Topic: Economics
Ron Paul, Economist Tyler Cowen, and a Problem with the Fed Fed induced market bubbles, Ron Paul Supporters, and a question for hybrid economist Tyler Cowen (of the Neoclassical and Austrian tradition).by Christopher Espinal
(Conservative)
Thursday, August 7, 2008
The first people who are up and against the Federal Reserve System are the Ron Paulites. There are two issues that I think are central to the debate - can inflation or nominal variables affect the real economy and can the Fed policy makers get around the complexity of the economy.
I always pondered the possible differences in the fundamental theories behind Austrian and Neoclassical economics. After finally asking these important questions and getting down to the assumptions of both theories, I figured they differ in that Austrian Economics accepts the notion that nominal variables affect real variables. That is why most Paulites, who are astute Austrian followers like Nolan Chart Founder Walt Thiessen, fear the growth of government with inflation. In matter of fact, the idea that we can use inflation to expand an economy came from the Austrian tradition and impacted Keynesian macroeconomic theory.
Neoclassical economics, at least in light of the monetarist era, assumes this to be true as well but only according to the Quantity Theory of Money. The MV=PY equation on the license plate of Milton Friedman's car suggests a concept central to Monetarist economic theory. Assuming that the Velocity of Money (V) and the Price Level (P) remain the same, an increase in the Quantity of Money (M) in circulation can have a real impact on the Aggregate Demand in an economy (D). But this equation implicitly states that the economy must demand more greenbacks (an increase in D) in order for an increase in the Quantity of Money (Q) to mean anything for the country. In this case nominal variables can to some degree affect the real economy, but there has to be an existent demand. For the most part, this may mean that real variables can affect nominal variables. However, the point is that to monetarists inflation will not necessarily impact the real business-cycle. Essentially, the monetarist school of thought explains why I differ from Walt Thiessen in our debates on the Fed.
However, the most legitimate question brought up by Ron Paul and the Austrian Economists regards market bubbles. The economy has become so complex and inter-tied that policy altering the money supply through target-interbank-loan interest rates doesn't necessarily have clear effects on the economy - sometimes leading to crises such as the recent housing market bubble. For example, it was probably too complex for Fed governors to track the activity of investors (like their high risk derivative attachments to the loan market) and realize the risk with raising target interest rates. Over the long run, can the Fed necessarily achieve optimal policy (in favor of the US) given the risk of negatively affecting a sector?
This is one question that I don't believe many Keynesian and Neo-classical macroeconomists have tried to answer. Perhaps they don't perceive this bubble phenomenon as being the worst thing in the world given the ability of strong economies to bounce back.
The Experts Corner:
Tyler Cowen:
Another interesting question: what if there were a hybrid economist between the Austrian School and the Neoclassical School of Macroeconomic thought? His name is Tyler Cowen who entertains this odd hybrid of economic thought.
I suppose he could answer two questions: do nominal variables affect real variables in the macro-economy, and is the Federal Reserve responsible for market bubbles as most Austrian economists suggest?
Tyler Cowen Replies:
I would say that yes nominal variables do affect real variables (at least usually) and that the Fed is 20-30 pct. responsible but no more...some of my earlier posts [on Marginal Revolution] on the crisis covered these views in more detail...
Tyler
Bryan Caplan:
Economist Bryan Caplan doesn't think that bubbles are that big of a deal and are a phenomenon caused by overvaluation of assets and securities. He also responded to my question on bubbles as stated above:
Bryan Caplan Replies:
Christopher Espinal writes:
Bryan, I guess you're right. So it's just a cyclical shock or when some overvalued company reaches it's true nominal value. However, does the Fed have anything to do with bubble creation? Please answer!
I'm not convinced the Fed has the kind of direct role that some of the other comments attribute to it. Vernon Smith has generated bubbles in extremely simple lab experiments, so I don't see why the Fed is supposed to be the Root Cause of bubbles in the real world.
Of course, you could blame the Fed for not tightening monetary policy until bubbles go away, but that's reaching.
Many of these Fed-bubble theories stem from Austrian Business Cycle Theory. My critique is at: http://www.gmu.edu/departments/economics/bcaplan/whyaust.htm, section 3.4
Interesting Questions:
What are nominal and real variables?
A nominal variable is something that has no intrinsic value attached to it's function - it's only a number. I have three dollars where three is only the nominal description. However, to provide this function a real value, we must attach some intrinsic value to the dollar. Thus, we now have a complete function to judge the intrinsic value of a dollar - for example one dollar can be traded for three bags of chips.
To apply it to the concept discussed in this article: adding three more dollars to the economic system can cause people to believe they had a rise in real income - which means simply printing three more dollars and adding that to three I already have has a worth of six dollars of goods. Hopefully, I properly described the concept that a nominal variable (quantity of dollar bills) has a real impact (purchasing power remains the same).
As Theissen points out, this certainly is important to Austrian Theory as it heavily relies on definitions like any other form of deductive reasoning.
Interesting Rebuttals:
Rebuttal: You're saying that Austrian Economics has advocated inflating the economy instead of sticking to sound money.
Response: Nope, that's not what I said. In matter of fact I said that Austrian economists were the first to say that nominal variables have real impacts. They see the real impacts as detrimental since government institutions pervade Human Action. Keynesians, unlike Austrian economists, believe that government institutions are good for individuals. That's the only difference in the overall philosophies of these two schools of thought.
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2008 Christopher Espinal, all rights reserved.
Published: Thursday, August 7, 2008
Last modified: Friday, August 8, 2008
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You cannot possibly get all scientific, mathematical, political & intellectual about this. Our country is ran by crooks. People who have minpulated our currency and our very lives -The very health of our physical being- our way of thinking as Americans: being free of unrepresented taxation & unreasonable taxation, free of government spying, free from laws that control us instead of keeping our liberties intact. The fed is run by people not even subject to our laws. They can do what they want and are never questioned by reputable sources. I don't trust our leaders. We elect PUBLIC SERVANTS who do OUR WILL not leaders who do the will of corrupt foriegn & domestic bankers. You people need to wake up and stop euphemizing the truth.
Posted By: Christopher Espinal
Date: 2008-08-08 11:23:37
Aggozzur - perhaps you simplify things way too much. Instead of sitting down and trying to understand the complexities of the situation, you would rather keep it simple and stupid to fit your simple and stupid conspiracy theories.
I have always pondered how any intelligent person could support a system that both directly and indirectly siphons off the ability to make a living and support a family. It is beyond me that anyone, who must work and work hard, would support such a system that drains the wealth-making abilities from the people of this country through the very direct and destructive inflationary policies. What is truly astounding is the fact that such policies are accepted in this country as normal for economic progress, when in fact such policies are counterproductive on so many levels that it is almost impossible to delve into them all. Of course, I suppose there are those who don’t mind working more for less. I am very uncertain where you get your information from regarding Austrian Economics however, I am not familiar with any Austrians who have ever promoted inflation as a means to an economic or governmental end. As far back as 1923 Mises was writing just the opposite, especially since he experienced first-hand the stupidity of the inflationary pressures brought about by the printing of massive amounts of Reichmarks.
I am not sure where you get the idea that the Austrian Tradition was to expand the economy through inflation since from the beginning, Austrian Economist have clung to the ideal of sound money. It is basically impossible to inflate, at will, a sound money system because under such a system the quantity of money is not an issue. When the money supply becomes inflated say through a new-minded source of gold, the dollars within the economy will bid against themselves until the economy adjusts to the new supply, prices and purchasing power will the self-adjust. Indeed, the original theory of the Vienna School, later to be known as the Austrian School of Economics was never based upon the quantitative theory of money, but upon the basic principles of human action and how that action influenced mass economics. By all means, read the works of Menger, Böhm-Bawerk, Bastiat, von Wieser, Mises, Clark, Wicksteed, I dare say that you will find the opposite of inflationary theory. Menger, who is considered the father of the Austrian School is a perfect example to prove your error. There was an attempt by Keynes and his associates to operationalize Menger’s concept of the Inner Value of Money, but that attempt completely ignored Menger’s work on the Nature and Measure of Value.
