Patterico's Pontifications

8/31/2015

“Human Action” and Robert Murphy’s “Choice,” Part 10: Where Prices Come From

Filed under: Economics,General,Human Action and Choice — Patterico @ 7:48 am

This is Part 10 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.” Like previous posts, this post is a summary of a summary.

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.

This is another meaty chapter.

In explaining how the prices of consumer goods are determined, Murphy relies on preference rankings similar to the ones we used in post number 7, which gave examples of preference rankings in ice cream.

In that post, we showed that one person (Milton) who had two scoops of vanilla ice cream, but preferred one scoop of chocolate, could profitably trade with someone (Murray) who had one scoop of chocolate, but preferred two scoops of vanilla. Then if a third person comes along (Ludwig) who also has a scoop of chocolate, and is willing to settle for one scoop of vanilla instead of two, Milton will trade with Ludwig and not Murray. (See post 7 for a fuller discussion.)

If you substitute dollars for scoops of one of the flavors of ice cream (for example, vanilla), you can see how prices are determined. Murray will sell his scoop of chocolate for $2. Ludwig will sell his for $1. The market clearing price becomes $1.

The valuation is still subjective even though money has been introduced. As for the issue of why people would want little green pieces of paper (dollars) instead of scoops of ice cream, we can, of course, answer that by saying that people expect to be able to use those little green pieces of paper to obtain other things they want. Why this should be so, however, is a topic for a future post.

Mises distinguishes between valuation and appraisement. Valuation, according to Murphy, is “the significance that an individual places on a good or service because of its ability to confer happiness or utility on the individual.” Appraisement “assesses the amount of money for which a good or service can be sold.” Each influences the other, but they are separate concepts.

The next point is very subtle but worth understanding, because it was important to Mises, and misunderstood by even famous economists such as Joseph Schumpeter. For a single actor, the subject of valuation of a higher-order good depends on his own subjective valuation of the consumer good it helps produce. In a market economy, by contrast, the prices of higher-order producer goods are ultimately determined both by consumer preferences and by entrepreneurs — who appraise the prices of producer and consumer goods using economic calculation. Mises’s concern is that we always keep in mind the key role of the entrepreneur in allocating resources to produce consumer goods. This is a task that entrepreneurs do using economic calculation, which works only in a free market economy with accurate price signals.

Why was this important to Mises? Because if you ignore the key role of accurate price signals as used by entrepreneurs, then you might get fooled into thinking socialism is viable. More on this in a future post.

Murphy now stops to mention two “complications” that arise in assessing the role entrepreneurs play in determining the prices of the factors of production.

One is the ever-looming issue of time preference — the idea that people tend to prefer having their desires satisfied now, and not in the future. As entrepreneurs bid on the factors of production, they must remember that goods are always more valuable today than in the future. Thus, entrepreneurs always have to charge a mark-up. Because, even if you set aside the risks taken by entrepreneurs in trying to predict what consumers will value in the uncertain future, they also generally must use capital. Thus, they must contend with the fact that production takes time — and this means that capitalists’ investments in the production process must be recouped and then some, to make it worth their while to put the capital up for use by the entrepreneurs.

Also, Murphy notes that entrepreneurs choose to buy inputs according to anticipated marginal productivity — similar to the way consumers buy consumer goods according to the marginal utility they expect to receive from successive units of those goods in the production process. The only difference is the inclusion of the factor of the entrepreneur’s appraisement. The entrepreneur appraises how much extra revenue a producer good will bring in, and purchases (and thus appraises the value of) those producer goods accordingly. This applies to labor too. If you think an extra worker will bring in more money, you hire him. (Shockingly, this means a higher minimum wage could mean fewer workers hired on the margin!)

THE ROLE OF SUPPLY: Standard economics textbooks tend to mechanically portray prices as intersections of supply and demand curves. Now, Austrians don’t reject out of hand the role played by supply. Obviously scarcity affects your demand decisions on the margin; recall the example of water and diamonds offered in post 4:

[A]s the supply of a good increases, the marginal utility of the good decreases, and vice versa. You pay less for water than diamonds because there is plenty of water (currently) to satisfy our most critical desires, like satisfying thirst. If there were so little water that you had to pay $10,000 (more than you’d pay for a small diamond), just to get a drink and not die of thirst, you’d pay it (if you had the money).

