Wednesday, August 21, 2013

A Course in Free Markets

This year I was asked to put together a class that does not shy away from the virtues of the free market.  This Summer I was speaking at Clemson University for the Foundation for Economic Education (FEE) and I showed my course outline to Larry Reed, the President of FEE.  After looking at it, he not only liked it, but asked if I could make the outline widely available.  And so here it is, my economics course that argues that Free Markets are a good and moral system that creates good character and expands societal wealth and living standards.  I hope you like it and if you have any comments, please feel free to do so.

Tentative Course Outline:     

WEEK #1     Read Part I: “Non-Contradiction” of Atlas Shrugged
     Morality of Markets

1.                “The Economic Foundations of Freedom,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 3-10.  Found here:

2.                “Liberty and Dignity Explain the Modern World,” by Deirdre N. McCloskey, in The Morality of Capitalism, 2011, pp. 27-30.  Found here:

3.                “The Intellectual Defense of Liberty,” by Walter E. Williams, October 1, 2007.  Found here:


4.                Honesty and Trust,” by Walter E. Williams, February 1, 2005. Found here:

5.                “Competition and Cooperation,” by David Boaz, in The Morality of Capitalism, 2011, pp 31-36.  Found here:

6.                “Ayn Rand and Capitalism: The Moral Revolution,” by David Kelley, in The Morality of Capitalism, 2011, pp. 69-.  Found here:

7.                “The Elite Under Capitalism,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 18-25.  Found here:

8.                “The Market Economy and the Distribution of Wealth,” by Ludwig Lachmann, in The Morality of Capitalism, 2011, pp. 87-95.  Found here:

LABOR DAY September 2nd -- NO CLASS

     Counter-Factual Reasoning

9.                 “The Lesson,” by Henry Hazlitt, Economics in One Lesson, 1946, Ch 1 pp. 3-7.   Found here:

10.             “The Broken Window,” by Henry Hazlitt, Economics in One Lesson, 1946, Ch 2 pp. 11-12.   Found here:

11.             “The Candlemakers’ Petition,” by Frederic Bastiat, in Economic Sophisms, part 1, 1845.  Found here:

12.             Bastiat “Something Else,” by Frederic Bastiat, in Economic Sophisms, part 2, 1848.  Found here:


13.             “I, Pencil,” by Leonard Read, 1958. Found here:
     Methodological Individualism

14.             “The Individual in Society,” by Ludwig von Mises, excerpted from Human Action, 1966. Found here:

15.             “The Class Struggle,” by Ludwig von Mises, Theory and History, pp. 112-122.  Found here:

TEST #1  September 11th

WEEK #5                   Movie: Atlas Shrugged Part I

WEEK #6     Read Part II: “Either-Or” of Atlas Shrugged
     The Individual and Society

16.             The Law, by Frederic Bastiat, 1950, pages 1-9, 17-21, 24-29 and 63-64.  Found here:

17.             “Economics and Property Rights,” by Walter E. Williams, January 1, 2008.  Found here:

18.             What Social Classes Owe to Each Other, William Graham Sumner, 1911, Chapters 1 & 2.  Found here:

WEEK #7                  
     Law of Association / Comparative Advantage

19.             Not a Zero-Sum Game by Manuel Ayau, 2007, Part 1, pp. 23-50.  Found here:

WEEK #8                  
     Direct and Indirect Exchange: Supply and Demand

20.             The Mystery of Banking, by Murray Rothbard, 2008, Chapter 2 and Chapter 1. (Yes, read them in reverse order.)  Found here:

WEEK #9                   MID-TERM  October 14th
     Profit & Loss

21.            “Profit Management,” by Ludwig von Mises, in Bureaucracy, 1962. Found here:

22.            “Bureaucratic Management,’ by Ludwig von Mises, in Bureaucracy, 1962. Found here:

WEEK #10

23.            “What Is Profit?” by Fred Foldvary, 2012.  Found here:
     Effects of Markets

24.            “The Economic Role of Savings and Capital Goods,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 26-30.  Found here:

25.            “Luxuries into Necessities,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 31-32.  Found here:

26.            “Political and Economic Freedoms Together Spawn Humanity’s Miracles,” by Temba Nolutshungu, in The Morality of Capitalism, 2011, pp. 96-99.  Found here:
     Critiques of the Welfare State

