What is Thymology?

One sees the word thrown around a lot.

I found how Mises defines it in Theory and History, Chapter 12, as “the knowledge of human valuations and volitions.” In simple language, “What were they thinking?”
So that we have Praxeology, the study of what people do given that they have a certain goal, and Thymology, the study of why do they have that goal.

Here are the two studies at work, talking about the future.
Smith goes into a room. It is a dark room. We know somehow that his goal is to have a well lit room.
Praxeology tells us that, ceteris parebis, he will flick the light switch.
Thymology tells us why he wants a well lit room. This is clearly a much more difficult question to answer.

Here they are again, this time talking about the same event in the past.
Smith went into a room. It was a dark room. We know somehow that his goal is to have a well lit room. He flicked the light switch and behold, the room was lit. He then sat down and read a book.
Praxeology tells us that he flicked the light switch because it was the easiest way he knew of to get what he wanted, a well lit room.
Thymology tells us why he wanted a well lit room, because he wanted to read the book.

Is thymology of the past always that easy? Not at all. Who knows what people were thinking? Mises writes:

Thymology is on the one hand an offshoot of intro-
spection and on the other a precipitate of historical ex-
perience. It is what everybody learns from intercourse
with his fellows. It is what a man knows about the way
in which people value different conditions, about their
wishes and desires and their plans to realize these
wishes and desires. It is the knowledge of the social
environment in which a man lives and acts or, with
historians, of a foreign milieu about which he has
learned by studying special sources. If an epistemolo-
gist states that history has to be based on such knowl-
edge as thymology, he simply expresses a truism.

In other words, you learn what the other fellow was thinking in two ways.
First, by introspection.
You see Jones standing taller when a girl enters the room. Why did he do that? What was he thinking? By introspection, you realize that if a girl you wanted to impress entered a room, you would stand taller. So you understand that is why Jones did it, too.

Second, by experience. If you are Mr Spock the Martian, you would never stand taller to impress some Earthling, a species you consider inferior and repulsive. But you have been around Earthlings long enough to have seen them do it many times, and they have taken you into their confidence and told you why. So the next time it happens, you understand that’s why Scotty is doing it now.

That’s what Mises meant by thymology. However, in recent times, the word is being used for yet another branch of study, predictive economics of the real world. Say Peter Schiff, by a mixture of his knowledge of Austrian Economics, his experience in the world of finance, and intuition and creativity, predicts that there will be a crash in the housing market. Such a prediction is not exactly pure praxeology, and there is no convenient word yet coined to describe it. So some people have started calling what he did thymology, for want of a better word.

Here is Walter Block, for example:
…allow me a few methodological, philosophical words. Austrian economists, qua Austrian economists, or praxeologists, do not predict. Period. In what sense, then, am I putting together this list of Austrians who have predicted the housing bubble? It is in the sense that they predicted this phenomenon not as formal economists, or praxeologists, but, rather, in their role as thymologists, or economic historians; see on this here.

I disagree with both his assertions. Of course praxeologists predict. That is the whole purpose of praxeology. Here’s Mises in Theory and History:

Economics deals with a regularity in the concatena-
tion and sequence of phenomena that is valid in the
whole field of human action. It can therefore contribute
to the elucidation of future events; it can predict within
the limits drawn to praxeological prediction….

Praxeology, the a priori science of human action,
and, more specifically, its up to now best-developed
part, economics, provides in its field a consummate in-
terpretation of past events recorded and a consummate
anticipation of the effects to be expected from future
actions of a definite kind….

I also disagree with the esteemed Prof Block calling a predictor of future
events a “historian”. History is the past, not the future.

Maybe Prof Block thought that since Mises wrote in Chapter 14 of Theory and History that we need thymology to predict the future, that thymology is the prediction of the future.
No. We need heat to bake a cake, but heat is not a cake.
Here’s Mises on the subject:

First he talks about thymological experience:
Thymological experience is what we know about hu-
man value judgments, the actions determined by them,
and the responses these actions arouse in other people.
As has been said, this experience stems either from in-
trospection or from intercourse with other men, from
our acting in various interhuman relations.

Like all experience, thymological experience too is
necessarily knowledge of things that happened in the
past…Thymology is a historical discipline.

Then he says:
For lack of any better tool, we must take recourse to
thymology if we want to anticipate other people’s fu-
ture attitudes and actions. Out of our general thymo-
logical experience, acquired either directly from observ-
ing our fellow men and transacting business with them
or indirectly from reading and from hearsay, as well as
out of our special experience acquired in previous con-
tacts with the individuals or groups concerned, we try
to form an opinion about their future conduct.

Clearly, he is not saying that thymology is prediction. Thymology is an understanding of the past.
But we have to use thymology, use our understanding of the past, to help us predict the future.
Just like an oven is not a cake, but we must use the oven to bake a cake.

But hey, language is what people decide it is.
A word means what people use it to mean.
When Mises used it, it meant an understanding of motives.
Block started using it to mean as well the use of that understanding to predict the future.
If that use catches on, and it looks like it has to some extent, then that it what the word means today.

A Fantastic Twelve Months For Bitcoin.

This one is really amusing. Over at the Mises.org blog, they quote one Charlotte Bowyer, who is really excited about bitcoin, especially in the last twelve months:

In many ways the last 12 months have been incredible for Bitcoin. It’s gone from an underground obsession to a mainstream curiosity and the darling of the FinTech world. Huge companies such as Overstock and IBM now accept payment in it, and the currency is on track to attract more VC funding in 2014 than the Internet did in 1995.

This is like the doctor telling the patient “These last twelve months have been fantastic for you. You have lost a lot of weight, are no longer obese, I mean it’s time to celebrate.”

“What about my terminal cancer, Doc?”

“Oh, it’s gotten worse. But that’s nothing.”

Here’s the bitcoin chart for the last twelve months:

Bitcoin Dying These Last Twelve Months.

And last week? Hoo wee, was it fantastic:

Bitcoin’s price rallied significantly after a long period of decline following the PayPal announcement.

She wrote that today. The Paypal announcement was on Sep 23. Let’s feast our eyes on the significant rally from Tuesday till now:

Bitcoin Last Week

With rallies like these, who needs panics?

Peter Klein, who should know better, quotes her about bitcoin theory:

For instance, Bitcoin is much more than the new PayPal, for it’s simultaneously both a currency and a payment processor.

“Jabba, They say you are the new LeBron James of basketball.”
“Oh, I am much more than the new LeBron. You see, I’m confined to a wheelchair.”