But Murphy notes that Austrians tend to portray prices as fixed by subjective demand rather than by “objective cost” or by supply. Consumers determine demand for consumer goods, and entrepreneurs “sit on the demand side” for producer goods. The reason to emphasize the demand, Murphy says, is to keep in the forefront of one’s mind that subjective demand drives the whole process. To the extent that “supply” sits on one side of a transaction, it is really demand . . . reversed. What we call “supply” in a traditional transaction is really someone demanding money, and willing to exchange a good or service in exchange for money.

Put simply, the reason demand is king is because demand is what creates value to begin with. Without subjective demand for a good, it is worthless.

Murphy notes that, while creating consumer goods is a process, at the time of the exchange, “suppliers” have usually sunk their costs in the particular item being offered. They then have to get the best deal for the goods they have created, based on demand for those goods. Demand will also affect their decisions going forward, including whether to produce the same goods, how many to produce, and what to charge for them.

These are difficult concepts, and I hope I have summarized them accurately. Tomorrow, we address Mises’s brilliant insights regarding money, and how it is not a mere afterthought grafted onto the barter economy. Challenging stuff, but very worthwhile. Stick with it!

8/29/2015

Texas County Sheriff’s Deputy Ambushed And Killed

Filed under: General — Dana @ 2:57 pm

[guest post by Dana]

In what is being referred to as a “cold-blooded execution,” Deputy Darren Goforth, 47 years old and a 10 year veteran of the Sheriff’s Dept., was ambushed and gunned down at a gas station in Houston last night.

Goforth, who was in uniform, was approached from behind by a man who said nothing as he opened fire on Goforth. Law enforcement officials said that the suspect fired more shots at Goforth even after he was already down on the ground.

Deputy Goforth was pronounced dead on the scene. Harris County Sheriff Ron Hickman said:

He was literally gunned down in what appears to be an unprovoked, execution-style killing. I have been in law enforcement for 45 years, I have never seen anything this cold-blooded

After the slaying, Texas Gov. Gregg Abbott said that “heinous and deliberate crimes against law enforcement will not be tolerated in the State of Texas. Texas reveres the men and women in law enforcement who put their lives on the line every day to protect and serve their communities.”

He expressed his belief in local law enforcement to “work tirelessly to apprehend the killer and ensure justice for Deputy Goforth is served.”

Harris County Sheriff Ron Hickman expressed law enforcement’s outrage while noting the current inflammatory rhetoric against America’s police officers. :

Hickman condemned what he characterized as “some of the very dangerous national rhetoric that’s out there today.”

“So any point where the rhetoric ramps up to the point that calculated, cold-blooded, assassination of police officers happen, this rhetoric has gotten out of control,” he added.

“We’ve heard ‘black lives matter,’ ‘all lives matter’ — well, cops’ lives matter too. So why don’t we just drop the qualifier and say ‘lives matter,’ and take that to the bank.”

Just moments ago it was announced that a suspect has been arrested in relation to the fatal shooting:

Earlier Saturday, investigators questioned a man they called a person of interest. They also executed a search warrant at a two-story brick home where they found a pickup truck that fit the description of the gunman’s getaway vehicle. The house was about a quarter-mile from the gas station.

The man being questioned was turned over to deputies by his mother, according to Fox affiliate KRIV in Houston.

ABC13 Houston is reporting that the Harris County Sheriff’s Office has released the name of the suspect as Shannon Jaruay Miles. ‪

Deputy Goforth leaves behind a wife and two children, 12 and 5. Our thoughts and prayers go out to his family at this difficult time.

–Dana

UPDATE from Houston County Sheriff’s Office twitter feed:

CORRECTED Mugshot of Defendant Shannon J. Miles #HouNews #DarrenGoforth #ThinBlueLine

“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.