27.            “Middle-of-the-Road Policy Leads to Socialism,” by Ludwig von Mises, April 18, 1950.  Found here:

WEEK #11

28.            “Tragedy of the Welfare State,” by Tom G. Palmer, in After the Welfare State, 2012, pp. 5-14. Found here:

WEEK #12                 TEST #2  November 4th

WEEK #13                 Movie: Atlas Shrugged Part II

Read Part III: “A Is A” of Atlas Shrugged

29.            “The Welfare State as a Pyramid Scheme,” by Michael Tanner, in After the Welfare State, 2012, pp. 91-96. Found here:

WEEK #14

30.            “The Evolution of Mutual Aid,” by David Green, in After the Welfare State, 2012, pp. 55-65. Found here:

31.            “Mutual Aid for Social Welfare: The Case of American Fraternal Societies,” by David Beito, in After the Welfare State, 2012, pp. 67-88. Found here:

WEEK #15                 (finish #31)


WEEK #16

32.            “How the Right to ‘Affordable Housing’ Created the Bubble that Crashed the World Economy,” by Johan Norberg, in After the Welfare State, 2012, pp. 97-105. Found here: 

33.            “Greece as a Precautionary Tale,” by Aristides Hatzis, in After the Welfare State, 2012, pp. 21-30. Found here:


Monday, June 3, 2013

A Health Care "I Told You So"

I normally do not post these sort of things, but there is some degree of satisfaction when you are proven right.  And so this is bittersweet since the prediction was for the worse.

In June 1st edition of the Raleigh News & Observer, an article states the following:

"McCoy Faulkner collects $81 a day as a substitute teacher in the Wake County Public School System. A mere sub, he has no benefits.  
"The 62-year-old former Raleigh police officer shells out $580 a month for an individual insurance policy, more than half his monthly pay. The full-time teachers for whom Faulkner fills in, however, are eligible for free health insurance, with no monthly premiums, through their employer. 
"That’s why Faulkner was looking forward to the Patient Protection and Affordable Care Act, figuring he was the kind of person that the health care reform law was designed to help. Under the new law, anyone who works 30 hours or more a week for a large business will be eligible for employer-sponsored health care. 
"But instead of adding subs like Faulkner to its health care plan, the school system is looking for ways to avoid doing so. Wake is considering restricting its 3,300-plus substitutes to working less than 30 hours a week, effective July 1. 
"The reason: If just a third of the system’s subs were to qualify for employer-sponsored insurance, it would cost Wake schools about $5.2 million, chief business officer David Neter said."
The lesson is to think about the secondary consequences of a policy.  To evaluate any policy, we always must ask, "What are the incentives that are faced by the decision makers?"  Clearly this substitute teacher did not manage to think beyond "step one."  And so now his position goes from bad to worse. 

Read more here:

Wednesday, March 27, 2013

A Painting of Cantillon?

This past weekend I attended the Mises Institute for the Austrian Economics Research Conference (formerly ASC).  First I should say that the Mises Institute has put together another great conference.  I believe that I have missed only one ASC since the beginning (and that was because I was at another Austrian Economics Conference in Prague). 

Of all the papers presented there, the most interesting (at least to me) was the one presented by Mark Thornton.  He has been attempting to solve an almost three centuries old mystery surrounding the most mysterious economist of all--Richard Cantillon.  Cantillon made his fortunate in John Law's bank during the South Seas Bubble and managed to get out just before the collapse, leaving him one of the wealthiest men in the world. 

After making his fortune he penned Essai sur la Natur du Commerce en Général.  We are not exactly sure when it was written, but estimates put in the late 1720s or early 1730s.  It is an important book not only because it is one of the few that Adam Smith actually cites, but it is actually a better explanation of basic economic principles than Smith's  Wealth of Nations.  (While some may argue that Smith is better, but Cantillon at doesn't lapse in a labor theory of value like Smith did.)

Now to add a twist, there is a mystery surrounding his death.  Was he murdered and the house burnt to cover up the crime?  Or did Cantillon fake his own death to live out the rest of his life in Bora-Bora or somewhere in South America?  We may never know.

