecting the
necessary cut in real wages".

Sounds convincing. Is there a response? I think Egger hints at one in the next paragraph, where he writes:

The claim that the market is incapable of achieving a pattern of prices consistent
with demands is Keynes's rejection of Say's law.

In other words, if we accept Say's Law, that products are what pay for other products, then even if wages go down, there is no reason for employers to anticipate a resulting five-percent reduction in the demands for their products, since lower wages does not mean less production. The apples to pay for the oranges Mr X is making are still out there, even if Mr X and everyone else pays lower wages.

Egger later writes:

General economic malaise results from inappropriate patterns of money prices,
which reduce incomes and production and produce unemployment. The total
amount of money that people want to, or actually do, spend is completely
irrelevant. Aggregate demand is an unintended result of individuals' actions and
has no causal role in determining them. But if aggregate demand is irrelevant
to action and has no meaning in an analysis of the functioning of a market
system, there can be no standard for determining that it falls short of some ideal,
and there can be no such thing as unemployment caused specifically by this
shortfall. All unemployment is caused by mispricing, and none by insufficient
aggregate demand. This, in turn, implies that a policy designed to reduce un-
employment by bringing aggregate demand closer to its ideal is fundamentally
misconceived from the start. The result is typical of well-intentioned efforts to
solve problems that do not exist: the problems that do exist are made worse.

I was blown away by this paragraph. He's saying that AD is like the spent shells after a gun fight. The amount of spent shells is never a cause for gunfights one way or another, it is an irrelevant variable, a meaningless byproduct, and should be ignored when we study gunfights. Similarly, AD is irrelevent to economic actions.

And why is AD irrelevant? Because what counts is whether prices match what the market [=supply and demand] would like them to be. The prices are what determine economic action. If they are aligned with supply and demand, the economy will thrive. If not, it will stagnate. What effect has AD on prices? It certainly did not determine past prices, because on the contrary, they determined it. As for future prices, AD might determine what the market would like them to be, but it has no say in whether prices will actually match what the market wants them to be. That happens by itself in a free market, or is hampered by govt interventions in an unfree market. But AD is indeed irrelevant.

If we assume Say's law is false, how does that change the picture? Because then we can claim that it's not supply that gives one ability to demand, but demand that magically determines supply. This makes AD very inportant indeed. Reduce it and you magically reduce production, which means poverty.

Now a Keynesian might argue like this: Forget about prices. They are fixed. Set in stone, they cannot ever change. [Ridiculous as it sounds, there are actually people who claim this]. So if prices do not match what they should be, given the current supply and demand, we have to increase demand. Doing so will raise what the laws of supply and demand indicate the price should be to equate with what they are fixed at.

Stated so baldly, we see some problems.

First, there is not one price for everything. The market, if left to itself, will adjust every single price of every single item. But how can a politician take an action that will set every last price to what will clear every last market? It's like throwing a bottle of ink on a canvas and hoping that out comes the Mona Lisa. You can't possibly fine tune your toss to do that.

Second, there is a morality argument here. If peope have chosen not to buy, what right have we to force them to buy, or what is worse, pay for what the govt buys for itself and its pals?

Ramble is long already. Would be glad to see comments.

Mathematical expectation and rational decision taking [split from "Defense in anarchy" thread]

ToxicAssets — Mon, 06 May 2013 09:05:38 GMT

malachi:
do you even know what mathematical expectation is?

Haha.. cute.

The problem though is that I'm not a chick and I'm no homo. So you should save your "negs" and cute little lines for someone else…

Anyways, I was trying to show you that even though the concept of mathematical expectation is at the heart of every decision under uncertainty, things are little bit more complicated than that.

It is not the mathematical expectation of the monetary return of a gamble that determines whether that gamble is worthwhile or not.

It is the mathematical expectation of the UTILITY FUNCTION of the returns.

Under normal conditions, we assume that people have concave utility functions, which can be interpreted as "risk-aversion".

It means that facing the alternatives of a gamble and an opportunity to get the average return of that gamble, they will generally choose the sure thing.

But on occasion the utility function of a certain individual might get convex, meaning that he's a "risk-taker".

Given a certain gamble, he'll prefer the small probability of earning a larger sum (and the risk of losing) than the sure thing of getting the average.

A reason why someone would have such a convex utility function with respect to a given gamble is that he's facing convex (non-diminishing) opportunities of investment for the returns he'll extract from that particular gamble.

