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:

Hi,

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/

Human Action, Smiling Dave style, continued. Intro, Section 3.

Mises mentions some faults people find with economics. Some say it is not “scientific”, in that there are no laboratory experiments, no differential equations [in the true, that is, Austrian, version of economics]. Mises says the book was written precisely to reply to such a claim. But for now he says that those who are bothered by it suffer from Maslow’s disease. If all you have is a hammer, everything starts looking like a nail.

He then mentions another fault people find, namely that economics is a total flop if measured by results. The world is just as miserable a place as it was before the discovery of economics. In fact, this is true of all the social sciences, they claim. All the social sciences put together, they say,
….have not stamped out misery and starvation, economic crises and unemployment, war and tyranny. They are sterile and have contributed nothing to the promotion of happiness and human welfare. Contrast this with the mighty achievements of the hard sciences, and economics looks pathetic.

Devil’s Advocate: Pretty strong case, Ludwig. What has economics done for me lately? Nothing.

Mises: All the mighty achievements of the hard sciences would never have happened if not for economics.

DA: What?

Mises: …the tremendous progress of technological methods of production and the resulting increase in wealth and welfare were feasible only through the pursuit of those liberal policies which were the practical application of the teachings of economics. It was the ideas of the classical economists that removed the checks imposed by age-old laws, customs, and prejudices upon technological improvement and freed the genius of reformers and innovators from the straitjackets of the guilds, government tutelage, and social pressure of various kinds.

It was they that reduced the prestige of conquerors and expropriators and demonstrated the social benefits derived from business activity. None of the great modern inventions would have been put to use if the mentality of the pre-capitalistic era had not been thoroughly demolished by the economists.What is commonly called the “industrial revolution” was an offspring of the ideological revolution brought about by the doctrines of the economists.

The economists exploded the old tenets: that it is unfair and unjust to outdo a competitor by producing better and cheaper goods; that it is iniquitous to deviate from the traditional methods of production; that machines are an evil because they bring about unemployment; that it is one of the tasks of civil government to prevent efficient businessmen from getting rich and to protect the less efficient against the competition of the more efficient; that to restrict the freedom of entrepreneurs by government compulsion or by coercion on the part of other social powers is an appropriate means to promote a nation’s well-being. British political economy and French Physiocracy were the pacemakers of modern capitalism. It is they that made possible the progress of the natural sciences that has heaped benefits upon the masses.

DA: Funny how all the old tenets you mention are alive and well and preached by all govts today.
1. that it is unfair and unjust to outdo a competitor by producing better and cheaper goods They made that illegal, calling it having a monopoly.

2. that it is iniquitous to deviate from the traditional methods of production. It’s the unions, who are supported by the govts, who fight changes tooth and nail.

3. that machines are an evil because they bring about unemployment. Obama himself used this excuse to explain why there is high unemployment.

4.that it is one of the tasks of civil government to prevent efficient businessmen from getting rich and to protect the less efficient against the competition of the more efficient Piketty’s book in a nutshell.

5. that to restrict the freedom of entrepreneurs by government compulsion or by coercion on the part of other social powers is an appropriate means to promote a nation’s well-being. This is a biggy. All the laws restricting the freedom of entrepreneurs are always touted as being for the benefit of the nation.

Mises: Yep, all those blunders the old time economists spent so much time refuting have made a huge comeback, which is why we are in such a mess. And of course there is a huge cover up going on, as nobody teaches that the reason we are so much richer than, say, Merrie Englande of 1400, is because the economists destroyed those myths. And trust Marx to make a right mess of things, again:

What is wrong with our age is precisely the widespread ignorance of the role which these policies of economic freedom played in the technical evolution of the last two hundred years. People fell prey to the fallacy that the improvement of the methods of production was contemporaneous with the policy of laissez faire only by accident. Deluded by Marxian myths, they consider modern industrialism an outcome of the operation of mysterious “productive forces” that do not depend in any way on ideological factors. Classical economics, they believe, was not a factor in the rise of capitalism, but rather its product, its “ideological superstructure,” i.e., a doctrine designed to defend the unfair claims of the capitalist exploiters. Hence the abolition of capitalism and the substitution of socialist totalitarianism for a market economy and free enterprise would not impair the further progress of technology. It would, on the contrary, promote technological improvement by removing the obstacles which the selfish interests of the capitalists place in its way.

DA: Talk about turning things topsy turvy!

