czwartek, 13 stycznia 2011

Why I am an Austrian Economist

Why not? Brayan Caplan, Assistant Professor of Economics at George Mason University, tells us why:
Why yes? Let's analyze his points:

2.1. Utility Functions vs. Value Scales

Caplan states "A utility function just uses numbers to summarize ordinal rankings; it doesn't commit us to belief in cardinal utility." Yes, false assumptions do not commit us to "nothing extra". But they do enable us to deduce false "extras". Make some "discoveries" which may or may not be true. As we'll see below, Caplan repeatedly admits that mainstream economists keep catching up with Austrians in this or that regard. They keep adjusting their artificial mathematical models so they are finally in agreement with Austrian theory. So why were they wrong in the first place if they were not commited to nothing extra?

Next Caplan accuses Rothbard that he has allegedly borrowed the substitution and income effects from the standard utility function analysis. Here's a rebuttal:

2.2. Indifference

Caplan states that "one can only observe that I choose a green sweater; but this does not rule out the possibility that I was actually indifferent between the green sweater and the blue sweater". Sure, but then Rothbard nowhwere says you cannot be indifferent, only "that indifference cannot be a basis for action". Caplan's indifference was not a basis for the choice of green sweater. He never made a choice to buy green sweater. He only made a choice to buy some sweater. Its color did not matter to Caplan so he never actually chose the color. As a good test, if he really is indifferent, then he should agree to close his eyes and pick one of the two sweaters at random. In fact, this applies to virtually any purchase out there. There are always some product features we don't care about. If we actually had to have a preference about all features of products we buy, we'd probably never buy anything. But we do buy stuff, and the basis for all the purchasing actions is always preference, even though we are usually indifferent to most product features. It does not matter, because the preference applies to features that we actually care about.

2.3. Continuity

Why all the intersecting supply and demand lines in Rothbard's works if he rejects the assumption of continuity? It is one thing to connect the dots for better visual illustration, and quite a different thing to use calculus on underlying ordinal reality.

2.4. Welfare Economics

In short, what Caplan is saying, if everyone were a die-hard communist, then people's utility gains (satisfaction) from communism would outweigh any voluntary exchange benefits. I admit that's true. Let's just all learn to love living like animals without division of labor! Light version: learn to love feeling envious of your neighbour's wealth to offset his bad feelings after you have stolen from him. Absurd? Not for Caplan.

2.5. Subjectivism

Strange as it sounds, Caplan's reason not to be an Austrian Economist is that neoclassicals now also believe in subjectivism. Look, here is a theory that has finally catched up with Austrian School in this or that regard, let's embrace it!

3.1. Economic Calculation and the "Impossibility" of Socialism

Collapse of a fully socialist society (due to lack of economic calculation) is, according to Caplan, a quantitative prediction. What? Collapse sounds perfectly qualitative to me. Still, Caplan is correct that "current events do nothing to show that economic calculation was the insuperable difficulty of socialist economies". In other words, Caplan does not accept the lack of economic calculation as a primary problem, because no socialist country has ever complained about it. After all, they all use accounting, don't they? Well, Chinese did kill all their accountants once, but in general, socialist countries do use accounting, and use it a lot, the red tape is phenomenal. So one might say, economic calculation in socialism is phenomenal! But is it legitimate to equate accounting with economic calculation? Depends on the environment the accounting is being peformed in. If it is free market environment, then it is economic calculation all right. If it is central planning environment, then it is just a desparate measure to know, more or less at least, what's going on. In practice, socialist countries just keep the accounting inherited from previous prerevolutionary capitalist owners, or, in current global economy, imitate the calculation of neighbor capitalist countries. However, slowly but surely, the socialist accounting degenerates as inefficient absurdities keep piling up and, sooner or later, follows unevitable collapse. But the lack of economic calculation will never "show up" explicitely. No socialist will ever perceive the problem, because, like neoclassicals, they can't see past their calculus equations inadequate for human action phenomena. The books will look good, the inefficient absurdities keep piling up precisely because they are invisible with the lack of actual economic calculation. But socialist countries will "mysteriously" keep getting poorer compared to capitalist countries. Socialists will obviously keep coming up with new ideas why it is so (foreign imperialists, speculators, greed etc), Caplan will read all that socialist propaganda and will state that "current events do nothing to show that economic calculation was the insuperable difficulty of socialist economies".

3.2. Monopoly Theory

Strange as it sounds, Caplan's reason not to be an Austrian Economist is that neoclassicals have agreed that perfect competition sucks. Look, here is a theory that has finally catched up with Austrian School in this or that regard, let's embrace it! But no, wait, neoclassicals have now even left Austrians in the dust:

A producer of a relatively unique product sets a profit maximizing price way higher than the product's marginal cost. This fact, according to neoclassical research, constitutes "unrealized gains to trade", which are "monopolistic distortion unless firms face a horizontal demand curve", because people willing to pay above marginal cost, but less than the profit maximizing price, won't buy the product.