Things like owing mobsters money and or facing some unique investment opportunity that will shut down soon may "convexify" your otherwise concave utility function, so the roulette game might be a rational decision for people in such a situation.

Individuals take decisions based on private and public information, and the shape of their utility functions takes both in considerartion.

Since most individuals face diminishing returns for their investments, we generally observe concave profiles for their utility functions.

That's why I was talking about pot-odds and implied pot-odds, assuming perhaps that you understood the fundamentals about poker.

You calculate your pot-odds by comparing how much you need to bet to take part in a given pot, but that's what everybody else knows. What other people don't know is what cards you have in the hole and how things are likely to turn out in your advantage (or against you) if certain scenarios unfold. And you use this information to estimate your implied pot-odds, which is going to serve as the basis of your decision.

The mathematical expectation of a gamble is the public information everybody has, but it is not enough to corroborate a fully informed decision about taking or not taking the gamble.

Does immigration explain most of the inequality in the OECD states?

Asgeir Ingvarsson — Mon, 06 May 2013 13:56:27 GMT

Hi all. This is my first post in the Mises community.

I am fishing for resources and leads (and thoughts) for my Masters dissertation at the LSE.

I will be exploring a theory I have about how immigration might be the main factor in explaining differing levels of inequality in the OECD states.

As it turns out immigrants tend to mostly enter the workforce from the bottom (unskilled labor) and the top (specialists, investors, billionaires) and would therefore tend to pull at the income distribution curve at both ends.

I produced a scatter chart of the OECD states comparing Gini-scores and migration levels and found a somewhat obvious correlation. There are a few outliers, but those appear to be countries that have a different composition of immigrants than the other OECD states.

To my surprise it seems that the immigration variable has not been properly studied before and it is proving to be quite a challenge to find material to support or refute my theory.

Thus far one of the best hints I've gotten ponted me towards german journalist Olaf Gerseman who wrote about the subject in a book of his and apparently proved that if you factor in immigration it turns out that inequality becomes the same among developed nations.

If it turns out my theory is correct I'm hoping that would be important news for libertarians, as it would serve to prove that the "problem" with inequality has nothing (or very little) to do with e.g. whether a country has a strong or weak welfare system.

Also, it appears that over time immigrants tend to slowly move closer to locals in wages and education, so the individuals move up the inome ladder, effectively lifting themselves up from the bottom of the inequality curve. I've found data from the US that shows that by the second generation immigrants have become completely normalized with regards to education. So looking at the progression of the individual inequality starts to not seem like such a big problem.

Here's a link to an image of the scatter chart showing how inequality tends to rise as the inflow of migrants rises. http://imgur.com/0h8iX1A

I would really appreciate any comments, suggestions or reccomended readings.

Fiscal Multipliers Debunked?

ITGF — Thu, 07 Jul 2011 14:31:14 GMT

I recently encountered a series of youtube videos which claimed to find errors in the logic and algebra underpinning Keynesian economics.

Excuse me for being sceptical, but I think its strange that it has taken 75 yrs to find these flaws. Surely if they existed, it would be well known by now? Below is a link to one of these videos. Has the author found a previously unknown flaw? Or is this well-known? Or has the author, in fact, got it completely wrong?

Pt. 2: Fiscal Multiplier Destroyed: Keynes' Deception
http://www.youtube.com/watch?v=encPMexUm8w

If you are interested, here is the full list of videos:

The Maynard Keynes
http://www.youtube.com/watch?v=pA67E8jMq84&NR=1

Pt. 1: Fiscal Multiplier Debunked and Destroyed
http://www.youtube.com/watch?v=4Vnus-Kw5Is&NR=1

Pt. 3: Fiscal Multiplier Destroyed: The Other Multiplier
http://www.youtube.com/watch?v=sZDIZ1U7gEk

Pt. 4: Fiscal Multiplier Destroyed: The Chain Reaction
http://www.youtube.com/watch?v=y1AVThNZuR4

Pt. 5: Consumption Function & Keynesian Cross Destroyed
http://www.youtube.com/watch?v=2bmsYNnS2MA

Pt. 6: Government Spending Multiplier Destroyed
http://www.youtube.com/watch?v=hHa-HE7Olq0

Pt 7: Tax Cut Multiplier Destroyed
http://www.youtube.com/watch?v=1oUMjJKQkkQ

Pt 8: Balanced Budget Multiplier Swindle - Keynesian Asymmetries
http://www.youtube.com/watch?v=VZL_1L9r-T4

Pt 9: Keynesian Logic - Apples, Oranges, Asses
http://www.youtube.com/watch?v=XErrpJHaExA

Pt 10: Keynesian Asymmetry and "Other Multiplier" Revisited
http://www.youtube.com/watch?v=684WIoQP6XQ

Did people borrow less from 1873 to 1896?

