Blogroll: Mises Institute

I read blogs, as well as write one. The 'blogroll' on this site reproduces some posts from some of the people I enjoy reading. There are currently 218 posts from the blog 'Mises Institute.'

Disclaimer: Reproducing an article here need not necessarily imply agreement or endorsement!

Subscribe to Mises Institute feed
Updated: 25 min 14 sec ago

The UN's Plans for More "Charity" Won't Solve the World's Problems

25 min 14 sec ago

At the 73rd session of the United Nations General Assembly, the President of the European Council of the European Union, Donald Tusk, recently gave an address on the EU’s participation in global efforts, and the future directions in which he believes it should move. In recent decades, Europe has been increasingly involved in numerous international missions, often focusing on immigration, environmental, and search-and-rescue endeavors. According to Tusk, though, Europe has far too small an involvement in worldwide affairs, and must seek a greater presence in them. As he said to the assembly, “More unity and collective action are needed in the struggle against conflict, poverty and famine, terrorism and mass displacement of people, of the kind we see in Venezuela, Syria, Myanmar and many other places”.

In the face of chaos and adversity, Tusk expectantly takes an attitude of advocating bigger and more expansive government influence, which will result in the granting of more money and power to the world’s highest political elites. It is, then, little surprise that, as the topmost EU leader, Tusk is amongst the most ardent supporters of the expansion of Europe’s international control. However, he is far from the only one pushing for international centralization; the regional hegemony of supranational associations like the European Union, the African Union, and the Arab League stand testament to this, as does the worldwide influence of organizations like the International Monetary Fund and the United Nations. Indeed, wherever government agents are able to expand their political authority and privilege, they will, and given the current ideological prevalence of progressivism and egalitarianism, the means by which this expansion is currently taking place is obvious.

However insidious the actual intents of global political leaders, though, some of their nominal goals are quite savory. The United Nations has set 17 objectives for global development that it hopes to achieve by 2030, called Sustainable Development Goals . These include: (1) eliminating poverty, (2) eliminating hunger, (3), providing good health and well-being, (4) providing quality education, (5) achieving gender equality, (6) providing clean water and sanitation, (7) providing affordable and clean energy, (8) creating decent work and sustainable economic growth, (9) building industry, innovation, and infrastructure, (10) reducing general inequalities, (11) creating sustainable cities and communities, (12) being able to produce and consume responsibly, (13) acting to solve climate issues, (14) protecting underwater life, (15) protecting life on land, (16) establishing peace, justice, and strong institutions, and (17) revitalizing global partnerships to achieve these goals. This last goal seems to be what Tusk was alluding to in his statement encouraging “[m]ore unity and collective action”. The understanding is that objectives as ambitious as these require the oversight and facilitation of a monolithic, international organization like the UN, with the ability to centrally plan and orchestrate its operations from the top-down.

The UN seeks to dispense with regular market processes in the pursuance of its goals, instead putting international bureaucrats in charge of its global development program. After all, many allege, the pecuniary interests of economic actors in the free market would not be able to handle these problems; only a central board unaffected by the incentives of money and profit could truly work for the common good. How accurate is that, though? Can a supranational body like the UN actually provide for the basic needs of the world’s worst off, all while saving the environment and creating just political institutions? Will the UN successfully achieve its Sustainable Development Goals? The answer to these questions does not stem in flowery, “we’re all in this together” rhetoric (as is all too common in worldwide efforts such as this), but rather in the comprehension of certain inescapable economic facts.

The act of giving charity should be fundamentally understood as an economic exchange engaged in by individuals for their mutual benefit. People voluntarily give to charity all the time (and without such high taxation and inflation, probably would much more ), because doing so is satisfying to them. As economist Jörg Guido Hülsmann explains, “If Smith gives a five-dollar bill to a beggar, then he thereby demonstrates that he, Smith, prefers that the beggar, rather than Smith himself, own the banknote.” Donors direct their money to causes they are passionate about, and that, as far as they know, successfully achieve their desired ends. Those who donate to St. Jude Children's Research Hospital, for instance, tend to care about ending childhood cancer and believe that their donation is making a positive difference towards that goal. Likewise, those who donate to the Mises Institute are interested in furthering the message of Austrian economics and libertarianism. No one ever gives to charities they do not care about, nor do they give to those they suspect of being ineffective, for they would obviously rather direct their money elsewhere.

When the UN uses its funds to subsidize healthcare or education for the poor, it is essentially “buying” a certain model of charity, to which the taxpayers of the UN’s dues-paying states are forced to subscribe. A portion of their earnings is exchanged for the plans, resources, and coordinative means that the UN deems fit to achieve its goals. It is, however, impossible for the UN to rationally allocate humanitarian aid. Once “charity” becomes an activity of the government’s domain, the values and preferences of individual good-Samaritans are dispensed with, and charitable causes are dealt with entirely through coercive means. This means that governmental “charity” is funded regardless of which world issues it seeks to solve, even if taxpayers do not care about (or even are strongly opposed to) certain causes. Indeed, out of the UN’s 17 Sustainable Development Goals, some of them surely resonate more with some people than with others. There is no intelligible reason why the mission of “protecting underwater life” should be given as much funding and precedence as “eliminating hunger” (and vice-versa). Despite this, the UN still makes a decision on the matter, however wasteful the resulting allocation of resources may be.

By ignoring the wishes of individual good-Samaritans, “charitable” government agencies are bound not only to spend too much on solving the wrong issues, but also to use methods that are ineffective at solving them - a double whammy of wastefulness. Bureaucrats do not own the capital value of the bureaus in which they work, so they have no incentive to cut costs and maximize profit. In fact, since the state receives funding regardless of its performance (and if anything, gets more if it has done an especially insufficient job), the information to assess the successfulness of different investments and expenditures simply does not exist. Consequently, it is a logical impossibility, even for the most well-meaning bureaucrat, to use taxpayer money in an efficient manner. In the case of UN “charity”, this means that out of the myriad different ways there are to solve a particular problem, a completely arbitrary one will be chosen, which may require a vast quantity of resources, only to make little progress.

As a result, all UN projects are governed by pure assumption and guesswork, even when its shoddy and misleading “cost-benefit analyses” are drawn up. The methods that it uses to solve global issues are wildly inefficient, using up billions of dollars of resources on unsuccessful projects, without ever having the information available to adjust to a more efficient expenditure. In trying to reduce poverty, for instance, it may be advantageous to provide the destitute with certain goods for a certain period of time, in order to help them to grow in their skills and savings. This consideration, though, leads to a host of questions: to what degree should the poor be given goods, rather than simply encouraged to work and save?; which goods should be provided?; how many of these goods should be provided?; should all impoverished persons receive the same goods, or should different goods be provided to different individuals?; etc. Private charities on the free market are able to answer these questions based on the empirical facts that they observe, and are flexible in responding to changing conditions. The UN, however, has no way of answering these questions due to its highly centralized position and its separation of charitable giving from individual choice.

To be sure, the UN may be able to take some cues from private charity in determining how to spend its funds, but such charity, as it currently exists, is heavily distorted and hampered due to government interference in the market. It can, thus, only convey very limited information to the UN. Plus, the UN would then be faced with the task of properly applying this information to its own efforts, at which it is likely to be inept, since it is not subject to the pressures of market competition. Its decisions would still be made “in the dark”, even if it used voluntary charity as a rough guide. Funds and resources would be used in a hardly more satisfactory manner.

The blindness of government agencies in making allocative judgments causes their inevitable waste of taxpayer dollars. David Friedman has estimated that the state requires around twice as much money to do things as does the free market (and many studies seem to corroborate this claim), which makes obvious sense, given the unavoidable properties of government expenditures. All cases of governmental “charity” squander precious resources, and by consequence, the needy are helped far less effectively on a dollar-for-dollar basis. The operations of the UN are no exception.

All of this is relevant, of course, only so far as the UN engages in efforts that can actually be considered charitable. Many of its Sustainable Development Goals include cronyist undertones behind their faux compassion - privileging certain groups and companies, while denigrating others. Countries are, for example, called upon to “accelerate the transition to an affordable, reliable, and sustainable energy system by investing in renewable energy resources, prioritizing energy efficient practices, and adopting clean energy technologies and infrastructure”. While such endeavors are done in the name of “saving the environment”, they amount, in reality, to little more than corporate subsidies to the wind, solar, and hydropower industries. As a result, the procurement of energy sources that are more efficient , like fossil fuels, is hindered. This all unfortunately comes at the dime of taxpayers, and in the name of “making the world a better place” .

Admittedly, some of the Sustainable Development Goals may be met by 2030 - but if so, it will be in spite of the UN, not because of it, and whatever progress that is made will not be as extensive as it would have been otherwise. Advancements in the human condition will hardly come close to what the free association of individuals could have accomplished otherwise. After all, such people take their psychic profit and loss into account and adjust their expenditures accordingly, so that ineffective charities and methods of solving problems could be easily phased out. Clearly, with more of their own money in their pockets, they could do a far better job of reducing poverty and providing clean water than the UN ever could. Contra Donald Tusk, “[m]ore unity and collective action” will only impede humanitarian efforts further.

Categories: Current Affairs

It's OK To Buy Your Pet a Halloween Costume (and Other Luxuries)

25 min 14 sec ago

Money spent on "luxuries" goes to support ordinary people who use profits from luxury goods to make a living and support their families.

Original article: It's OK To Buy Your Pet a Halloween Costume (and Other Luxuries).

Categories: Current Affairs

It's Easy to Hoax Academic Publishers — Since They Don't Seem to Care About Good Scholarship

3 hours 35 min ago

In 1768, the Portable Theology, or Brief Dictionary of the Christian Religion was published under the authorship of Abbé Bernier. It claimed that all of the “dogmas of the Christian religion are immutable decrees of God, who cannot change His mind except when the Church does.” Posing as an authority on Church doctrine, the piece was actually satire, and the true author was Baron d’Holbach.

In the twentieth century, following the birth and growth of academic publications, hoax articles showed up from time to time. In 1931, a handful of physicists published a parody article titled “On the quantum theory of the temperature of absolute zero” making fun of the then-fashionable attempts to identify constants in nature through the use of numerology (don’t worry, I don’t get the joke either), and the authors were later compelled to apologize.