8/28/2015

The “Extremely Serious” Investigation Into Hillary Clinton

Filed under: General — Dana @ 5:50 pm

[guest post by Dana]

I just have a couple of minutes to throw this up…

While Hillary Clinton was getting testy at a press conference today because that nervy Ed Henry dared to ask her about a report this morning that cited Bill Clinton’s “eyebrow-raising requests for information from her top aides while she was secretary of state in 2012,” it was also being reported that:

An FBI “A-team” is leading the “extremely serious” investigation into Hillary Clinton’s server and the focus includes a provision of the law pertaining to “gathering, transmitting or losing defense information,” an intelligence source told Fox News.

The specific provision in question is 18 USC Sec. 793.

A separate source, who also was not authorized to speak on the record, said the FBI will further determine whether Clinton should have known, based on the quality and detail of the material, that emails passing through her server contained classified information regardless of the markings. … It is not clear how the FBI team’s findings will impact the probe itself. But the details offer a window into what investigators are looking for–as the Clinton campaign itself downplays the controversy.

Uh-oh.

No doubt Clinton is standing by her carefully worded defense:

“I have said repeatedly that I did not send nor receive classified material and I’m very confident that when this entire process plays out that will be understood by everyone,” Clinton said.

‘“It will prove what I have been saying and it’s not possible for people to look back now some years in the past and draw different conclusions than the ones that were at work at the time. You can make different decisions because things have changed, circumstances have changed, but it doesn’t change the fact that I did not send or receive material marked classified.”

We are already being told that this isn’t really an email scandal, and you can just blow it off, because:

“Is it a crime? Technically, perhaps yes. But it would never be prosecuted.”

So stop making such a big deal about it. (Note: the source defending Clinton at the linked report is somewhat, questionable, to say the least.)

Exit question: Do you think Hillary Clinton will suspend her campaign, or just keep on keeping on with her denials and lies??

–Dana

“Human Action” and Robert Murphy’s “Choice,” Part 7: The Importance of Monetary Calculation

Filed under: Economics,General,Human Action and Choice — Patterico @ 12:01 am

This is Part 7 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.” As a result, you are reading a summary of a summary.

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.

We are now moving into the section of the book titled “Economic Calculation” and begin with a chapter on the importance of monetary calculation.

In an earlier post, we emphasized that preference rankings in human action are ordinal, not cardinal. You can say you prefer chocolate ice cream to vanilla, but you can’t assign a number of units to each: it makes no sense to say “I prefer chocolate ice cream three times as much as vanilla.” More importantly, you can’t compare the intensity of your preferences to the intensity of another individual’s preferences. But I told you that there was a subtlety involving buying goods with money that would come up in a future post. This is that post.

With the introduction of money, for the first time arithmetical operations can be applied to economic affairs. The importance of money to the workings of the free market can’t be overstated. Having price signals determined by the market and communicated in units of money allows society to allocate resources in the most efficient manner possible. Without money, and without prices set by a free market, this cannot happen — because (as previously noted) in a barter system one can only look to ordinal preference rankings which cannot be expressed in units. (As we will later see, this is the central reason that Mises said socialism could not work — his famous “socialist calculation problem,” which will merit its own post.)

Before we get to money, we must explain how “barter prices” emerge in a world without money, based on ordinal preference rankings. (These are my examples and not Murphy’s. Although they are loosely based on his examples, don’t blame him.)

Assume there is a fellow named Murray whose ordinal ice cream preferences line up this way:

MURRAY’S PREFERENCES

1. Two scoops of vanilla
2. One scoop of chocolate (Murray possesses this)
3. One scoop of vanilla

#1 is his top preference. #2 is his second, and #3 is his last choice.

Clearly, Murray would trade his scoop of chocolate for two scoops of vanilla, but not for one.

Now, pretend a fellow named Milton has this ice cream preference rank:

MILTON’S PREFERENCES

1. One scoop of chocolate
2. Two scoops of vanilla (Milton possesses this)
3. One scoop of vanilla (obviously Milton possesses this too; if he has two, he necessarily has one)

Milton would trade two scoops of vanilla for one scoop of chocolate. We know that Murray would trade his own scoop of chocolate for two scoops of vanilla. So we can see that these two folks can do a direct trade — and both will be better off.