People keep forgetting that the increase in the cost of credit, which has become known by the very misleading term, and sustainable economic growth cannot be overcome in the long run by inflationist measures. They also forget that the interest rate cannot be reduced in the long run by credit expansion. The expansion of credit always leads to higher commodity prices and quotations for foreign exchange and foreign moneys while pressuring depreciation on domestic money. It is interesting to note, that the government, in its ideological understanding, will always seek to formulate a misunderstanding amount the people about money and the operations of money, particularly fiat money.
For instance, using the government own CPI figures to calculate the inflationary pressured placed upon this people, you need to consider these facts: a person making, say $35,000.00 per year in 2008 only has the effective purchasing power of $6,206.16 in 1970 dollars; so, in other words, a person who makes about $16.84 dollars per hour in 2008 only has the purchasing power of $2.99 per hour in 1970 dollars. Now, when you consider the same $35,000.00 today compared to the purchasing power of 1913, the year the Federal Reserve Act was rammed down the throats of the American People, then that 35K only has the purchasing power of $1,583.53 in 1913 dollars…pretty sad, wouldn’t you say? Such sad facts are a direct result of the policies of the government’s mandate of Fiat Money and the FED’s monetary policies. That is real wealth that has been diverted from the People and from the economy, into the coffers of the central bank and the federal government.
That Sir is a direct result of FED Fiat Monetary Policy and it is definitive proof that the policies of the FED are counterproductive, not only to the workingmen and women of this country, but also to the country in general. It is the common equation of all Fiat Money Systems, each accomplishes the same thing in the same way and all end in massive insolvency. You and I are, in every sense of the word, being robbed of our wealth-building ability.
Inflation allows for government expansion without the introduction of the more obvious confiscation of wealth through taxation. Under such Fiat Monetary Systems, the purchasing power of the currency will decline more and more until it disappears altogether, it is a mathematical fact that such systems cannot be maintained indefinitely because each “bill of credit” is, in effect, a debt obligation. Every single Dollar under the Federal Reserve System must be “borrowed” into circulation, therefore each carries with it an interest obligation. Eventually, the people will be forced to exchange billions or even trillions in face value for smaller and smaller transactions to the point that the folly is evident to everyone. One of the first signs that the people recognize the fact that their hard-earned money is declining in value is the savings rate, it eventually will become a negative value because the people realize just how much of a loss they are taking by holding such fiat money. The next step will be when the people, recognizing that the depreciation of their money cannot be stopped, will begin to hoard commodities, even though they may not need such commodities at the time, or perhaps in the future, but they view such commodities as a better store of value than the fiat money. Then, or course, panic ensues, speeding up the process of the collapse. Eventually, the depreciation of the currency in circulation becomes more rapid until hyper-inflation becomes a force that multiplies exponentially, even without further inflation of the money supply making realistic exchange impossible. Obviously, the Quantity Theory of Money therefore could not be correct, based upon historical data of societies which have experienced Fiat Meltdowns. While I realize that there are those who accept the primitive versions of the Quantity Theory will always argue that a further increase in the quantity of money should continue because, according to the Theory, the economy will be stimulated by such expansion.
The error should not be hard to recognize, but I suppose it should be spelled out clearly for proper understanding. As monetary depreciation progresses, the demand for that money as a store of value and exchange decreases. When the losses incurred become greater the longer a person hold his currency then that person will seek to exchange that money for what he perceives as real stores as quick as possible. The individual desire to keep and use cash no longer remains strong, thus the Fiat Economy rapidly declines. This will also have a very detrimental effect on credit, on which this entire economy is built. The people, in a panic psychology, rush to purchase any products available, even if not needed, this creates an even wider spread panic as shortages being to bear upon general commerce. The normal processes of the market, which would usually bring the total demand and supply in balance through the use of shifting exchange ratios would no longer function. The settlement of transactions in business and markets would also begin to suffer from the systemic depreciation of the currency upon which they depend. Once these stages are reached there is no turning back in a Fiat Monetary System, it collapses in massive insolvency that siphons off all profitability from commerce.
Strangely enough, the Quantity Theory of Money, along with the troubles associated with Fiat Currency were long ago refuted by David Hume. Yet, there are those, obviously, who cling to obsolete theories that have not been correct in their predictions. It has been shown, time and again, that under the circumstances associated with Fiat Monetary Systems, that increasing the quantity of money in circulation cannot solve the scarcity of money in terms of exchange ratios, this is especially true in consideration of Fiat Money since each “Note” is a debt obligation.
For business, the Fiat System is extremely difficult. Credit, in particular, is extremely susceptible to the attributes of Fiat Money because the lender of money cannot accurately anticipate the degree of inflation that depreciates the present money that is lent verses future repayments. The borrower receives present value but repays that money in depreciated value, if this depreciation is not factored into the loan itself through interest rates then the lender suffers a loss. In such cases, of course, the borrower actually “wins” in this scenario and the lender loses. Then, if the borrower uses his loan to purchase appreciating commodities to sell them later, the borrower is not only able to repay the loan in less valuable currency, but upon the sell of the commodities he purchased he would be able to realize a real profit over and above the amount he borrowed even at a premium. As long as the depreciation of the money continues, or is expected to increase, the lender must always demand higher interest rates on the money loaned. This scenario however, makes accurate credit transactions difficult to measure in terms of future profitability to the lender. The same is true in both capital improvements and inventories since there is a depreciation in terms of present money verses future return.
As the rapid decline of the purchasing power of money continues, trade begins to emanate from hoarding because people want to have access to marketable goods to meet future needs they might not presently anticipate. In other words, other commodities always become “money” when Fiat Money rapidly depreciates through expansive monetary supplies. For a short time, the people will look to foreign currency as a store of value until it is recognized that even foreign fiat currency is also susceptible to the same inflationary pressures as domestic currency. There are those, obviously, who, for whatever reason, cherish this Fiat Money System, even in the face of its continual depreciation in value; perhaps they hold some hope that the use of such a faulty system can be maintained over the long run, or that a miracle solution to the age-old problem faced by all Fiat Money has faced, but history has, time and again, proved them so dead wrong that one must wonder how they tie their shoe laces in the morning. It is, after all, impossible to provide a long-term contradiction to the laws of mathematics by using an unsolvable circular equation and that is exactly what the Fiat Monetary System is built upon. You cannot continue to create debt as a means of exchange without eventually suffering from systemic insolvency, it is a mathematical impossibility, there is no such solution to such an equation. Fiat Money always, without exception, fails.
Of course, the first thing to do would be to restrain the printing of more money and allow for the contraction of the economy, but that will not, cannot happen under our current government or monetary system. Since the Fiat Economy completely relies upon the expansion of credit for its life-blood, there is no way to impede the exponential expansion of the money supply, therefore there is no way to avert the coming collapse of the Fiat Monetary System, our economy and for that matter our society.
Let us consider just what the policies of the FED have accomplished. It has not accomplished what it was touted to accomplish at its creation, that is certain. Its flawed policies were very evident in the 1920s leading up to the economic dislocation of the 1930s. It has not stabilized the economic processes or prices for that matter. The FED, without Congressional oversight or power of audit, has a relatively free reign, without accountability, to pursue polices that affect you and I in a very direct and detrimental way. The FED is in total control of the entire monetary structure and substructure of this country and therefore its economy. The complexity of the economy has primarily evolved due to FED policies and ancillary interventions by the government that have provided for and, in turn, induced such complexities. Markets, without such interventions, tend to self-regulate and self-correct. The vast majorities of the complex problems that form within the economy do so because of direct intervention by the government and the FED. The FED and their spoon-fed economists, tend to ignore the basis of what the economy consists of and that is the actions, the psychology of billions of people as they make trillions of decisions in milliseconds.