Twelve years later, James McAuley and Harold Stewart wrote sixteen deliberately terrible poems by picking words randomly from books and tying them together with poor rhyme schemes. They then submitted them to a prominent literature journal as having been discovered among the papers of a deceased poet named Ern Malley. The journal published the poems before it came out that Ern Malley never existed, subjecting the editors to a great deal of humiliation.

The first famous (or infamous, perhaps) parody article was published in 1996 by Alan Sokal. His article, “Transgressing the Boundaries: Toward a Transformative Hermeneutics of Quantum Gravity,” was meant to expose the lack of academic rigor that Sokal believed was plaguing the academic left at the time, particularly due to the fashionability of post-modernist relativism. The article was written in meaningless academic jargon with the purpose of demonstrating how vacuous, intellectually void articles could be accepted as serious scholarly contributions as long as they appealed to the biases of the day.

Sokal’s hoax gained nationwide attention after the New York Times ran an article about the controversy. Stanley Aronowitz, the editor of the journal who published the hoax reacted to the revelation that Sokal had hoodwinked them by saying, “He says we're epistemic relativists. We're not. He got it wrong. One of the reasons he got it wrong is he's ill-read and half-educated.” The problem, of course, is that if Sokal was so uneducated about the journal’s editorial staff, how did he get an article approved by them to begin with?

While Sokal’s hoax may have exposed how the political views of academics were tarnishing the quality of scholarship, the incident was soon forgotten and the problem was left unsolved.

But in 2017, two academics, Jamie Lindsay and Peter Boyle, picked up Sokal’s mantle by publishing “ The conceptual penis as a social construct ,” in the journal Cogent Social Sciences. They took the absurdities to a new level, arguing, for example, that “manspreading” (a man sitting with his legs apart) “is clearly a dominating occupation of physical space, akin to raping the empty space around him.” If the absurdities contained in the article weren’t indicative enough that the submission was a hoax, the authors gave more hilarious indicators in their author bios, writing that “While neither [author] uses Twitter, both finding the platform overly reductive, they incorporate careful reading of the relevant academic literature with observations made by searching trending hashtags to derive important social truths with high impact.” To any dispassionate reader, the article should have been seen as a sham within the first two sentences.

When “The conceptual penis as a social construct” was published, the authors came out with a popular article acknowledging the hoax and presenting their views on what we can learn from it. They admitted that their opening sentence was “preposterous,” setting the tone for “3,000 words of utter nonsense posing as academic scholarship.” Like Sokal, they were concerned with the way politically fashionable ideas have destroyed the intellectual objectivity for much of the academic left, and they wished to expose it. But they also admitted that the article was published in a “pay-to-play” journal – one in which authors must pay to have their journal published once it is accepted, which can easily indicate lower academic standards and indicts the cutthroat culture of academia in which job security in a saturated market is predicated on publication records. Perhaps it is not the politically biased left that is responsible for the publication of gibberish, but the nature of the publication-centered academic job market.

So Lindsay and Boyle, along with another academic, Helen Pluckrose, resolved to continue testing their theory that certain academic fields – such as gender studies, critical race theory, and sociology – would be willing to publish either nonsensical or morally repugnant articles, so long as the paper appealed to the current political fashions of the leftist intelligentsia. They dubbed their targeted fields as “grievance studies” – being academic fields that exist to air political grievances, rather than to further the pursuit of knowledge.

Recently, Lindsay, Boyle, and Pluckrose have garnered more attention after a writer for the Wall Street Journal became curious about a scholarly article entitled “ Human reactions to rape culture and queer performativity at urban dog parks in Portland, Oregon ,” published in Gender, Place, and Culture: A Journal of Feminist Geography. Upon investigation, the journalist found out that this was one of several hoax articles that had been published or was pending publication. The Wall Street Journal ran an editorial on the hoax , revealing that no less than seven hoax papers had been accepted to academic journals, including some well-respected ones (at least, for their field). No longer can the authors blame “pay-to-play” journals for the low academic standards for publication.

In addition to the “conceptual penis” and “rape culture in dog parks” topics, the “grievance studies” pranksters published an article titled “Our Struggle Is My Struggle: Solidarity Feminism as an Intersectional Reply to Neoliberal and Choice Feminism,” which – as the name almost makes too obvious – is little more than passages of Mein Kampf rewritten in intersectionality jargon.

In response to these hoax papers, many academics refuse to acknowledge the problem. Yascha Mounk, a professor at Harvard, actually condemned the hoaxers saying, “To hoax morally suspect fields like economics . . . is morally righteous. To hoax morally righteous fields like gender studies, on the other hand, is morally suspect.” The level of insanity at play here is staggering. At the point that we are defending academic fields on no other grounds than moral claims, we can at least acknowledge that these disciplines cannot be considered scientific at all.

But all of this is already making plenty of headlines. What should concern people just as much – if not more – is the purging of actual scientific articles, which have met truly rigorous standards, for not appealing to the political sensibilities of the same academic left that is accepting rewrites of Mein Kampf. Mathematics professor Theodore Hill came up with a mathematical argument attempting to explain a long-standing empirical phenomenon known as the “Greater Male Variability Hypothesis.” In sum, this hypothesis asserts that men are overrepresented both among the extremely high- and extremely low-achieving ends of the spectrum.

The hypothesis is controversial for obvious politically correct reasons, but it nonetheless has received genuine scientific attention because no matter how offensive people may find it, the empirical data clearly and consistently demonstrates these variances. Dr. Hill was simply trying to offer a mathematical explanation for the phenomenon “based on biological and evolutionary principles.” His paper was submitted to a respectable journal – the Mathematical Intelligencer – and after going through the peer-review process, it was accepted for publication. Concerned that the paper would be controversial, Dr. Hill sought reassurance from the editor, only to be told, “In principle, I [the editor, Marjorie Wikler Senechal] am happy to stir up controversy and few topics generate more than this one.”

However, once the article was published, some politically correct Penn State professors started a social media campaign to get the article removed. After contacting the editor of the Intelligencer multiple times and stirring up notable social media attention, the Intelligencer actually unpublished a scholarly article. This had never been done before. Even the hoax articles that have come to light can still be read in their respective online publications, even as they are now qualified as “redacted.” But for publishing a non-politically correct, but genuinely scholarly, article, a scientific article was entirely removed after publication. Not only is this unprecedented, but this means that the article can never be published anywhere else, as the Intelligencer now holds the copyright to the article.

Effectively, this is academic book burning.

It should be mentioned that all of the professors who have been trying to expose and combat these poor scholarly practices identify as part of the political left. This is not a left-versus-right battle – this is a battle for open and honest academic practices versus politically biased, intellectually dishonest, and morally disreputable practices. The question is whether these stories are revealing the loss of academic integrity in favor of political agendas, or if academia has always been this way, and we are only just now starting to realize it.

Categories: Current Affairs

Audio Lecture: What is Money?

Thu, 18/10/2018 - 20:25

In this 18-minute talk, Malavika Nair presents the basics on what money is, its origins, and why it is so central to a modern economy. Delivered at the Mises Institute on 21 June 2012. 

Categories: Current Affairs

Capitalism Makes Us More Humane

Thu, 18/10/2018 - 20:25

Why is it that starving Venezuelans are eating dogs while Americans are rescuing dogs from hurricanes? Original article: Capitalism Makes Us More Humane.

Categories: Current Affairs

Purchasing Power and the Exchange Rate

Thu, 18/10/2018 - 20:25

According to popular thinking, a key factor in the foreign currency exchange rate determination is the state of the balance of payments. Following this logic, an increase in imports gives rise to an increase in the demand for foreign currency. To obtain the foreign currency importers sell the domestic currency for it. As a result, this causes a strengthening in the exchange rate of the foreign currency against the domestic currency i.e. more domestic currency per unit of a foreign currency.

Conversely, if there is an increase in exports, all other things being equal, then once exporters exchange their foreign currency earnings for domestic currency this sets in motion a strengthening in the domestic currency exchange rate against the foreign currency. (Less domestic currency per unit of a foreign currency).

In this way of thinking, exporters determine the supply of foreign currency while importers determine the demand for foreign currency. Hence, the interaction between supply and demand establishes a foreign currency exchange rate.

Following this logic, it makes sense to conclude that the state of the balance of payments, which is the result of the interplay between exports and imports, is a key in determining the foreign currency exchange rate.

Key Factors Determining Demand and Supply of Foreign Currency

Is it valid to suggest that exporters set the supply of foreign currency while the demand for it is set by importers?

For instance, the demand for the yen emanates not only from American importers of Japanese goods and services but also from the Japanese themselves.

Every bit of economic activity that takes place in Japan gives rise to demand for Japanese money - the yen. A Japanese producer of shoes exercises his demand for money by selling his product (shoes) for yen, which in turn he could employ some time in the future, in order to be able to buy other goods and services.

Likewise, the producers of other goods and services exercising their demand for money by exchanging their produced goods and services for money, which in due course is going to be exchanged for other goods and services.

What is the source of the supply of foreign currency such as the yen and the euro? In the modern monetary system, the source is the central bank monetary policy and the fractional reserve banking. The quantity of the yen and the euros is set by the relevant central banks and fractional reserve banking and has nothing to do with the activity of exporters.

Moreover, we suggest that, with all other things being equal, the respective monetary policies of central banks determine the respective purchasing power of money. This in turn determines the exchange rates. Here is how.

The Relative Purchasing Power of Money and the Exchange Rate

A price of a basket of goods is the amount of money paid for the basket. We can also say that the amount of money paid for the basket of goods is the purchasing power of money with respect to the basket of goods.

If in the US the price of a basket of goods is $1 and in Europe an identical basket of goods is sold for 2 euros then the rate of exchange between the US$ and the euro must be two euros per one dollar.

An important factor in setting the purchasing power of money is the supply of money. If over time the growth rate in the US money supply increases against the growth rate of European money supply, all other things being equal, this is going to put pressure on the US dollar.

Now, a price of a good is the amount of money per good, this means that the prices of goods in dollar terms are going to increase faster than prices in euro terms, all other things being equal.

Another important factor in driving the purchasing power of money and the exchange rate is the demand for money. For instance, with an increase in the production of goods the demand for money is likely to follow suit.

The demand for the services of the medium of exchange is likely to increase since more goods are now going to be exchanged. As a result, for a given supply of money, the purchasing power of money is going to increase. Less money will be chasing more goods now.

