Friday, January 28, 2011

Austrian Economics Forum Spring 2011 #1

It is a new year and a new series in our Austrian Economics Forum.  This semester we are not simply reading through a single book.  We are attempting to put together topical readings each session.  On one side will be the Mainstream approach and then there will be the Austrian counter point to it.  We are hoping that this will generate interest outside of the few dedicated Austrians at NCSU.

The first set of readings centered on Methodology.  The article supporting the mainstream approach was Milton Friedman's "The Methodology of Positive Economics."  Unfortunately, there was a mistake in the copying of this article and only the first two sections were made available.  Nevertheless, the discussion on this article lasted about 75 minutes, leaving us with only 15 minutes for the second article! 

It is amazing how seriously Austrians take Methodolgy.  The unfortunate thing is that the rest of the economics profession does not take methodology seriously.  In fact, most economists never even consider methodology.  It is my contention that even if the Austrians were able to demolish every argument in favor of positivism and were able to replace it with the Austrian approach, there would be few converts to the Austrian School.  Sadly, the profession just doesn't care.

So the discussion centered on the typical arguments that Austrians raise when discussing this subject.  How can postivists really believe in hypothesis testing?  How can the science move forward if we are only observing?  Is introspection merely a tautological definition or can something be learned and understood?  Why should the social science of economics attempt to mimic physics?  Etc.

My thoughts on this subject can be found here in my "Methodology" presentation for FEE in 2010.

The more interesting article was the second.  We chose Roderick Long's "Realism and Abstraction in Economics: Aristotle and Mises versus Friedman" in the Quarterly Journal of Austrian Economics, vol. 9, no. 3, Fall 2006.  It is found here.

We only had 15 minutes left to discuss this article and apparently we all agreed with it, there seemed to be little hope for any discussion.  We found two major points that were particularly noteworthy.

The first centered on a quote by Peter Winch.  Winch's example runs something like this.... Suppose that a positivist has no knowledge of the Chinese language.  He is given "data" in the form of newspapers, articles, etc.  From this data he is able to predict which "words" are fairly likely to occur in the near future.  We can test the "power" of his "theory" by the basis of how well it predicts.  However, there is still no understanding of what is actually being said.  To test an economic theory on the basis of how well it predicts follows this example.  There is no deeper understanding other than complex pattern recognition.  This is why the Austrians have argued so passionately in favor of introspection.

The second point is borrowed from Guido Hülsmann.  Hülsmann says that the big divide between the Austrians and the mainstream is the Austrian emphasis on the use of the counterfactual method.  For example, what happens if there is a price floor compared to if there is no price floor? 

Bastiat uses this approach in the story of the "Broken Window" and Hazlitt makes ample use of it throughout his Economics in One Lesson.  This method is absolutely critical in most Austrian theorizing.  However, to a mainstream economist, once you step outside of the principles level, this method of reasoning disappears. 

Next time, the articles are Frank Knight's "Professor Mises and the Theory of Capital," Economica, Nov. 1941, pages 409 - 427; and Israel Kirzner's response in "Ludwig von Mises and the Theory of Capital and Interest," reprinted numerous times and is found here.

Addendum: Over the weekend, I was chatting with Richard Ebeling and we have come to the conclusion that Positivists do indeed engage in "counterfactual" thought.  Actually, all that they do is count the facts!!! 

Tuesday, January 18, 2011

Moore Nonsense on Taking and Giving

To start the new year, I have been receiving free movie channels through a promotion.  On one of them, Michael Moore's movie, "Capitalism: A Love Story" came on.  Since there is no way that I'd ever pay to watch one of his movies, free was about the right price.  I soon discovered that even free was too much.

Either the first or second sentence out of Moore's mouth was this, "[Capitalism] is a system of taking and giving."  It is mind-numbing how completely wrong this is.  Capitalism, or rather the free market, is a system of giving and giving.

Suppose you go to the store because you want to buy a snack for a dollar.  In order for you to give up the dollar, which do you have to value more: the snack or the dollar?  The answer is the snack.  In order for a trade to occur, what does the guy behind the counter have to value more: the snack or the dollar?  His answer has to be the dollar.  If both sides of the exchange value the dollar more, there would be no trade.  Also if both sides value the snack more, again there would be no trade.  We trade because each side values what they gain more than what they are giving.  Trade requires unequal valuations.  Since value is in the eye of the beholder, meeting this requirement is not difficult.

When we trade both sides say, "Thank You" because both sides are giving and benefiting. 

A system where one side gives while the other side takes also has a name: it is called stealing.  It is a system where one side has no choice in the matter while the other side has all the power.  An example of this relationship is the one between the individual and the state.  The individual must give whenever the state decides to take.  Try not paying your taxes and see what happens. 

The relationship of giving and taking is between unequal parties.  The relationship between giving and giving is necessarily between equals, since both sides can walk away from the trade at any time.  The ability to refuse and say, "No" is the most fundamental power that an individual has in expressing one's individuality.

In his movie, it's clear that Michael Moore thinks that we were harmed by the national bail-outs of the large banks and corporations.  I completely agree that this was a disgrace and that it never should have happened.  These banks and corporations should have been left to fail.  However, the bail-outs weren't market phenomena, rather they were the actions of the state repeatedly intervening in the economy.  The government took tax money and gave it to these institutions. 

Furthermore, the underlying cause of the economic crisis wasn't too little government, it was that there was too much.  The free market has a system of natural checks and balances that prevent massive business cycles.  It is when the government disrupts this system, that bubbles form and burst.  Those that cannot see the past the immediate and are unable to look at deeper causes blame "capitalism" in a knee-jerk reaction. 

Michael Moore's movie was just thata classic case of haphazard economics and laziness.  He could learn much from Henry Hazlitt's single lesson:

[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence.  The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Tuesday, January 4, 2011

On things to come...

With the start of the new year and new semester, it looks like there will be some energy for the NCSU Austrian Economics Forum.  This semester we are planning to do some comparing and contrasting.  We are going to pick two presenters of a topic.  One person will present the Austrian perspective and the other will present the mainstream's side. 

I am looking forward to this format.  I hope that it will bring in more students and appeal to a wider base.  I find that when we are challenged by another to defend our position, we are much better for it.

I do not know what the readings are as of yet (or even the topics!), but as soon as I do, I will be posting them.