No2statism — Sun, 05 May 2013 23:57:39 GMT

If the deflation didn't deter people from borrowing, then why didn't it?

What are the main Austrian criticisms of government regulation?

WallStreetAce — Sat, 12 Mar 2011 07:08:16 GMT

Hi all,

I'm relatively new to Austrian economics, but truly believe in all of its principles and have come to love it. Most of the time, I am able to state the reasons why government shouldn't set price controls, minimum wages, inflate the money supply etc. However, as of late I've been at a loss as to how to explain from an Austrian POV why government regulations aren't needed and cause more harm to the economy than good.

With that said, I was recently debating a friend of mine who was vehemently in favor of nearly all government regulations. He said that without them businesses would create shoddy products to cut costs, causing death and injury to their customers in the process. He went on to say that without government regulations there would be no industry standards, and that nothing would be uniform across certain sectors and lines of business, again causing injury and chaos. After he said these things, I used Rothbard's argument that regulations impose a cost on a producer that has yet to do anything wrong, and as a result are illegitimate. I also told him that in a completely free society without government controls, the market would regulate itself and those companies with shoddy products killing people would be weeded out because consumers would shift to the ones who don't create such products. He told me that such a world view is a fantasy, and that firms can't be trusted to make good products if all they're relying on is cutting costs to make a profit, and that you can't wait for people to die in order to do something. He ended by saying: "If you can save people's lives with a simple safety standard why wouldn't you be in favor of that? What, you don't want to save people's lives? What's wrong with you?". I then just lost it and threw up my arms in disgust.

So, with that said, can someone please educate me further on the Austrian criticisms of government regulations, why they are not needed in a free market and why they cause more harm than good? Because every time I tell people that I'm against regulation of any kind, they look at me like I need to be put into a mental institution. Like the guy I just quoted, they then say how bad things were before the regulatory state we now live in and give the usual stupid arguments in favor of them. Any links to works by either Mises, Rothbard or Hayek on the subject would be great. I could really use some study materials.

Thanks a lot!

Homosexual Marriage

Thomas — Sat, 04 May 2013 16:42:17 GMT

What is the Austrian economic thought on changing marriage laws to include homosexual marriaga?

Higher Order Goods and Interest Rate Sensitivity

Jargon — Mon, 08 Apr 2013 16:21:40 GMT

I'm having trouble with the notion of the higher order capital goods being more interest rate sensitive. For instance, it makes sense that a segment of production which is capital intensive is sensitive to interest rates. If the rate of interest is too high in the perspective of an entrepeneur he will not invest in the needed capital. And it seems intuitive that higher order processes are more capital intensive just from observation of an economy. Burger flippers basically just need a grill and a restaurant, more of the costs are in labor, whereas griddle/frier producers require a complex array of machinery and tools for the fixing thereof. But what is the reason that the segment of production furthest from the final good is necessarily the most interest rate sensitive?

For example, if we're producing HomeDepot miniShacks, the entire process might go like this: logging->cutting->treating->assembling->transporting->selling. How is it necessarily the case that logging is more capital intensive and thus interest rate sensitive than treating wood with chemicals?

The standard explanation is that higher order goods are furthest from the final good and so there is a longer period between the initial investment and the "payoff" - that period in which revenue starts coming in and interest can start to be paid off. But the producer of higher order goods does not have to wait for the demand from the final good producer; due to the forward-looking nature of entrepeneurship, a producer of a good "one level" beneath him will buy that highest order good to satisfy his own business plan. This is ultimately dependent on how much of the final good is bought from what is produced, but the point is that the producer of the highest order good is not deprived of revenue for a greater period of time (or at least not the period of time it takes for one "round" of production to occur). He can sell his good to the next producer down the line. So what in Bohm-Bawerk's laws makes it completely implausible/impossible that the segment of production "beneath" him is less capital intensive? Or am I not conceiving of this issue correctly?