Deviation of the exchange rate from the relative purchasing power sets in motion arbitrage

Any deviation of the exchange rate from the rate set by the relative purchasing power of money is likely to set in motion arbitrage, which will undo the deviation. The deviation could emerge because of the market response to the trade account data or because of a change in the interest rate differential. We suggest that these deviations are likely to set corrective forces in motion.

Let us say that the Fed raises its policy interest rate while the European central bank keeps its policy rate unchanged. We have seen that if the price of a basket of goods in the US is one dollar and in Europe two euros, then according to the purchasing power framework the currency rate of exchange should be one dollar for two euros.

Because of a widening in the interest rate differential between the US and the euro-zone an increase in the demand for dollars pushes the exchange rate in the market toward one dollar for three euros. (The holders of euros are now demanding more dollars that are going to be placed in deposits earning higher interest rates).

Notwithstanding, the dollar is now overvalued as depicted by the relative purchasing power of the dollar versus the euro (it should betwo euro to one dollar and not three euro to one dollar). In this situation, it will pay to sell the basket of goods for dollars then exchange dollars for euros and then buy the basket of goods with euros – thus making a clear arbitrage gain.

For example, individuals could sell a basket of goods forone dollar, exchange the one dollar for three euros, and then exchange three euros for 1.5 basket, gaining an extra 0.5 of a basket of goods.

The fact that the holder of dollars increased his/her demand for euros in order to profit from the arbitrage is going to make euros more expensive in terms of dollars i.e. more dollars per euro – pushing the exchange rate in the direction of one dollar for two euros.

We suggest that an arbitrage is always set in motion once the rate of exchange deviates, for whatever reasons, from the underlying rate of exchange.

Summary and Conclusion

Contrary to a popular belief, the state of the balance of payments has nothing to do with the determination of currencies exchange rates. The key factor behind the rate of exchange determination is the relative purchasing power of various monies.

Categories: Current Affairs

Yes, Inequality Is a Problem — When Caused by the Government

Thu, 18/10/2018 - 20:25

Some inequality arises naturally from freedom of choice. Some comes from government meddling. One is good and the other is bad. Original article: Yes, Inequality Is a Problem — When Caused by the Government.

Categories: Current Affairs

The Problem with Prescriptive "Rationality" in Economics

Thu, 18/10/2018 - 14:05

Behavioral economics is becoming more and more popular. After Daniel Kahneman, who in 2002 received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for having integrated insights from psychological research into economic science, another representative of this current of thought, Richard Thaler, joined the group of laureates of this prestigious award last year.

But what is the difference between behavioral economics and mainstream economics? After all, economics has been dealing with human behavior since its inception. According to the popular narrative, the basic merit of behavioral economics is to show that people are not fully rational, that the economy is made up of individuals who are weak-willed and susceptible to cognitive biases. Is this interpretation correct?

Rationality of People vs. Model of Rationality

Contrary to the common opinion, behavioral economics does not show that people are irrational. It rather undermines the neoclassical model of human rationality.
Daniel Kahneman was actually aware of this, as he emphasized it several times in Thinking, Fast and Slow that his research did not show the irrationality of human choices, but that the model of homo economicus did not describe true human behavior well. These are two different things: people can behave in a logically inconsistent but reasonable manner. If the people’s actions deviate from the predictions of the theory, it does not necessarily mean that they make “errors” – it may mean that the theory on the basis of which predictions are formulated is incorrect.

Vernon Smith notes that the observed asymmetry of profits and losses (people are loss averse) may not mean irrational behavior, but rather the maximization of the likelihood of bankruptcy being avoided. The observed behavior of individuals would be inconsistent with the profit maximization model, but would fit the survival model.

From an evolutionary point of view, survival is much more important than maximizing profits. In other words, deviations from the standard neoclassical model may be appropriate behaviors from an evolutionary point of view.

Indeed, if people were as irrational as it is often thought, it would be difficult to explain how our species survived. It must be remembered that the actual decision environment is more complicated than the one assumed by the theoreticians. People owe their existence to their ancestors who have developed the ability to adapt to a dynamically changing environment, not to the optimal processing of information about static equilibrium conditions and probability distributions.

It is worth to raise an important point here: is making mistakes when making decisions about abstract choices is really irrational given limited cognitive capacity? Is limiting our mental effort – is there something more valuable to man than his mental resources? – not rational, after all?

From the point of view of the limited “processing capacity” of the mind, committing judgment errors from time to time can be a small price for automating most of the activities we do – especially that, in general, at least in the case of routine situations, it works correctly. As Vernon Smith remarked in his Nobel Prize Lecture, “if it were otherwise, no one could get through the day under the burden of the selfconscious monitoring and planning of every trivial action in detail.”

Individual and Market Rationality

But even if we agree on the irrationality of individuals, does it change anything in economic theory? Contrary to the standard neoclassical model, for markets to function properly people do not have to be rational, omniscient, good or intelligent. After all, the greatest merit of Bernard Mandeville and Scottish philosophers was to show that people do not have to be good, that their behavior would bring good results. As Adam Smith famously says in The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

And Hayek showed in The Use of Knowledge in Society the great feature of the price mechanism is the economization of knowledge with which it operates, or “how little the individual participants need to know in order to be able to take the right action.” In other words, the perfect information is not a condition of competition – on the contrary, it is on the market that previously unknown information is generated in the competition process. By developing Hayek’s thought, Vernon Smith notes that “markets economize on information, understanding, rationality, numbers of agents, and virtue.”

Indeed, as Armen Alchian has shown in his article “ Uncertainty, Evolution, and Economic Theory,” what really matters for the economy is generating profits, not the individual decision-making processes, motivations or capabilities behind them. Profits are achieved by those who are better than the competition, not the most intelligent, or the most rational individuals. This means that intelligence or individual rationality does not matter, because even in a society of ignoramuses or idiots profits will exist.

The economy will thus achieve the equilibrium anticipated by the standard neoclassical model, even if individuals are not fully rational and do not maximize profits (according to Alchian, in the world with the uncertainty “profit maximization” is a meaningless concept). As in case of the biologist who, thanks to the knowledge about evolution, can predict the impact of environmental changes on organisms, even though they themselves do not know the laws of evolution, the economist is able to describe economic tendencies resulting from the adaptive, imitative trial and error process in the search for positive profits, even if individuals are not rational, i.e. they do not maximize profits.

It is true that the homo economicus model is not realistic. If you treat behavioral economics as a critique of this model, it is the right one. It seems, however, that researchers belonging to this strand of thought have focused too much on finding anomalies relative to the standard neoclassical model, ignoring its predictive achievements. Unfortunately, behavioral economics – especially its popular interpretations – throws the baby out with the bathwater, treating deviations from the model not as evidence of its defect, but as evidence of the irrationality of individuals (which – as Thaler believes – must therefore be nudged in the right direction).

Thus, behavioral economists are not really a real opposition to the homo economicus model. They remain within the framework of constructivist rationality, according to which the rationality of the market is derived entirely from the rationality of individuals. Both neoclassical and behavioral economists believe that markets cannot be rational, unless entities are fully rational in the sense assumed in theoretical models (although Hayek has shown that it is wrong to equate the knowledge needed by the economist to explain the market phenomena with the requirements for knowledge possessed by market participants). Both neoclassical and behavioral economists, therefore, think that the rationality of individuals exhausts the scope of their research; they do not take proper account of social interaction and coordination taking place through the price mechanism.

And the magic of the market is, as Vernon Smith writes, precisely the fact that it aggregates “information far beyond the reach of what each individual knows, and is able to comprehend.” In other words, in addition to individual (constructivist) rationality, there is also market rationality (ecological), which causes that markets lead to equilibrium regardless of the nature of actions (whether they are rational, nonrational or irrational) undertaken by individuals.

Instead of pointing to and complaining about the alleged defects of individuals, economists would probably do better, explaining how “unsophisticated” individuals, which have only crumbs of information and limited intellectual abilities, are nevertheless able to find effective solutions to economic problems and drive the economy towards a socially beneficial results.

Originally published in Polish by Poland's Financial Observer under an "open content" license:

otwarta_licencja_200px.png
Categories: Current Affairs

It's OK To Buy Your Pet a Halloween Costume (and Other Luxuries)

Thu, 18/10/2018 - 01:45

One of the more persistent myths about capitalism is that wealth and resources are "wasted" when spent on luxuries.

But now this waste has reached a new level. Thanks to our abundant wealth in the developed world, we're no longer just spending money on luxuries for ourselves. We're "wasting" it on our pets too.

For example, a recent article at Salon contends that the billions spent on luxuries for pets "could do more good" if spent somewhere else.

Now, I know what you're thinking. You're thinking it's those Millennials who are throwing all that money away in order to dress up their dogs.

Well, there's no doubt that some American millennials do that, but, it turns out that the middle class in China has grown so much that the Chinese are now spending billions on their pets too. The Salon article explains the "problem":

Sylar, the border collie, has his own mansion along with a trampoline and indoor pool...

Sylar’s mansion, where other pets can visit and indulge in expensive spa-like treatments ... drew the media’s attention to the increased spending in China on pet-related services. The Chinese are forecast to spend about US$2.6 billion on their pets by 2019 – a 50 percent increase from 2016.

This, however, pales in comparison with what Americans spend on their pets annually. This year alone, pet spending in the U.S. is estimated to exceed $72 billion , which is more than the combined GDP of the 39 poorest countries in the world.

Of course, these expenditures are not distributed equally among all pets. Sylar, like other celebrities, lives in the lap of luxury, while many of his fellow creatures experience hunger, homelessness, abuse and other deprivations.

How are we to think about the ethics of spending so much money on pets when it could be used to alleviate the suffering in the world?

This is an old, old story. The basic premise has long been this: people should not spend their money on luxuries while there are some people in the world who can't get enough to eat, or who lack adequate housing, or who lack an education.

Now, there is no doubt that real value can be obtained from charitable giving to people who live in poverty. Encouraging people to share the wealth in this way — freely and without state coercion, of course — is a good thing.

However, much of the argument being made in this case of pet spending is that spending of this sort has little to no actual value.

There are a few problems with the underlying assumptions here, so let's look at some of them now.

First of all, we can't really assign value to how much "utility" is gained for the buyer — who is, of course, the person and not the dog — when purchasing, say, a halloween costume for a dog.