It is easy to examine the nature of both the fractional reserve system, fiat currency and the ideology behind both central banking and central economic planning. Basically, the Federal Reserve enjoys a total monopoly on the issuance of bank notes. At one time, of course, that was the purview of the U.S. Treasury at the behest of Congress, that ended completely on August 16, 1968 when the Treasury abandoned the issuance of bank notes altogether. Of course, in 1933 the U.S. abandoned the gold standard domestically, making Federal Reserve Notes, which are nothing, absolutely nothing more then “bills of credit backed by debt” legal tender for all monetary debts both public and private. Of course, no one seems to question how a bill of credit backed solely by debt can be used as a payment of debt, but that will soon be revealed as the true nature of the Federal Reserve Notes lose all value of exchange in this society. Every single Federal Reserve Note is a liability, not an asset and we now are forced to pay our liabilities with liabilities. As I said, it is a mathematical impossibility.
Inflation, which is absolutely necessary in a Fiat Monetary Economy, is the bane of our society and will be proven so in due time. Since a Fiat Economy must rely totally upon the expansion of credit as its life-blood, the expansion of the money supply is essential but the consequence of that expansion is the debasement of the currency’s purchasing power. Eventually, this purchasing power will hit a negative value and, as all Fiat Monetary Systems do, become hyper-inflated. Now, hyperinflation does not occur in a vacuum, it is due to a number of factors, the least of which is the massive expansion of the money supply, another is the expansive growth of government as it uses the Fiat Monetary System to finance, solely through debt, its growth. It is a pyramid scheme that dwarfs all others in history and it has brought real wealth to those who control the system.
The Federal Fractional Reserve System simply pyramids reserves by a 10:1 ratio, this is the minimum reserve necessary to play in the FED’s sand box. When the FED decides, for whatever reason, to expand the money supply by 100 Billion Dollars, it simply buys 10 Billion Dollars in “assets”, such as a U.S. government open market bond and low and behold, the money supply has expanded by 100 Billion Fiat Dollars. So, the FED cuts a “check” in its own name for the amount of 10 Billion Dollars, transfers that “check” to a government bonds dealer in exchange for 100 Billion Dollars in government bonds. The government bonds dealer then deposits the “check” drawn on the FED and in exchange there is an increase in the money supply by 90 Billion Dollars. The question should then be where did the FED get the money to write that 10 Billion Dollar “check”? Well, it simply wrote the “check” on itself and like magic, the 10 Billion Dollars appeared because it was not held in an account as we would normally think of, but our of the power of the FED to use the system to its advantage, always with the government’s tacit approval, of course. That is a simplistic explanation, but it does give you a good idea how the system operates. Of course, that 100 Billion Dollars will provide the first recipients the most benefit of value, as the fiat money moves through the economy the more the purchasing power of that 100 Billion Dollars is diluted by inflation, as is all other existing money in circulation. By the time those on the “low-end of the totem pole” are able to use the money, the inflationary pressures on that money had depreciated the purchasing power proportionally to the increase in supply. It is just the opposite is true in a sound money system since the increase of the money supply will filter through the economy, biding against itself until the economy adjust to the increase in supply and prices then stabilize.
In the Keynesian model, there have always been the attempt to stabilize the value of the monetary unit however; all such attempts have done just the opposite under the Fiat Monetary System. Prior to the lastest version of the Fiat Fiasco, the concern was to bring the quantity of money into balance with the demand and to do so without changing the purchasing power of each unit of exchange. So, the attempt was to develop a monetary system in which there would be no distinguishable changes in ratios that could ensue from the money side as a medium of exchange and economic goods and services. Of course, it is impossible to achieve such results because the motivational needs of humans vary to such a degree that such goals are futile. Our economy has suffered from decades of chronic and ultimately destructive inflation, manipulated booms and busts which usually involve the massive transfer of wealth, mainly from the middle class.
Now, the problem of course, is that the Keynesians have sought to do the same thing, to stabilize the economic processes into uniformity, but of course, that is, once again, an impossibility, especially with their favorite instrument: Fiat Money. History is completely against the success of Fiat Money, it has been shown to have an inherent terminal point in its life span, at which point it becomes insolvent and brings about total economic and social collapse. Anytime a government institutes a Fiat Monetary System it must create that money through the process of debt, there is no other way since each “dollar” consist as a Legal Notification of a Debt Obligation, or an IOU. The disadvantages of such a system become evident over time, primarily the debasement of the purchasing power of the money harms both individuals and the country at large. Such a system cannot be tolerated by the economy over a long period of time because they always, without exception, end in massive and destructive insolvency. The FED has created a non-neutral monetary system; it is highly biased, as all Fiat Systems are, toward those who are wealthy or politically connected.
Under such a system, the government must persist in creating and promoting deficits with the creation of bills of credit, otherwise known as Federal Reserve Notes. The problem, of course, is that these bills of credit have no backing behind them except for the “Full Faith of the United States Government”. Such systems always fail, sooner or later; Fiat Monetary Systems break down completely and at such disastrous results to the society that it takes decades to recover. Also, there are no examples of any society which implanted a Total Fiat System that when it collapsed, did not return to a sound monetary system for the simply reason that it is the only thing that is able to promote actual stability in such chaos.
To think that someone who adheres to either the positions of Ron Paul, or the School of Austrian Economics fear the growth of government through inflation ignores the obvious. The problem, as you and your family will eventually be party to, is that such a system always, without exception, fails. The consequences of such failure will be absolutely unimaginable in every aspect of the word unimaginable. In your article, I have not seen anything that you propose to support your own position, much less explain your opposition to the position taken by either Ron Paul or Walt, or any other adherent of the School of Austrian Economics.
It is very interesting to note that even those who have sought to expand central planning and a heavy centralized and consolidated government system over this country and others have recently expressed doubts, serious doubts that question the premise of an ever expanding government.
Here are a few examples:
A European Commission report acknowledged: “Budgetary consolidation has a positive impact on output in the medium run if it takes place in the form of expenditure retrenchment rather than tax increases.”
The IMF agreed: “This tax induced distortion in economic behavior results in a net efficiency loss to the whole economy, commonly referred to as the ‘excess burden of taxation,’ even if the government engages in exactly the same activities—and with the same degree of efficiency—as the private sector with the tax revenue so raised.”[8]
An article in the Journal of Monetary Economics found: “[T]here is substantial crowding out of private spending by government spending.…Permanent changes in government spending lead to a negative wealth effect.”
A study from the Federal Reserve Bank of Dallas also noted: “Growth in government stunts general economic growth. Increases in government spending or taxes lead to persistent decreases in the rate of job growth.”
An article in the European Journal of Political Economy found: “We find a tendency towards a more robust negative growth effect of large public expenditures.”
A study in Public Finance Review reported: “Higher total government expenditure, no matter how financed, is associated with a lower growth rate of real per capita gross state product.”
An article in the Quarterly Journal of Economics reported: “The ratio of real government consumption expenditure to real GDP had a negative association with growth and investment,” and “Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment.”
A study in the European Economic Review reported: “The estimated effects of GEXP [government expenditure variable] are also some what larger, implying that an increase in the expenditure ratio by 10 percent of GDP is associated with an annual growth rate that is 0.7–0.8 percentage points lower.”
A Public Choice study reported: “An increase in GTOT [total government spending] by 10 percentage points would decrease the growth rate of TFP [total factor productivity] by 0.92 percent [per annum]. A commensurate increase of GC [government consumption spending] would lower the TFP growth rate by 1.4 percent [per annum].”
An article in the Journal of Development Economics on the benefits of international capital flows found that government consumption of economic output was associated with slower growth, with coefficients ranging from 0.0602 to 0.0945 in four different regressions.
A Journal of Macroeconomics study discovered: “The coefficient of the additive terms of the government-size variable indicates that a 1% increase in government size decreases the rate of economic growth by 0.143%.”
A study in Public Choice reported: “A one per cent increase in government spending as a per cent of GDP (from, say, 30 to 31%) would raise the unemployment rate by approximately .36 of one percent (from, say, 8 to 8.36 percent).”
A study from the Journal of Monetary Economics stated: “We also find a strong negative effect of the growth of government consumption as a fraction of GDP. The coefficient of –0.32 is highly significant and, taken literally, it implies that a one standard deviation increase in government growth reduces average GDP growth by 0.39 percentage points.”