Another mystery is what did Richard Cantillon look like?  How can there not be a painting of such a wealthy man?  It is at this point that Thornton's paper "A Man and his Family" jumps into the picture.  Thornton's paper is posted here, and the audio of the session is here as an mp3 audio.  Or you can follow this link.

Many scholars have been looking for such a painting with no luck.  It is at this point that Thornton picks up the detective story.  Thornton has been looking for a picture of Cantillon for the past 10-15 years.  The last time he was at the Louvre may prove to be the big break he (and all of us) have been hoping for.  He might have made the big discovery.  Thornton argues that the painter, Largillière, knew and painted Cantillon, his wife and daughter.  I freely admit that I am biased and have a low threshold of proof on this matter, nevertheless, I am cautiously optimistic.

Here is the painting that Thornton claims is Cantillon and his family.

Thornton claims that it was painted around 1730, which would be the correct time.  In fact, he also found a painting from 1720 also by Largillière, entitled "Portrait of a 'Gentleman.'"  And it is this...

It is clearly the same man.  He is younger and while wearing very expensive clothes, his shirt is undone.  It is a sign that he is a part of the "nouveau riche."  That could very well fit Cantillon and his rise in status during the up swing of the bubble.

Who knows for sure if this is Cantillon or someone else, but I'd like to think that it is him.  The next step is to compare the wife in the portrait above with a painting which positively identifies Mary Anne Cantillon.  So all we need to do is get some expensive facial recognition equipment, fly to Paris and ask very politely to test these paintings.  I'm sure that the French will have no problem with that!  ;-) 

Thursday, March 7, 2013

Solving Environmental Problems Through Economics

While my passion lies with Austrian Economics, I also find Environmental Economics fascinating.  (Of course, these two areas are not mutually exclusive and are often quite compatible,)  The reason why I like environmental economics so much is because it is so different from the normal use of economics.  It forces one to think (sometimes radically) out of one's comfort zone.

One of the major problems in environmental economics is non-point source pollution.  In other words, it is a type of pollution where the source is hard to identify.  A smoke stack or a drain pipe are examples of point-source pollution.  You can see the "point" where the pollution emanates from.  However, when it comes to some things such as agricultural spraying, determining which farm is causing the run-off pollution down-stream is much more difficult.

When I have been asked by my students how a market society would handle these problems without government regulation,  I would say that technology would find a way.  For example, when explosives are manufactured an inert identifier is added to the mix.  This way bomb residue experts can trace the manufacturer and lot number of the exploded material.  So why not employ similar technology to pesticides and other sprays?  That way, we can monitor down-stream and say that x% of the pollution is coming from Y's farm, and so on.

An unexpected development has arisen along these lines.  

Many people are worried about hydraulic fracturing or "fracking."  This is a process where shale is layered underground.  Between these many, tiny, thin layers is oil and natural gas.  The problem is how to extract the oil and natural gas because the layers are so thin that pumping from a single layer is inefficient.  The answer is to pump water into the area so that the layers are broken up and the oil  and natural gas can be profitably extracted.  The process mostly uses water to break up the shale layers, but an amount of hydraulic fluid is also used in the drilling process.  The worry is that this fluid along with the oil and gas might leach into the ground water.  While the science shows that this possibility has low risk, the fear is real.

And now the market solution.

A company, BaseTrace--which is based in the Research Triangle Park, NC, has developed an inert material that can be added to the hydraulic fluid so that if any leaching into the water table occurs, we can trace it back to the specific well.  That means that if there is a problem, we can identify where the problem is occurring and who is responsible.  For this to work, the amount of tracer needed is about a thimble full.  Amazing.

And possibly the most remarkable thing about this company is that it is run by 2 full-time and 3 part-time employees, all in their 20's.  I am encouraged that theories that could only imagine happening are being developed and employed by recent college graduates.

Monday, February 25, 2013

A Very Marxist Movie

With utter and complete disregard of the Oscars yesterday, I watched a movie....

I watched one of the most Marxist movies I have seen in a long time.  Fortunately, it was also a terrible movie.  It's called, "In Time" (2011) with Justin Timberlake and Amanda Seyfried.  I won't get into anything that a normal movie critic would look at like acting or cinematography; I'll concentrate on what I know--economics.

The story takes place in a dystopic future.  Normally, I love dystopic movies because usually they are about an oppressed people who throw off their chains and fight for freedom.  While this movie is about an oppressed people, who throw off their chains, it is a world in which the Marxist vision of capitalism is alive.  The rich are parasites that feed off the poor and that system must be overthrown.