We can't really say how much psychic profit is obtained from buying such things since each consumer is different. However, perhaps the costume was purchased by a parent in the hope of augmenting family bonding. Or perhaps he or she bought the costume to participate in a local Church event designed to build community among members. It's impossible to say, and thus it's impossible to conclude that every dime spent on a pet "luxury" is a waste of money.

Secondly, we have to remember where that money goes when it is spent on luxuries. It's not as if that money simply evaporates into the ether. The money spent on any luxury item goes to someone somewhere — whether a shopkeeper, or a manufacturer, a truck driver who delivers the item, or the factory workers who creates each item.

Take for example a pet concierge — yes, they exist. These are people who specialize in pampering pets in exchange for money from the pet's owner. Can we say that all of this money is wasted? Presumably, at least some of the the people who run pet concierge services have families. Some may have no skills other than as a pet concierge. At any rate, any person who works as a pet concierge has determined that this is the least bad job he or she can obtain at this point in time.

Can we conclude that the money paid to these people is just wasted? What if the pet concierge uses that money to care for an elderly or impoverished relative? Or a disabled child? To make blanket statements about how all money spent on these services is "wasted" is not only wrong, but inhumane.

And this brings us to our third point.

Some may respond to our previous observation by claiming, "well, if we redistributed all that money spent on luxuries, that pet concierge wouldn't have to work hard just to help his elderly relative or disabled child."

In other words, at the core of the "money-spent-on-luxuries-is-wasted" argument is often an assumption that some government agency could do a better job of allocating the money.

But let's look at what would be required to "re-allocate" this money in an allegedly better way.

First of all, government agents would have to determine which people are spending too much on luxuries, and then determine what portion of their income to confiscate for purposes of re-allocation.

Then, it must be determined which people will receive the redistributed funds.

All of this will be dictated by rules and regulations, and government bureaucrats will take their cut in the re-allocation process, of course.

In the end, some people will end up with more money than they had before. And some will have less. And government employees will certainly have more.

But, can we be sure that the pet concierge who supports her family with the profits from pet luxuries will actually be better off? No, we can't be sure. Its entirely possible, that as the wealthy are less able to purchase luxuries, the pet concierge will be put out of business, and end up working in a field she less prefers, and possibly even hates.

Moreover, we can't be sure that she'll even see a net gain in her income, since the rules authored by bureaucrats may not favor people in her particular situation.

Moreover, the pet concierge's subcontractors and service providers will themselves see a reduction in their income. Had those people been investing their surplus — a surplus obtained from catering to pet luxuries — been investing in any number of non-luxury goods and services, all of those industries will see a loss.

And finally, workers overseas in poor countries who, say, sew together pet costumes, will see less demand for their work, and thus less income. These people are probably the ones who will suffer the most from our attempt at punishing people who spend too much on luxury items.

The cumulative effect is substantial, and there's no way a government planner could account for every possible outcome.

And finally, of course, there is the fact that the forced re-allocation of funds requires coercive taxation on the part of the state — taxation under threat of fines and imprisonment. Contrast this with the voluntary exchange between the pet owners and the pet concierge. Both parties benefit. and the benefits don't end there, as we have seen.

So, the next time we witness someone who is spending money on some luxury we deem unnecessary, whether it be a luxury car, or seemingly pointless toy, or a service that "nobody needs," it's helpful to keep in mind that those who sell and market such goods are ordinary people who benefit from these transactions.

Indeed, people who think that "rich" people have too much money and too many luxuries, ought to applaud people who sell dog trampolines to rich people. After all, those people are helping to separate the rich from their money.

Categories: Current Affairs

The Battle of Ball’s Bluff, Part 2: A Little Short of Boats

Wed, 17/10/2018 - 22:35

After General Stone’s “slight demonstration” erupted into a small-scale battle, communication errors and battlefield mistakes continued to make matters worse for the Union army. The battle would not only end in a Union defeat, but it would also claim the life of one of President Lincoln’s closest personal friends. 

Chris Calton recounts the controversial history of the Civil War. This is the 27th episode in the third season of Historical Controversies. You may support this podcast financially at Mises.org/SupportHC.

Categories: Current Affairs

Mises: Scientist and Fighter

Wed, 17/10/2018 - 22:35
The Free Market 26, no. 2 (February 2005)

Mises was a towering figure, representing uncompromising intellectual integrity, the courageous pursuit of ideas regardless of the crop of unpopularity which he well knew he would reap. His scholarship was extraordinary; his wisdom legendary; the profundity of his insights into social processes has probably never been surpassed.

Much has been written about his passionate championship of individual liberty; it is only natural that exponents of the several different streams of social philosophy to whom individual liberty is of importance are each eager to recognize Mises as a source for their respective positions on the ideological spectrum. I, too, wish to draw attention to Mises the proponent of individual liberty, but I wish to do so in a context for which matters of ideological emphasis are, nonetheless, wholly irrelevant. Let me explain.

A number of writers have, on occasion, claimed to have perceived a contradiction in Mises. On the one hand Mises was an outspoken exponent of the Weberian view that economic science can and must be wertfrei (value free). Economic science can and must be pursued in a manner that carefully distinguishes between the personal opinions and value judgments of the economist, and the objective, interpersonally valid conclusions of science. On the other hand Mises was the impassioned defender of the free market, full of scorn for the pretensions of central planners and interventionists to replace or supplement the spontaneous market with contrived arrangements by the state. It has seemed difficult, for a number of writers, to reconcile these different aspects of Mises. Yet, to anyone who heard Mises lecture on these topics, there can be no doubts concerning his position; there is certainly no contradiction in that position.

For Mises economic science is very definitely wertfrei. The demonstrations that wage controls tend to produce specific consequences, that rent controls tend to produce specific consequences, or that foreign exchange controls tend to produce specific consequences—these are not matters of opinion, they are the conclusions of science. Whether one approves or disapproves of these consequences, whether the fulfillment of these lessons of science be welcomed or feared, affects not in the slightest the truth of the proportions which assert these tendencies. Yet for Mises economics does not operate in an ivy-clad vacuum; it is impossible to ignore the fact that these consequences do not in general coincide with the goals which the proponents of controls purport to cherish. From the perspective of these goals, then, these policies are simply wrong and muddleheaded policies.

No doubt, in articulating these judgments it was difficult for Mises altogether to conceal his own passionate sense of human tragedy entailed by the pursuit of such bad policies. But what made these policies bad policies in the view of Misesian applied economic science was not Mises’s own opinions, but the opinions of those who wrong-headedly sought to promote their announced goals by policies that tend to produce consequences precisely the opposite of these goals.

Now, there can be no doubt that for Mises, the value of the value-free pursuit of economic truth, was extremely high. For Mises the systematic search for economic truths is an activity that is eminently worthy of human endeavor. This sense of worth had its source in Mises’s passionate belief in human liberty and the dignity of the individual. For Mises the preservation of a society in which these values can find expression depends, in the last resort, upon the recognition of economic truths.

But, paradoxically enough, Mises was convinced that these deeply held values can be promoted, through the advancement of social science, only if scientific activity is itself conducted as an austerely dispassionate undertaking. If economic science is to attain a credibility beyond that achieved by crass propaganda, it must earn that credibility by impartial concern for truth. The values to be achieved by economics require value-freedom in economic investigation.

How tragic, then, it must have been for Mises in the latter half of his life to observe the direction taken by economics. So far from economic science demonstrating those truths upon which, for Mises, the very future of civilized society depends, we had an atmosphere of professional opinion in which the prestige of science was deployed to deride the very possibility of spontaneous market solutions to social problems. In virtually every area in economics, it seemed to turn out, chaos and misery were shown to be bound to ensue unless market forces are curbed, redirected or superseded by the firm, benevolent hand of an all-wise government.

For Mises these sadly mistaken conclusions meant a two-fold tragedy. First, they represented serious error in the understanding of economic phenomena; second, they constituted a tragic perversion of science for ends diametrically opposed to those which, for Mises, confer worth and beneficent purpose upon the distinterested study of economics. The possibility that today, as we mark the one-hundredth birthday of our teacher, the climate of professional opinion may to some extent be changing, offers us an opportunity to appraise the place of Mises within the broader perspective of the history of economic understanding.

The historic contribution of Mises, I submit, was represented not so much, perhaps, by the magisterial works that he produced in 1912, or 1922, in 1933, or 1940—as by his courageous, lonely vigil during the arid decades of the 1940s, 50s and 60s, a vigil marked by a stream of unpopular books and papers, and by patient, unperturbed teaching and lecturing to whomever he was able to influence. It was this painful, unappreciated work which kept Austrian ideas alive during the years of eclipse.

Thus it was that, during the 1940s, 1950s, and 1960s, Austrian economics declined to permit itself to be relegated to the dustbin of intellectual history. Instead Austrian economics identified itself with unprecedented clarity not as a primitive approach displaced by intellectual advance, but rather as a unique set of ideas the subtlety of which had hitherto escaped attention. Sooner or later the richness of these ideas, and the depth of understanding they convey, would come to be appreciated.

If there is hope today for a resurgence in Austrian economics, then the unsung contributions of Mises during the decades of eclipse indeed assume historic proportions.

There is, in fact, considerable room for hope. Looking to the future, I would submit, it is our obligation to see to it that indeed Mises will be remembered in the long sweep of the history of economic thought as the pivotal figure responsible for a late-twentieth-century rediscovery of the fruitfulness and the subtlety of subjectivist economics. In this rediscovery process, the Misesian commitment to strict ideological neutrality, to an almost puritanical wertfreiheit, must never be relaxed. And yet, one senses, it is precisely the truths that such a wertfrei pursuit of praxeology can reveal, that would be likely to gladden the heart of Mises, the devoted adherent of the ideals of Western civilization, the passionate lover of human liberty.

This is adapted from a paper in the 1981 book  Papers for the Ludwig von Mises Centenary (Hillsdale College, 1981).Homage to Mises: The First Hundred Years: Commemorative

Categories: Current Affairs

8 Traits of the Entrepreneur

Wed, 17/10/2018 - 19:25

The role of the entrepreneur is central to Austrian economics. Entrepreneurs are the coordinators of individual human action in the context of subjective knowledge and dispersed information.