The fact that it’s both a currency [haha] and whatever is the tragic flaw than means bitcoin’s doom, as Timothy Terrel prophetically recognized in 2001, many years before there even was a bitcoin.

For the real scoop on bitcoin, with quotes from Mises backing up every word of Terrell’s article, and so much more, mosey over to http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

Human Action, Chapter 19, First Paragraph, Smiling Dave Style.

Devil’s Advocate: So you started skipping around, hey? You have written about the Intro and a bit of Chapter 1, and now we’re jumping to Chapter 19?

Smiling Dave: Devil, we’re going for the jugular. Chapters 19 and 20 are the hardest ones, so we’re tackling them. Without further ado, here’s Mises, Chapter 19, section 1:

Mises: Thank you Dave.

1. The Phenomenon of Interest
It has been shown that time preference is a category
inherent in every human action.
Time preference manifests itself in the phenomenon of originary interest,
i.e., the discount of future goods as against present goods.

DA: Plenty of big words here. What does it all mean?

SD: We begin with Category, a word Mises picked up from reading Kant. Let’s ask Bertrand Russell what it means.

Russell: What, exactly, is meant by the word “category,” whether in Aristotle or in Kant and Hegel, I must confess that I have never been able to understand. I do not myself believe that the term “category” is in any way useful in philosophy, as representing any clear idea.

SD: Elsewhere, Russell talks about “those …general concepts which Kant calls ‘categories.'” So we are going to go with category meaning “concept”, and leave it at that.

DA: So we are talking about the concept of originary interest. And what is that, pray tell?

SD: Interest is a very deep subject, that has confused many since the beginning of time. The latest stumbler was Keynes, who went along with the hoary viewpoint that interest is an unfair, parasitic exploitation that the rich man does to the poor man. He spent his life scheming for ways to force the interest rate be zero forever. In this classical exposition, Mises is going to explain that interest is composed of many layers. Not all layers exist in every situation. But the most basic layer, the interest that is charged in every loan, is what he calls originary interest.

DA: But what about if Smith gives his pal Jones an interest free loan?

SD: Then besides the loan, Smith is also giving Jones charity, waiving the interest.

DA: Some people say the Old Testament agreed with Keynes, because it forbade interest.

SD: Not so, certainly not according to ancient Jewish tradition. The Talmud explains that interest is not theft or extortion, and indeed if someone pays an interest fee he cannot go to court and sue for his money back, as would be the case if his money was stolen or extorted. Also, the Old Testament allows lending Gentiles at interest, although it never allows stealing from anyone.

DA: So why does the Old Testament forbid taking interest?

SD: The Old Testament is full of various forms of charity one is supposed to give. For example when harvesting ones field, one is supposed to leave the corners of the field untouched for the poor to come and take for themselves. The prohibition on interest is actually a form of charity, not binding on non Jews at all.

It is odd that Keynes latched on that one charity. He was not a generous man. I mean, you don’t see Keynes running around insisting that farmers leave the corners of their fields untouched for the poor to take.

DA: But I thought interest is something Smith demands of Jones if Jones wants to borrow his money. What does Mises mean that interest is a concept inherent in every human action. When I make coffee in the morning, where’s the interest?

SD: Would you rather have your coffee sooner than later?

DA: I sure would. Ideally, the stuff would be ready and piping hot the moment I awoke, instead of me having to stumble around setting it up and waiting for the water to boil.

SD: That means you have a time preference. You would rather have the coffee right now than have to wait for it.

DA: Are you kidding? I’d even pay someone a small amount to get up early and make the coffee for me, that’s how intense my time preference is for that coffee.

SD: Mises is saying that time preference happens with everything people do. They always want what they want right now, if possible. Not later.

DA: And if they are willing to pay to have it right away, that’s interest?

SD: Not quite. Interest is the other side of the coin. It’s what you have to pay someone to relinquish his time preference.

For example, say you are waiting in line at Starbucks, dying for coffee. There is some battle ax of a woman ahead of you in line. You know from experience that she takes her sweet time reading the menu, gossiping with the barista, and in general torturing you as you are Jonesing for your coffee. So you want to cut ahead of her in line. You cannot appeal to her better nature, because she doesn’t have one. So you offer her some money for her to waive her place in line, in other words her right to get the coffee sooner, and give that right to you. According to Mises, you are paying her interest.

DA: So when Smith borrows money from Jones for a year, he is paying say 5% interest to compensate Jones for cutting ahead of him in line, as it were, for making Jones wait a year before he can spend his own money.

SD: You got it.

DA: This has gotten pretty long, Dave. I mean a thousand words on the first paragraph.

SD: I told you it was deep stuff. To be continued, hopefully.

Matrix Redux. Start With Consumer Prices and Solve Mises’s Calculation Problem?

We’ve written quite a few articles explaining Mises’s Calculation Problem, the problem he says any Socialist economy will have that will bring on its downfall.

Recently, we have discussed solving the problem with good old linear algebra. One Mabel suggested we just input all the costs of production in Column A of some gigantic matrix, other stuff in the other columns, and then solve the system of equations the matrix represents, using our sophisticated computers, and lo and behold, the solution will be exactly how much of everything we need to make, using what ingredients. She even linked to a sample matrix that does exactly that.

I explained that the heart of the calculation problem is that we don’t know what to put in Column A.

Devil’s Advocate: Felt pretty smug, didn’t you? Until you got that cryptic comment from Michele which left you scratching your head.

Here’s her comment:

hi Mabel,

just a fast reply

if you do have the explicit preference structure of all the individuals in an economy you can solve the calculation problem with a good matrix. that’s for sure.

but that’s also not the problem

the calculation problem lies in the impossibility to obtain the preference structure of the individuals which is only revealed through the market process.

Smiling Dave: I admit I was mystified. But reading around a bit, I think I know what she’s saying. Allow me to elaborate.

if you do have the explicit preference structure of all the individuals in an economy you can solve the calculation problem with a good matrix. that’s for sure.

The idea here is simple. We don’t know what numbers to put in Column A? Then we will work backwards. Austrian Economics says that costs of production are determined by the profits to be made.

DA: Say what?

SD: Why does steel, say, cost 40 cents a pound? In the old days, people thought it’s because of the amount of labor that went into making it, or some other reason inherent in the properties of steel. But Austrian Economics says it costs forty cents a pound because there is someone out there who has figured out that he can make a profit large enough to keep himself happy if he pays forty cents a pound for that steel, uses it to make steel mixing bowls, and sell the bowls at ten bucks each. His bid for the steel is the highest, and that’s what determines the price of steel.

DA: But his profit depends on what he can charge the customers.