Mises: Coming back to the claim that economics has not ended war, or stamped out starvation and tyranny, we see now that’s because everyone with any power despises and belittles economics:

The characteristic feature of this age of destructive wars and social disintegration is the revolt against economics. Thomas Carlyle branded economics a “dismal science,” and Karl Marx stigmatized the economists as “the sycophants of the bourgeoisie.” Quacks—praising their patent medicines and short cuts to the earthly paradise—take pleasure in scorning economics as “orthodox” and “reactionary.” Demagogues pride themselves on what they call their victories over economics. The “practical” man boasts of his contempt for economics and his ignorance of the teachings of “armchair” economists. The economic policies of the last decades have been the outcome of a mentality that scoffs at any variety of sound economic theory and glorifies the spurious doctrines of its detractors. What is called “orthodox” economics is in most countries barred from the universities and is virtually unknown to the leading statesmen, politicians, and writers. The blame for the unsatisfactory state of economic affairs can certainly not be placed upon a science which both rulers and masses despise and ignore.

DA: Because if people understood basic economics, they would realize that war means only one thing for them personally: Death at the worst and increased poverty at best. And if they allowed the free market to flourish, we would all get richer and richer.

Mises: As we will show in this book. The truth is, our whole civilization is imperiled because people have turned their back on Austrian Economics:

It must be emphasized that the destiny of modern civilization as developed by the white peoples in the last two hundred years is inseparably linked with the fate of economic science. This civilization was able to spring into existence because the peoples were dominated by ideas which were the application of the teachings of economics to the problems of economic policy. It will and must perish if the nations continue to pursue the course which they entered upon under the spell of doctrines rejecting economic thinking.

DA: You know that saying anything good about white people is bad form nowadays. How about if we touch this up a bit to “modern civilization as developed by ethnic diversity, with women especially taking the lead whenever they were not oppressed into dust by the ruling white racist imperialist male dominated elitist capitalist power structure.”

Mises: You want me to say black men can’t jump?

DA: If you say it about white men, it’s fine. But if you say it about black men, you’re a racist. That’s the way it is nowadays.

Mises: Whatever.

DA: You know, Professor, the Ayn Rand crowd really got on your case because you said Economics should not make value judgements.

Mises: It is true that economics is a theoretical science and as such abstains from any judgment of value. It is not its task to tell people what ends they should aim at. It is a science of the means to be applied for the attainment of ends chosen, not, to be sure, a science of the choosing of ends. Ultimate decisions, the valuations and the choosing of ends, are beyond the scope of any science. Science never tells a man how he should act; it merely shows how a man must act if he wants to attain definite ends.

DA: Makes sense to me.

Smiling Dave: Devil, it’s funny how you always agree with Mises, but never give me a moment’s rest.

DA: Sane sicut lux se ipsam et tenebras manifestat, sic Veritas norma sui et falsi est. [Indeed, just as light defines itself and darkness, so truth sets the standard for itself and falsity.]

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

Human Action, Introduction, Section 2, Smiling Dave Style.

Our “translation” of HA continues.

Previously in HA: Mises talked about the big splash Economics made when it first appeared [proved all kinds of utopias impossible], the flaw it still contained [value was not understood], and the removal of the flaw requiring a new understanding of Economics. The flaw was a result of thinking about economic problems in terms of graphs and charts and numbers. The flaw’s removal showed that the way to study economics was to study human action, meaning think about the people involved and what they will do under the circs, using good old logical thinking.

In Section 2, Mises talks a bit about how people took to this new understanding of what Economics is, and how to go about it. Short version: They hated it. The whole thing met tremendous resistance, that continues to this day. And they did not keep their dislike a secret. The Germans had alternate proposal about how to do Economics, namely, read up on the historical data and come up with something [= Historicism]. The Americans had a similar proposal, do experiments somehow and take it from there [= Empiricism].

Mises points out that this was not a debate about “What’s the best way to do economics?”, but about “What’s the ONLY way to do it?”, each side totally rejecting anything derived from the methods of the others as fatally flawed, like a modern scientist rejects any opinion derived from reading tea leaves, for example.

But the attack did not end there. Economics, the real Economics, known today as Austrian Economics, was not only attacked as being “unscientific” because it tackled economic questions in a way people didn’t like. It was also rejected out of hand because its professors came from the wrong “class”. Yes, Marx put his two cents into the debate, claiming that unless you are from the working class, you will never know anything, because your mind is just a muddled mess. Others jumped on Marx’s bandwagon, claiming that if you live in the wrong period of history, your mind is but mush, or if you come from the wrong race, you will never be able to think straight. The low point of this whole thing was the claim that anyone who thinks at all cannot possibly know Economics or anything else involving people, because people are irrational, and how can a rational being grasp irrationality?