There are two critical individual roles for economic dynamism. The first is consumer sovereignty: the consumer is boss, because they determine what is produced by deciding what to buy and not to buy. The decision is subjective, emotional, idiosyncratic, inconsistent, and unpredictable. The consumer lives in a permanent state of dissatisfaction, believing things could be better and seeking to make decisions that improve their circumstances. The second is the individual entrepreneur who serves the consumer, attempting to identify solutions to this dissatisfaction, and sacrificing time, capital assets and current income to the production of that solution, having made the economic calculation that the net present value of the future revenue streams that will result is greater than the current cost of production. The entrepreneur bears the uncertainty of this process.

With that as context, is it possible to identify those traits — and combinations of traits — that are associated with the entrepreneurial role, and that may point toward the best execution of the role? To investigate, we have developed a survey that explores these traits. Please, take a few minutes to help us gather information.

1. Empathy

Empathy is the primary skill for the entrepreneur as service innovator and service provider. Since the service customer’s perceived need is subjective, emotional, and idiosyncratic, the service designer must “put themselves inside the customer’s head” to try to understand the service need from the customer’s subjective perspective. In the entrepreneurial process of developing new services, the entrepreneur must be able to transfer this empathetic understanding to implementers, such as those designing and writing code for apps. This is sometimes referred to as empathetic engineering.

2. Interconnection

The answers to the entrepreneur’s self-assessment questions “Who Do I Know?” and “What Do I Know?” hinge on interconnection. Building a network of collaborators and customers is an act of interconnection, as is connection to knowledge in all its forms. Dr Cristina Mele of the University of Naples has conducted research that indicates that, in the digital era, interconnection IS entrepreneurship. You can read about Dr. Mele’s research here.

3. Adaptability

Austrian economics defines the efficiency of the entrepreneurial order as an adaptive efficiency, capable of responding to new knowledge and new market signals to co-ordinate the needs of consumers and suppliers. Service science emphasizes a process of dynamic innovation, whereby the service provider makes an offering to a service customer, who provides feedback, whether positive or negative, to which the provider adapts by changing the offering to match the content of the feedback. To maintain this adaptive process, the entrepreneur must be able to cross disciplines, communicate well with collaborators, and keep up with changing information streams from customers, all of which is summed up in the term “adaptive.” (Agility often means the same thing, but is less specific than adaptive.)

4. Time Preference

The entrepreneurial process takes time. Once an opportunity to serve customers in new ways is identified, resources must be assembled and/or rearranged to develop the new service or product. During this time, the entrepreneur typically uses savings, and sacrifices current income, in the anticipation of future profits. The entrepreneur is said to have a low time preference, which indicates a willingness to forego satisfactions and benefits today, in order to experience improved benefits in the future. The opposite attitude, high time preference, can be summarized in the phrase “I want it now” — i.e., an unwillingness to sacrifice current satisfactions. The entrepreneur lives in the future more than the present. Low time preference is associated with a long-term perspective rather than a short-term one, and is also associated with ethics and morality in decision-making.

5. Lifelong Learning

Lifelong learning is an expression of individual commitment to the economic model of entrepreneurial dynamic efficiency, and it is a social concept and educational concept that has garnered more attention as the static institutional model of educating youth for an extended career based on the learning they receive in school has shifted to the dynamic one of accumulating skills and new knowledge throughout adult life. There is an element of boundary crossing in lifelong learning, since a lifelong learner might accumulate skills in mechanical sciences (like coding) as well as social sciences (like economics), as well as crossing cultures in order to operate globally, and crossing physical/digital barriers to deliver services digitally and physically.

6. Co-creation

Co-creation is a concept specific to consumer sovereignty. The innovator deduces the needs of consumers from their expressions of dissatisfaction, and designs a possible solution. The consumer gives feedback, initially via research or trial, and ultimately by buying or not buying. The entrepreneur receives the feedback and adjust accordingly. In this way, all consumer products and services, as well as producer goods and services, are co-created by producer and customer. Collaborative traits are important to the success of the co-creation process.

7. Grit

Grit is a term to denote the personality trait required to deal with continuous learning from market feedback, which often comes in the form of negative feedback, sometimes referred to as “failure,” and to keep going by processing that feedback and eventually achieving success. There was a popular book of this title, defining it as passion plus perseverance.

8. Individualism

Entrepreneurs should seek unique knowledge, make a unique benefit promise to customers, identify a niche that no-one else has identified, and generally be comfortable with being the only occupier of a commercial space. Initially they might be viewed as crazy or taking excessive risk or out on a limb. Individualism makes them comfortable with that situation. Individualism doesn’t mean they are not collaborative; in fact quite the opposite. They will assemble a team, hire vendors and co-create with customers. Individualism embraces the self-confidence to originate and create differentiation.

We have designed a survey to investigate these 8 traits, using a combination of proven research scales from psychological testing. The first draft of the survey is 194 questions long, so when we ask you to respond, we are asking for 25 minutes of your time. Your commitment will help us to refine the research instrument and we hope to get to a 100-question survey.

Categories: Current Affairs

Old Wine in Old Bottles? A Nobel for Clever Packaging?

Wed, 17/10/2018 - 19:25

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018 was awarded October 8 to Paul Romer, Professor at New York University, “for integrating technological innovations into long-run macroeconomic analysis,” specifically for what is sometimes called “New Growth Theory.” He shared the Prize with Professor William Nordhaus, Professor at Yale University (and a Bonesman), who received it “for integrating climate change into long-run macroeconomic analysis.” The Romer Prize had been predicted for a long time.

Predictably, commentators, fellow economists, pundits etc. have been fawning over the “discoveries” of Romer and Nordhaus (including at least one major contemporary Austrian who apparently see no problems with treating “knowledge” as a homogenous factor of production). Nothing new here, and nothing wrong with celebrating major scientific advance. This is worthwhile, right, and of course, great fodder for the tweeters and the bloggers. But, this year’s Nobel is particularly illustrative of what gets rewarded in economics, and how this does not exactly conform with more intuitive notions of scientific progress.

If asked about what we mean by “scientific progress,” the proverbial (Wo)Man in the Street would probably respond something like, “Pointing to new phenomena that no one so far has been aware of,” “Explaining phenomena in a fundamentally novel manner” or similar.

Incidentally, many philosophers would agree. For example, to many scientists Karl Popper is a standard reference and many scientists will be able to not only invoke but also explain the “falsification criterion” (only theories that can be conceivably be rejected by facts can be deemed “scientific”). Popper is of course all about putting forward new predictions. His follower Imre Lakatos would agree: Scientific advance is about theoretically formulating and empirically corroborating “novel facts”—new insights in the world that previous generation of scientists had missed.

Economists are familiar with a bastardized version of Popperianism, namely Milton Friedman’s famous emphasis on economic theories as tools of prediction. So, these ideas most certainly have currency in economics. Do economists practice what (many of them) preach, in particular that scientific progress amounts to putting forward novel facts and/or novel explanatory mechanisms in the form of bold, new hypotheses? The late Mark Blaug repeatedly pointed out that they don’t. The recent Nobel may confirm this.

Consider how the Prize Committee justifies the Prize to Romer :

Romer demonstrates how knowledge can function as a driver of long-term economic growth. When annual economic growth of a few per cent accumulates over decades, it transforms people’s lives. Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.

There is absolutely no doubt that Romer is an extremely clever modeler and economist (which these days is often the same thing). But, notice the wording in the press statement: “previous research” was lacking because it had not “modeled” endogenous technical change. The press statement does not say that Romer discovered anything new per se.

Many years ago I ruminated on the success among research economists of the new growth theory that Romer is said to have created. Mymain point was that the essence of the explanatory mechanisms proposed and modeled by Romer and other new growth theorists has been known since at least the 1920s work of Allyn Young on increasing returns and externalities in the growth process. Kenneth Arrow, another Nobel laureate, highlighted the role of learning by doing in growth. Evolutionary economist Richard Nelson has argued that much of the content of the new growth theory can be found in the 1950s work of Moses Abramovitz. When economists talk about Romer’s (and others’) contributions as the “New Growth Theory,” the “old” theory implicitly referred to is very specifically the theory of Robert Solow from the mid-1950s, which not only had novel implications but also was a formal theory. However, the “old theory” does not include the many thoughts on the growth process that economists have offered (almost) since Adam Smith.

For example, Mises and Hayek, and even earlier, Carl Menger pointed to scientific progress and general advance of knowledge as strongly intertwined with the process of growth. Moreover, they, and many early writers on the growth process, stressed the importance of institutions—private property rights, the rule of law, and the price system—in promoting growth, and they emphasized that the advance of knowledge is largely determined by such institutions. Any reader of, e.g., Mises’ Socialism will recognize this theme. Nobel Laureate Douglass North thought these aspects were so largely absent in the New Growth Theory that it was begging all the important questions.

Of course, those who are familiar with modern economics know that “progress” mainly means what may be called “heuristic progress”—better, more elegant, and cleaner models that, for example, succeed in endogenizing what has hitherto been taken to be endogenous. As I wrote in 1998: “This, then, accounts for the success of the [New Growth Theory]: the advent of the NGT meant that a recalcitrant … problem—endogenizing technological change in the context of economic growth—could be treated in formal terms, and thus assimilated into neoclassical economics.”

To be sure, such exercises can have very significant value, in making some assumptions explicit, illustrating particular mechanisms, and the like. ( Not always! ) But, putting existing ideas in a different language does not, by itself, constitute a huge advance in scientific understanding. For this we need new, causal explanations for phenomena (such as Menger’s explanation of price formation, Mises’s critique of socialist planning, Hayek’s advances of business-cycle theory, and so on). For example, Mises’ famous critique involved the prediction that socialism cannot work for very specific reasons to do with the pricing and allocation of capital goods. There is a huge, and perhaps categorical, difference between such fundamental predictions and finding new ways to put existing, if informal insights into established models, such as neoclassical general equilibrium.

Categories: Current Affairs

Global Warming: The UN's Plan Ignores Real Costs of Implementation

Wed, 17/10/2018 - 16:15

Last week, the United Nations' Intergovernmental Panel on Climate Change (IPCC) released a sizable new report titled "Global Warming of 1.5 °C."

The basic premise of the report is that if the governments of the world do what the UN tells them to do, then global temperature rise will be limited to 1.5 °C.

