Home » Uncategorized » Top Ten Economic Blunders, According to Mises.

Top Ten Economic Blunders, According to Mises.

He wrote this list in 1948. I’ve paraphrased and modified here and there. The original is at http://mises.org/efandi/ch42.asp

Which ones do they tell you in your econ classes? Which ones do you hear on TV? Which ones do the politicians still say?

1. There is a potential plenty, thanks to the technological achievements of the last two hundred years. The insufficient supply of useful things is due merely to the inherent contradictions and shortcomings of the capitalist mode of production.

2. The rate of interest and entrepreneurial profit can be eliminated by credit expansion. Only the selfish class interests of bankers and usurers are opposed to credit expansion. This is because of the following two facts:

2a. An increase in the quantity of money and money-substitutes does not affect prices, and the general rise in prices which we have witnessed in these last years was not caused by the government’s monetary policy, but by the insatiable greed of business.

2b. A government, which is not on the gold standard and which has control of a central bank system, has the power to manipulate the rate of interest downward without bringing about any undesired effects.

3. The recurrence of periods of economic depression is an evil inherent in capitalism. The free market lacks the power to control its own destiny.

4. The most disastrous consequence of the economic crisis is mass unemployment prolonged year after year. People are starving because free enterprise is unable to provide enough jobs. Under capitalism technological improvement which could be a blessing for all is a scourge for the most numerous class.

5. The improvement in the material conditions of labor, the rise in real wage rates, the shortening of the hours of work, the abolition of child labor, and all other “social gains” are achievements of government pro-labor legislation and labor unions. But for the interference of the government and the unions, the conditions of the laboring class would be as bad as they were in the early period of the “industrial revolution.”

6. The lot of the wage earners is desperate. The rich are still getting richer; the poor are still getting poorer; the middle classes are still disappearing. The greater part of wealth is concentrated in the hands of a few families.

7. Commodity prices are manipulated by the businessmen. In the absence of minimum wage rates and collective bargaining, the employers would manipulate wages in the same way too. The result is that profits are absorbing more and more of the national income. There would prevail a tendency for real wage rates to drop if efficient unions were not intent upon checking the machinations of the employers.

8. The description of capitalism as a system of competitive business is manifestly inadequate. Mammoth-size cartels and monopolistic combines dominate the national markets. Their endeavors to attain exclusive monopoly of the world market result in imperialistic wars in which the poor bleed in order to make the rich richer.

9. As production under capitalism is for profit, those things manufactured are not those which could most effectively supply the real wants of the consumers, but those the sale of which is most profitable. The “merchants of death” produce destructive weapons. Other business groups poison the body and soul of the masses by habit-creating drugs, intoxicating beverages, tobacco, lascivious books and magazines, silly moving pictures, and idiotic comic strips.

10. The share of the national income that goes to the propertied classes is so enormous that, for all practical purposes, it can be considered inexhaustible. For a popular government, not afraid to tax the rich according to their ability to pay, there is no reason to abstain from any expenditure beneficial to the voters. On the other hand, profits can be freely tapped to raise wage rates and lower prices of consumers’ goods.

What are these all incorrect? That’s what this blog is about, really. I’m taking requests for more info about any of these points. Let me know.

9 Comments

  1. Dave, this is a terrifying and wonderful list.

    I do freak out slightly at point 9. Surely tobacco and (the terribly similar) heroin are “bad things”, in the sense that consumption of them itself increases demand for them to a level far beyond what a beginning user would choose. (I do like the occasional cigar, but I’d like to be able to smoke on special occasions only rather than crave nicotine and smoke three or four cigars a day.)

    And surely the free market is adapting itself to supply and even advertise these things in quantities way beyond what any rational planner would choose?

    If the state did have the power to completely cut off the supply of heroin and tobacco, shouldn’t it do so?

    Isn’t ‘poisoning the body and soul’ exactly what the tobacconists and drug dealers are doing?

    I don’t think this is a personal freedom thing. I am a short-termist, hedonistic, libertarian smoker and I would prefer tobacco to be successfully prohibited by the government in order to protect me from myself!

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  2. Smiling Dave says:

    John, this aspect of things, the morality and ethics, is not my strong point. I refer you to mises.org, where they will have plenty of free source material of every kind.