Now, neoclassicals obviously fail to account for the gains of trading at the higher price. If the producer set the price lower than to maximize his profit, there would exist less incentive for competitive producers to try to come up with a similar product. Caplan does not realize that what he considers to be a "monopolistic distortion" is in fact precisely the mechanism that prevents the alleged monopoly to last longer than temporarily on a free market. Which then cannot be properly called a monopoly in the first place. What was to be demonstrated. Unfortunatelly, Caplan may never be able to comprehend this dynamic process, because it cannot be formulated as a neat mathematical equation.

3.3. Public Goods

Caplan's beef here with Rothbard is that Rothbad claims public goods and positive externalities do not really exist. Rather, "what he should have done was emphasize the public goods problems of government, along with voluntary solutions to genuine public goods problems on the free market." Also, "Rothbard deserves praise for analyzing the extent to which private property can solve externalities problems". Well, fine with me...

3.4.1. The Correct and Widely Accepted Aspects of the ABC

Strange as it sounds, Caplan's reason not to be an Austrian Economist is that neoclassicals, by 1997, have agreed with Mises-Rothbard view of unemployment. Look, here is a theory that has finally catched up with Austrian School in this or that regard, just maybe not as "boldly as Mises or Rothbard". Let's embrace it!

Caplan's further criticizm is that Mises-Rothbard view focuses on government and unions as the fundemental cause of unemployment, while Rothbard admits "that either business firms or the workers themselves may become persuaded that maintaining wage rates artificially high is their bounden duty". Precisely that's why Mises-Rothbard view focuses on government and unions. If business firms or the workers themselves, in effect, increase unemployment through their voluntary non-aggresive decisions, they have a right to do so. But government and unions claim they fight unemployment, and use aggression for this purpose (assuming unions posess aggression privilidges granted by government, like when employers are forbidden to fire strikers etc), so Mises-Rothbard's focus on government and unions is only natural. Why should we criticize someone only because he does not want to hire, or get hired, below artificially high wage rates? That's his private matter. But we should obviously criticize anyone who forces others into unemployment, even, or especially, while claiming otherwise, or sincerely wanting otherwise.

Finally, Caplan finds an alleged discrepancy in Rothbard views, because Rothbard admits that increases in the money supply can increase employment, and decreases can reduce it, while at the same time claims that that the quantity of money is always "optimal". Of course, employment temporarily does increase when you pump new fiat money into economy. But does that mean the higher quantity of money is more "optimal"? No, because the increased employment is part of the malinvestment bubble. Even if you pump new fiat money during downturn, you just prolong the dowturn, precisely because you don't allow employment to realign to consumer value scales.

3.4.2. The Incorrect and Controversial Aspects of the ABC

Caplan asks "why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely?" Caplan overestimates businessmen's insight. Rothbard is correct that "[E]ntrepreneurs are trained to estimate changes and avoid error", but it is a huge challenge even in a free market environment. And when government starts to intervene? That would require literally devine insight.

That is actually just a light version of Caplan's view on the lack of economic calculation described previously. He does not consider it a big problem in a socialist country. So why would he consider it a problem in a relatively capitalist country, but ridden with government monetary aggression? Simple, why don't businessmen just "forecast government policy"!

Caplan says "Moreover, even if most businesspeople don't understand that low interest rates are only temporary, the long-term interest rate will still be a good forecast so long as the professional interest rate speculators don't make the same mistake." As we can see even from the most recent downturn, professional interest speculators do keep making the same "mistake". You cannot foresee the exact influence of current government intervention. Yes, it will sooner or later lead to some sort of a downturn, to a bubble burst. But no one can ever know when the burst will actually happen, how severe it will be and how long it will last. Not only because no one can predict the actual future effects of current government intervention, but also because no one can predict future new government interventions themselves which will again generate new unpredictable effects on the economy. In short, when government intervenes, there are no rules any more which would "weed out businesspeople with such a gigantic blind spot".

If Caplan were ever an entrepreneur, or even a board member, he would not be ignorant of the pressure to make money now, rather than "refrain from making investments which would be profitable only on the assumption that interest rates will not later rise". Try to explain to your shareholders that! Competition is making money but you won't join in because interest rates may rise in the future! Hey, let's just "make investments which will be profitable even though interest rates will later rise". How easy, let's just focus on the most profitable investments! After all, there are so many of them because no one has thought of them before! Why do we have to pursue all the risky and less profitable investments? Genius! Simply set up a company and get rich, the sky is the limit for Caplan!