The Organization for Economic Co-operation and Development acknowledged: “Taxes and government expenditures affect growth both directly and indirectly through investment. An increase of about one percentage point in the tax pressure—e.g. two-thirds of what was observed over the past decade in the OECD sample— could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the over all reduction would be about 0.6–0.7 per cent.”
A National Bureau of Economic Research paper stated: “10 percent balanced bud get increase in government spending and taxation is predicted to reduce output growth by 1.4 percentage points per annum, a number comparable in magnitude to results from the one-sector theoretical models in King and Robello.”
Another National Bureau of Economic Research paper stated: “A reduction by one percentage point in the ratio of primary spending over GDP leads to an increase in investment by 0.16 percentage points of GDP on impact, and a cumulative increase by 0.50 after two years and 0.80 percentage points of GDP after five years. The effect is particularly strong when the spending cut falls on government wages: in response to a cut in the public wage bill by 1 percent of GDP, the figures above become 0.51, 1.83 and 2.77 per cent respectively.”
An IMF article confirmed: “Average growth for the preceding 5-year period…was higher in countries with small governments in both periods. The unemployment rate, the share of the shadow economy, and the number of registered patents suggest that small governments exhibit more regulatory efficiency and have less of an inhibiting effect on the functioning of labor markets, participation in the formal economy, and the innovativeness of the private sector.”
Looking at U.S. evidence from 1929–1986, an article in Public Choice estimated: “This analysis validates the classical supply-side paradigm and shows that maximum productivity growth occurs when government expenditures represent about 20% of GDP.”
An article in Economic Inquiry reported: “The optimal government size is 23 percent (+/–2 percent) for the average country. This number, however, masks important differences across regions: estimated optimal sizes range from 14 percent (+/–4 per cent) for the average OECD country to…16 percent (+/–6 percent) in North America.”
A Federal Reserve Bank of Cleveland study reported: “A simulation in which government expenditures increased permanents from 13.7 to 22.1 percent of GNP (as they did over the past four decades) led to a long-run decline in output of 2.1 percent. This number is a bench mark estimate of the effect on out put because of permanently higher government consumption.”
So, as you can see, the doubts are increasing and the facts are pretty clear that government growth is counterproductive not only economically, but socially as well. Only a suicidal society would continue such destructive paths, but then again perhaps this is exactly what the people of this country need to wake them to the dangers associated with an unaccountable, unresponsive government. The question, the real question is how you and I will feed ourselves when this Fiat Monetary System collapses, and it will because it is simply unsustainable over a long period of time. Each Fiat System has a very definite life span, usually abused Total Fiat Systems have an effective life span of between 25 to 40 years, at which point they exhaust themselves through insolvent debt reaching the terminal point of the system. Our current system is now 37 years old.
You may tout this failing system if you want to and place faith in it and the future of your family, but I would suggest you prepare yourself and your family.
Austrian Economics, as opposed to other schools of economic thought, is very connected to the empirical reality faced by real people on a daily basis. It takes into consideration the lives and actions of humans instead of relying completely on a large disconnected degree of the functions of differential equations, as well as other arcane mathematical functions such as Lagrange Multipliers and matrix algebra which seeks to explain the scope and basic definitions of matrices, their arithmetic and simple operations, and describe special matrices and their properties, including the analog of division. Such demonstrations as the linear dependence and independence, as well as rank, canonical forms, generalized inverses, eigen roots, and vectors give mathematical models, but rarely take into account the causes behind such models, without which the models are basically useless, except to the mathematician himself. Even the simplified use of matrix algebra in linear equations, regression, linear models, linear programming, and Markov chains do little to actually predict economic behavior. These advanced mathematical functions may look impressive however; they have nothing to do with economic reality that we see on a daily basis. They only point to mathematical actions and not economic actions, which always involve people, their needs, desires, fears and even their hopes. The economy is, after all, completely made up of human actions.
Such mathematical equations are less than useless in the understanding of economics or enhancing our understanding of the science of economics, they usually necessitate the description of a deceptive view and description of economic reality since they cannot completely describe the actions of billions of people making multi-trillions of millisecond decisions each and every day, not only decisions that affect their daily lives, but their future lives. Mathematical functions and equations are simply incapable of such predictive powers.
Now, if you really want to talk mathematical equations and how such equations have been used and substituted for real economic theory then I would be more than happy to oblige your request. While I find a rather limited use for econometrics, I try to avoid such pithy subjects for more common knowledge that tends to be far more useful.
Posted By: Christopher Espinal
Date: 2008-08-08 13:55:01
"Such mathematical equations are less than useless in the understanding of economics or enhancing our understanding of the science of economics, they usually necessitate the description of a deceptive view and description of economic reality since they cannot completely describe the actions of billions of people making multi-trillions of millisecond decisions each and every day, not only decisions that affect their daily lives, but their future lives. Mathematical functions and equations are simply incapable of such predictive powers."
Firstly: Perhaps, you should take a class in economics to understand why these mathematical models are useful. Secondly, the models DO have predictive powers, which is the reason why Austrian economics is not used, and the econometrics you speak of is used everyday in the mainstream world.
Austrian Economics consists of philosophical derivations of human action. However, human action has no empirical EVIDENCE to substantiate it's claims. Anyhow, it's not supposed to have evidence, which is why academics reject it's method. Economists who treat economics as a hard science have reason to reject the Austrian tradition: we have to know what is right and what is wrong - Austrian economics doesn't allow us to ask that question because it's not scientific or based on empirical judgement. In other ways, there is no way to discuss its predictive powers. In conclusion, Austrian economics is not a science and is not meant to be a science - which doesn't invalidate its usefulness. I will write on the idea of Austrian economics in another post.
Republicae, please leave questions to discuss. I don't have time to read through your treatise above.
Posted By: Walt Thiessen
Date: 2008-08-08 13:57:09
Chris--You really need to define what you mean by "nominal" and "real" variables. Without definitions, what you said is meaningless.
My understanding of the word "nominal" is that it relates to naming something. I don't really see what a "named" variable would have to do with anything, particularly Austrian theory, so it's vital that you define your terms. I also don't see any justification for describing the variables that neo-classical theory uses as "real." It strikes me that neoclassicists live in fantasyland where the Fed is concerned, so if you're going to call their variables "real" you'd better at least establish a foundation for that claim.
Seems to me you're engaging in semantics as a replacement for substance.
One more thing. Your headline said you were going to discuss Tyler Cowen. I don't know the guy, so I was interested to find out what you had to say about him. Unfortunately, you really didn't say much of anything. You just referred us to a website. Come on, Chris, you can do better than that!
Posted By: Christopher Espinal
Date: 2008-08-08 14:36:45
I answered your question by adding an additional piece at the bottom. Sorry that I didn't mention more about Tyler Cowen. The only important part to me is that he is a hybrid between your models and my models of economic thought.
It may surprise you just what classes I have “taken” on the subject of economics. Since, however, you are so pressed for time, perhaps I should keep this short.
Tell me just how such mathematical models actually predict economic reality? Can you do that? Give me a direct example, for instance, of how the focus of equilibrium, which is the first order condition of a Lagrange multiplier and is a partial derivative equaling zero expresses key elements in economic reality? Can you do that?
You said you wanted questions, well I have a multitude of them. Now, you state that economists don’t use Austrian Economics, that may well be true in certain closed economic thought, but it ignores factual information about how correct Praxeology has been over the years. I have yet to see an actual model posed by the various schools of economic thought that has helped the people of this country or the government understand economic reality, can you name one? I can name a number of models that propose such realities, but as of yet, I don’t see any that actually have made a difference in the way the official stance of government or even the FED deals with economic issues. Judging from the experts in the FED, it certainly appears that they have missed the proverbial boat on more than one occasion and yet, they cling to such arcane modeling equations. If the proof is in the pudding, then show me the proof. Show me the effects of such equations on actual economic matters that effect each American?
If the models are predictive then why on earth has the FED failed so miserably with its predictions over the decades if such predictive models are so accurate?