The report comes out of the Paris Agreement which backed a long-term goal to limit global temperature rise to “'well below 2C' and to 'pursue efforts towards 1.5C'".

Since then, the focus of UN policymakers and personnel has been to focus on putting together a policy agenda centered around the idea of using government mandates, taxes, regulations, and subsidies to limit global temperature rise to the selected value of 1.5 °C. Previous plans had centered around limiting warming to 2 °C, so the new plan represents a ratcheting up of goals to push through sizable taxes on carbon emissions, subsidies for "renewable" energy, and more.

To claim the necessity of all of this, the report is almost entirely devoted to painting a picture of what will happen if temperatures rise by 2 °C, and comparing that to a rise of a "mere" 1.5 °C. In either, case, the report asserts, things will get much worse than they are now. But an increase of 1.5 °C won't be quite as bad.

The response in the media has been sizable — and certainly uncritical. The New York Times concludes the “landmark report…paints a far more dire picture of the immediate consequences of climate change than previously thought and says that avoiding the damage requires transforming the world economy at a speed and scale that has ‘no documented historic precedent.’”

The UK's The Guardian features the headline: “We have 12 years to limit climate change catastrophe, warns UN.”

The Guardian also ran a an editorial asserting “The IPCC report is clear that we may not be able to limit warming to 1.5C without the need later in the century to remove carbon dioxide from the atmosphere. Although we can do this by expanding forests and other vegetation, we must also explore other options, including the development of carbon capture and storage.”

This is just a small sampling of the media's highly favorable response to the report. Essentially, the report was very successful at what it set out to do: the focus was entirely on the climate models and predictions, and largely ignored any details of how the world's governments might set about actually executing and funding these regulatory changes.

Almost completely absent from the debate is any discussion about how the "solutions" might be paid for, and what the true costs are.

Certainly, some numbers were offered. As the report notes: "Total annual average energy related mitigation investment for the period 2015 to 2050 in pathways limiting warming to 1.5°C is estimated to be around 900 billion USD2015"

That's just a moderate estimate. The range of estimated costs goes much higher to over $3 trillion. And $900 billion (i.e., nearly one trillion) is a sizable number given that global GDP in 2016 was 75 trillion.

But even these numbers are part of an extremely limited estimate, and they fail to cover a myriad of other costs. The report itself admits "The literature on total mitigation costs of 1.5°C mitigation pathways is limited and was not assessed in this report. Knowledge gaps remain in the integrated assessment of the economy wide costs and benefits of mitigation in line with pathways limiting warming to 1.5°C."

Any Serious Analysis of UN Plans Must Consider All Costs

The "literature" however, involves a variety of estimates. And many of them suggest that the 1.5°C plan will cost much more in lost wealth than in benefits from global-warming disasters averted.

Notably, some of this literature devoted to pointing out the true costs of climate policy comes from William Nordhaus, who last week won the Nobel Prize in economics to much fanfare from global warming activists.

As Robert Murphy notes, Nordhaus has been lauded as a champion of climate policies of the type pushed by the IPCC. But those who are singing the praises of Nordhaus as an advocate for climate control miss that Nordhaus thinks the 1.5°C goal is a bad idea, and totally unrealistic.

Murphy writes :

For starters ... [Nordaus's model back in 2007 showed] the climate goal of limiting global warming to 1.5°C was a horrible policy, which would make humanity $14 trillion (in present-value terms, in 2005 US$) poorer than doing nothing at all. (See Table 4 of my article to see the details.)

Now it’s true that the numbers have changed since 2007, and Nordhaus’ model would no longer give such a pessimistic assessment. However, back in 2013 Nordhaus argued in his then-new book on climate change that the optimal policy (depending on assumptions regarding participation among the world’s governments, etc.) would limit global warming from 2.3°C up to nearly 4°C, as Paul Krugman admits in his review of the book.

Please re-read my last sentence: As of 2013, William Nordhaus—who just won the Nobel Prize for his work on the economics of climate change—was saying the optimal path of global warming would allow for temperature increases of at least 2.3°C and possibly close to 4°C. Yet the IPCC’s media people are telling the world that we should really shoot for 1.5°C of warming to avoid catastrophe, and that the difference between 1.5°C versus 2.0°C is huge.

Nordhaus, mind you, favors a carbon tax. But, unlike most of the people writing up media articles on how the world will soon end in a global climate catastrophe, Nordhaus recognizes that policies like taxes, subsidies, and regulations come with costs.

Totally ignoring these costs, however, has long been the bread and butter of climate change advocacy groups which steadfastly avoid any discussion of real world costs and benefits of climate-change policy.

Anyone who disputes their policy plans is denounced as a climate denier, but as I've noted in the past, this is a deliberate attempt to avoid admitting that the topic of climate change itself is separate from what ought to be done about it. Instead, the strategy is something like this:

All too often, the response to questions such as these are angry diatribes about how we must act now. But of course, such a position is similar to that of a person who, upon seeing that winter is approaching demands that everyone build the winter shelter his way immediately. “Can’t you people see it’s getting colder?” he says. “If we don’t build the shelter my way, we’ll all freeze.” When faced with questions of whether or not his shelter plan is really the best way to proceed, or if a different type of shelter might be more cost effective, or if others would rather build their own shelter, he angrily declares “you winter deniers don’t care if we all die.”

Meanwhile, in the real world, any attempt at addressing the issue of dealing with climate change — assuming the magnitude of it as described in Un reports is accurate — requires acknowledgement of the costs and benefits of policies.

Indeed, some climate change activists are so steadfast in refusing to even admit the role of cost assessment that some more reasonable activists have felt compelled to coax their colleagues into the light of honest debate by pointing out that many people are actually more amenable to discussing climate change if the true costs are admitted.

But many activists refuse to talk about costs because they know that if the costs of mitigation (i.e., carbon taxes, etc) is too high, then people are likely to rely on the other climate-change policy strategy, which is "adaptation":

Both approaches [adaptation and mitigation] may sound essential, but some environmentalists worry that drawing attention to the need to adjust to a changing climate will undercut public support to boost spending on efforts to slow the pace of global warming.

In other words, some activists continue to just pretend that they shouldn't even have to talk about costs of their big plans for global climate control. They don't want to talk about adaptation because they know that may actually be more attractive to many, many people. Moreover, mitigation efforts present a risk because of large amounts of resources are sunk into mitigation strategies — and they don't work — then the opportunity cost will be extremely high, and there will be far fewer resources left for adaptation strategies. But, given that adaptation strategies are less likely to require global governance, centrally planned energy policies, or even carbon taxes, this would present a big risk to a political agenda founded on establishing an enormous global climate bureaucracy.

The strategy of many activists, therefore, is to continue to rely on media and politicians to just demand that something be done, or human civilization will collapse. This is the "hysteria" strategy, and it is often effective. But it basically pretends that scarcity doesn't exist when it comes to centrally planning and regulating the global economy in pursuit of global-warming mitigation.

Can the Real Costs Even be Known?

And then, of course, there is the problem of whether or not it's even possible to really calculate the costs of mitigation. The costs put forward by groups like the IPCC tend to focus only on the apparent costs of tax policies, subsidies and other mitigation strategies. It is impossible to truly calculate, however, the regulatory over time, lost opportunities foregone from outlawing certain technologies, and the effects of higher taxes and energy costs on startups and entrepreneurs. Its at this foundational, entrepreneurial and household level where the real costs will mount, and this is impossible to slap a number on and proceed with a meaningful cost-benefit analysis. It's impossible to predict future innovations and opportunities foregone as the world adopts what is essentially central planning for purposes of manipulating the atmosphere. Advocates of government imposed mitigation, however, speak as if mitigation is all just upside, and that failure to act now brings total destruction. It's the usual "do what we say or die!" strategy that is the mark of a plan lacking in solid information. The unwillingness to discuss specifics tells us a lot.

But, as Nordhaus's research has shown, even if we accept all the climate observations, the cost estimates, and the mainline narrative on global warming, we still find an alarmingly sparse amount of attention to how much it all really costs.

Categories: Current Affairs

Italy’s Problem Is Not The Euro, It’s Political Spending

Wed, 17/10/2018 - 13:05

The Italian government has created another massive turmoil in European markets with its 2019 budget proposal.

With a huge increase in spending, it estimated a deficit of 2.4% for 2019 compared to its previous target of 0.8% and the 1.6% announced by the finance minister.

Not only does it represent a huge increase in a country that already has 131% of debt over GDP, but a brief analysis of the tax revenue estimates shows that the figure presented is simply unattainable. Most independent analysts pointed the evidence of over-optimistic estimated revenues, raising fears of an additional 14 billion euro financial gap.

The Milan stock market collapsed, banks had to be suspended from trading after falling 6-7%, bond yields soared and the 10-year Italian bond fell to the worst level in a year despite the interventions of the European Central Bank.

This is what happens when a country with enormous internal problems launches itself to the eternal magic solution of spending much more and increasing deficits.

Many commented that this is the “price of sovereignty”. Someone has to enlighten me on how you achieve sovereignty raising debt and increasing current spending.

Anyone who believes raising imbalances and threatening with default and leaving the euro is going to be the solution for Italy ahead of billions in maturities and with banks burdened with enormous non-performing loans and government bonds, simply dreams.

The prospect of capital controls, bank runs, and domino bankruptcies is even conservative.

The biggest problem of the proposals is that they are the same old mistakes that never worked. Massive subsidies and political spending are not tools for growth but the recipe for stagnation and ultimately larger and more painful adjustments in the long term.

Debt-held-by-ECB-600x266.jpg

Italy has been one of the main beneficiaries of the ECB bond purchase program. Despite the enormous bubble and bond yield compression created by the quantitative easing policy, Italian bond yields have soared. Imagine outside of the eurozone and with a central bank committed to copying Argentina and Turkish monetary policies, as Spain or Italy did before the euro.

Public-debt-600x253.jpg

Italy’s enormous debt burden is not a consequence of “austerity”. It is misleading to define as austerity a Government spending of 48.9 percent of GDP in 2017. Government Spending to GDP in Italy averaged 49.83 percent from 1990 until 2017.

Interest-Payable-600x272.jpg

The monster public spending that Italy is proposing is not the solution. Even less, it would be impossible outside of the euro, with the historical knowledge that the central bank would pursue an inflationary and purchasing-power destructing policy, as it did in the years before the euro.