    That said, here’s what little I know. From what I’ve read, the idea is that free people have the right to choose how they spend their money. They are grownups, and if they want to spend their money on heroin and tobacco, so be it. We can, as friends and family members, exhort them. But ultimately legally prohibiting things like this has results much worse than a few people smoking too much, as we see with our own eyes. Because a whole cops and robbers culture will spring up, with murders, jails, organized crime, loss of freedom, have a look over at mises.org.

    Also, in the free market, the consumer is king. The producers will not make money unless they produce what he wants. So it is not “the free market’ or corporations or whatever that are responsible for people smoking or taking heroin. It is the choice of the society, as consumers, that dictates all economic activity. That’s what it wants, and only because that’s what it wants is that what it is going to get. So maybe the tobacconists and drug dealers are poisoning bodies and souls, but it is the bodies and souls themselves who want it and and are paying good money for it and are the engine of this whole thing, with the tobacconists and drug dealers merely the caboose.

    Now I understand that you personally may want to pay someone to follow you around and jail you if you buy tobacco, and that’s fine, more power to you. But I think we can agree that one person’s desires and needs should not dictate to a whole society how they should live.

    BTW, ever notice that it’s the mathematicians, aka the best minds, who are most attracted to Austrian Economics? Coincidence?

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  3. Dave, I am a mathematician! Thank you for your kind words.

    What I have noticed is that mathematicians tend to warm to laisser-faire when they realise that every voluntary trade increases the utility of the parties, and that they then cool on it when they realise that most voluntary transactions have side effects on uninvolved parties. And they cool even further when they realise that human beings are really bad at working out what will make them happy.

    As far as ‘Austrian Economics’ goes, the best ideas of the original Austrian School seem to have gone mainstream (in fact I once taught a course on Classical microeconomics without realising how many of the important ideas were invented in Austria).

    The rest of it seems appealing (I mean *of course* printing money has to cause inflation, how could that not be true?!), but I get the impression that it’s not backed up by the actual data. Which looks like a deadly objection to me.

    The modern movement seems to be mostly defined by a reluctance to make mathematical models and predictions, which I strongly dislike. How can one even be wrong if one refuses to make predictions?

    One reason I like your blog is that you do have confidence to ‘put your money where your mouth is’. If, in twenty years time, bitcoin is not a crashed wreck, then we’ll know that the “Regression Theorem” is a hand-wavy origin story rather than a tool for predicting the fate of made-up currencies.

    I tend to think you’ll be proved right, and I like your arguments in favour of that position. But even you seem to feel it necessary to hedge and say that the truth or falsehood of {whatever Austrian Economics actually is} doesn’t depend on your application of this “theorem” being true.

    One thing I really loathe in macroeconomics generally is the incessant quoting of dead people. That’s a sign of a non-subject, like philosophy. I might revere Newton, but I wouldn’t dream of recommending his books or teaching his methods. What he said was true. We’ve learned more about it and can explain it better now.

    I do hope this doesn’t come over as hostile. It’s not intended so. I like your blog, it’s most interesting and well written. I wouldn’t be reading it if I didn’t think you had a lot of important things to say.

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  4. Smiling Dave says:

    most voluntary transactions have side effects on uninvolved parties. Could you provide an example?

    human beings are really bad at working out what will make them happy. So other humans, who are equally bad if not worse, should be the ones to decide?

    I get the impression that it’s not backed up by the actual data. Which looks like a deadly objection to me. Could you provide an example?

    The modern movement seems to be mostly defined by a reluctance to make mathematical models… If all you have is a hammer, everything looks like a nail. In other words, why do you think economics can be studied by math models?

    a reluctance to make…predictions, which I strongly dislike. How can one even be wrong if one refuses to make predictions? http://archive.lewrockwell.com/block/block168.html

    One thing I really loathe in macroeconomics generally is the incessant quoting of dead people. That’s a sign of a non-subject, like philosophy. I might revere Newton, but I wouldn’t dream of recommending his books or teaching his methods. What he said was true. We’ve learned more about it and can explain it better now. http://mises.org/store/

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  5. John Lawrence Aspden says:

    Oh God, I’m turning into one of those people who leaves wall-of-text comments on blogs. Sorry. I’ve made this a new comment because the formatting is going funny, but it’s a subcomment of the thread above.

    >*most voluntary transactions have side effects on uninvolved parties.* Could you provide an example?

    I’m currently sitting in a pub with a cup of coffee. The transaction between me and the pub was voluntary. But it has effects on other people. More people are turning up, and tables are running out. By sitting here with my coffee, I’m stopping other people sitting here.