If economists are so right, then why are they so wrong when it comes to predicting economic movement and business cycles. I mean the government and the FED is full of such professional economists, yet they have been consistently wrong, so wrong that they then are forced to scramble to try to correct the problem, that, in most cases, their own policies created in the first place. I mean give me the evidence that they have a track record that can be remotely considered correct in both predictive powers and proper solutions.
The problem I see is that non-Austrian economists seem to have substituted realistic economic causal relations for mathematical functions that have, over the decades, proved flawed.
As I said, show me one model that has accurately predicted economic results, for instance, the FED cannot, or will not, even admit that we are in a recession. Of course, that is partially political in design.
Posted By: Christopher Espinal
Date: 2008-08-09 12:49:10
It seems that you haven't bothered looking amongst the hundreds of studies using neoclassical economic theory. There are many and perhaps you should do the research yourself. If there's a particular focus that I find interesting it's the models used to predict behavior in the housing market and government intervention. These studies, almost 90% of the time predict where people will "consume" their goods.
There are macroeconomic models that are less successful and microeconomic models that are more successful. The field of macroeconomics is premature, thus when you do the research you will see where these models fail and are successful. There are tons - you should probably look up the research yourself and determine for yourself whether or not the studies constitute good evidence. You will need a background in statistics and econometrics.
Mathematical models are used all the time by professional economists to determine various things like the elasticity of demand for tickets at a museum.
When you speak of the Fed economist failing at predicting information again you will need to understand that 1). there is a LAG in establishing monetary and fiscal policy - economists need to think out the best policy before enforcing the policy, 2) macroeconomics is a premature subject.
Monetarists, those macroeconomists of the Friedman School, admit that we know almost nothing of human activity, therefore - we should target interest rates, stabilize prices, and supply the proper quantity of dollars, rather than "stimulate" the economy.
You are mistaking monetarism with Keynesian economics. Monetarists are more realistic and understanding of our prematurity in macroeconomics.
Most microeconomists call macroeconomics a big pile of intellectual crap because it's heavily ideological.
The reason why I reject Austrian economics is because there's no way to determine if their ideas are true or false. They don't believe in scientific evidence - which makes it difficult to refute their ideas.
"Tell me just how such mathematical models actually predict economic reality? Can you do that? Give me a direct example, for instance, of how the focus of equilibrium, which is the first order condition of a Lagrange multiplier and is a partial derivative equaling zero expresses key elements in economic reality? Can you do that?"
You miss the point of treating human behavior as a hard mathematical science. The Lagrange multiplier and all that multivariable calculus is not meant to say that humans walk around with sheets of paper and calculate things. The way economists think is "people make decisions AS IF they were solving a Utility Maximization problem (UMP)." Thus, the process of solving the UMP does not consider the way people think, but what decision they will make. We care none about the decision making process (what they think, how they feel) but the effects of parameters on the final decisions of human beings - hence human behavior. Mathematical equations can predict the FINAL decision of humans - as shown in numerous studies utilizing this method.
For more information on this controversy - read Positive Economics by Milton Friedman.
One empirically successful example: when the price of something increases, assuming convex preferences, we can predict that the consumer in question will consume less. Another interesting situation: suppose that individuals with convex preferences in the housing market are given a subsidy by the government for a given tax bracket. Their constrained trade-off line (budget constraint) will now involve a kink after the subsidy. Neoclassical economics has OVER and OVER again, predicted that most people in this housing market will consume at that kink - which also represents the highest level of utility for the selection of consumers. This is why I find the housing market studies to be very interesting - simple and a direct demonstration of neoclassical economics at work. There are many, and you should look them up on your library electronic journal database.
Please let me know if I have answered your questions.
PS: If you want models that are scientific and take into questions the process of human decision making perhaps you should look into Behaviorial economics - which consists of excellent and interesting models that predict human behavior.
Ah… then why does neoclassical economic theory not apply subjectivism in a consistent manner when approaching its treatment of opportunity costs? If it cannot be consistent in the manner in which it views these cost how can its models be correct, or is it that its models are correct in the eyes of neoclassical economist?
Actions, consistent in purposeful behavior and preference are determinates and should, if accurate be predictive in given situations so if A is preferred over B and B is preferred over C or C is preferred over A by various subjects how can such things be predicted through equations? So, for any individual to act which always, without exception, involves choice and all choice in economic terms necessitates costs, given opportunity, that will form perceived benefits, in one way or another, to a person which is making a choice. Only the individual can understand which alternative may suit his needs and which would be more valuable at the time he acted to make a purchase, that is not quantifiable at all and the entire economy consists of hundreds of millions of individuals making such choices based upon individual distinctions.
While neo-classical economist tends to accept that there are distinctions they do so by treating such distinctions as though there are no differences in such distinctions. For example, revenues and expenses are not only quantifiable, but also objective in measured monetary units of exchange and as such they will be measured in a similar fashion by different individuals because they have a consistent measure however, the problem with neo-classical economics is that they don’t seem to make distinctions when it comes to benefits and actual cost opportunity which are not objective or quantifiable with common mathematical measure.
Take the analysis of positive externalities, more times than not, the neo-classical economist will refer to the market demand curve as a marginal private benefit curve. Now granted, average revenue can be measured quantitatively, but marginal private benefits cannot be measured in such a quantitative manner, it is simply mathematically impossible. Marginal private benefits within the economy make up a huge portion of its viability since consumers fuel approximately 70% or more of economic activity in this country. Neo-classical economists seem to misapply such variables in a way that cannot produce a predictive forecast since such things cannot be measured by any mathematical formula. Neo-classical economist continue with this strange line of analysis by adding “marginal social benefit” curve to the equations along with “marginal external benefit” and “marginal private benefit”, all of which they measure on a vertical axis. As you can, hopefully, see each of these benefits are not quantifiable as a mathematical measure, yet the Neo-classical economists use these as though they were. They then argue that a competitive market fails to produce an economically efficient quantity of output since the marginal private benefit from the last unit produced is lower than the marginal social benefit of that unit and so on and so forth.
While such analysis purports to measure benefits and costs to all participants in economic markets, it really only measures revenues and expenses to sellers and gives only an estimate of the marginal external benefit applying it to the whole of society made up of one person it would seem. The go on to measure theses benefits in monetary units without understanding that such benefits are not quantifiable in mathematical measures. Estimates of marginal social benefits for all of society, in their equations, are being made by one person limiting the scope of the analysis to individual actions but placing the results of such analysis on society as a whole. They also measure each benefit in monetary units and treat them as being objective, when, in fact they are very subjective. Only the individual can estimate a particular benefit to himself and since such subjective benefits cannot possibly be measured quantitatively they simply cannot be applied over all members of our economic society, yet that is how Neo-classical economist calculate such benefits in their equations.
Now although the information resulting in the comparison of revenues with expenses can aid in choices, the individual, despite such equations, will ultimately weight the potential benefits and costs associated with various courses of action and will do so differently in each case. The Neo-classical economist uses a very broad brush to paint a small picture. This approach always lacks consistency in their communications and this introduces inconsistencies in positive economic analysis, which will lead to poor policy recommendations on a governmental scale.
Let’s take the neo-classical theory of industrial organization, it maintains, at least from what I have read, that, for a company, the socially-optimal allocation of resources will occur when the price equals the marginal expense, yet the privately optimal allocation of resources occurs when the marginal revenue equals the marginal expense for the company in example. Now, according to their model, because a company’s demand curve slopes down, the marginal revenue is less than price, thus the divergence between MR and P is said to give rise to a potential monopoly issue. [(P=ME)(MR=ME)(MR
So, to illustrate this lets compare neo-classical analysis with subjective analysis:
For simplicity sake lets said that Q=Quantity of product units and W = units sold, therefore P (Q)= will equal the price per unit W as a function of Q as an inverse demand function. E (Q)=the neo-classical total expense, both explicit and implicit, having Q units of W for sale.
Therefore: Z=[P(Q)*Q]-E(Q)=equals profits and profit maximization requiring that: dZ/dQ=0, where: dZ/dQ=P+(Q*dP/dQ)-dE/dQ=); and, of course, d2Z/dQ2<0.