SD: Exactly. That’s why the prices for factors of production depends on the prices of consumer goods, and not vice versa.

DA: So what Michele is saying is that if we know all prices consumers are willing to pay for consumer goods, we can work backwards to figure out costs of production, fill in column A of that matrix Mabel was talking about, and voila! Calculation problem solved.

So that’s what she meant in the first sentence. What did she mean in the second?

Here it is again:

but that’s also not the problem

the calculation problem lies in the impossibility to obtain the preference structure of the individuals which is only revealed through the market process.

DA: So what does that mean?

SD: I think what she’s saying is that there is no way to find out the prices people are willing to pay for consumer goods unless there is a market selling them.

DA: So what’s the problem? In a Socialist economy Mises was talking about, there are stores, there is money, there are consumer goods for sale. The only change from a free market economy is that the govt owns all the factors of production. What part of “the market process” is missing?

SD: Yep, I agree. That’s why I think she missed the boat.

DA: So is the calculation problem solved, at least in theory? I mean, I know that current estimates of how long it would take to solve such a matrix using existing computer power is about a quadrillion years. So it’s practically impossible. But I’m asking about in theory. Is Michele right? Has she solved the calculation problem “for sure”?

SD: I think not. And here we enter deep waters. The thing is, costs of production are not determined by actual market prices. They are determined by the estimate of some entrepreneur as to what market price will be.

In other words, steel is not forty cents a pound because somebody can make a nice profit buying it at forty cents a pound, making steel mixing bowls, and selling them for ten bucks apiece. It is forty cents a pound because somebody thinks that what will happen, and is willing to gamble his fortune on it.

DA: But isn’t that a quibble, really? All the Socialist planner has to do is see what mixing bowls are selling for now, and assume that’s what they will sell for when the next batch of bowls are made.

SD: Let’s begin with a dialog between J. K. Rowling and the Socialist Office of Book Publishing.

JKR: I have this wonderful new book, Harry Potter meets the Vampire. I bet the public will pay $25 a copy for it, just like my other books back in the day.

S. O. of Book P: I don’t like it. My mother in law has written a new book, Comrade Potter Defeats the Imperialist Bourgeoisie, and I think that is what will sell.

SD: You get the idea. It’s the nature of people that they get tired of the same old same old. On the one hand, you cannot keep making more copies of the old Harry Potter books and expect them to sell at the same price forever. On the other hand, the public wants reading material. On the third hand, who decides what new stuff to offer, what price to charge, and based on what criteria?

DA: So there will have to be entries for which the consumer price is unknown.

SD: Yep. Books, music, the latest fashion in clothing, new inventions, new ideas, [assuming the Socialist economy has a provision for that. I mean, imagine of the Socialist got their wish right after Marx wrote his book. Would we not have cars, computers, all the inventions that came after Marx, in a Socialist economy? Sounds pretty horrific already].

DA: But how does a free market know what prices to set for goods that have never been offered before? How does it know whether to publish Harry Potter or Boring Potter?

SD: The free market has something the Socialist economy, by definition, lacks, namely people who are willing to bet their fortunes that they have guessed right about these things.

DA: So you are saying that yes, costs of production are indeed determined by consumer prices, but by future consumer prices, [as estimated by the fellow buying the factors of production], not by present consumer prices. Because he might be planning on making something for which there is no precedent.

SD: Exactly. And once we understand that it’s future prices that determine the prices of factors of production, then it becomes obvious that we cannot know the price of any consumer good tomorrow, not just of unwritten Harry Potter books, but of anything. Who can foresee the future? Consumers are fickle. They change their minds all the time. Just because yesterday they paid ten dollars for the mixing bowl doesn’t mean they will pay ten dollars six months from now. They may decide to spend their money elsewhere. It takes an expert to know these things.

DA: So we cannot start with prices of consumer goods and work backwards, because that’s using actual consumer prices today. But the price of factors of production is determined, not by them, but by imaginary numbers in the mind of some aspiring entrepreneur, as he imagines himself making big bucks.

SD; Exactly

DA: But why not put him in charge?

SD: So already we are throwing away the matrix, and getting back to people making the decisions based on their understanding of the future.

DA: Yes, the matrix is dead. Long live the Planning Board of Experts.

SD: Well that old chestnut, the Planning Board pretending they are real businessmen, has been refuted long ago by Mises in Human Action.

DA: Dave, could you give a summary here?

SD: I’m glad you asked.

The calculation problem is that you do not know what numbers to fill in Column A of your matrix, costs of production.

And you cannot compute Column A from current consumer prices, because costs of production are not determined by them, but by totally unknowable future prices of consumer goods that exist in the imagination of someone thinking about going into business.

In a free market, there are people who can make good guesses what those prices will be. But such people can only exist in a free market. See Human Action Chapter 26, section 5.

Say’s Law Tested in Kansas City. Uh huh.

Here’s an interesting one:

Google Fiber Offers a Test of Say’s Law

Does supply create demand? Google has introduced ultra fast download capability to the people of Kansas City. Will this transform this city into the next San Francisco? The NY Times hints at an interesting scale issue. Computer programmers are not building Apps that use such fast download capability because few people have access to this technology. Will Chess Champions move to this city to play really good chess computers who can now analyze even more positions per second? Will flash stock traders move there to place their buy orders even faster? Or will teenagers who want to quickly look at hacked phone photos move in droves to this area? Aggregate demand for Google Fiber will be the sum of some interesting idiosyncratic demanders.

What a sad, sad, day when people think Say’s law is that supply creates demand, with a corollary that Google fiber in Kansas City will bring the masses there.

No, guys. That is not Say’s Law at all. Maybe it’s what they teach you in school, because that’s how Keynes, either purposefully or through ignorance, presented it, but that’s not Say’s Law.

To prove it, let’s quote J.B.Say himself, in his intro to Say’s Law:

A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it.

Just the opposite of what the article thinks is Say’s Law. According to the article, Say should have written:

[Fake quote]: A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can expect such a value to be appreciated and paid for, no matter whether other men have the means of purchasing it, because supply creates its own demand. That’s why Google can introduce ultra fast download capacity right in the middle of the Sahara Desert, and everyone will move there and buy it.

Devil’s Advocate: OK, you proved your point. Say wrote the opposite of what that foolish article thinks. But come on, that’s not fair, Smiling Dave, throwing in the Sahara Desert. Kahn said Kansas City, not the Sahara Desert.

SD: Of course it’s fair. It’s called reductio ad absurdum, a standard tool of logical analysis. In any case, right in that first paragraph, before he even states the famous Law, Say was explaining to Kahn that he is not saying supply creates its own demand. Quite the contrary. If a person thinks there is no market for his wares, he won’t make them in the first place, because he cannot expect anyone to pay for it, so why bother making it.