Devil’s Advocate: Professor, what do you care? Those attacks on logical thinking are attacks on math and physics and all the sciences, not just economics. And you don’t see the physicists losing any sleep over it. They just do what they do, and don’t care that Marx thinks their physics is all wrong, because they are from the wrong class or race. So why this thousand page book here to refute those idiotic ideas? Remember what the philosopher Spinoza said. Sane sicut lux se ipsam et tenebras manifestat, sic Veritas norma sui et falsi est.”

Mises: Say what?

DA: Indeed, just as light defines itself and darkness, so truth sets the standard for itself and falsity.

Mises: Thank you. And to answer your question, all these attacks on logical thinking, which we will call polylogism, the idea that different classes and races have different standards for what makes a good argument, and irrationalism, the idea that rational thinking is not the right weapon for understanding people, are really attacks on Austrian Economics.
Although they formulate their statements in a general way to refer to all branches of knowledge, it is the sciences of human action that they really have in view. They say that it is an illusion to believe that scientific research can achieve results valid for people of all eras, races, and social classes, and they take pleasure in disparaging certain physical and biological theories as bourgeois or Western. But if the solution of practical problems requires the application of these stigmatized doctrines, they forget their criticism. The technology of Soviet Russia utilizes without scruple all the results of bourgeois physics, chemistry, and biology just as if they were valid for all classes. The Nazi engineers and physicians did not disdain to utilize the theories, discoveries, and inventions of people of “inferior” races and nations. The behavior of people of all races, nations, religions, linguistic groups, and social classes clearly proves that they do not endorse the doctrines of polylogism and irrationalism as far as logic, mathematics, and the natural sciences are concerned.

But it is quite different with praxeology and economics. The main motive for the development of the doctrines of polylogism, historicism, and irrationalism was to provide a justification for disregarding the teachings of economics in the determination of economic policies. The socialists, racists, nationalists, and étatists failed in their endeavors to refute the theories of the economists and to demonstrate the correctness of their own spurious doctrines. It was precisely this frustration that prompted them to negate the logical and epistemological principles upon which all human reasoning both in mundane activities and in scientific research is founded.

DA: In other words, Austrian Economics tells politicians things they do not want to hear. After trying and failing to show the flaws in AE, they stooped to attacking logic itself. But they only did that as an excuse to ignore AE.

Mises: Exactly, my son.

DA: In that case, now we know their ugly motives, there is no need to refute them, right?

Mises: Wrong. Marx made a big deal about the person presenting an idea. Attack the person, he thought, and you automatically attack his idea, at least in the eyes of the people who take Marx seriously. But we have a higher standard. Talking about a person is not the same as talking about his ideas. If the most evil man in the world, for the most evil of motives, makes some claim, his claim must still be examined on its own merits. Person being evil is not the same as idea being wrong.

DA: So that’s why you are going to disprove Historicism and Empiricism and Polylogism and Irrationality.

Mises: Yeppers. Plus, there’s another attack on AE making the rounds lately, that it talks about hypothetical situations that don’t exist in the real world. Or about situations that only apply to a Capitalist economy, not a Socialist Economy.

DA: But these same people who say AE is unrealistic then turn around and scribble equations and draw up charts that don’t apply to the real world either, by their own admission. SO can’t we ignore them.

Mises: Once more, my son, if a fool says something, it is not automatically folly. It must be proven so. For all these reasons…

The system of economic thought must be built up in such a way that it is proof against any criticism on the part of irrationalism, historicism, panphysicalism, behaviorism, and all varieties of polylogism. It is an intolerable state of affairs that while new arguments are daily advanced to demonstrate the absurdity and futility of the endeavors of economics, the economists pretend to ignore all this.
It is no longer enough to deal with the economic problems within the traditional framework. It is necessary to build the theory of catallactics [=the market process] upon the solid foundation of a general theory of human action, praxeology.

DA: When you say economics, you mean Austrian Economics.

Mises: But of course. What other kind is there, that has any validity? As Peter Schiff is fond of saying, one day Austrian Economics will be called simply Economics, and all the other kinds will be called Nonsense.

DA: I always wondered why you rambled on about philosophy for ten chapters of this book before doing any economics.

Mises: Now you know why. I had to strike down all the opposing silliness before I could get to the meat of the subject. Plus, it will clarify many problems hitherto not even adequately seen, still less satisfactorily solved. There is, especially, the fundamental problem of economic calculation.

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

Reisman’s Objection to Praxeology.

This is an ongoing piece, a heroic attempt to translate Human Action into Smiling Dave’s English. [Here's Part one and Part Two]. All quotes in italics, of course.

Previously on Smiling Dave’s blog:
Mises: [Economics] is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference.