Zoom-Italy-600x303.jpg

Italy’s economic problems are self-inflicted, not due to the Euro.

  • Italy has seen more governments since World War II than any other country in the European Union.
  • Governments of all colors have consistently promoted inefficient dinosaur “national champions” and state-owned semi-ministerial corporations at the expense of small and medium enterprises, competitiveness and growth.
  • Labor market rigidities remained, leaving high unemployment and differences between regions.
  • A perverse incentive financial system, where banks were incentivized to lend to obsolete and indebted state-owned companies in their disastrous empire-building acquisitions, inefficient municipalities, as well as finance bloated local and national government spending. This led to the highest Non-Performing Loan figure in Europe.
  • A nightmare legal system that makes it virtually impossible to repossess assets from bad debt, led non-performing loans through the roof and malinvestment to soar.
  • A thriving export and small enterprise ecosystem were constantly limited by taxation and bureaucracy. This made the thriving companies smaller and actively looking to set activities outside of Italy.
  • Because of this, government spending continued to rise well above revenues. As Italy -like Spain and Portugal- decided to penalize high-productivity sectors with rising taxes, revenues fell short, while expenditures continued to rise. Italy, like so many peripheral countries, created a massive “crowding out” effect of the public sector against the private. It is not a coincidence that most citizens in Italy, like Spain or Portugal, prefer to be civil servants than entrepreneurs.

None of these problems are solved in this budget. In fact, they are worsened by increasing massively entitlements and subsidies.

It is no wonder that, while private companies managed to survive and improve “despite government”, debt and non-performing loans soared.

Many blame the euro. As if the same crowding out effect would not have happened outside of the single currency.  The only difference is that outside the euro, the government would have destroyed savers and citizens through constant “competitive devaluations” that were the cause of the economic weaknesses of the past. Constant devaluations did not make Italy, Spain or Portugal more competitive, they made them perennially poor and perpetuated their imbalances.

Corruption costs Italy a reported €60 billion a year, which amount to four percent of its GDP., according to the Corruption Perception Index. A problem that affects Spain as well. Increasing funds for politicians to manage only increases cronyism, special interests and perverse incentives.

Devaluations were never a tool for competitiveness, but a tool for cronyism. And that has pushed Italy to stagnation.

Blaming the euro will not save Italy. Increasing the imbalances that have led to stagnation will worsen its delicate situation.

Magic solutions never work. What Italy needs is to reduce perverse incentives, special interests and stop subsiding the low productivity sectors while penalizing the high productivity ones.

Italy’s problem is political spending. The same problem that this budget is going to increase massively. 

Originally published at DLacalle.com

Categories: Current Affairs

Audio: Historian Ralph Raico on the Rise of the West

Tue, 16/10/2018 - 21:25

The European Miracle was on in which humans achieved sustained growth for the first time on earth. Why Europe? Because of European decentralization and private enterprise. Property rights were well-defined and well-defended. Feudalism was of the contract variety. City states and chartered towns arose. The freedoms that people fought for were primarily economic freedoms. Political freedoms followed. The middle ages were not the dark ages they were portrayed to be. The rule of law required little or no involvement of the state. The ruler was under the law. The West even held a social taboo on the expression of envy.

Historian Ralph Raico explains why all of this contributed to the rise of human rights and economic prosperity in the West — and why it happened there first.

From a lecture presented at the 2001 History of Liberty seminar.

Categories: Current Affairs

Yes, PC is Real. Yes, it is Illiberal

Tue, 16/10/2018 - 21:25

Brian Doherty at Reason magazine has a new article that attempts to dispel certain myths surrounding "cultural Marxism," a term used promiscuously and inaccurately in Mr. Doherty's view. Fair enough, but the article sheds more heat than light on what is in fact a very illiberal and powerful phenomenon in western countries. Cultural Marxism and political correctness are not imaginary and cannot simply be dismissed as benign or organic.

Two omissions in the article stand out.

First, Doherty completely ignores the general meaning of the term, which is fairly well-understood. In the mid-20th century (actual) Marxists realized their focus on creating economic class consciousness by pitting proletariat against bourgeoisie had failed to resonate with working class people. Thus they shifted (albeit not all at once and not always deftly) to a narrative of oppressor and oppressed, which allowed women, minorities, gays and other groups to create class consciousness around cultural issues rather than economic standing. Cultural Marxism describes the results of this shift.

Second, political correctness — an important subset of cultural Marxism and a term Doherty dismisses — is also reasonably definable:

Political correctness is the conscious, designed manipulation of language intended to change the way people speak, write, think, feel, and act, in furtherance of an agenda.

Doherty's insistence that there's nothing to see here beyond right-wing crankery would be better served by at least attempting to define the views of his opponents. And if you believe The Atlantic, rejection of PC culture is hardly limited to the Right.

The timing of the article is unfortunate, coming on the heels of yet another round of social media de-platforming. Facebook recently removed several libertarian pages without warning, apparently over concerns they might promote Wrongthink on the eve of mid-term elections. In case you missed it, the Atlantic Council— funded by the US government and several foreign governments — helpfully counsels (private company) Facebook regarding which pages to darken.

Needless to say this sort of action is demoralizing to affected Facebook users, particularly those who count on social media platforms for their businesses, and sends a message that encourages self-censorship. So maybe something bigger is happening than Pat Buchanan misreading dead French philosophers.     

Doherty makes reasonable points about the political Right's vague mishmash of ideas and thinkers supposedly behind cultural Marxism, including the Frankfurt school, critical theory, Marcuse, Freud, and Karl Marx himself. But he depressingly launches into tired progressive shibboleths and buzzwords that only hurt his argument:

It may be comforting to believe your ideological foes are dupes of manipulative intellectual fiends. But declaring that advocates of multiculturalism, feminism, and gay rights are the pawns of dead Jewish communists is both mistaken as a matter of cultural history and foolish as a way to sell an alternate ideology. You won't win the day by treating people who merely disagree with you as stalking horses for socialist tyranny.

Then he doubles down on his insistence that opposition to cultural Marxism must be driven by nefarious right-wing hatred of minorities and modernity:

American right-wingers hate multiculturalism and gay rights and radical feminism for their own sake, not because they were designed to pave the path for communism. But the story has the emotional advantage of allowing them to imagine that the trends they despise didn't arise from a long history of the social abuse of blacks, gays, women, and immigrants, but from sinister machinations of commies striving to enslave us. Never mind that the unstoppable traditionalist "cultural decline" of the last several decades has not gotten the United States any closer to public ownership of the means of production.

Or maybe people just resent being told how to think and speak? Yes, accuracy in language is important, Yes, accuracy is important in identifying historical influences. So why doesn't Doherty apply these standards to his own critiques? Not everyone who worries about Orwellian language and thought policing does so for the reasons Doherty lazily imagines.

Doherty makes room for an obligatory swipe at Jordan Peterson, whose work I haven't taken the time to read or view much. But from a distance Peterson's two unpardonable sins seem to be exposing the rottenness of social science departments and suggesting individuals bear some responsibility for their lot in life. Anyone who shakes up the Left/Right paradigm in an articulate way and encourages self-sufficiency seems to me a potential ally for libertarians, rather than a punching bag.

Doherty also bemoans Dr. Ron Paul's1 opposition to cultural Marxism, referencing posts on Paul's Facebook page. He correctly reminds us that Paul's presidential campaigns offered people a way out of the culture wars by (quoting Paul) "allowing [everybody] to make personal choices, social relations, sexual choices, personal economic choices" — and this ought to be a potent sales pitch for libertarianism generally.

But Doherty misses the salient point: cultural Marxism is not about allowing anything, but rather about policing our views. And if in fact dramatically reducing the size and scope of government (as both Paul and Doherty advocate) would reduce cultural hostilities, doesn't this tacitly acknowledge that cultural Marxism and PC are related to the state? Does Doherty not see the state as the potential enforcer via hate speech laws, employments laws, and the like?  

Doherty concludes with this puzzling admonition:

All who want a tolerant civic peace in this vast and varied land should work to forge whatever way of life they choose on their own property or in their own communities, not insist that former outsiders who wish to be treated more fairly are merely doing so as a cover to impose communist tyranny. The fight for limited government in our culture can't be successfully fought in dogged, frightened opposition to freely chosen cultural plenitude.

Again we witness a reversion to common themes of victimhood, tolerance, and blinkered cultural nativists. And once again Doherty misses the point: the question is whether our "cultural plenitude" is always freely chosen, or rather sometimes imposed by a very small nexus of cultural, media, and economic elites — elites who are increasingly state-connected.

It also never occurs to him that many who do want tolerance and peace resent the constant imposition of new PC modes of thought and speech, rather then considering those modes a form of liberation.

  • 1. Brian Doherty generally has been fair and friendly toward Dr. Paul in his writing, see, e.g., his book on the Ron Paul 2012 presidential campaign.
Categories: Current Affairs

Is Technological Know-How the Key to Economic Growth?

Tue, 16/10/2018 - 18:15

According to this year Nobel Prize winner in economics, Paul Romer, the technical knowledge that spills over into the creation of new products is the key to sustained economic growth. Is it however true that technical knowledge is the heart of economic growth? If this would have been the case, why do economies in the developing world continue to experience poverty? After all individuals in these economies have access to the technical knowledge of the developed world.

Furthermore, Romer is of the view that free market economies, left to their own devices, tend to produce little new knowledge. In a fully competitive environment, firms will be concerned that other firms will quickly copy any innovations they introduce, so they will be reluctant to make costly investments in research and development, argues Romer.

To deal with this problem, Romer is of the view that it is necessary to introduce policies like subsidies for research and development. Hence on this way of thinking government policies play a critical role in fostering technological innovation.1

Contrary to Romer, the most important ideas actually emerge because of the initiative taken by various individuals in the private sector without any support from the government. To name a few such innovations includes computer technology in the late 20th century or the development of electricity, radio and television in the early 20th century, or the automobile industry and the airline industry also in the early 20th century.

Furthermore, the policy of providing subsidies by the government would bypass the market mechanism thereby stifling the usage of scarce capital thus undermining economic growth.

It seems to us that Romer ignores the key factor of economic growth — funding. Individuals that are engaged in the various stages of production require access to final consumer goods in order to support their lives and wellbeing.