DA: Well, what do you expect from some random blogger? I bet that Matthew Kahn never studied economics.

SD: Not only did he study it at the most prestigious schools, he teaches it at the most prestigious schools. Check that link and be impressed with his credentials.

So we’re talking about a respected member of the economics community, who attended the best schools, of both Left and Right flavors. He teaches all over the world, at the very top institutions.

And he still doesn’t know what Say’s Law is!

Now don’t get me wrong. He is not alone in his ignorance. All his buddies and all his professors, and all their students and his, they are all equally ignorant of what Say’s Law actually is.

DA: How did that happen?

SD: Keynes wrote, through malice or ignorance, his own Bizzaro World version of Say’s Law, and that’s what they teach in the mainstream. By sheer coincidence, Say anticipated all Keynes’s outlandish theories, using Say’s Law to refute them.

DA: So what is Say’s Law? I always thought it’s that supply creates its own demand.

Smiling Dave: Let’s quote Say’s book, Treatise on Political Economy, in italics, with my snarky comments in regular font. We begin at the beginning of his exposition:

It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices.

Sound familiar? Those adventurers must have been Keyne’s great grand daddies, because they are claiming exactly what he did, and what all mainstream economists are saying. Lack of Aggregate Demand is the problem.

But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so;

True to this very day. The mainstream has no clue what causes this so called lack of Aggregate Demand. In fact, they brag about their ignorance. They are proud of it.

DA: Dave, now you have gone too far. Bragging about their ignorance? Seriously?

SD: Here’s Krugman:

Krugman: Rather than getting bogged down in an attempt to explain the dynamics of the business cycle – a subject that remains contentious to this day – Keynes focused on a question that could be answered. And that was also the question that most needed an answer: given that overall demand is depressed – never mind why – how can we create more employment?

There you have it. The first ones to admit they have no clue what causes recessions and depressions are the Keynesians.

And there they are, too, bragging about it. Keynes did not get “bogged down” explaining why the Great Depression happened. Never mind why it happened. I, Keynes, will cure it, without even bothering to know its cause. Don’t bog me down with that cause stuff. I’m not about that.

DA: But what about the Chicago School, that contraction of the money supply did it?

SD: Too bad that’s been shown wrong, by the mainstream itself. But we digress. Let’s give Say the floor again:

…they treat doubtful points as matter of certainty, often pray for what is directly opposite to their interests, and importunately solicit from authority a protection of the most mischievous tendency.

That has Keynes and the mainstream written all over it, as Say will show us.

Now Say is a patient man. He explains, given that the mainstream knows nothing, how they can actually learn something:

To enable us to form clear and correct practical notions in regard to markets for the products of industry, we must carefully analyse the best established and most certain facts, and apply to them the inferences we have already deduced from a similar way of proceeding; and thus perhaps we may arrive at new and important truths, that may serve to enlighten the views of the agents of industry, and to give confidence to the measures of governments anxious to afford them encouragement.

In other words, begin at the beginning. Start with the best established and most certain facts. Then use logical reasoning to draw conclusions. You know, like they taught you in high school geometry. Which of course, is what Austrian Economics is all about, and why their results are correct, and the mainstream just fumbles around.

DA: They don’t begin with best established and most certain facts.

SD: Quite the opposite. They begin with absurd initial assumptions. They turn those absurdities into equations. And then they are proud of themselves, until the model falls on its face.

But enough talk about the wrong way of doing economics. Let’s sit at the feet of the master, Jean Baptiste Say, as he begins at the beginning, and culminates with the great Say’s Law, refuting Keynes before he was even born. [Which is why Keynes hated him so, and used dirty tricks to besmirch Say's Law].

Say: A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it.

DA: Sounds iron clad. You won’t bother making something if you know nobody can afford to pay for it.

Say: Now, of what do these means consist?

SD: Meaning, where do they get the money to buy stuff?

Say: Of other values of other products, likewise the fruits of industry, capital, and land.

SD: They have money to buy things because they worked hard and produced products, which they can sell or trade with.

DA: Iron clad again.

SD: Here comes Say’s Law, right now. Watch for it.

Say: Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.

DA: Wait a minute. Isn’t that what Kahn was claiming? That supply creates its own demand?

SD: Let’s get the difference very clear, with a little story. You know about dating sites, right?

DA: Sure, I’ve been there myself. Somehow I didn’t get any dates though. I posted pictures, was myself, everything. But no dates.

SD: According to Kahn, you should have been overwhelmed with girls throwing themselves at you. Supply creates its own demand. You created a supply, yourself, and that creates its own demand, meaning girls magically show up wanting to date you.

DA: OK, that’s Kahn’s incorrect version. What’s the correct version?

SD: Say wrote that you will never get a date unless you first create a marketable good that people want, meaning a desirable male that women will drool over. You go to the gym. You get a decent job. You learn good manners. You develop an attractive personality. You produce a product, a desirable male, yourself. Once you have a product to offer, you can then go to market, the dating site, and ask for a date, because you have something to trade for it, your desirable manliness.

DA: How does that fit into what he wrote?

SD: It is production which opens a demand [=on the part of the producer] for products [=other people's products]. You produce a desirable man. That opens up an ability for you to demand other products, meaning girls.

Bottom line, the wrong version is: If Smith makes something, Jones will automatically demand it. Supply by Smith creates demand by Jones. Google does things on Mars, and people will move to Mars to buy them. Patent nonsense.

The right version is: If Smith makes something marketable, that gives Smith the power to demand things from Jones, because Smith has something to offer in exchange. Supply by Smith creates demand by Smith.

DA: But that means if we have a lack of Aggregate Demand, that’s caused by people not producing marketable goods.

SD: Yeppers. All these recessions happen when people waste their time making non marketable goods. Take the recent housing bubble. People made way more houses than there was a market for. Result, our Great Recession.

DA: But shouldn’t the govt print more money and buy up those non marketable goods, thus enabling the producers to make even more non marketable goods? Wait a minute. That sounds really stupid.

SD: It does indeed. And that’s the Keynesian prescription. Let the govt intervene somehow and allow companies to keep on making non marketable goods.

DA: What’s your solution then, Monsieur Say?

Say: …the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

DA: But Obama tried that. he gave half billion dollars to Solyndra, and they went bankrupt.

SD: Because Obama and all politicians are, by definition, not businessmen putting their own money on the line.

DA: What difference does that make?

SD: To get out of the recession, should we be producing any goods, or marketable goods?