Now say there is a third guy, Ludwig, whose ice cream preference is as follows:

LUDWIG’S PREFERENCES

1. Two scoops of vanilla
2. One scoop of vanilla
3. One scoop of chocolate (Ludwig possesses this)

Now, Murray and Ludwig both have a scoop of chocolate, which Milton wants. But Ludwig has set a cheaper price. He will accept just one scoop of vanilla for a scoop of chocolate — while Murray is demanding two scoops of vanilla.

Milton, with his two scoops of vanilla, would rather trade with Ludwig, who will take only one of Milton’s two scoops of vanilla, as opposed to Murray, who insists on getting two scoops of vanilla in return for his one scoop of chocolate.

In this way, adding more people to the market helps establish an equilibrium barter price for the scoop of chocolate: namely, one scoop of vanilla, the lowest price that a vendor of chocolate scoops will demand.

Note well: we never once had to say anything like “Milton gets twice as much pleasure from chocolate as he does from vanilla” or anything of the sort.

Also note that we never once talked about how difficult it is to create or obtain one scoop of chocolate vs. one scoop of vanilla. From the time of Adam Smith there was something called the “labor theory of value” which posited that prices depend upon the cost of the inputs. This fallacy led directly to the fallacy that the laborer, and not the capitalist, was the person who imbued goods with their true value, and thus “deserves” the fruits of that production. You can easily see that, while the labor theory of value was taken as true by Adam Smith, it was seized upon by Karl Marx, and is still implicit in many of the complaints of socialists like Bernie Sanders.

Whenever someone like Bernie Sanders complains that McDonald’s workers are getting paid too little, their implicit argument is that the workers are the ones who are really adding value to the business, while the people running the company are just fat cats putting in cash and watching the profits roll in. When they refuse to give those profits to the workers, they are exploiting the workers, who really give the business its value. This exploitation theory is Marxism 101.

But once you understand that value is subjective, then you understand that the person who contributes the most to an enterprise is the entrepreneur, who correctly foresees what consumers will want. The entrepreneur who predicts the advent of streaming video like Netflix will add far more value to his company than all the sweat of workers tirelessly toiling away to build new Blockbuster outlets that are going to go out of business.

Getting back to ice cream: the creation of barter prices wowed economists so much that they treated money as an afterthought: as a kind of neutral factor that served as a kind of stand-in for the equilibrium barter prices that are reached through the operation of trades like those described above, following from simple ordinal preference rankings. This, Mises warned, was a huge mistake — and his recognition of that fact amounted to one of his key insights. (We’ll discuss this in later posts. The hint I’ll offer here, which will be elaborated on later, is that money is a good with its own demand and supply issues.)

For now, it is enough to understand (with subtleties to be added later) that money serves as the basis of economic calculation, which is the central device that allows man to determine how to most efficiently allocate his resources. You might not need monetary calculation (though it helps) to decide it actually makes more sense to grow oranges in Florida and ship them to Montana, rather than try to grow them in Montana. But without monetary calculation, how can a businessman decide how many oranges to grow? whether to ship them by truck or by plane? how many retail outlets should distribute them? and so forth.

To make complex determinations like this, you could never rely on something like the equilibrium barter prices such as we demonstrated above with our ice cream examples. There are just too many elements in the calculation: how much is a plane ride worth, compared to a truck shipment, compared to a box to put your oranges in, compared to a tractor to plow your grove, compared to an hour of labor offered by a retailer to sell your oranges . . . and so on? Without monetary calculation, this sort of analysis cannot possibly be done. It is just too complicated.

And (again jumping ahead), this is why a socialist economy, without real price signals, cannot possibly succeed.

With that observation, we have come full circle for this post, which has been a longer one, but (I hope) very satisfying and informative. Tomorrow we will further explore what economic calculation can do — and cannot do.

8/27/2015

Fifth Circuit: DOJ Failed to Investigate Misconduct of Prosecutors Who Prosecuted James O’Keefe

Filed under: General — Patterico @ 8:45 pm

Well, they didn’t say it in quite those words, of course . . . but that’s the effect of their opinion.