So here is the premise of the movie...

People have been genetically modified so that they stop aging at 25 years, what you look like at age 25 is locked in.  (Amazingly, everyone is gorgeous.  I don't remember 25 like that, but I guess my memory has faded with age.)  When one reaches 25, numbers on your left arm light up and start counting down from 1 year.  If they reach zero, you die.  Fortunately, time can be added and subtracted.  As a result, time has become the medium of exchange.  Literally, time is money!

In a classic Marxist perspective, society is divided up into distinct "Time Zones" or socio-economic classes.  The ghetto (zone 12) is populated by the poor who labor day-to-day barely scrapping by, whereas in the rich district of New Greenwich, the rich live idle lives.  In fact since they have all the time in the world (again literally!) they are accused of not actually living at all.

The "hero" explains that prices rise for no apparent reason.  The cup of coffee's price was 4 minutes, but then jumps up to 5 minutes the next day.  A bus ride was an hour, but now has a price of 2 hours.  As a result, the hero's mom is (in a tragic and supposedly heart-wrenching scene) the first shown to die when time runs out. Actually, I didn't feel all that bad, mostly because the movie was terrible.  Or is it because I am not a Marxist?  hmm...

The plot moves forward when the "hero" helps a rich guy slumming it.  His name is Henry.  Henry is tired of living and is contemplating suicide even though he has over a century on his clock.  The movie shows its true Marxist colors in the following exchange between Henry and the "hero" Will.

Henry Hamilton: For a few to be immortal, many must die. 
Will Salas: What the hell is that supposed to mean? 
Henry Hamilton: You really don't know, do you? Everyone can't live forever. Where would we put them? Why do you think there are time zones? Why do you think taxes and prices go up the same day in the ghetto? The cost of living keeps rising to make sure people keep dying. How else could there be men with a million years while most live day to day? But the truth is... there's more than enough. No one has to die before their time. If you had as much time as I have on that clock, what would you do with it? 
The point is that the population is increasing and so prices (from an assumed Central Planner) rise to reduce the surplus population. The result is a transfer of time (wealth) to the rich.  And so the rich get richer by stealing from the poor.

However before Henry kills himself, he gives the "hero" over 100 years.  Our "hero" then goes to the capital to experience the life of the idle rich.  He gains even more years by playing poker and meets Amanda Seyfried.  After romancing her, the cops come along and accuse him of stealing the rich guy's time.  After the usual escape and chase action found in Hollywood movies, Timberlake and Seyfried's characters decide to get back at the rich.  They use guns (Oh Hollywood!) and start robbing banks.  They redistribute the time to the poor who, of course, selflessly share this time with everyone else who is poor.  They then emigrate out of their zone and cross into the rich zone, thus collapsing the system.  

And if that simply isn't enough Communist preachiness for you, then there is the coupe de grace.  As the "heroes" are robbing the banks, there are a few moments when they ask if robbing the banks are wrong.  The answer is: no, this is not wrong.  They ask, "Is it stealing if it is already stolen?"  Yes, all the rich ever do is steal their wealth.  Yes, Proudhon lives, "All property is theft."  

If this is the sort of movies that Hollywood insists on making, you can see why I skipped the Oscars.

One last note, this movie lost money in the US.  It was budgeted at approximately $40 million and brought in $37.6 million.  So do they simply make it for ideological reasons?  No, because, according to IMDB, Non-US Income was $103.2 million.  Now what does that tell you?  Your guess is as good as mine.

Wednesday, February 20, 2013

Austrian Economics Forum Spring #1 2013 (Part 2)--Buchanan and Artifactual Man

The second reading in the first AEF meeting centered on an article by Buchanan called, "Natural and Artifactual Man."  While this article is found in volume 1 (The Logical Foundations of Constitutional Liberty--1999) of the collected works of James M. Buchanan, Liberty Fund does not have electronic rights to the first volume.  (So I can't link to it, sorry.)

Oddly we started with the end of the article.  In fact Roy Cordato said he posted the last few lines on his Facebook page and someone replied asking why he was quoting a long forgotten President.  (Buchanan immediately preceded Lincoln.)  So what is the last paragraph?