DA: Marketable goods, of course. Producing non marketable ones will just deepen the recession, as just explained.

SD: Obama and all politicians would not recognize a marketable good if it bit them on the nose. That’s not what they are trained for. Businessmen who risk their own money learn to know what is a marketable good, or go out of business.

Say: How right you are, Smiling Dave.

Having once arrived at the clear conviction, that the general demand for products is brisk in proportion to the activity of production, we need not trouble ourselves much to inquire towards what channel of industry production may be most advantageously directed. The products created give rise to various degrees of demand, according to the wants, the manners, the comparative capital, industry, and natural resources of each country; the article most in request, owing to the competition of buyers, yields the best interest of money to the capitalist, the largest profits to the adventurer, and the best wages to the labourer; and the agency of their respective services is naturally attracted by these advantages towards those particular channels.

SD: Meaning people make things not for fun, but to make money. And they make the most money when they make the most demanded, i.e marketable things. Thus, that’s what they will make. So just stay out of the way, Keynes and all your ilk, and let the free market do its thing.

DA: But Dave, you just admitted that a recession is caused by tons of people making non marketable goods. So the free market can make huge mistakes.

SD: Austrian Economics has shown that it’s govt inflation of the money supply that causes those mistakes. So again, stay out of the way, govt, and let the economy thrive.

Don’t forget to do a search of this site for more good stuff on Say’s Law.

LATER: One Major freedom over at Bob Murphy’s blog had this to say [snark omitted]:

I highly recommend that you add a few back and forths that include DA asking something like

“OK, I now get that in order for people to demand goods, Say says that they must produce marketable goods. But the Keynesians only care about employment in the present, not employment in the future after employment slowly recedes as marketable products increase relative to non-marketable products. Krugman himself said that with no government “stimulus” the market would eventually after some time reduce employment. But they insist that it is better for government to stimulate the demand for ALL production, including what would otherwise be non-marketable products, and reduce unemployment now, rather than wait for the market to gradually eliminate non-marketable goods.”

They don’t care about non-marketable goods in the market. They only care about unemployment.

Devils’ Advocate: I have a fan! He wants to hear my opinions!

SD: Devil, I love you like my very self, but that argument sounds a lot like “The beatings will continue until morale improves.”

“Stimulate demand for non marketable products” means pay people to use up valuable resources to make useless garbage. That will save the economy? Seriously?

DA: It will end the unemployment, at least, gotta give ‘em that.

SD: Devil, we talked about this back in the day.

DA: Remind me.

SD: http://smilingdavesblog.wordpress.com/2012/09/15/productive-jobs-and-parasitic-jobs/

Austrian Economics: Obsolete Scholasticism?

Actually, Scholasticism sounds pretty good, if you look up Wikipedia.

Mabel doesn’t like it, though. I think she’s saying that in the twenty first century, we should be using modern techniques, equations and software and the scientific method.

Mabel accuses AE of Scholasticism
Which is one step removed from Mysticism.
It’s computers you need
That work at high speed,
But Dave thinks AE is sheer Wisdom.

Here’s her comment on my previous article, [which is comments on a previous article, if you want to be thorough], hot off the presses.

Hi Dave,

Compliment taken, and thank you for your response as well.

My cards on the table: I think the contemporary followers of AE have solidified around positions that prevent the fullest realization of what AE has to offer – which realization would be oh so good for Western Civilization. If you are open to the possibility of coming to that conclusion yourself, then perhaps we have something to learn from each other. If not, no offense; and I will look for allies elsewhere. Your blog, your call.

0. I think (correct me if I am wrong) that “matrix” suggests CGE modeling to you. If so, your response started off on an incorrect presumption. SFEcon has no linear programming in it. It is an engineering dynamic emulator of the distributed intelligence that generates prices, from which all else about economic adjustment follows. SFEcon’s matrix structure is detailed at their site: from the homepage, click on THEORY; then go down the outline and click on A GENERAL MATRIX STRUCTURE.

It seems to me that Hayek (1945) subsumed I/O matrices in his specification of a solved calculation problem:

“The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”

1. Column 0 is a negative sum on physical asset acquisitions times their respective prices. Assets are acquired in the amounts that they are so as to maximize profits at current prices. There is no specification as to why maximal profits are desired. Self-interest on the part of the assets’ owners works as a motive, as does the diktat of benign economic command. All the mathematical system knows is the motive, not the motivator.

2. I did not post in response to your “humble article”, but I now see that you use a simple problem to illustrate why the calculation problem is unsolvable. Mabel’s problem with this sort of reasoning is its presumption that your mind will only be changed by a more robust, but also verbal counter-argument. To the contrary: if you say something cannot be done, you are stating a premise in the form of a general negative. That’s fine. But it then obligates YOU to state what you find wrong in an objective demonstration that someone has done what you say cannot be done.

There are five of these demonstrations written in ordinary MS Excel workbooks staged at the SFEcon site. Click EXEMPLARS from the homepage, and choose a workbook with whatever size I/O structure you wish. These workbooks will allow you to input I/O data of your own choosing. The program will then compute equilibrium prices for you, as well as the shapes of the technical and utility tradeoffs for which your I/O data are optimal. (Note that Hayek subsumed utility functions with his reference to “marginal rates of substitution” in 0 above.) You can then change the shape of a utility function, and watch the model go through all the chaotic states and disequilibrium prices leading up to a new general optimum.

3. An a priori assertion that these demonstrations must be deficient because sufficient demonstrations are impossible is circular reasoning around a vanishingly small circuit. I find that to be trite. I, for one, hear these assertions a lot (but have, let it said, yet to hear one from you). Sorry about the helmet. Make specific comments about a specific demonstration and I will take it off.

4. Asking for a “rebuttal” to someone’s “reasoning” is insisting on verbal dispute. I observe economists to me mired in Scholastic arguments that cancel one another out, while refusing to create and compare objective, dynamic, mathematically determined representations of what they hold as true. You cannot, for example, make an objective, dynamic, mathematically determined representation of a general negative.

5. I make no claims regarding prediction. I do not say the subject irrelevant, but you will have to tell me how it relates to the calculation problem as defined by Hayek above.

6. I have read Rothbard on the depression and regard it highly. I agree that he makes good use of quantified observations. If we have a disagreement here, it has to do with my narrow use of “objective”. The economy is a complicated, nonlinear, dynamic system. Assertions about the economy that are not objectively realized in mathematically determined, complicated, nonlinear, dynamic systems might be intelligent and useful, but they are not objective in my chosen use of the word.