I don’t have the time or energy to blog this that I once had, but regular readers will remember that I have written extensively about the perfidy of the New Orleans federal prosecutors who went after James O’Keefe.

Well, the Fifth Circuit came down with its opinion last week, and it wasn’t pretty. Power Line has more.

For my part, tonight, I’ll simply quote briefly from the Fifth Circuit opinion:

The reasons for granting a new trial are novel and extraordinary. No less [fewer — Ed.] than three high-ranking federal prosecutors are known to have been posting online, anonymous comments to newspaper articles about the case throughout its duration. The government makes no attempt to justify the prosecutors’ ethical lapses, which the court described as having created an “online 21st century carnival atmosphere.” Not only that, but the government inadequately investigated and substantially delayed the ferreting out of information about its in-house contributors to the anonymous postings.

It’s that last bit — the stonewalling by Eric Holder’s Justice Department — that I concentrated on in the past. Well, that, and the overlap (namely Jan Mann) between these prosecutors and the team that persecuted James O’Keefe.

But Holder’s gone. So what difference, at this point, does it make?

Right?

The Despicable Desperation Of Hillary Clinton

Filed under: General — Dana @ 7:10 pm

[guest post by Dana]

Say, remember that time Democrats were outraged and hysterical after falsely accusing Scott Walker of comparing the Madison protesters to ISIS earlier this year at CPAC?

It takes a special kind of hubris to stand all puffed-up not just before the simpatico audience at CPAC, but also those watching from a distance online and claim that handling Madison protesters is just like dealing with extremists abroad, but that’s what Scott Walker did during his speech.

Oh, the horror:

There are two entirely different ways to be horrified by Wisconsin Gov. Scott Walker comparing his battle with state unions to the fight against ISIS.

From the left, you can be disgusted by Walker comparing legal protests by labor unions and their supporters to the barbaric, blood-thirsty terrorism of ISIS.

Yeah, that time.

Well, in a speech today, Hillary Clinton actually did just that. For real. She likened Republican candidates working to defund Planned Parenthood and protect the unborn to terrorist groups. It logically follows that her accusation also includes all Americans fighting the good fight, not just Republican candidates:

“Now, extreme views about women, we expect that from some of the terrorist groups, we expect that from people who don’t want to live in the modern world, but it’s a little hard to take from Republicans who want to be the president of the United States,” Clinton said. “Yet they espouse out of date, out of touch policies. They are dead wrong for 21st century America. We are going forward, we are not going back.”

Two things: Clinton is as utterly contemptible as she is confused. She defends the butchery and barbarity taking place behind the doors of Planned Parenthood as “going forward”, when in fact we know that what takes place behind those closed doors more closely resembles the brutal reality of ISIS in a seventh century nightmare than that of a civilized, life-honoring society.

Second, these are the comments of a candidate who knows she’s in big trouble. While Clinton is still leading the Democratic field, she has dropped 10 points this month. Further, a new Quinnipiac poll revealed that when voters were asked the first word that came to mind when they thought about Hillary Clinton, the majority answered liar, followed by dishonest. No doubt her attacks on Republicans will increase with a renewed vigor and rhetoric focused on portraying the GOP as extremists and out of touch with voters. (Interestingly, she made this speech in the home state of Gov. Kasich, whose job-approval rating is at an all-time high of 61 percent.)

–Dana

Ted Cruz, the True Anti-Establishment Candidate, Is Called a “Jackass” by John Boehner

Filed under: General — Patterico @ 1:22 pm

Donald Trump is not a conservative. Ted Cruz is. And if people are looking for a guy who’s not in lockstep with the GOP establishment, they might consider this story:

Speaker of the House John Boehner stunned audience members Wednesday evening at a Colorado fundraiser by referring to Republican presidential candidate Ted Cruz as a “jackass,” two people in attendance tell The Daily Caller.

At a Steamboat Springs event for GOP Rep. Scott Tipton, the Ohio Republican quipped that he likes how Cruz’s presidential campaign keeps “that jackass” out of Washington, and from telling Boehner how to do his job.

Lots of people claim they will take on the establishment and then go to Washington and get co-opted.