    If I drive home, then I take up space on the road, and cause congestion, and I put fumes into the air and deprive children of places to play football (as I believe they used to do before widespread car ownership). If I cycle, then I block the road and slow down the other car drivers. If I walk, I’ll be home late.

    If I come back to the pub later tonight and buy a beer, my friends will be happy to see me. That’s also a side effect of a decision they didn’t make. This one’s positive.

    I actually find it difficult to think of any action that doesn’t have side effects on people who had no input as to whether the action took place. Every time I move my car I’m spoiling someone’s view and restoring someone else’s.

    > *human beings are really bad at working out what will make them happy.* So other humans, who are equally bad if not worse, should be the ones to decide?

    Oooh, gosh, no! That would be worse. But one of the arguments for laisser-faire that is powerful to mathematicians is that any voluntary transaction improves the happiness of both parties. If it’s possible that people make decisions that make them worse off, then that argument is weakened (but not broken. It’s still probably true in most cases. But when people start selling heroin to schoolchildren, we’re allowed to get nervous again. Which we wouldn’t be if the argument held.).

    > *I get the impression that it’s not backed up by the actual data. Which looks like a deadly objection to me.* Could you provide an example?

    Oops, no, I can’t. That’s just something I’ve heard economists say. It’s probably wrong. Sorry. I am an idiot.

    > *The modern movement seems to be mostly defined by a reluctance to make mathematical models…*
    If all you have is a hammer, everything looks like a nail. In other words, why do you think economics can be studied by math models?

    This is a fair point. All the things I think I understand, I understand through mathematical models. When you understand things in terms of lots of pages of words, then you can usually explain anything that happens. Making models of your ideas forces you to work out what they actually mean and predict.

    Microeconomics has lots of models and predictions. Some of those predictions are pretty solid, for instance I have found it a reliable rule of thumb that restaurants with good views of tourist attractions are usually overpriced and poor quality. And that people with things to sell will try to segment their markets (oap/student discounts, first and second class train tickets, differently priced coffees in coffee shops, etc.)

    On the other hand, there’s no reason to expect that mathematical modelling will work for macroeconomics. It may just be that you can’t make any predictions about it.

    But once you’ve said “We reject mathematical modelling as a technique”, you’re a weather forecaster saying “Cold days will be followed by hotter days”. It sounds profound, but there are almost no patterns that will disconfirm the prediction. If he says “The average temperature will rise and fall in a twelve month pattern”, then he’s making a mathematical model, and almost all data patterns will disconfirm his prediction. So if he turns out to be right, then he knows something.

    > *a reluctance to make…predictions, which I strongly dislike. How can one even be wrong if one refuses to make predictions?* http://archive.lewrockwell.com/block/block168.html

    Those are all good, but they’re predictions about something that has already happened, and you can usually find people who’ve turned out to be right in retrospect. I’ve been predicting a crash in the English housing market for twenty years. The market has stubbornly accelerated into the stratosphere. I’ve stopped believing it recently. If the market now crashes, was I wrong or right?

    What predictions does Austrian Economics make, now, about the near future, that all Austrian Economists agree on, and that are different to the predictions that people who aren’t Austrian Economists make, and which are specific enough so that if the theory is wrong it will be obvious that it’s wrong?

    An example would be “Bitcoin will crash to zero within the year”, except that I think I can probably find plenty of people who call themselves Austrians who don’t predict that. And you yourself have (a) pushed the timeline out to 20 years and (b) claimed that if your prediction fails then that disconfirms *your understanding* of AE, not AE itself.

    If Jupiter pulls a loop the loop, that doesn’t disconfirm *my understanding* of physics. That’s in flat contradiction with physics, and it means physics is wrong. Similarly with evolution and fossil rabbits in the precambrian.

    *http://mises.org/store/*

    OK, I’m way out of my ground, pontificating about things of which I know nothing. Can you recommend a good beginner textbook, well written, readable, with lots of concrete examples and not using too many unfamiliar long words, that I should read? (Obviously I don’t have a problem if it’s a bit mathematical, but I’ll settle for clarity and good style if maths is impossible)

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  6. Smiling Dave says:

    John,
    A free market is not perfect. It may leave some people unhappy. But even worse is an unfree market, because:

    1. There are not less unhappy people, but more. Absolutely nobody can do as he pleases or benefit to the max from his labors.
    2. Most of the examples you give are just saying that we live in a world of scarcity. There is not enough to go round, and that’s that. Only so much room in the pub, etc. [Only exception is polluting the air with the car. But that’s a flaw in the legal system here, that the courts in the 1800’s ruled the railroads do not have to pay for the damage their smoke etc does to people’s property, because mankind needs railroads.]
    3. Free markets decrease scarcity, as we can see with our own eyes. The higher the standard of living the freer the market. This is no accident. Too long to go into proof here.
    4. Free market has a system of dividing up the scarce resources very fairly, and preventing their eventual depletion. You only get to use them if you first increase the store, meaning you only get to spend if you worked [=were productive] and got paid first.