7. My favorite example of harebrained Austrianism is asserting that Hayek foreclosed the possibility of economic calculation in 1945, when we are told (e.g. by Bruce Caldwell) that Hayek spent the 47 years left to him trying to solve the calculation problem. Another gem is Lew Rockwell recounting Mises’ assertion that markets should be explicable in rational terms, rather than by “magic” or “some force that is beyond human comprehension”, and then correcting Mises with his counter-assertion that markets are “miracles”.

The economy is out there; and we observe that, insofar as markets are free, the economy tends to efficiently search-out an optimal resting point. This is clearly systematic behavior. Upon observing such order, the civilized scientist (e.g.: Hayek) accepts the obligation to explain it. Insisting that markets are inscrutable and omnipotent in the face of these counter-indicia fits my definition of harebrained.

8. I am glad that liberty and Austrian Economics are separated, if we can agree that liberty is the prior consideration.

I agree that most people lack “the intellectual capacity, or honesty, or energy, to grasp AE”. That being the case, it seems to me wise for Austrians to get out from behind their hedge of esoteric verbiage and present their causality in a dynamic and visual way that people can grasp and would likely credit. Refusing to consider the possibility of economic calculation forecloses this option.

My humble reply:

0. The thing is, we are talking about two different calculation problems. There’s Mises’s version, and there’s Hayek’s version. Those programs do not solve Mises’s version, which is that the first column, the green inputs, must remain question marks. Whether it solves Hayek’s version I leave to someone else to look into, since I see it as academic. If Mises’s problem remains, I don’t much care if Hayek’s problem is solved or not. But I did see somewhere that given the current state of computing power, and the mass of variables needed to input, it would take several quadrillion years [no exaggeration] to compute the answer. You’ll note that the program you linked to uses 5 variables, not five million or five hundred million.

1. So verbal arguments are old fashioned Scholasticism, hey? That’s idle name calling, meaning carries no weight with me. I kind of see it as putting on voluntary blinders to insist on number crunching as the only possible way to get anywhere. Need we go further than Einstein, who used thought experiments [=verbal arguments] to do what he did in physics.

You may know that Mises claims to have proven that number crunching is not the right tool for economics, because of inherent features of what is being studied, mainly people with free will who don’t obey formulas, but do what they please. So we enter deep waters here when you insist on numbers only, when I think you chose the most flawed method possible to work with, rejecting what I consider the only possible tool to work with, good old logical reasoning.

I’m not sure if you realize it, but mathematics itself is verbal arguments, succinctly stated. There was a time [early twentieth century] when people thought there was some magic to numbers and symbolic logic, that it is a magical machinery that obviates the necessity for verbal arguments. Godel shot that one to pieces, and the picture accepted by the mathematical community world wide nowadays is that all of mathematics takes place within verbal argumentation. A math proof, it is understood today, is a mathematician convincing his peers of something, with verbal arguments. Of course, due to the intricacy of the topic discussed, a lot of shorthand has to be used [Imagine verbally stating Pythagoras's theorem every single time, instead of A squared plus B squared equals C squared]. But there is no inherent magic in formulas and equations. They are tools used to present and clarify a verbal argument, because, humans that we are, that’s all we have. Maybe Martians have other ways of proving things. Humans don’t.

Economics, however, is much more primitive than math or physics. The truths known to date are more readily understood verbally than as equations. As for all the equations the mainstream uses, they are fallacious, as they assume people obey some formula, which is of course nonsensical. The more insightful mainstream economists have noticed this, and reject 95% of all published economics, all the formula stuff, as nonsense. Deirdre McCloskey writes about this.

2. The specific comment you requested is how do you know, in a socialist economy, what numbers to put into that first column, Expenditures? The State owns all means of production. Thus it doesn’t expend any money when it makes something, because it need buy nothing, because it already owns it. What price will you give the things it uses to produce something, when they are not for sale anywhere, thus have no market price?

3. Could you kindly provide the link to Lew Rockwell’s statement?

4. I’m very pleased that we agree on so much, even though there is a huge gap still.

5. My humble blog tries to present AE in dynamic and visual language, understandable to all. Not everyone has the gift. Some can actually do economics, others can present it in an interesting, easy to understand way. I invite you to look around the place and see what you think.

6. BTW, a professional mathematician might very well argue against that software program by saying something like “That first column cannot be filled in, it can only be question marks.” I’ve heard them saying similar things. You may remember how Bertrand Russell refuted decades of Frege’s work, full of formulas and symbols, with a one paragraph verbal argument. [Consider the set of all sets that are not elements of themselves. Etc.]

The Matrix Solves Mises’s Calculation Problem. Or Does It?

One lovely young lady named Mabel
Placed a comment on my Calculation Problem Article, saying it’s a fable.
I took no offense,
Did not say, “Get thee hence”,
But laid all my cards on the table.

Mabel claimed the Calculation Problem was solved by 1970, and linked to a matrix that apparently solves it.

I think that matrix is a wonderful tool, not to refute the Calculation Problem, but to give a nice visual of where the problem actually is. That neat little matrix shows exactly where the Calculation Problem exists [no data to fill in the first column] and how it gums up the works in a socialist economy. [No data in first column means no numbers for the matrix to crunch, rendering it useless].

So for all you math whizzes and computer science guys out there, who get things better when they are laid out in neat tables and stuff, here’s the required info:

Here are the links to my humble article, which explains the Calculation Problem. It’s in three parts. Part One. Part Two. Part Three.

Here’s Mabel’s comment in full:


I am prepared to defend the premise that the calculation problem was solved by 1970.

I know that is a challenging premise, so I request that you click over to http://www.sfecon.com and ask yourself: could these arrays of numbers be regenerating themselves if the calculation problem were not solved? The software generating this demonstration is freely available for you to run on your own desktop.

I would like to address the premise that economic calculation is impossible because only free markets can generate the prices needed to guide economic order into the general optimum. All this tells me is that a true science of macroeconomics would present an understanding of how free markets generate such prices – hence macroeconomics is not yet a science. We all knew that.

All the Austrians tell me is they cannot fathom how anyone might map out the complexity behind how markets compute prices, and that this is supposed to be a sufficient proof that no else can possibly penetrate that complexity, ergo: anyone’s demonstration of the ‘swarm intelligence’ creating the ‘information-carrying particles’ of money prices is ipso factor a fraud. Invincible argument, but utterly trite.

As a partisan of the free market, I am not upset by a mathematically determined solution to the calculation problem. On the contrary, I wish to develop that solution into educational software that extolls the virtues of the freest possible markets. We would likely agree that the self-interested disposition of private property is, first and foremost, an aspect of liberty. If liberty is the objective, the we should choose markets even if they were not efficient.