Ted Cruz has shown that he can go to Washington and not be co-opted. Boehner’s nasty comment proves it.

Thanks to ThOR.

“Human Action” and Robert Murphy’s “Choice,” Part 6: The Importance of Ideas and Reason

Filed under: Economics,General,Human Action and Choice — Patterico @ 12:02 am

This is Part 6 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.” As a result, this is a summary of a summary. Blog life.

The idea here is to popularize and spread the word about Austrian economics and educate the public. (Several of you have bought Murphy’s book, and that is very pleasing to me. Some have even started reading Mises himself, which is fantastic!) 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.

Chapter 6 is a chapter devoted to summarizing Mises’s views on the importance of ideas in history. As Keynes said, most men are “the slaves of some defunct economist.” How ironic that quote is to the Austrian economist! — who watches governments haplessly careen from one absurd Keynesian “solution” to another, always prescribing the most counterproductive “cure” imaginable to the given diagnosed economic disease. The Austrian watches countries in a “bust” try to “fix” everything with huge infusions of cash and lowering of interest rates. The Austrian sees these actions as insane — like using trepanation to cure headaches, lobotomies to cure depression, or cigarettes to cure asthma. The Austrian longs for the day when the basics of economics are widely understood by policymakers, as real human suffering will thereby be alleviated to a previously unheard-of extent.

Mises literally believed that using reason “to grasp the advantages of social cooperation” (to use Murphy’s phrase) is the key to preventing the collapse of society.

Murphy spends much of chapter 6 drawing contrasts between Mises’s Austrian economics and other economic philosophies, such as Marxism and logical positivism.

The contrast with Marxism might sound like it would require a long explanation, but for now Mises (and Murphy) are concerned mainly with showing that Marx believed society molded men’s ideas, while Mises believed that ideas molded society. Other stark differences between Austrian economics and Marxism/socialism, such as Mises’s famous explication of the “socialist calculation problem” (also discussed by Hayek) will be reserved for future posts.

Probably the most interesting contrast is that between Mises and the logical positivists asserted that statements about economics lacked value unless they could be “verified.” This contrast, to me, appears related to Murphy’s final topic of the chapter: the notion that economics cannot be a “science” unless it makes testable predictions. Although Murphy separates the sections, I will discuss them together in this post.

Here, Murphy contrasts Mises with another well-respected economist (and a Patterico favorite): Milton Friedman. It turns out that Friedman and Mises are severely at odds with one another on the notion of economics as a “science” — and whether the correctness of economic principles depends upon those principles being validated by real-world data.

At this point the reader may be uneasy. We’re taking issue with Milton Friedman and rejecting the notion of using real-world data to validate our principles? Surely we are on shaky ground here! The fact that I know you are thinking this, to me, means I need to spend a little extra time on this final point.

This reminds us of Murphy’s analogy to geometry in Chapter 3 (see post number three in this series). As I summarized it in that post:

We do not derive the Pythagorean theorem by building 500 right triangles and measuring the angles and the sides. The proof of the theorem does not depend on experimentation. The proof is within us — it is simply a logical chain of thoughts that we need to reflect on.

Murphy quotes Mises on this point in chapter 6. Mises argued that while the Pythagorean theorem could be considered a “tautology” in the sense that “its deduction results in an analytic judgment,” that does not mean it is to be discounted:

Nonetheless nobody would contend that geometry in general and the theorem of Pythagoras in particular do not enlarge our knowledge. Congition from purely deductive reasoning is also creative and opens for our mind access to previously barred spheres. . . . It is its vocation to tender manifest and obvious what was hidden and unknown before.

Mises makes an analogy here to the quantity theory of money (the cornerstone of which he elsewhere modestly defined as “the idea that a connection exists between variations in the value of money on the one hand and variations in the relations between the demand for money and the supply of it on the other hand” — Theory of Money and Credit, p. 130) and says that it is like the Pythagorean theorem:

The quantity theory does not add to our knowledge anything which is not virtually contained in the concept of money. It transforms, develops, and unfolds; it only analyzes and is therefore tautological like the theorem of Pythagoras in relation to the concept of the rectangular [right] triangle. However, nobody would deny the cognitive value of the quantity theory. To a mind not enlightened by economic reasoning it remains unknown. A long line of abortive attempts to solve the problems concerned shows that it was certainly not easy to attain the present state of knowledge.

