Patterico's Pontifications


“Human Action” and Robert Murphy’s “Choice,” Part 8: What Monetary Calculation Can and Can’t Do

Filed under: Economics,General,Human Action and Choice — Patterico @ 1:11 am

This is Part 8 of a 17-part series of posts summarizing Bob Murphy’s indispensable book Choice: Cooperation, Enterprise, and Human Action. Murphy’s book is itself is a summary of Ludwig von Mises’s classic treatise “Human Action.” (At the end of this short post, we’ll be about halfway home!) Like previous posts, this post is a summary of a summary. If you’re intrigued by what I discuss here, you’d do well to buy and read Murphy’s book.

The purpose of these posts is to popularize and spread the word about Austrian economics and educate the public. Rather than list all the previous parts, I have created a category for all these posts, called “Human Action and Choice,” so that all these posts can be read (in reverse order) with a single click. Note well: any errors in these summaries are mine and not Murphy’s.

Yesterday we introduced the concept of monetary (or economic) calculation. Today we’ll look a little bit more at that important concept, and talk about what it can, and cannot, do. Chapter 8 is a short chapter — and after the lengthy exercise we put the reader through yesterday, I am happy to do a shorter post today.

Although Murphy labels his chapter as being about what economic calculation can and cannot do, it seems to be principally about what it cannot do. Murphy starts by reminding us that a balance sheet (the key document in monetary calculation) seems so very precise . . . yet it is full of predictions about an uncertain future. You include, as an item of depreciation, 1/10 of the cost of a capital good expected to last 10 years . . . but for all you know, it will crap out tomorrow. You list your accounts receivable as an asset . . . but one of the businesses that owes you might go bankrupt next week, leaving you to receive pennies on the dollar.

Entrepreneurship is about predicting an uncertain future. Monetary calculation aids in this endeavor greatly — to the point where Goethe described double-entry bookkeeping as “one of the finest inventions of the human mind.” But no activity that involves predictions about the future can ever be exact.

Another point that I consider very important: remember that in Part 1 I said (in a comment) that

one thing I find very attractive about Mises and Austrian economics is that it is so much more realistic than classical economics, because it treats human beings as human beings.

In Chapter 8, Murphy makes the point that, according to the Austrian school in general, and Mises in particular, it is not assumed to be true “that people in a market economy are just out to make money.” The great thing about Mises’s broad view of “human action” is that it does not judge between people’s ends or desires — and in particular, it does not require that the desired goal be a goal to make more money. The altruism of a Mother Teresa is every bit as compatible with Mises’s theories of “human action” as are a CEO’s mass firing of employees to boost the bottom line. So economic calculation is not the be-all and end-all of the Austrian school, by a long-shot — and to me, that makes it the most realistic economic school of thought in existence.

By contrast, classical economics all too often reduces people to stick figures in a graph, robotically “maximizing utility under constraint.”

That’s it! See, I told you this would be a short post! Tomorrow, we act much more ambitiously, tackling the economics of the market society, beginning with defining and studying the market economy. Hope you’re enjoying the posts. See you tomorrow.

8 Responses to ““Human Action” and Robert Murphy’s “Choice,” Part 8: What Monetary Calculation Can and Can’t Do”

  1. Yes, I am enjoying these posts. Thank you.

    felipe (56556d)

  2. One thing I would like to add to the part about what economic calculation cannot do is that, even if humans were “stick figures in a graph, robotically ‘maximizing utility under constraint'”, there would still be questions that it couldn’t answer. I’m not just talking about poetic concerns, either; answering the questions I have in mind would require, at minimum, deciding the halting problem.

    Unfortunately, I don’t have the patience to type out the many chapters it would take to demonstrate this; I suggest using Patterico’s sidebar widget to search Amazon for books on “Computable Model Theory” if you want the full background. However, I can summarize it with the assertion that just about every quality that requires searching over a collection that may vary in size will not be decidable in finite time.

    CayleyGraph (dfcefe)

  3. I am enjoying these posts, too.

    DRJ (1dff03)

  4. my favorite economic calculation is the mean

    cause of just about everything eventually reverts to it

    happyfeet (831175)

  5. I know Patterico had mentioned the words “setting religion aside”… in his first post, but I wonder if Chesterton, in his Father Brown stories, had hit upon a difference between the Keynesians and the Austrians when he wrote:

    “I’m afraid,” said the American, in tones that were still doubtful, and keeping his eye on the priest rather as if he were a wild animal, “that you’d have to explain a lot to me before I knew what you were talking about. The science of detection —— ”

    Father Brown snapped his fingers with the same animated annoyance. “That’s it,” he cried; “that’s just where we part company. Science is a grand thing when you can get it; in its real sense one of the grandest words in the world. But what do these men mean, nine times out of ten, when they use it nowadays? When they say detection is a science? When they say criminology is a science? They mean getting outside a man and studying him as if he were a gigantic insect: in what they would call a dry impartial light, in what I should call a dead and dehumanized light. They mean getting a long way off him, as if he were a distant prehistoric monster; staring at the shape of his ‘criminal skull’ as if it were a sort of eerie growth, like the horn on a rhinoceros’s nose. When the scientist talks about a type, he never means himself, but always his neighbour; probably his poorer neighbour. I don’t deny the dry light may sometimes do good; though in one sense it’s the very reverse of science. So far from being knowledge, it’s actually suppression of what we know. It’s treating a friend as a stranger, and pretending that something familiar is really remote and mysterious. It’s like saying that a man has a proboscis between the eyes, or that he falls down in a fit of insensibility once every twenty-four hours. Well, what you call ‘the secret’ is exactly the opposite. I don’t try to get outside the man. I try to get inside the murderer . . . . Indeed it’s much more than that, don’t you see? I am inside a man. I am always inside a man, moving his arms and legs; but I wait till I know I am inside a murderer, thinking his thoughts, wrestling with his passions; till I have bent myself into the posture of his hunched and peering hatred; till I see the world with his bloodshot and squinting eyes, looking between the blinkers of his half-witted concentration; looking up the short and sharp perspective of a straight road to a pool of blood. Till I am really a murderer.”

    “Oh,” said Mr. Chace, regarding him with a long, grim face, and added: “And that is what you call a religious exercise.”

    “Yes,” said Father Brown; “that is what I call a religious exercise.”

    felipe (56556d)

  6. I hope anyone who bought the book (a few of you have) will correct me if they see misstatements anywhere in these posts.

    Patterico (3cc0c1)

  7. I am enjoying these posts, too.

    I’m glad. I will be referring to them in the future quite a bit, I think.

    I can’t overstate the importance of people understanding this stuff.

    Patterico (3cc0c1)

  8. it seems the residue of marx, remained in the most anti dirigiste critics, like Von Mises and Hayek

    narciso (ee1f88)

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