I am afraid the Austrian’s insistence on merely verbal argumentation to the exclusion of objective demonstrata will ultimately be used to discredit liberty along with their harebrained economic commentaries. Anyone care to discuss a separation of these issues?

My reply:

0. Thank you for the link to that little matrix. It helps show exactly what the calculation problem is, once we grasp why that whole matrix is null and void in a socialist economy.

1. The boo-boo is in the very first column of green numbers. That whole first column, all of it, is a blunder, when applied to a socialist economy. In a socialist economy, there are no Expenditures. The State owns all factors of production. They pay no one for them. So where are all those green numbers going to come from, which represent Expenditures on means of production? On the other hand, you can’t say Expenditures are actually zero, because means of production are being used up. There are Expenditures, but no way to calculate what they are. That’s the calculation problem.

Naturally, when that whole first column is filled with question marks, the rest of that beautiful little matrix becomes useless. No data to input means no output, obviously.

2. The humble article did not say the problem was complexity of something or other. Notice that the example it used was not complex at all. There is no mention of “information carrying particles of money”, either. All it had was one factor of production, phosphorescent plastic, and two possible products, skeletons and laptops. And yet, there was an unsolvable calculation problem.

3. I don’t know whether the complexity/information carrying argument is invincible, or utterly trite. I do know that bringing it up in a comment about my humble article, and about Mises’s calculation problem, is like the bride wearing a football helmet at her wedding. Out of place.

4. Do you know why Austrians insist on verbal argumentation? What is your rebuttal of their reasoning?

5. Do you know why they claim objective demonstrata are useless in predictive economics? What is your rebuttal of their reasoning?

6. Have you read America’s Great Depression, by Rothbard?
Have you noticed how full it is of objective demonstrata?
How do you reconcile that book with your presumption that Austrians exclude objective demonstrata?

I’ll give away the secret. In fact I already have, right here: http://smilingdavesblog.wordpress.com/2014/01/31/thoughts-on-ae-and-interpreting-data/

7. Can you please give examples of what you consider harebrained economic commentaries? What is your rebuttal of their reasoning?

8. Liberty and Austrian Economics have been separated on the Internet, with many people waving the liberty flag, but lacking the intellectual capacity, or honesty, or energy, to grasp AE.

Human Action, Smiling Dave Style, All the Links.

I’ll gather all the links here. Hopefully, this will grow as time goes on.

Introduction.  5 links.

1. http://smilingdavesblog.wordpress.com/2014/07/18/human-action-the-smiling-dave-translation-featuring-devils-advocate-introduction/
2. http://smilingdavesblog.wordpress.com/2014/07/18/human-action-intro-continued/
3. http://smilingdavesblog.wordpress.com/2014/07/18/reismans-objection-to-praxeology/
4. http://smilingdavesblog.wordpress.com/2014/07/20/human-action-introduction-section-2-smiling-dave-style/
5. http://smilingdavesblog.wordpress.com/2014/07/20/human-action-smiling-dave-style-continued-intro-section-3/

Chapter 1. 2 links so far.

1. http://smilingdavesblog.wordpress.com/2014/07/22/ha-smiling-dave-style-chapter-one-section-one/
2. http://smilingdavesblog.wordpress.com/2014/07/25/ha-chapter-one-section-two-smiling-dave-style/



HA, Chapter One, Section Two, Smiling Dave Style.

This section is pretty understandable, after the spadework we did earlier.

Mises: Prerequisites for a person acting:

1. He thinks things could be better than they are. If he is perfectly content as is, he will leave things alone.
2. He thinks he can do something about it. If he thinks there is nothing he can do about things, he won’t do anything.
3. He has a brain to think about these matters. If he is so mentally challenged he cannot do the previous two things, he can’t act.

Only when those three things are in place will an action happen.

DA: Simple Enough.

Now Mises talks about Happiness. You could say that “Human Action” is another phrase for the “Pursuit of Happiness”. But, just as every other aspect of economics, it always comes back to the individual. What is Happiness? Every person has his own answer, and it’s what he pursues.

DA: So when someone says, “You should only be happy if you do so and so, like feeding the homeless,” that may be right or not, but it has nothing to do with economics.

Mises: Economics does not take a stand on what Happiness really is, or should be. It merely says the obvious, that when you get to actions, people will do what actually makes them happy, not what someone else thinks should make them happy.

DA: What if it makes them happy doing what someone else tells them?

Mises: Then that’s what they will do. It takes all kinds to make a world. Some people are happy eating and drinking and carousing. Others are happy doing more spiritual things.

DA: Does economics make any distinction between them?

Mises: No. Because economics is not about what people want, what makes them happy, but about how they act to get what they want. And the rules of economics will apply to all actions, no matter what brand of happiness the actions are going after.

DA: Time to impress us with some big words, prof.

Mises: OK, how about Eudaemonism, Hedonism, Epicurean àτapaξίa, and Utilitarianism, not to mention “heteronomous”.

Eudaemonism. The theory that the final goal of all human action is happiness.

Hedonism. The theory that the final goal of all human action is pleasure, or rather happiness.

Epicureanism. The Greek school of thought founded by Epicures (342-270 B.C.) that held that the joys of the mind are superior to the pleasures of the body.

àτapaξίa, (Ataraxia, Greek). Complete peace of mind.

Utilitarianism. A school of thought, neutral as to ends, that holds that social cooperation, ethical precepts and governments are, or should be, merely useful means for helping the immense majority attain their chosen ends. It holds that the ultimate standard of good or bad as to means is the desirability or undesirability of their effects. It rejects the notions of human equality, of natural law, of government as an instrument to enforce the laws of God or Destiny; and of any social entity, such as society or the State, as an ultimate end. It recommends popular government, private property, tolerance, freedom and equality under law not because they are natural or just but because they are beneficial to the general welfare.

Heteronomous. Not self-determining; subordinate to something else; opposed to autonomous.

DA: How do you know all that stuff?

Mises: Simple. I just consult the webpage Mises Made Easier.

DA: How did all those things sneak into this discussion?

Mises: They all were saying what I’m saying, that the goal of all actions is what makes the individual Happier, as he defines happiness. I think they had it right, though they were misunderstood, poor things.

DA: What about hypostasis, which you mention a bit later?

Mises: Hypostasis. Assignment of substance or real existence to concepts or mental constructs.

[At this point, William McDougall enters, smoking a big cigar].

William McDougall: Sorry to disappoint you, Prof, but I’ve refuted your book before you’ve even begun.

Mises: How so?