Man wants liberty to become the man he wants to become.  He does so precisely because he does not know what man he will want to become in time.  Let us remove once and for all the instrumental defense of liberty, the only one that can be derived directly from orthodox economic analysis.  Man does not want liberty in order to maximize his utility, or that of the society of which he is a part.  He wants liberty to become the man he wants to become.  (page 259.)
This article is clearly one of the most Austrian of his writings for in it he takes apart mainstream Neo-Classical economic theory.  In Buchanan's words:
My purpose [this article was originally a lecture, hence the informal style], however, is not to criticize particular areas of concentration, but to advance a broad criticism against economic theory generally.  If I may resort to philosophical terms, what I am objecting to in modern economic theory is its teleological foundations, its tendency to force all analyzable behavior into the straitjacket of "maximizing a utility or objective function under constraints."  In one way, I am suggesting that the utilitarian origins of nineteenth-century political economy may have come to haunt us and to do us great danger. (pages 249-250.)
What Buchanan is getting at fits neatly into the Mengerian/Mises tradition.  According to Mises, I act because of a "felt uneasiness."  I envision myself in a better future situation.  According to Menger I imagine my ends and I think of employing means to achieve those ends.  What Buchanan is pointing out is that the very act of accomplishing these ends changes me.  I am no longer the same person I was when I started.  I am able to artificially construct a new me, hence we are all "artifactual."

A few of the examples Buchanan uses are quitting smoking or going on a diet.  "As the smoker abstains, ..., he will find that he does become different from the person that he was.  He preferences shift; he becomes the non-smoker that he had imagined himself capable of becoming."  (page 253)  Under this umbrella, we find "any aspect of human behavior that represents 'civility.'"  This includes more than simply manners and codes of conduct, it contains morals.  (As an aside, it is worth noting that this inculcating and transference was a traditional purpose of a liberal arts education.)

Today, higher-level modern economics has been reduced to essentially a study of pattern recognition.  Modern economists collect data and attempt to find patterns and derive economic laws from regularities that are "uncovered" in the data.  While some economists dress their findings up in Positivism, most economists do not think about these "meta" issues.  They are more concerned with "doing research."

Unfortunately, that approach is ultimately fruitless.  Thomas Tooke, the German Historical School and many others have all gone down this very path.  If economics is truly a social science, if it can contribute to the betterment of mankind and enrich our understanding of our world, we should pay heed to this article.  Buchanan is able to undercut the whole of the utility maximizing model and simultaneously argue in favor of a free and open society.  His method is to essentially adopt the Austrian view of "ends and means" and how Austrians view cost and choice.  (Yes, that was a reference to part 1.)

Wednesday, February 6, 2013

Unemployment "Insurance"

North Carolina has new Republican majorities in both the House and the Senate.  With a new Republican governor, North Carolina has Republican control of the reigns of government for the first time since Reconstruction.  

The outgoing Democrats have left North Carolina with a $2.6 billion debt that it owes to the Federal Government for unemployment expenditures.  Since the recession NC has had higher than the national average unemployment.  Additionally, NC has had generous benefits (greater than our neighbors) that last for 26 weeks (that's half a year).  So when the economic recession settled in NC, the pool of unemployment funds were quickly drained.  The Democratic majority in the legislature and Democratic Governor had a choice to either reduce the outflow of funds or find a new source.  Their solution?  They decided to borrow the money from Washington D.C.  As a result, we now owe $2.6 billion and the unemployment rate is still above the national average.

The new Republican Governor and majorities in the House and Senate are moving legislation through each chamber that will reduce the "benefits" and shorten the span from 26 weeks to a range of 12 - 20 weeks depending on the state of the economy.  Such a plan will quickly pay off the debt and put money back (about $2 billion) into the unemployment insurance fund.

In economics, there are two axioms that everyone should be familiar with.  The first is if you want more of something, use taxpayer dollars and fund it.  The second is if you want less of something, tax it.  What is unemployment insurance?  Well, it certainly is not insurance.  

What is insurance?  It is a method to reduce risk.  It helps alleviate the cost of something bad  happening.  In order for insurance to work, we need to understand class risk.  Class risk means that I know that a certain percentage of people will be affected by something, but I couldn't tell you who in particular.  I might know that so many people will get cancer in a given year or that a certain percentage of people will be killed in a car accident in a year or so many homes catch fire, etc.  Since I know the percent of people harmed, I know the risk.  We can then pool together the funds and help offset the cost of the event.  