Now, since you are up on your neo-classical theory, give me how the “first order condition” may be written in the above equations? Both in the Neo-Classical way and in the Subjectivist way…can you do that?
Okay, so not to give it away, I will continue by saying that neo-classical theory maintains that downward sloping demand curves are the cause of market failure, and since all demand curves slop downward it maintains that market failure is ubiquitous. The interesting thing is that these failures are all of the same type in neoclassical theory: in each case study unregulated companies use less than the socially optimal quantity of resources to produce less than the socially-optimal quantity of goods; these companies pay less than socially-optimal prices for the resources and receive greater than the socially-optimal prices for the goods in question. You notice the use of socially-optimal, in the context of use it implies that, according to the neo-classical economists there is a point where it is not only acceptable, but advisable that there be government intervention into the markets, which, in my estimation has been a great deal of the problem since the 1920s and 30s. Neo-classical is simply a branch of socialist thinking where reliance on the State is advanced over the free-market.
Next, there is also an inconsistency in the neo-classical theory of negative externalities, as they exist when an action is taken that adversely impacts a third party. Real world economics, unlike theory, the negative externalities are pervasive within the market whereas in neoclassical theory treats such negative externalities simply as external expenses, therefore at margin, as marginal external expenses, this causes a company’s marginal social expenses to diverge from marginal private expenses. Subjectivist theory, on the other hand maintains that such negative impacts on third parties are not costs in the economic sense, thus they are not opportunity costs; therefore there are no MEE(MEE=0) to create a divergence between private and social expenses which means that there would be no divergence between profit maximization and any possible social optimal because of negative externalities or MSE=MPE.
So, in the neoclassical theory you have P=MPE for profit maximization and P=NCMSE=MPE + MEE as the social optimal, but in the Subjectivist theory you would have P=MPE that would relate to the social optimal as P=SMSE=MPE + 0. It appears therefore, that neoclassical theory acknowledges that cost are subjective, yet it treats negative effects on third parties as expenses, which is necessarily objective concept of costs. Thus, it almost has the effect making the neoclassical analyst himself some sort of objective, a third party observer who has the power to determine the negative effects that should be taken into account by the acting third party even though such negative effects do not affect him.
Now onto your other points, since you didn’t answer any of my questions you requested me ask, I can only assume that you didn’t have an answer therefore you resorted to ambiguous relative points as is evidenced by your reply.
Skipping over macroeconomic models, let’s move on to the FED, one of my favorite subjects of research. The FED, in all its propositions of stabilization over the years also has proven that it is absent-minded in its actions and responses. Granted there are Lagging Indicators within the economy that effect the establishment of monetary and fiscal policy however, such Lagging Indicators do not preclude the known elements within economic choices, even if those choices are the FED’s. If you view each and every business cycle since the 1920s you will readily see that the FED, and their economists, have used basically the same methods reacting to the same problems time and time again. The problem is that their policies are drudgingly repetitious following a very prescribed path, in reality they have no need for economists at all, because each business cycle runs similar courses with every single economic trough preceded by a high, boom to bust economics rule the Federal Reserve and the reason for that is the system is completely based upon a fiat monetary system that requires a particularly narrow balance of effects. Each one is predictive without mathematical equations, all you have to do is review the history of each boom and bust cycle since the Great Depression. The policies of the FED are completely predictable. I have made a fortune on the constancy and predictability of the FED and its policies. The problem this time is that the FED and its policies, along with the unsustainable fiat monetary system has ventured into uncharted waters, much deeper then they seem to realize. They assume that the foundation of the economy, the fiat monetary system, is stable when in fact it is inherently unstable and like all fiat monetary systems it has an inherent terminal life span.
Believe me, I am not mistaking monetarism with Keynesian economics, my thesis was on the Grand Neoclassical Synthesis of the Keynesian General Theory, so I might, just might have an idea about the differences between the two. Now, if you want to discuss Walrasian, Neo-Walrasian or Marshallian economics I can do that too. Now, beyond the surface similarity of monetary non-neutrality there are very significant differences between Austrian and Monetarists business cycle theory. The differences diverge in the use of macroeconomic aggregates and different concepts about the monetary mechanisms conclude different implications about things like relative price changes and their causes, also about the various types of unemployment and its effect on economic sectors. The Monetarist contends that the economy will return to its original equilibrium structure and rely upon long-run changes in macroeconomic aggregates, especially in the consideration of real cash balances, investment, employment, income, price levels and non-cash assets. In the Phillips Curve, the analysis tends to focus on a relation between aggregates for price level and unemployment ; in the recession phase of a business cycle it characterized by cyclical unemployment as a response to a general rise in real wage earnings, thus this focus on macroeconomic aggregates occur within a temporary adjustment toward, as they see it, a long-run equilibrium. Austrian economics do not consider these as meaningful concepts since they do not consider relative changes among the components of the aggregates. Overall unemployment in a recession phase of the Austrian business cycle theory is not in relation within the aggregates, but is essentially fictional and otherwise structural in response to changes in the relative yields of capital types in the economy. As Mises put it: the inappropriate investment during the expansion phase of the cycle forever changes the distribution of wealth and income, so that the original equilibrium cannot be reestablished, in other words once these non-neutralities occur within the aggregates there is a much longer lasting effect than the Monetarist conclude because they believe that economic equilibrium will return to normal even though so many variables are effected in the expansion phase as it is adjusted by the recession phase of the cycle.
In comparison, it appears that both Keynesians and Monetarists believe that fiscal and monetary policy affect aggregate demand. While most Keynesians believe and advocate government stabilization policy they tend to veer away from the Monetarist at this point concerning the efficacy of such stabilization polices. In this the Keynesians resemble the Neo-classical school rather than the Monetarist school. Keynesians have always held the belief that proactive and aggressive government action to stabilize the economy is based on value judgments which hold that macroeconomic fluctuations significantly reduce economic health and that the government is knowledgeable enough and capable enough to improve upon the free market, they also seem to believe that unemployment is a more important problem than inflation, of course they would since Keynes himself was a heavy advocate of a total fiat currency.
Now, concerning your rejection of Austrian theory, have you actually read say Human Action, or the Theory of Money and Credit, The Causes of Economic Crisis or Epistemological Problems of Economics by Mises? Have you read, for instance, Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto, which is a bit to chew I grant you, but well worth it when you finish. Some others are Banking and the Business Cycle by C.A. Phillps, McManus and Nelson.
Now, I haven’t missed the point concerning human action and how it directly and indirectly effects the economic character of our society. My contention is that it is impossible to use equations to formulate human action or final decisions by such so-called predictive equations, for if that were possible then economists would be the wealthiest people on earth since such predictive powers would give them insight into economic movements prior to those movements actuating in economic reality.
An interesting study is the comparison between Neoclassical theory and Marxist theory, there are some interesting similarities…
Okay, on that note I will close, its time for bed.
Posted By: Christopher Espinal
Date: 2008-08-10 10:41:22
You write a hell of a lot.
"Therefore: Z=[P(Q)*Q]-E(Q)=equals profits and profit maximization requiring that: dZ/dQ=0, where: dZ/dQ=P+(Q*dP/dQ)-dE/dQ=); and, of course, d2Z/dQ2<0.
Now, since you are up on your neo-classical theory, give me how the “first order condition” may be written in the above equations? Both in the Neo-Classical way and in the Subjectivist way…can you do that?"
Are you challenging me to a math competition sir or are we discussing the foundations? Apparently, you think I don't know my stuff.
Posted By: Christopher Espinal
Date: 2008-08-10 10:58:59
"Now onto your other points, since you didn’t answer any of my questions you requested me ask, I can only assume that you didn’t have an answer therefore you resorted to ambiguous relative points as is evidenced by your reply."
Where have I not answered your questions?
You asked me over and over to discuss the predictive powers of neoclassical theory. I said, look for the studies that show its successes. I don't have time like you do to write three page responses and pull out good research. You can easily do that.