It occurred to me that producers in those segments furthest from the final good will be more subject to both time lag and more layers of entrepeneurial failure/success. Mises might call this the higgling of the market. But it doesn't seem a compelling reason that, granting abstention from consumption and reallocation of said absentions into the loan market, process N's frontier of production will necessarily expand greater than N-1's (N here being a 'stage' of production).

How do people/businesses get affected by the interest rate?

fakename — Thu, 02 May 2013 23:40:18 GMT

Abstract theory tells us that interest rates affect people and institutions but in my experience, (which is admittedly limited) I can't see how they do this.

Obviously the rate of interest encourages people to leave more money in the bank rather than less, however I'm not sure how that fact concretely translates into employment/unemployment or depressions/booms? For instance, the construction industry is greatly influenced by interest rates but I don't see lots of hard-hatted construction workers in banks taking out loans so I have no concrete mechanism for how this happens.

Also, how does the FED enforce its decrees on what number the interest rate should be?

Who is your dream team ?

jakgaph — Mon, 15 Dec 2008 21:06:29 GMT

What if President Elect Obama selected you as his economic adviser, you have complete control of the economy, he will OK any suggestion you make, your decisions are final, your job starts tomorrow.

You are allowed to hire 5 people to your team who would they be and why ?

Bonus question: What would be your first 5 decisions in this role, and how would you implement them ?

Huerta de Soto and secondary deposit

Zordon — Sun, 31 Mar 2013 23:07:52 GMT

In his book "Money, Bank Credit and Economic Cycles' in chapter 4 subchapter 5 he writes on page 223 (second english edition, .pdf version - http://mises.org/books/desoto.pdf) that: "ds1 represents Bank A’s secondary deposits and equals 1,219,512 m.u", while (if I correctly understand the definition) I would argue that Bank A's secondary deposits equal 1 097 560 money units and 121 952 of primary deposits (pp 218-219). Do I err or he errs?

Is the Austrian School the Creationism of Economics?

Austen — Thu, 02 May 2013 05:54:47 GMT

This guy thinks so. http://www.debate.org/forums/economics/topic/30571

What about the employees rights?

DunklenWurzeln — Wed, 01 May 2013 18:58:23 GMT

Hi everyone, this is my first thread here, and I created this account to ask the libertarian position about the employees rights. I've been reading and watching a lot of online libertarian content, I've read some Walter Block's books but still I can't seem to discover what would happen if there was no such things as the mininum wage, maximum working period, and many other benefits that workers have.

I know that the minimum wage generates unemployment, because many aren't able or don't want to pay the minimum wage for some of their employees, but the big question is, wouldn't employers abuse the lacking rights? Wouldn't we go back to the times of the first Industrial Revolution where labor conditions were precarious and inhuman? 0,5 a dollar for 18 hour shifts. Would people rather just be unemployed and not eat than work in those conditions? How would that work?

ABCT and a-priorism

Prashanth Perumal — Thu, 02 May 2013 05:52:04 GMT

I have been studying the ABCT for the past two months, and while most of the theory makes sense to me, there is one that puts me in doubt.

As argued in the ABCT, an increase in the proportion of savings against consumption leads to the addition of new stages to the production structure. What I'm skeptical about is: when we assume increase in savings would necessarily cause more roundabout methods of production to be adopted, aren't we assuming that there are more roundabout techniques of production available?

If so, shouldn't the validity of the ABCT be tested empirically rather than being asserted as an a-priori conclusion?

Consumer theory proves that P=NP?

Wheylous — Wed, 01 May 2013 17:13:09 GMT

We were learning about P and NP in computer science today. All that is relevant to the conversation is that a certain set of problems P is a subset of another set NP.

A big question is whether P=NP.

Now, it has been proved that there are certain problems in NP called NP-complete. If these NP-complete problems can be shown to be part of the set P, then all NP problems are in P.

(To those interested, P is the set of problems that can be solved in polynomial time, while NP is the set of problems that can have their solutions verified in polynomial time. Showing that P=NP proves that if you can check the solution in polynomial time, you can also solve it from scratch in polynomial time).

One of the NP-complete problems is the knapsack problem:

You have a certain number of items. You also have a knapsack. The knapsack can only carry some limited amount of weight. The different items have a certain value. The knapsack problem is to maximize the total value of the items you put in the knapsack, constrained by the maximum weight the knapsack can carry.