Suppose that it costs $100 to set a broken bone.  Further suppose that there is a group of 10 of us who fall into the risk class that says one of us will break a bone once this year.  Each of us then contributes $10 to the pool, for a total of $100.  The "winner" is the guy you breaks a bone.  The "losers" are those that do not.  So when it comes to insurance the "winners" are those that get cancer, those who are in car accidents, those who homes burn down, etc.  The "losers" are those who pay into the fund, but nothing bad happens to them.

So let's apply this reasoning to unemployment "insurance."  First, can we identify risk classes?  No, not really.  Can we estimate how many will lose their job in the next year?  Again, not really.  With many insurances, we can modify the risk class we find ourselves through our behavior, like good driving vs. a record of drunk driving.  Is there any consideration along these lines for unemployment "insurance"?  Sadly no, like most government things, it's one size fits all.  Finally, am I paying into the fund that I am insuring against?  Yes, but it is subsidized by those who don't work.  I don't simply mean the unemployed, I mean those that don't have a job and do not want a job.  To the extent that funds come from the General Fund, those that pay sales tax, the gas tax, etc. are also paying into this fund.

If unemployment "insurance" isn't really insurance, then what is it?  It is simply a transfer payment to those who meet the government's definition of eligible recipient.  And now, finally, we can apply that first axiom, which is if we want more of something, have the government pay for it.  If we want more people unemployed, pay them not to work.  If we want people to be without work for week after week after week, pay them week after week after week.

The critics of the new governor have asked him to try to live on $350/week (the new proposed rate).  However, they miss the point.  This transfer payment is not supposed to replace work.  It is to help offset the cost of an event, losing one's job.  People respond to incentives and if the cost of being unemployed is high, those people will be highly motivated to take the next job out there.  If they are not highly motivated, they will wait until the "perfect" job comes along.  The reality is that the "perfect" job does not exist.  The reality is that you take the next job (which will pay less) and you work up the ladder again.

It is only by using the natural incentives found in the market will the economy recover.  The market will put people back to work.  We just have to let the market do its job.

Saturday, February 2, 2013

Austrian Economics Forum Spring #1 2013 (Part 1)--Buchanan and Methodology

It has been awhile since I made a AEF post.  Let's just chalk up last semester as a mess.  I might get back to posting them, but I realize that I need to move forward.

Yesterday, February 1st, was the 2013 kick-off meeting for the AEF at NC State University. There was quite the group there.  In addition to the group of graduate (and a few advanced undergraduate) students there were Prof. Stephen Margolis, Dr. Roy Cordato and his wife Dr. Karen Palasek, and additionally there was Dr. Mike Munger--Chair of Duke University's Political Science Department and all around nice guy.

There were two readings for this session, both written by Nobel Laureate James Buchanan (1919-2013).  The first reading was from Chapter 3 of his book Cost and Choice: An Inquiry in Economic Theory (1969).  The Chapter is called Cost and Choice.  It is found here: 3, Cost and Choice

This chapter is really an attack on the Neo-Classical approach to economics.  While I think that his criticisms are excellent when directed to the Neo-Classical approach, I don't think they have much impact on the Austrian approach to economics. 

To start, Buchanan says that mainstream economists say that science (and hence economics) must rest on something measurable.  There must be empirical and objective content.  Buchanan states, "the behavioral postulate" and the subsequent predictions of economic man are "drained of power," unless "specific descriptive content is given to 'costs' and to 'benefits' or to 'revenues.'"  He further states that, "There is no implied presumption that men should behave economically."  And then, "The motivational assumption is vital in that this allows the scientist to use the objectively observable magnitudes of money cost and money revenue streams as representations of the subjectively evaluated alternatives of choice in individuals' behavior patterns."

This simple insight is devastating to the Neo-Classical approach.  As Buchanan points out, "Objectively observable cost-revenue streams cannot serve as surrogates for the subjectively evaluated alternatives in which noneconomic elements are influential."  In other words, when I actually buy something, I am making an unobservable, subjective valuation of the product and another valuation of my next-best alternative, what eventually becomes my opportunity cost.  The seller is also making a similar calculation, albeit from the other point of view.  However, the core of the Neo-Classical approach depends upon observable, objective data.  All they can observe is the final trading price, not all the "stuff" that actually is needed for a trade to occur.  There is no action in the Neo-Classical system it is assumed that individuals will just maximize according to constraints. 