    About heroin to school kids. If heroin was legal [=allowed to be part of the free market], there would be more money in opening a heroin store and selling to adults, like liquor stores today. This is a complicated specialized subject, why all drugs should be legal and we will all be better off. Search on mises.org is needed.

    We are not talking about an all out ban on models. Like charts and graphs and such, some people are helped by them, and more power to them. But they have not increased our knowledge. Take the examples you gave.

    1. Restaurants with good views of tourist attractions are usually overpriced and poor quality. An immediate consequence of supply and demand laws.
    2. People with things to sell will try to segment their markets (oap/student discounts, first and second class train tickets, differently priced coffees in coffee shops, etc.) Also follows from laws of s. and d. Notice that the companies that decided to do these things did not sit down and make models to reach these conclusions. Some really smart fellow had an insight, which others copied.

    Math models are also rejected because every math model makes simplifying assumptions. In the hard sciences and in math, you can simplify things and say “we can ignore friction here, because we know its contribution is numerically small. We can ignore that gravity is different 10 feet higher off the surface of the earth, because the difference is tiny anyway.” And so forth. But with economic models, the simplifications required to make an economic situation amenable to mathematical reasoning are so unjustified that they render the model ridiculous and wholly unrealistic. [Unless we are talking about “trivial” things where we get the same result faster with out the math, as in restaurant story above]. There is more to say on this, time and space preclude me.

    About cold days followed by warm days and there is a twelve month pattern. How do you know there exist in economics numerical patterns that have to come true within X amount of time? Mises argued that it is impossible for there to be such patterns. Economics, he claims he has shown, is a qualitative, not a quantitative science. In short, we can say that doing X will create a force pushing in a certain direction, but we cannot give it a numerical magnitude. Does that mean we have no knowledge? We do, and plenty of it, but of a qualitative nature. For example. If we know that doing thing X creates a force in the direction of lowered standard of living for all, then we know to avoid doing X.

    “… they’re predictions about something that has already happened…” Not when they made those predictions. I don’t understand your English housing market q.

    I pushed the timeline to twenty years because I found that the Ithaca Hour lasted twenty years. So we see a “money” with all bitcoins flaws managed to survive twenty years before dropping dead. How do I know bitcoin is even worse? I don’t. As for my saying it refutes my understanding of AE, not AE itself, that’s because plenty of Austrians think I am dead wrong. I say they don’t understand AE, they say it’s me.

    If Jupiter pulls a loop the loop, I doubt the reaction will be to throw out the physics and engineering textbooks. In fact we did have a Jupiter pulling a loop the loop, when quantum effects were first discovered, invalidating all Newton’s laws. So what happened?

    As for a good book, that’s a personal thing. You ask for a textbook. You might try Man Economy, and State, by Rothbard. Full of graphs and charts, very comprehensive. You may like Capitalism, by Reisman. Non textbooks: The Case for Legalizing Capitalism, by Kel Kelly. Maybe Theory and History, by Mises. Or Mises’s lectures and speeches, meaning his shorter works, not Human Action. I’ve read and liked Liberalism, Economic Freedom and Interventionism, Planning For Freedom. You might like Defending the Undefendable by Block. My very first Austrian book was Economics In One Lesson, by Hazlitt. All these are free, no jargon, readable. You might want to download all of them, see which one fits your current needs.

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  7. > All these are free, no jargon, readable. You might want to download all of them, see which one fits your current needs.

    Will do, thank you ever so much for your time. I’ll be back when I know more!

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  8. John Lawrence Aspden says:

    Couldn’t resist responding to the Jupiter thing, but thought I’d better do it on my own blog since it’s nothing to do with Austrian Economics:

    http://johnlawrenceaspden.blogspot.co.uk/2014/03/the-falsifiability-of-classical.html

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  9. Smiling Dave says:

    Read your article. Well said.

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