In chapter 6, Murphy gives us a hypothetical in which aliens visit Earth. We might not expect them to already know things that are purely a matter of human convention — such as the idea that a “bachelor” is someone without a wife. But we would expect that they would know geometry. And (if they engage in specialization and trade) we would expect that they would know economic principles like marginal utility theory. And if the aliens didn’t know geometry, or economic principles, we would expect that they would be grateful to learn these things — and that they would recognize their inherent truth.

Murphy quotes Friedman as disdaining an economic theory based on “a structure of tautologies” as being nothing but “disguised mathematics” if it cannot predict action in the real world. Let me quote Murphy at length in response:

From the starting point that humans act, the economist could logically deduce — thereby forming a tautology, it’s true — that individuals have subjective preferences with ordinal rankings, that choices come with opportunity costs, and that the value of second-order capital goods is dependent on the value of the first-order consumer goods that the individual believes they have the technological power to produce. Say what one will about these types of statements, they are clearly within the realm of economics and are not merely “disguised mathematics.” Although they have not been derived by reference to empirical observation, thinking through these tautologies definitely aids acting individuals as they navigate the real world. Logical, deductive economics as championed by Ludwig von Mises is not mere word games.

That’s how Murphy ends his chapter, and it’s a good way to end this blog post. We’re about 1/3 of the way through the project so far. Keep reading and sharing!

8/26/2015

Trump: Pandering on Oreos

Filed under: General — Patterico @ 6:59 pm

He’s not a conservative:

Hotel magnate and Republican presidential candidate Donald Trump confirmed on Tuesday that he will stop eating Oreos, a decision he came to after Nabisco parent company Mondelez International, announced last month that it’s replacing production lines in Chicago with new ones at a plant in Salinas, Mexico.

“I’m never eating Oreos again,” Trump said on Tuesday, reaffirming statements he first made last week at a rally in Alabama, where he said, “Mexico is the new China . . . I love Oreos. I will never eat them again. Nabisco closes the plant in Chicago and they are moving the plant to Mexico.”

A quick fact-check: that last sentence isn’t true. Mondelez is not closing the Chicago plant, but it is cutting 600 jobs there as a result of the new investment in Mexico, the Associated Press reports.

And why would a company making a foodstuff, whose key ingredient is sugar, find it cheaper to manufacture that in Mexico?

TOTALLY UNRELATED QUESTION: Why does Mexican Coke taste so much better than Coke made in the U.S.?

OR IS IT UNRELATED AFTER ALL? If you’re familiar with the absurd ways that the U.S. Government subsidizes sugar, you’ll see these questions are related. As the Dartmouth Business Journal explains:

America’s sugar farming industry is currently one of the most protected industries in the United States. Two centuries ago, the U.S. government embarked on this protectionist trend in order to gain the loyalty of the sugarcane farmers in the Louisiana Territory. Today, the original program has evolved into a series of complicated import tariff-rate quotas (TRQs) that heavily distort the sugar market. These TRQs are combinations of quotas, limits on the amount of the good that can be imported, and tariffs, taxes on these imported goods. The TRQ used to protect the American sugar industry allows a certain amount of sugar to be imported at lower tariffs, but for all sugar exceeding this amount, tariffs rise to around 150% of the sugar’s cost. On average, Americans pay 3 times the world price for sugar. This huge price distortion is one of the largest in the U.S. and has had far-reaching negative consequences, both at home and abroad.

One of the things this policy does, is drive businesses dependent on sugar across the border to Canada or Mexico.

If a candidate wants to talk about Oreos being made in Mexico — and if that candidate is a classical liberal, limited-government conservative — that candidate will pledge to undo sugar quotes and tariffs.

If, instead, the candidate is a huckster making a cheap populist appeal to Americans too ignorant to understand what’s going on, that candidate will run his mouth about Nabisco and pledge not to eat Oreos.

UPDATE: I have talked about sugar protectionism and its unintended side effects before, here.

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