Your questions weren't all that clear. You ask: Show me the effects of such equations on actual economic matters that effect each American?
What the hell does that even mean. Are you talking about monetary policy or are you talking about microeconomics? The research where economists can predict actions are everywhere. Do the research yourself; I even ask you to look at the most simple sorts of research: the housing market with government subsidies.
If the models are predictive then why on earth has the FED failed so miserably with its predictions over the decades if such predictive models are so accurate?
You are asking me questions as if I do my own research. To respond to this I said explicity: macroeconomics is a premature topic therefore models used in the macrosense do not have the predictive powers of those models used in microeconomics. Do the research yourself. If you look up the PIH's predictive powers 6 out of 10 times you will see successes in predictions - 4/10 failures. That's not a good mark, or at least relative to microeconomic theory. There are numerous studies on this instance, as there are for other models. Search for these things on your own time.
If economists are so right, then why are they so wrong when it comes to predicting economic movement and business cycles.
Same answer as above. Macroeconomics is premature as a science. Never have I said they are so right. I follow their models because in terms of empirical evidence they are the best models available to us THUS FAR. They aren't the final answers.
If you read basic economics texts they will tell you the difference between Social optimality and Market optimality. They aren't the same - but yes market failures do exist. Sometimes markets can't live up to situations like Global warming. GW is not a topic I am well versed in but private enterprise will not in the short run live up to the responsibility.
"The problem I see is that non-Austrian economists seem to have substituted realistic economic causal relations for mathematical functions that have, over the decades, proved flawed."
Flawed yes. But the best we've got for empirical analysis: hell yes. Austrian economics doesn't even live up to empirical evidence which is the reason why you are so hardpressing on neoclassical economics. There's nothing we can disprove about Austrian economics - because there's no EVIDENCE that AE has to live up to.
So yes I have answered your questions. You just choose not to sit and understand them - and call them "relative points." You are asking me to put in hours of work by doing research you should be doing. I'm guessing only a person who has the time to write 20,000 word responses has the time to sit and research the evidence.
It appears that it is not me who must concern himself with his blood-pressure. In your original article you used Quantitative Equations to prove a point, or at the very least to embellish your article. I was just following your lead, while, as you requested questions of me. I asked those questions and yet, while you maintain you provided adequate answers, actually you did not, but only evaded those questions with generalities to support a position that you support. As far as challenging you, no, I was, once again simply complying with your request: I asked a question, to which you have yet to provide an answer. The answer, by the way, provides counter distinction between the two schools of economic theory, and does so in a way that also provides an answer to the predictive powers of neoclassical theory. However, since you are unwilling to answer that equation which simply asked for the “first order condition” of each equation as presented by the two schools.
I have done the research, I have read both studies and commentary, along with the thesis of various economist, even neoclassical economist like Caplan, so it didn’t, in the least surprise me that you would use his “criticism of Austrian Economics” however, I could go into exactly where Mr. Caplan totally missed the boat in his criticism. In fact, I have also read the debates between Caplan and Hülsmann, and then his criticism of Walter Block, also when Caplan appeared in the Southern Economic Journal back in 1999 and in the Quarterly Journal of Austrian Economics. The interesting thing is those quid pro quo debates, if you can call them that, is that while the QJAE was open-minded enough to include Mr. Caplan’s work in the journal, the SEJ refused equal publication of both Hülsmann and Block. It would appear that they, like many, are just not prepared to air opinions and research contrary to their own views. Interesting, don’t you think?
Now, if you want to read a comparable critique of Austrian Economics, then I would suggest the 1977 work by Nozick for a much more informed critique of the school. Nothing however, in Caplan, either in his 1999 critique or his 2002 critique persuaded me to change my position, it only served to strenghen the position of Austrian Economics for me, disappointing I know.
Similar to Caplan’s criticism, your own appears to attempt to down play Austrian Economics while never directly confronting the issues of contention you have with the school. Caplan, in a manner similar to your own, criticized the Austrian concept of the synthetic a priori, yet his criticism didn’t dissect the concept in any meaningful way. There was also a particularly condescending tone to Caplan’s analysis of Austrian Economics in that he used this phrase more than once: “about how little people are able to know”. Such comments detract fro the validity of the debate, in my opinion. However, along that line of thought, the debate shouldn’t be if Austrian Economist claim that people “know” their needs, requirements and desires, but that the focus should be on certainty or the probability of an analysis upon which this knowledge is held.
In 1953, Friedman claimed that if two practitioners of apodictic discourse disagree, since they have no empirical experiments to help the determine who is right, they can only fight, or at best fail to come to any conclusion. But this is precisely the same position occupied by two mathematicians who disagree with one another, or two different theorists of geometry. Needless to say, no such conclusions apply in either of those cases, nor would anyone assert they would. Why then, only for Praxeology? I think that is a very valid question, don’t you?
Caplan attempts to overturn logical necessary of a synthetic a priori, but all the “probability” spoken by Caplan cannot overturn it indirectly as he has attempted to do, it must be done directly or not at all. We do, after all learn posteriori through experience, do we not? In terms of a priori, especially when dealing with synthetic verses analytic, we must learn it through understanding. Caplan seems to be overly concerned with a “realism” or at least agreement with physical reality without confronting the Austrian concept that both understanding and experience, direct or indirect, are necessary to come to an accurate conclusion.
Now, while the Austrians accept such insights as reflections of a reality which is the basis of economic science, the Vienna School, or logical positivists, the progenitor of neoclassical economics do not. However, in the view of the neoclassical economist, such as Caplan, hold, as he said “a claim either applies to the real world, in which case it is at least in principle falsifiable on the basis of evidence, or if it is not falsifiable on the basis of evidence, then it cannot be applicable to the real world.” At the very least, such a perspective is internally self contradictory.
As you can see, I have researched both sides of the coin, still I find that the Austrian School provides the most workable system of economic theory, especially when it concerning monetary theorem. Now concerning my “pressing against neoclassical economics”, I would assume you would agree that my pressing was no different than your own against Austrian Economics.
Posted By: Christopher Espinal
Date: 2008-08-10 20:14:07
Never have I supported Caplan's ideas about the Austrian School, I just thought it was an article of interest. Sorry to not have clarified my position.
If you actually did the research then you would realize that you are wrong and that yes, Neoclassical economics has great predictive ability. The MICROECONOMICS studies prove that. Maybe not so much the macroeconomic literature.
"It appears that it is not me who must concern himself with his blood-pressure. In your original article you used Quantitative Equations to prove a point, or at the very least to embellish your article. I was just following your lead, while, as you requested questions of me. I asked those questions and yet, while you maintain you provided adequate answers, actually you did not, but only evaded those questions with generalities to support a position that you support. As far as challenging you, no, I was, once again simply complying with your request: I asked a question, to which you have yet to provide an answer. The answer, by the way, provides counter distinction between the two schools of economic theory, and does so in a way that also provides an answer to the predictive powers of neoclassical theory. However, since you are unwilling to answer that equation which simply asked for the “first order condition” of each equation as presented by the two schools."
Firstly, what questions have I not answered? I went question by question. You are asking questions that would require work that I don't want to do, that you can do yourself. I think I have adequately demonstrated my knowledge of neoclassical economics. You seem to question my mathematical abilities, as if partial derivatives are a part of our debate. They never were, and it's ridiculous of you to ask me to take the FOC of some Utility function when we are discussing the methodology.
Quit lying about all the "studies" you have read. If you actually read them then you would see that neoclassical economics is not a bunch of junk. It's actually useful. If you have read them, then why the hell do you keep challenging me? To see if I can back up what I'm saying, perhaps. I would have to go back several years of studying and reading to prove things that I don't want to prove if we both understand them.
Your questions are ridiculous: such as show which equations can explain this and that on americans and asking for specifics that are improbable - because one, to me, an ameteur and student, it is unclear what the DIRECT effects are in MACRO policy, and two there's a lag to the effects of policy, and three macro is a premature subject. Of course we don't know everything about what will and will not work. There's a lot friction in policy and you know that.