WMcD: Your whole book assumes people think things through. Means and ends and rationality is what your book is about. But I have discovered that man is an animal, ruled by deep, mysterious, animal instincts. All your rationality has nothing to do with it. You can toss your whole book away. It’s nothing but a tissue of false conclusions drawn from false psychological assumptions. Thank you.

Mises: So if Jones’s deep mysterious call of the wild tells him to rob a bank, he will do it?

WMcD: Yep.

Mises: Even if there are armed guards ready to shoot him down the moment he tries anything?

WMcD: In that case, he’ll try to sneak in at night, or something.

Mises: So once Jones has an end in mind, robbing the bank, which makes him happy because it satisfies some deep instinctual urge, he will then plan the best way to do it? He won’t just make like the Hulk and smash, if it means getting himself killed?

WMcD: Exactly.

Mises: My book is about the plans he will make. It’s about the actions people make to get what they want, not about why they want what they want. For all I care, it may well be some call of the wild that decides what he wants. But how he will try to get it is what economics is about.

WMcD: OK, let’s move on to Section Three.

The other parts of this epic attempt can be found here: http://smilingdavesblog.wordpress.com/2014/07/26/human-action-smiling-dave-style-toc/

HA, Smiling Dave style. Chapter One, Section One.

Devil’s Advocate: Finally, after thousands of words about the intro, we get to the book itself. Take it away, Professor Mises:

Mises: Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement or commentary.

DA: I’m glad Smiling Dave is translating that into English.

SD: All he’s saying is that in this book, the word “Action” will mean “what people do to get what they want”.

DA: That simple, hey?

SD: Yep, and there has been tons of ink spilled on these few words, lots of it nonsense. For example, plenty of time was wasted trying to prove that humans act, that they do things to get what they want. As if that needs any proof.

DA: But not everything people do is doing something to get what they want. Sometimes they sleepwalk, sometimes they sneeze and have other reflexive movements, sometimes they do things just for the heck of it, with no goal in mind. Sometimes they suffer brain damage and are reduced to a vegetable state, merely existing in a coma.

SD: Very true, and all that stuff can be ignored in an economics book. That’s why this book is only about humans acting.

DA: Professor Mises, aren’t you afraid that by using the words “act”, “action”, and “acting” in a very special way, not the way they are usually used, that some people will get all confused and have no clue what you are saying?

Mises: It’s true. I am assuming my audience has a level of intelligence above that of primitive caveman. If anyone gets flustered by my using one word in a very special sense that I defined carefully in the very first sentence, then this book is not for them.

SD: Besides, all science books do this. Ask a man in the street what “group” means, then ask a mathematician, and you will get very different answers.

DA: Dave, what do you think of the proof that humans act that’s circulating on the internet, that if you try to prove that humans don’t act, then you are yourself acting. Because you are doing something [presenting an argument] to get what you want [convince people Mises is wrong].

SD: All that would prove is that one person acted one time. Is that all you want to prove? If that’s all you want to do, there is a much simpler way. Walk to the fridge and get some food. Then say, “Look at me, I acted.” Better yet, just say “Look at me, I’m acting. I’m trying to prove people act, which is itself acting.”

Besides, as I said earlier, there is no need to prove such a self evident thing as that people do things to get what they want. I mean, seriously.

DA: What about all this stuff about Kant, that takes a lot of space on the internet when talking about Mises?

SD: Even if everything Kant said or did was permanently erased from everyones memory, the book Human Action would be exactly the same. No need to know anything about Kant to understand it fully.

DA: Say a person does nothing, because he thinks that’s the best thing under the circs. Is that an action?

Mises: Maybe it’s not an action as the man in the street uses the word, but in the technical sense “action” is defined in this book, doing nothing can be an action. If the person thinks doing nothing is the best way to get him what he wants, and makes the decision to do nothing, then doing nothing in that case is an action. To talk or not to talk, to smile or to remain serious, may be action. Action is not only doing but no less omitting to do what possibly could be done.

DA: What about psychology? How does that fit into the scheme of things?

Mises: Psychology is about what people want, why people want what they want, and other things going on peoples’ heads. It’s an important subject, but it’s not economics. Economics is about what people do, the actions they take, to get what they want. Now don’t get me wrong [as some noobies have]. I know very well that people think things, and their thoughts will influence how they “act”, obviously. In fact, I talk about this later, that people have a list in their heads, what they think is most important to get, what is second most important, and so on. But again, we are only going to talk about how what is in their heads affects what they will do, how they will act.

DA: Dave, I am too embarrassed to ask the prof, but I don’t get it. According to what he said, if Homer Simpson hears he can make a million dollars by going outside and picking up some money that fell on the street, but Homer decides to keep lying on his sofa and watching TV, that’s an action. How does that make sense? And why is Homer Simpson, lying around doing nothing, part of economics?

SD: I’m glad you asked. The old time economists, and indeed some of the current ones, have this model of people as always doing what will make them the most money. So they had an unrealistic, and therefore mistaken and flawed model, of the world. Their model has no lazy Homers lying around. This led them to conclude, for example, that if the size of a welfare check is less than what a person will make if he gets a job, then the person will get the job. How shocked they were when their model proved a flop, because we all have some Homer in us. Sometimes we prefer to be lazy, and getting more money is not an incentive to get the job. Sometimes we’d rather get a little less money for doing nothing than a little more money for working.

DA: How would Mises analyze this case?

SD: Mises would begin with what Homer wants. Homer has priorities. At the top is a roof over his head, food in the fridge, clothing and beer, in that order. Next in line in order of importance is being able to sit around and watch TV. This is more important to him than having some extra spending money. Now that we know exactly what he wants, we can analyze the options he has to get what he wants, meaning what possible actions he can take. All his first priorities, the roof, the food, the clothes, the beer, he can get by going on welfare. So he does. His next priority is relaxing, and he gets that accomplished by not getting a job, and not going outside to pick up the money in the street. So he “acts” by doing nothing.

DA: But what about the fact that he’s missing out on all that money?

SD: He has made his decision. To him, laziness is more important. Of course, if Marge would go out and work, he will gladly take her money and spend it, but him personally doing nothing is more important than anything he could buy, once he has his roof, food, clothes, and beer.

DA: Thank you, Dave. I get it. A complete understanding of Homer has to start with what he wants, and this analysis clearly has economic repercussions, so it makes a lot of sense to have it in an economics book. Without it, we will never understand the economics of welfare as it really is.

Now excuse me, I have to pick up my food stamps.

The other parts of this epic attempt can be found here: http://smilingdavesblog.wordpress.com/2014/07/26/human-action-smiling-dave-style-toc/


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