The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology.1 The economic or catallactic problems2 are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.

Devil’s Advocate: Dave, I’ve been reading Reisman’s Capitalism, and he kinda disagrees here:
…the mistaken claim that economics is a science of choices rather than a science of wealth—a science which studies the “allocation of scarce means among competing ends.”11
This contention rests on a logical fallacy. It does not see that what gives rise to economics’ study of choices and its concern with the allocation of scarce means among competing ends is the fact that people have a virtually limitless need for wealth but only a limited capability of satisfying that need at any given time. Thus, people must choose which aspects of their need for wealth are to be satisfied and which are not. Economics studies the determinants of human choice only insofar as they concern choices of how to spend incomes that are of necessity limited, and only insofar as they affect the attraction of capital and labor to the production of some goods rather than other goods. In other words, it studies the issue of choices for no other reason than that it is necessary to do so as part of its study of the production of wealth under a system of division of labor.
To claim that economics is on this account a science of human choices rather than of wealth is to confuse an aspect of the science with its totality. To adopt this view is to be led to ignore all the really crucial matters that economics deals with and to seek esoteric extensions of the subject that have nothing whatever to do with its actual nature. Fortunately, those who adopt this view are highly inconsistent in its application and generally continue to devote most of their attention to the serious business of economics and leave the alleged necessity of extending the subject beyond the domain of wealth as a task to be carried out in the indefinite future.12

SD: May as well add the footnote:
12. Regrettably, this criticism applies to the great von Mises and his efforts to portray economics as merely the “hitherto best developed part” of an allegedly wider science of human action known as praxeology. See Ludwig von Mises, Human Action… I wish to note, indeed to stress, however, that even when I have ultimately come to disagree with some position of von Mises, as in this case, I do not recall ever having read so much as a single paragraph of his writings that did not serve as the most powerful stimulus to my own thinking. Therefore, I urge everyone to give the most serious consideration to every portion of his writings.

DA: So what have we got here? What is each side saying, and who is right?

SD: I dunno. I think it’s a case of how many angels can dance on the head of a pin. Mises is saying that it’s not enough to follow the money; we have to put people’s pursuit of money in the larger context of their pursuit of happiness, which is what economics is really about. Reisman is saying that we have to put people’s pursuit of happiness in the larger context of what they do with their money, which is what economics is really about.

I see it like this:
Let Set A = {all things people do to pursue happiness}.
Let B ={all things people do with their money}.
Let C = A intersect B.
The old time economists thought C was an empty set, and economics is all about B. Mises says that C being non empty means economics is really about A. Reisman says it means economics it’s still really about B, but C cannot be ignored, being an important subset of B.

DA: In other words, not the most vital topic out there.

SD: Exactly.

DA: What about his claim that Mises’s view will get people “to seek esoteric extensions of the subject that have nothing whatever to do with its actual nature.”

SD: It seems to have happened, on the internet level of Austrian Economics. The old mises.org forum had plenty of threads about deep philosophical matters related to praxeology and the action axiom. Personally, I don’t mind. They’re fun. If people find that intriguing, go for it. But I agree with Reisman that it’s not really economics, they way the word is commonly used, and all the truly economic parts of AE don’t have to seek far and wide into the forests of praxeology to get results.

**************

Thinking about it a little more, maybe part of what Mises meant is this. Take Keynes and his multiplier equation, or MV=PQ, or even the concept of GDP. When those things are discussed in the mainstream, nobody talks about choices people make. Mises is saying that therefore everything they say must be wrong, a gross misunderstanding. Because to understand an economic situation is to understand who is choosing what and why. If you don’t know that, you don’t know anything about what is really happening.

Frank Shostak gives an excellent example. Here’s an economic analysis devoid of people choosing anything, a supply and demand curve argument:

Using the supply-demand framework for a particular good, mainstream economists proceed further and introduce supply and demand curves for the whole economy. They hold, for example, that if the economy is underperforming, then what is needed is a bolstering of demand by means of fiscal or monetary policies. For a given supply curve, they contend, this will push the demand curve to the right, thereby lifting overall output. Needless to say, the supply-demand framework provides the rationale for government and central bank interference with businesses.

Push the demand curve to the right, thereby lifting overall output. It all happens by itself. No humans were consulted in constructing this analysis. And naive little children go to universities, and are taught this nonsense, and think they are now ever so educated and understand how an economy works. Push the demand curve to the right.