If this problem can be shown to be P, then all NP problems are P.

My idea is as follows:

In consumer theory in economics, we know that people solve constrained optimization problems when buying things. That is, they maximize the utility they gain from the stuff they buy, constrained by the budgets they have. This problem is equivalent to the knapsack problem. Since the human brain is just a computer, then it seems that people solve the knapsack problem quickly, which shows P=NP.

If, on the other hand, the human brain cannot solve the knapsack problem, then the field of consumer theory in economics is wrong.

The assumption of economics that must be true is that of completeness. That is, given any two bundles of goods, a person may choose between them or be indifferent.

My intuition is that people do not in fact satisfy completeness, and instead think of only a limited number of bundles that they rank.

But if people's valuation is indeed complete, then I've just proved that P=NP and should win a million dollars.

Raw red meat: good idea or bad?

Kelvin Silva — Tue, 30 Apr 2013 04:52:48 GMT

Raw milk is wonderful, I have consumed it for weeks without any problem.

What is your guys opinion on raw red meat? Of course it shall be grassfed/organic but what you guys think?

Does it really give a benefit over cooked meat?

Please critique this article of mine on allocation

Wheylous — Thu, 25 Apr 2013 02:36:11 GMT

https://docs.google.com/file/d/0B1Avn8i4tc6JLWRvWWVVVW43YUE/edit?usp=sharing

I discuss the simplistic idea that if we just kep all prices and production the same at the onset of the recession we could have avoided all of this.

where is the error with this image?

nomar — Sat, 16 Jun 2012 04:35:15 GMT

I know this might be very old, but based in the austrian economics theory, where is the error?

Thanks in advance and sorry for any english mistake.

"Essential Aspects of Austrian Economics" or "Neodoxy's Low Content Economics Thread"

Neodoxy — Thu, 18 Apr 2013 00:47:31 GMT

Well frankly I'm disappointed with the level of economic discussion that is going on with these forums (ever since Dave's been in and out I have no one to argue economic theory with and the only other decent discussion that's been going on is the discourse between myself and Jargon concerning the importance of interest and the production structure). Therefore I'm going to make a highly informal post about what I see as some of the essential aspects of Austrian economics in the way that these ideas have been floating around in my head over the past few months. Being able to contrast the Austrian approach to economics with the mainstream view has given me a much greater ability to contrast and appreciate certain aspects of AE (I'd also like to know Wheylous' views on this).

Within this list I will also include how these factors relate to capitalism, since I think that Austrainism (in the way it has manifested itself, not in its base methodology) can be accurately characterized as a description of the social function of the market economy within society. Indeed the entire path to becoming a supporter of free markets can be described as a path from considering the market as a random, purposeless, and elitist institution, to a spontaneous and purposeful entity which, above all, exists for a reason.

In no particular order:

1. Human action is purposeful behavior

All human institutions and practices within society exist for a reason and people act in certain ways for specific reasons. It does not mean that these reasons are always positive or wise, but it does mean that the market economy emerges for a reason, and this extends to the entirety of the market economy given time.

This contrasts with non-Austrian views of economics which, even though they don't usually explicitly state "people don't act purposefully", nonetheless marginalize the importance of this fact and are inherently predisposed to elitism and viewing the market as a positive entity

2. Human action occurs in the face of an uncertain future and is therefore imperfect.

Neither firms, consumers, nor governments act perfectly, however each individual constantly strives to reach a more perfect state of affairs. This means that the market economy doesn't fit to the relatively static equilibrium that lives within most mainstream conceptions of the market economy, instead the economy is continuously being destroyed and rebuilt. As consumer demand as well as objective productive considerations vary, different processes of production and different quantities of output need to be produced. The invisible hand does not perfectly "grasp" on to a position, rather the invisible hand is forever groping under dim light to find the most perfect level of prices and production.

This is one area where most models of the economy are wholly lacking. Some of the more astute critics of mainstream economics, and therefore capitalism, often base their arguments off of the fact that markets don't act "perfectly", and therefore the government must come in and correct this state of affairs. Yet this critique only works if one believes that the only defense of markets is that they are indeed perfect, or meant to be perfect. This is not the case, however. No human institution is perfect, but few have the inherent tendency towards establishing a more perfect state of affairs like the market economy does. In reality the existence of this imperfect world just means that well functioning markets need to exist in order to react to these changes as smoothly and swiftly as possible.