This is all typical for mainstream economists desperatly trying to make calculus work for humans. Their neat mathematical models first ignore entrepreneurs. Then they accuse entrepreneurs they are not devine entities and fail to perfectly foresee all the effects of all government intervention, past, current and future. In other words, their can think of only two cases, either there are no entrepreneurs or entrepreneurs are Gods. Reality check please!

Next Caplan asks "why don't the consumption goods industries enjoy a huge boom during depressions? After all, if the prices of the capital goods factors are too high, are not the prices of the consumption goods factors too low?" Which consumption goods industries? Those that reflect real consumer value scales do enjoy a boom while the economy restructures during depression. For example, the most recent depression was a boon to Wal-Mart.

Then Caplan points to "Austrian theory's inability to explain why output declines during a depression; instead, it predicts a short-term increase." Output of what products? Output of products that reflect real consumer value scales do increase, but total output decreases (along with total employment) while the economy restructures.

Strange as it sounds, Caplan's another reason not to be an Austrian Economist is that neoclassical economics "offers a simple alternative explanation" why capital goods industries suffer more than consumer goods industries during depressions. As Einstein has once said, make everything as simple as possible, but not simpler. Look, here is a theory that occasionally happens to explain this or that in a more simplistic way than Austrian School, so even though the theory is just a bunch of incoherent mathematical models that in fact have little to do with reality, let's embrace it!

Same for stagflation, so what that "there were numerous theoretically rigorous explanations of stagflation"? I don't want "numerous" explanations of this or that. I want one single coherent theory that explains the whole economy. Only Austrians can offer such.

Finally, Caplan states that modern mainstream academic economists have now learned everything Austrians contributed to economics, and now only "government officials, journalists, the general public, and weaker academics still need to learn this lesson". Maybe, just maybe, the reason is mainstream economists do not promote the lessons "as boldly as Mises or Rothbard would"? Maybe, just maybe, the reason is government officials, journalists, the general public, and weaker academics keep stating there are "numerous" and "alternative" explanations of economic phenomena, so no one really knows which theory is really correct? Just a theory...

4.1. The Theory and Practice of Economic Theory

Strange as it sounds, Caplan's reason not to be an Austrian Economist is that "Austrian methodological criticisms of neoclassical economics are often wide of the mark precisely because mainstream economists don't practice the methods they preach". Look, here is a theory that does not practice what it preaches, let's embrace it!

4.2. Is Theory Enough?

Caplan says "Mises and Rothbard however err when they say that economic history can only illustrate economic theory. In particular, empirical evidence is often necessary to determine whether a theoretical factor is quantitatively significant. " There is no contradiction. The determination of whether a theoretical factor is quantitatively significant is precisely part of illustrating economic theory. So even though, "as Mises and Rothbard emphasize, economic theory tells us nothing about how big the increase in unemployment will be", they have never claimed empirical studies are completely useless. They have "merely" said they are useless to deduce economic theory.

4.3. Mathematics, Econometrics, and the Progress of Economics

Similarily, "the principled Austrian objections to mathematics and econometrics" means merely that econometrics "must become a subordinate tool of the economic historian rather than vice versa".

Caplan lists examples of "a few of the best new ideas to come out of academic economics since 1949", but then admits that in each of them "intuition, not math, probably played the leading role" and that "the contributions of econometrics to economics are similarly meager".

So here is the most absurd part, Caplan's reason not to be an Austrian Economist is that even though he basically agrees with Austrians, he does not agree in principle. Wow.


"While the substantive contributions of Austrian economists to economics are significant, their sum from Human Action on is small compared to the progress that neoclassical economics has made over the same time period."

The progress in catching up with Mises' Human Action, published in 1949... They keep getting closer, maybe in a couple of decades they'll finally get there. Now as for Rothbard's Man, Economy and State, published in 1962, I would say not before the end of 21st century.

Finally, Brayan Caplan says, "I also consider the economics of Mises and Rothbard to be a great achievement in spite of my numerous reservations about it." That's a good summary of his whole essey. He is not an Austrian economist because current modern neoclassical economics is slowly catching up with Austrians. He is not an Austrian economist because neoclassical economists do not actually practice the methods neoclassical economists themselves preach. He is not an Austrian economist because there exist some alternative explanations to this or that phenomena. He is not an Austrian economist, even though he basically agrees Austrians, because he somehow cannot accept Austrian principled approach.

Austrian economics? Okay, but quietly, and let's find some alternative mathematical models first. The more math the better, tons of calculus, smoke and mirrors. Austrian principles? No way!

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