Where’s the flaw? The good Prof explains:

This framework, however, says absolutely nothing about how the increase in demand generates more output. Furthermore, it is silent regarding the funding required in order to raise output. Also, we have seen that, in reality, it is producers that initiate the introduction of new products. They set in motion increases in goods and services, and not consumers as such. Producers present new products, so to speak, to consumers who, in turn, by buying or abstaining from buying, determine the fate of products. Hence there is no such thing as an autonomous demand that somehow triggers supply. Moreover, one cannot demand something before offering something in return.

Notice how all the points he raises are about people’s choices. Why will A make more just because he finally managed to sell the inventory that has been languishing for months? Why will someone decide to invest in more of something that had a hard time being sold? How does govt spending on the old make a producer produce something new? And on and on. All his q’s are about the people involved, and how the simplistic “push that puppy over to the right” has no answers to such questions.

That, I think, is the heart of Mises’s claim that it’s all about choices, and you have to start from choices. And I have no doubt that Prof. Reisman agrees with this.

BTW, there is some Deep Stuff about Mises vs Reisman right here.

Next time on Smiling Dave’s blog:
DA: I’m tired of being the straight man here. How about if you let me be right for a change?
SD: You’re right.

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

Human Action Intro, continued.

Just go to previous post for part one.

The story thus far: Mises states that all the planners of The Way Things Should Be were stunned to discover that they cannot set up whatever society they want, because there are laws of economics that decree certain things impossible. [One example that he will talk about in the book is the impossibility of Socialism, no matter how perfect and well meaning everyone is]. That was the first splash economics made in the world. He goes on [and all italics are quotes]:

For more than a hundred years, however, the effects of this radical change in the methods of reasoning were greatly restricted because people believed that they referred only to a narrow segment of the total field of human action, namely, to market phenomena. The classical economists met in the pursuit of their investigations an obstacle which they failed to remove, the apparent antinomy of value.

DA: Antinomy? That’s a a silvery-white metal that breaks easily and that is used especially in alloys.

SD: Nope, that’s antimony. Mises is talking about antinomy, which means contradiction.

DA: What’s so contradictory about value?

SD: Basically, the problem is that the usefulness and importance of something is not the same as its market price. The classic example is the contrast between water and Curt Schilling’s bloody sock. Without water, you die. Without Curt Schilling’s bloody sock, you really aren’t missing much. And yet the market price for water is pennies. But the bloody sock worn by Curt Schilling while pitching in the 2004 World Series was sold for $92,613.

DA: Indeed, what’s up with that?

SD: As Mises explains, the problem is that the early economists forgot about the human element:

Their theory of value was defective, and forced them to restrict the scope of their science. Until the late nineteenth century political economy remained a science of the “economic” aspects of human action, a theory of wealth and selfishness. It dealt with human action only to the extent that it is actuated by what was—very unsatisfactorily— described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines.

SD: In other words, their picture of a market was of people trying to make as much money as possible. That was the only goal of the actors in their model of the economy, to rake in the moolah. If people do something for any other reason than to make money, that something is not part of economics, they said. Which was their big mistake.

DA: Why is that?

SD: Because they forgot that people spend money, too, and on the most frivolous things. People who do foolish things with their money are also part of the economy. And of course, they are the secret behind Curt Schilling’s sock.

The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice.

SD: In other words, the value of Object X is not something inherent in the object, like how vital it is, or how much labor went into making it, or what color it is, or anything else. The price a very personal thing, different for every person. In other words, the question is not “What value does this have?”, but rather “What value do this have, in my opinion, to me, right now?” In other words, the value [to me] is how much I am willing to pay for it, for whatever reasons I may have.

DA: So everything people want, for whatever reason, has gotten into economics through the back door, as it were. Because what people want, they will pay for. Thus their wants are part of the economy, and cannot be separated from any study of economics.

SD: Well, yes and no. After all, only the last part of the story enters into the market, the part when someone shows up, with cash, looking for Curt Schilling’s sock. But economics does not have to go into the back story, about why he wants that sock, why it is important to him, what need does it fulfill for him, and so forth.

DA: Which is what Mises meant when he wrote later on that psychology is not relevant to economics.

SD: So that was stage two of mankind’s economic understanding. Stage one was grasping that there are economic laws. Stage two was realizing that economics is not just about things. It’s about people buying and selling, and what those people think about things is what determines the price of the things. And then there came Stage three:

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being.

DA: But Dave, I’ve been reading Reisman’s Capitalism, and he kinda disagrees here.

SD: Tell you what, we’ll end with Mises’s take on what economics is about, and next article we’ll hopefully discuss Reisman’s objections.

[Economics] is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference.

The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology.1 The economic or catallactic problems2 are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.

DA: Praxeology? Catallactics? Is that even English?

SD: That’s why we’re translating, Devil.

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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