3. The market economy is the "democracy" of the consumer

This is, in my opinion, the ultimate justification of the market economy. The fact is that companies must ultimately service the consumer or else they will go out of business. There's no way of getting around this. In order to make profits a businessperson has to produce something that consumers want at a reasonable price. What the consumers want are produced, and those companies which are better than this than others receive larger profits. Foolish entrepreneurs go out of business and are replaced by superior counterparts. Even the most vicious of monopolies has an incentive to provide quality products and customer service to increase the demand for what they are selling. Despite the fact that in the short run the capitalists and entrepreneurs control production, it is ultimately buyers on the market who control the entire economy.

If one looks at the companies at the top fortune 500 companies; Mobil, Ford, Walmart, AT&T, Microsoft, Apple, General Electric, CVS, ETC, then one will notice that these are almost exclusively household names that cater to the common man (banks are very high on this list but presumably these are funding other companies such as the ones above), not to the rich and powerful. The market will always tend to allocate resources where they are most desired by consumers, and therefore resources flow from where they are least wanted into where they are most wanted. This inherently means that the market economy is a social system, it is a series of trade that is ultimately not based off of the capitalist, but the consumer and mutual interactions that provide what is desired in larger quantities.

This is not an element that is necessarily lacking in mainstream economics, but the true wonder of it is not emphasized. This is where socialism and statism can result, from the assumption that production is "automatic", and that it will always occur in the way that we have become accustomed to in our vaguely capitalistic society, when ultimately it is only so long as the consumers democracy and effective market structures are maintained that consumers are properly seen to and the most desired goods are ultimately produced. Just as with all human phenomena it is the result of definite human action that will not occur under all conditions, rather a state of very definite conditions continually allow it to occur.

4. Production is a process that always occurs over the course of time

This is an absolutely essential aspect of the Austrian model of the economy, particularly because of the school's emphasis upon the importance of capital (which I'm just going to lump in here). Time is important, time is valuable. I don't care what will be made available for me to consume in a thousand years, and I'm less interested in hearing what you will be able to do for me in 20 years than in a month. Therefore because production takes a decent period of time (as anyone who has ever seen a construction project knows) the market time preference is an essential coordinating factor within the economy. Furthermore capital, one of the only things which separates the economies of modern and primitive societies (the other primary factor being education) takes time to produce. Therefore by taking a longer period of production we can enjoy a greater living standards in the future.

This is why ABCT should really be just filling in intuitional gaps. Since the interest rate is an essential economic indicator in the accumulation of capital, fiddling around with this rate willy-nilly should ring some alarm bells in anyone's head. Since the interest rate is the price of time, and time is one of the few omnipresent aspects of the entire economy, large and unexpected alterations within this may obviously cause large problems.

This is one area where mainstream economics generally overlooks the matter. They overlook the importance of savings and production over time. Beginning with the Classical economists and emphasized by Frank Knight the production structure is generally viewed as "instantaneous" and the way that GDP is calculated (including the emphasis put on this measurement) overlooks the importance of savings in the economy. Capital is also considered important within the mainstream viewpoint, but it is not considered as essential and the only consistent means to a higher living standard, as it is within the Austrian view.

Well those are some of my brilliant insights for the evening. This will also serve as a place for other random rants on these sorts of topics that I might have.

I also invite anyone with casual economics questions to post things here, so as to entertain a bored and lonely young economist.

Doesn't the market ultimately determine how much revenue income tax brings in?

No2statism — Tue, 30 Apr 2013 01:10:02 GMT

Why or why not?

Aren't market agents/human action more of a factor in how much the govt gets than anything the govt can do (when it comes to income tax)?

I'm asking because Rothbard seemed (to me) to reject Dr. Walter E Wiliams' finding that income tax revenue is always about the same percentage of GDP. I would be tempted to side with Dr. Walter E Williams on this if he weren't a Keynesian.

Can someone summarize the economic calculation problem?

fegeldolfy — Thu, 08 Nov 2012 02:23:47 GMT

I'm trying to explain it to a fried on facebook, but I don't understand it that well.

Thanks.

Ayn Rand and Mises underestimating the common man/woman

gravyten577 — Mon, 29 Apr 2013 15:59:35 GMT

Sorry a lot of this might seem like rambling

Page 13 of "A Farewell to Alms" by Gregory Clark

Workers in modern cotton textile factories in India, for example, are actually working for as little as fifteen minutes of each hour they are at the workplace

!!!