You seem to be testing me rather with those kinds of questions rather than sticking to the initial concern, is neoclassical economics useful.
I used the equation to show a very simple point. MV=PY is a supply and demand model for the quantity of money, and I wanted to show people how Monetarists arive at their decision for Fed policy. Plain and simple, and not too complex. No calculus involved.
"Similar to Caplan’s criticism, your own appears to attempt to down play Austrian Economics while never directly confronting the issues of contention you have with the school."
Seriously, have I ever critiqued Austrian theory by looking at these things point by point. NOPE. In matter of fact I've read very little literature on AE. Of Human Action that I have read, I don't like the methodology of the Austrian thinking. You can't prove if they are right or wrong because there's no empirical evidence, sir. I can't wholly reject AE but I do know it's far to subjective to consider as FACT as opposed to OPINION. I want to know the facts as opposed to what people FEEL is correct. That's a simple and fine critique on the most important fundamental of ANY school of thought: the methodology.
If you have never supported Caplan’s ideas then why use him as an example of a better criticism of the Austrian School, which defies logic. Particularly if your position is to castigate the school in the first place, that counterintuitive, would you not agree? I mean if you propose a position then use certain proofs to support your position it would be logical that the proofs you use would be one that you support. So, what is it?
The question concerning the predictive ability of neoclassical economics is what do they explain? You loudly exclaim that I am wrong, yet you have yet to provide any sound argument supporting your opinion, you have just continued to repeat that it is predictive, yet your argument has been weak to say the least, following no logical construct supporting the argument, as yet.
Neoclassical Economist rely upon a system that was rooted in the deductivist method, thus through this method, it seeks to explain by deducing or predicting a particular statement about a particular occurrence from a set of conditions, axioms and assumptions. So they base these predictions or deductions upon a form of constant conjunction that drives their inferential mechanics. In other words, ultimately their predictions are based upon closed systems, but in the real world there are virtually no closed systems in the socio-economic world, there are simply too many variables to provide an adequate deduction. Certainly their equations can show certain mathematical results, any formula can achieve that feat, but to be predictive of real world systems is an impossibility since there are very few systems in the real world which operate spontaneously in a closed system, they simply do not occur at a rate that can provide a systematic conclusion. Neoclassical Economist, therefore, using deductivism, must engineer artificially closed systems through the use of known falsehoods. Hodgson said it effectively reduces neoclassical economics to the “economics to nowhere”, thus the presence of known falsehoods removes all explanatory power for the theory presented by neoclassical economics.
If you look at the closed system theory of labor demand. Now the law of labor demand states that the quantity of labor demanded varies indirectly with real wages. To understand that you would need to study what is known as Humean Law. For a perfect example of this all you need to do is look at the four assumptions known as the Marshall-Hicks conditions to see that these conditions are based such artificially constructed assumptions so that the demand for labor is alleged to be more elastic if these assumptions are met however, if you look at the Marshall-Hicks conditions you will readily recognize that they close the system itself and without them there would be absolutely no constant conjunction between the changes in labor demand and the changes in real world wages. Marshall-Hicks therefore, introduce known falsehoods, or fictions into the theory and the ability to have constant conjunctions is shut, the predictive powers of such observations therefore provide conclusions based upon such closed conditions.
Because neoclassical economics are forced by their theory to use closed systems the conclusions they arrive at are inconsistent with real world results. Their predictive powers therefore, are based solely upon conclusions that included an inherently flawed methodology.
“Two counter-arguments are commonly deployed to legitimize the use of known falsehoods. The first runs as follows: ‘all theory has to leave out the inessential, has to abstract from reality, has to make unrealistic assumptions, so all theory is inevitably false in the strict sense of the word’. Now whilst abstraction is legitimate, the process is complex and cannot be elaborated upon here (c.f. Sayer 1998). I defend my claim with the following observation. Theories like that of labor demand are replete with such obvious falsehoods that to suggest they are really (legitimate) abstractions is merely a rhetorical ploy to avoid methodological discussion. In any case, as noted above most neoclassical economists admit to knowingly using falsehoods. The second counter-argument invokes the ‘method of successive approximation’ (Sweezy 1968; 11) or the ‘method of isolation’ (Maki 1992, but see Pratten 1999), and runs as follows. ‘The initial stages of theorisation use known falsehoods. Explanatory power is added in stages as realistic assumptions are successively substituted for false ones’.
There are two objections to this.
The method of successive approximation or isolation might be appropriate when the successive analytical steps merely involve the mechanical addition of factors that were previously assumed away. This mechanical addition is, however, not appropriate for systems where the elements possess emergent properties. When, for example new technology is introduced to a workplace or a new management regime is installed, its behavior often evolves, giving rise to properties that were not present before. Many theoretical propositions derived on the basis of pre-emergent properties provide no grounds for the analysis of post-emergent forms of behavior.
Theory is still reliant on closed systems. All that has happened is that one closed system has been added to another (slightly larger) closed system. A succession of closed systems does not, however, add up to an open system. Consider the following example:
· Closed system1 assumes demand for labor is determined solely by wages.
· Closed system1 generates the deduction/prediction1 that the introduction of a minimum wage will cause a fall in labor demand.
· Closed system2 now allows labor demand to be determined by wages and (say) aggregate demand.
· System2 is, however, still a closed system: it just contains more variables. Many of the previous (false) assumptions remain in place and, new (false) ones are added to ensure closure in this more complex system. Falsehood is then piled upon falsehood – and the dream of one day removing all false assumptions evaporates.
The method of successive approximations, or successive closures might, therefore, be more accurately termed the ‘method of successive falsehoods’ or the ‘method of successive closed systems’. In short, the counter-arguments do not evade the critical realist critique.” Fleetwood, S. (1999)
Read Fleetwood S. (1999a) ‘The Inadequacy of Neoclassical Theories of Trade Unions, Labor Vol.13, No.2, pp 445-80., Critical Realism in Economics: Development and Debate, (1999) Routledge.
As you said my questions require work and that is something you are not prepared to do, then why continue the debate or what was the reason for submitting your article in the first place if you had no intention on providing supporting rebuttal?
As far as your knowledge of neoclassical economics, you have yet to provide any evidence of that knowledge, only advocating your support of the system without the presentation of supporting proofs. As the author of the original article it would be assumed that you were prepared to defend your position, you have not, as I have said, you have only continued to express your support for a system without providing the compelling points that cause you to support such opinion. You have not provided us with anything other than stating I am wrong and you are right, that is simply not an adequate form of rebuttal of any issue we have sought to discuss here. I have provided you with numerous examples giving you an opportunity to provide a sound and logical rebuttal, you have failed, time and again, to do that.
You then go on to call me a liar; please to stoop to such base levels of contrivance only reduces your ability to convince me that you have the knowledge you purport to have. You have yet to show the usefulness of neoclassical theory or the predictive powers of such theory. As Hodgson said, neoclassical economic is economics to nowhere, I agree with him. The question should be, since you initiated the original propositions in your article, what provides the reader of your article with any substantial proofs of your position, if you don’t provide that in the original article then should you not expect the readers to delve into the subject you submitted in depth to either concur with your original article or to rebut it, if you are not prepared to take such steps then perhaps you should not submit such articles in the first place. It is, after all, your responsibility to defend your position when you place it in the public domain.
This is a piece from the magazine Scientific American:
“The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated…
The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.
Strangely enough, the origins of neoclassical economics in mid-19th century physics were forgotten. Subsequent generations of mainstream economists accepted the claim that this theory is scientific. These curious developments explain why the mathematical theories used by mainstream economists are predicated on the following unscientific assumptions: he market system is a closed circular flow between production and consumption, with no inlets or outlets.
Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.”
Also, and interesting study is that of 1995 Nobel Winner Robert Lucus, he debunked both macroeconomics and states that the neoclassical and classical schools of economic thought are based on untestable ideas and theory.
A great book on the subject is Market Econmics and Natural Laws by C.Rene Dominique: "The forefathers of neoclassical or conventional economics, beginning with Walras, wanted to build a psycho-mathematical science similar to
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