The reason I think that this is not a criticism of the Austrian approach is because Austrians do not rely on objective empirics as a foundation to economic science.  For the Austrian following Menger's approach, we start with the Ends/Means framework.  An individual thinks of an end and then imagines how to best achieve that end.  This assessment leads to action and thereby we can deduce economics.  This is the Praxeological approach.  

The next section of Buchanan's chapter centers on the idea of cost.  For me, there is only one kind of cost--opportunity cost.  Opportunity cost is a marginal cost.  It is the subjective value of the next-best (foregone) alternative when a decision is made.  To illustrate, I use this example in my class.  Suppose I want to buy a soda from the store and the price is $1.  What is the cost of the soda?  The answer is NOT $1; that's the price, but it is not the cost.  The cost, the true cost, the opportunity cost is the value of the next best thing that I could have purchased with that dollar.  Perhaps it was a bag of chips.  The value I would have received from that bag of chips is foregone because I bought the soda.  That foregone value is the cost of the trade.  Another example...  Suppose that you are an entrepreneur and you have a choice between Project A and Project B.  Each have an upfront expenditure of $100.  Project A will yield revenues of $150 and Project B will yield $130.  So which do you choose?  Project A of course, because it has a return of 50% while Project B is only 30%.  The cost of choosing Project A is not the $100 expenditure, it is the 30% return that I am unable to get because I am not doing Project B.  Suppose that for whatever reason the initial expenditure for Project A climbs to $110.  Now the rate of return drops to 36.36%  I still pick Project A and my cost is still the 30% return from Project B even though my expenditures for Project A have increased.  If the initial expenditures climb high enough, I will choose Project B and my "cost" will change, but the point is that the initial expenditure is NOT a "cost."

Buchanan argues along these lines, however, he makes a distinction between three types of costs.  He uses opportunity cost in the same way that I outlined above and uses "objective costs" for what I was calling "expenditures" in the above example.  Buchanan adds a third type of cost in his analysis "choice-influenced cost."  He states that there can be "opportunities lost" and that these lost opportunities should be counted as a type of cost.

On this point Cordato and I parted ways.  Cordato argued that since Buchanan was defining terms, that this was a perfectly appropriate thing to do.  I understand that point and it is valid, nevertheless I disagree.  I object to the notion that a reduction of future choices is a cost.  I think that all costs are only opportunity costs.  They cannot be borne by another.  They are completely subjective and they only occur when a decision is made.  I can imagine a situation where I shut down my business and that creates "a reduction in future choices" for those who are no longer employed.  Some may argue that this is a cost, but they would also have to argue that I am imposing a cost on another.  But where is these former employees' decision?  They are not making a decision and so I reject the notion that they are incurring a cost.  Another in the discussion group said, what if someone got bone cancer.  Is that a cost?  I want to push that example further and just take simple aging.  As one gets older, there are future choices that I am unable to do.  The body aches and I can't run as far or for as long.  Is aging now a "choice-influenced cost"?  There is too much that can be put into this concept and as a result, its meaning is confused, watered-down and eventually lost.  

One person did point out that in order to read the rest of the book, you had to take Buchanan's definitions.  So on that point I conceded and we moved onto the next reading.  

One last point, this reading and discussion reminded me of a quote from Wicksteed.  Wicksteed wrote in 1888 in The Alphabet of Economic Science, "When two men give the same thing, it is not that same thing they give."  Brilliant!  If two people give a $5 bill away, they are giving up (incurring) their opportunity cost for that $5 note.

The second reading was Buchanan's "Natural and Artifactual Man."  It was originally a lecture to a Liberty Fund Conference in 1978.  It has been reprinted in vol. 1 of Liberty Funds collected works of Buchanan.  

Since this post is already a little long, I will hold off and break this into two parts.  So part 2 will follow shortly.

The next AEF meeting will be a lecture by Prof. Ed López newly employed at Western Carolina University.  He will be talking about his book, Madmen, Intellectuals, & Academic Scribblers (2013).