That has to be an exageration but it does make the point that the attitudes of the common people do make a big difference.

In Human Action Mises wrote that the progressing economy comes from the entrepreneur and the workers to him are like clay that are molded by the entrepreneurs. To him the workers had nothing to do with building the modern world but they benifit from it. Ayn Rand of course took these kinds of ideas to the extreme seeing common folk as just clay that doesn't produce anything. After all if it wern't for the innovators the common folk would just be hunting and foraging

Mises even wrote that common folk don't have ideas of their own but only copy ideas of "uncommon man".

But Mises seems to contradict himself when he says that the flowering of human society depends on sound economic and social theories being spead amongst the public. If the masses of people were just worthless clay to be molded by capitalists the spreading of bourgeois virtues would be meaningless. For example in Human Action Mises said people in 3rd world countries are so callous that any extra money they have they blow it in just not working while in rich countries people will accumulate wealth. I remember reading a quote somewhere from 18h or 17th century England complaining that whenever workman have a little more than they need to survive they will just take time off which would of course stifle industry.

And of course birth control is a big part of making the modern world. After all if any increase in wealth lead to more breeding people would never become richer because any extra wealth would be consumed by a greater population. Adam Smith even made the point in his time that richer people have less children than the poor. But the spread of birth control to the lower classes isn't just the lower classes copying the bourgeois but becoming bourgeois themselves. In fact Mises makes the point that it isn't enough for 3rd world countries to copy the United States they must also have the capitalistic ethic, technology itself won't do it.

Has anyone else seen a contradiction where Mises says that the masses of people will always be some unthinking horde but at another place says that econoics is a subject to be studied by everyone. If this was true it wouldn't even be necessary to have wide spread literacy. On the other hand the industrial revolution did involve a closing of the gap between unskilled and skilled laborers.

Mises has said in many places that in modern capitalism it is possible for a fairly poor person to be a creditor to a rich corporation as opposed to the ancient system where the rich were usually creditors and the poor usually debtors. Of course in modern America everyone is in debt, but the economic system in America is on the verge of collapsing so that doesn't count. The fact is in a modern economy it is possible, perhaps even neccesary that the poorer classes be creditors, they save part of their pay checks and use those funds productively. In a libertarian society there would be no FDIC insurance so even the poor will have to put thought into how they invest. They won't be simply copying what the upper classes will be doing they will be bourgeois themselves. There would be no public school system and no government subsidized student loans so parents would be required to decide the right schools and teachers for their children.

Another contradiction is that Mises says that the common person is competent enough to make their own decisions in consumption and are not idiots that will succumb to any advertising. But how does this reconcile with the idea that the common person is just clay copying the ideas of other people?

Interestingly enough many liberal type people are well off, even extremely wealthy while many poor people are very conservative and believe that it is wrong to punish to tax somone for being succesful and that being hard on businessman will hurt themselves. Certainly the common people might mindlessly hold onto certain beliefs but it is equally true that even businessman might mindlessly hold onto false ideas which is certainly seen with the business cycle where businessman never seem to learn their lesson that the central bank inteervention in the economy doesn't bring to prosperity that the false boom will always end in tears. On the other hand some of the people that dislike the government the most are the poorer people, and some of the people that hate foodstamps the most are the poor. After all it is frustrating when you are struggling to get by in an honest job and the guy next door is getting stuff for free

Here is one article "On Equality and Inequality"

http://mises.org/daily/2179

Also Mises makes the mistake in assuming the same kind of people will be succesful in any economic system. Accoding to him the strong will always be in higher positions than the weak. But evolution isn't about being strong but about being adaptable. The kind of person who might flourish in a capitalistic society might not be able to under communism and vise versa. A talent that will be very good at working up the ranks in the communist party might not make it very far under capitalism. A businessman who supports socialization may find that the government suddenly works against his own interest making the businessman just as foolish as the poor person who supports socialism

The tenor of the arguments of such "progressive" businessmen runs this way: "I owe the eminent position I occupy in my branch of business to my own efficiency and application. My innate talents, my ardor in acquiring the knowledge needed for the conduct of a big enterprise, my diligence raised me to the top. These personal merits would have secured a leading position for me under any economic system. As the head of an important branch of production I would also have enjoyed an enviable position in a socialist commonwealth.