At any point in time, there is a finite pool of final consumer goods. To fund a greater number of activities requires an increase in the pool of consumer goods i.e. an increase in the pool of real wealth.

The essence of the pool of real wealth

We have seen that to fund a greater number of economic activities requires an expansion in the pool of consumer goods i.e. the pool of real wealth. The key for the increase in this pool is the improvement in the productive structure i.e. tools and machinery. With the help of better tools and machinery one can secure a larger quantity of better quality consumer goods.

What is required is to allocate some of the consumer goods towards individuals that are going to be engaged in the improvement of tools and machinery i.e. the improvement of the infrastructure.

We label the part of the pool of real wealth allocated towards the maintenance and the expansion of the infrastructure as real savings.

Note that the improved infrastructure permits not only the increase in consumer goods but also the introduction of various services that were not available before.

The size of the pool of real wealth determines the quality and the quantity of various tools and machinery. If the pool of real wealth is only sufficient to support one month of work, then the making of a sophisticated tool that requires two months of work cannot be undertaken.

Thus, even if we had the best technical knowledge, if the pool of real wealth is not large enough then nothing is going to happen.

Note that the enhanced infrastructure permits the expansion of the pool of consumer goods i.e. the pool of real wealth. All other things being equal this permits a greater allocation of real wealth towards a further improvement of the infrastructure and consequently permits a higher living standard.

New ideas without the expanding pool of real wealth cannot generate economic growth

Whilst new ideas can result in a better use of scarce resources, they can however, do very little for real economic growth without an expanding pool of real wealth.

In Man, Economy, and State Rothbard says that technology, whilst important, must always work through the investment of capital in order to generate economic growth. On this issue Rothbard quotes Mises who says,2

“What is lacking in (underdeveloped counties) is not knowledge of Western technological methods (“know how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect.”

So regardless of how knowledgeable we are and regardless of various technological ideas, without an expanding pool of real wealth — which in turn permits an increase in real savings — no expansion in economic growth is going to emerge.

It is through the expansion in the pool of real wealth that an increase in the stock of capital goods is possible. The increase in capital goods — correctly allocated — permits the increase in economic growth to emerge.

Note again that we do not say that technical knowledge is not important. This knowledge however must be embedded in the infrastructure. For instance, to make a particular tool the toolmaker must have an idea of how to make this tool.

The idea alone however will not be sufficient to produce the tool. Various elements to make the tool must be produced before it could be assembled.

In the various stages of production i.e. intermediate and final stages, individuals that are employed in these stages must be supported by providing them with final consumer goods, which will sustain them.

As we have seen, the allocation of final consumer goods towards various individuals that are engaged in the various stages of production is what real savings is all about.

Observe that without the allocation of consumer goods towards the individuals in the various stages of production the tool will not be made notwithstanding that the toolmaker has the technical knowledge of how to make the tool.

Categories: Current Affairs

Rent Control and Minimum Wage Laws Harm Those Who Are Supposed to Benefit

Tue, 16/10/2018 - 15:15

Jacob Bronowski wrote, in The Common Sense of Science, that “at the basis of human thought lies the judgment of what is like and what is unlike.” That is, useful analysis requires treating that which is like similarly, and that which is unlike, differently. Unfortunately, public policies often mistakenly treat people that are unlike in crucial ways as if they are like, and people who are alike in crucial ways as if they are unlike.

There are several issues in housing policy alone that illustrate this point.

Not All Renters Are Alike

The most recent example involves California’s Proposition 10, which would allow local governments there to once again impose rent control without restriction from the state. An October 6 article in the Los Angeles Times was titled “Will Prop. 10 help or hurt state’s tenants?” The problem is that such a question assumes all tenants can be treated as part of the same group. However, imposing rent control will treat different groups of tenants in sharply different ways. It would be a massive windfall for current tenants from landlords’ pockets, forcing rents below market value, with tenancy protections guaranteeing the windfall into the future. Los Angeles Mayor Eric Garcetti wasn’t wrong when he called getting a rent-controlled apartment “like winning the lottery.” But rent control does not benefit all renters. It would harm the far larger group of people who seek rental housing after rent control is imposed. The progressive reduction in the quantity and quality of the housing stock over time will increasingly face prospects with “no vacancy” signs rather than available or affordable units. But the usual focus on current renters as if they represent all renters hides that radically different treatment of present tenants and future tenant hopefuls.

Another recent example is inclusionary housing policies, such as San Jose’s 2010 ordinance requiring housing developers of over 19 units to sell 15% of their units far below their market value. The mandated units were presented as proof politicians were “doing something” to increase housing availability. However, the mandate increased the costs of non-subsidized new housing, reducing the number of new non-subsidized units constructed. And the large decrease in non-subsidized housing construction swamped the much smaller effect on mandated construction, reducing the future supply of homes, raising home prices for everyone except those who “win” a subsidized home, including everyone who met the same qualifications as the winners. But looking at the lucky as representative of all prospective buyers again hides radically different treatment.

Rental housing subsidies are still another violation of Brownowski’s insight. Those who meet the program criteria are eligible for the subsidies. But funding is far less than sufficient to give aid to all those eligible. Those who actually receive the aid benefit. But their subsidies increase the market demand in that sector of the rental housing market, which harms all those who are eligible, but who remain on nearly endless waiting lists, or give up, by increasing the rent they must pay. Again, looking only at the lucky disguises harm to the unlucky from the same group.

Examples of this phenomenon also extent beyond the housing market. The minimum wage provides another illustration. Supporters assert “the poor” will gain. However, in labor economist Mark Wilson’s words, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.” Yet even if “the poor” in aggregate would gain income, we must ask how low-income individuals fare. They are often harmed. Some lose jobs. Others lose hours of work. For those who keep their jobs and hours, on-the-job training and fringe benefits will fall, or required effort will rise, to offset hiked wages. And higher current wages are often less valuable than what is given up, particularly on-the-job training, which enables people to learn and earn their way out of poverty. Further, those with fewer skills, less education and job experience face greater employment losses. But treating low-income workers as if they form a single group disguises the fact that lucky low-income workers gain, while many others lose, some to the point of being unemployable.

Beyond such examples are other related ones. For example, subsidies that go to one group—e.g., the elderly, young, poor, etc.—but not others, also increase the market demand for the goods in question, harming those not subsidized by raising the market prices they must bear. That means we must carefully investigate whether there is a sufficient reason to treat those affected in such a disparate manner.

In the cases we have discussed, at the basis of policy formation, there is all-too-frequently a failure to adequately distinguish like from unlike. Such failures in beginning premises can undermine or invalidate policy conclusions drawn from them. Consequently, we need to question current policies based on such errors and recognize similar errors as red flags for any new policy proposals.

Categories: Current Affairs

Positivism and Behaviorism

Tue, 16/10/2018 - 02:35

What differentiates the realm of the natural sciences from that of the sciences of human action is the categorial system resorted to in each in interpreting phenomena and constructing theories. The natural sciences do not know anything about final causes; inquiry and theorizing are entirely guided by the category of causality. The field of the sciences of human action is the orbit of purpose and of conscious aiming at ends; it is teleological.

Both categories were resorted to by primitive man and are resorted to today by everybody in daily thinking and acting. The most simple skills and techniques imply knowledge gathered by rudimentary research into causality. Where people did not know how to seek the relation of cause and effect, they looked for a teleological interpretation. They invented deities and devils to whose purposeful action certain phenomena were ascribed. A god emitted lightning and thunder. Another god, angry about some acts of men, killed the offenders by shooting arrows. A witch's evil eye made women barren and cows dry.

Such beliefs generated definite methods of action. Conduct pleasing to the deity, offering of sacrifices and prayer were considered suitable means to appease the deity's anger and to avert its revenge; magic rites were employed to neutralize witchcraft. Slowly people came to learn that meteorological events, disease, and the spread of plagues are natural phenomena and that lightning rods and antiseptic agents provide effective protection while magic rites are useless. It was only in the modern era that the natural sciences in all their fields substituted causal research for finalism.

The marvelous achievements of the experimental natural sciences prompted the emergence of a materialistic metaphysical doctrine, positivism. Positivism flatly denies that any field of inquiry is open for teleological research. The experimental methods of the natural sciences are the only appropriate methods for any kind of investigation. They alone are scientific, while the traditional methods of the sciences of human action are metaphysical, that is, in the terminology of positivism, superstitious and spurious. Positivism teaches that the task of science is exclusively the description and interpretation of sensory experience. It rejects the introspection of psychology as well as all historical disciplines. It is especially fanatical in its condemnation of economics.

Auguste Comte, by no means the founder of positivism but merely the inventor of its name, suggested as a substitute for the traditional methods of dealing with human action a new branch of science, sociology. Sociology should be social physics, shaped according to the epistemological pattern of Newtonian mechanics.

The plan was so shallow and impractical that no serious attempt was ever made to realize it. The first generation of Comte's followers turned instead toward what they believed to be biological and organic interpretation of social phenomena. They indulged freely in metaphorical language and quite seriously discussed such problems as what in the social "body" should be classed as "intercellular substance." When the absurdity of this biologism and organicism became obvious, the sociologists completely abandoned the ambitious pretensions of Comte. There was no longer any question of discovering a posteriori laws of social change. Various historical, ethnographical, and psychological studies were put out under the label sociology. Many of these publications were dilettantish and confused; some are acceptable contributions to various fields of historical research.

Without any value, on the other hand, were the writings of those who termed sociology their arbitrary metaphysical effusions about the recondite meaning and end of the historical process which had been previously styled philosophy of history. Thus, Émile Durkheim and his school revived under the appellation group mind the old specter of romanticism and the German school of historical jurisprudence, the Volksgeist.

In spite of this manifest failure of the positivist program, a neopositivist movement has arisen. It stubbornly repeats all the fallacies of Comte. The same motive inspires these writers that inspired Comte. They are driven by an idiosyncratic abhorrence of the market economy and its political corollary: representative government, freedom of thought, speech, and the press. They long for totalitarianism, dictatorship, and the ruthless oppression of all dissenters, taking, of course, for granted that they themselves or their intimate friends will be vested with the supreme office and the power to silence all opponents.

Comte without shame advocated suppression of all doctrines he disliked. The most obtrusive champion of the neopositivist program concerning the sciences of human action was Otto Neurath, who, in 1919, was one of the outstanding leaders of the short-lived Soviet regime of Munich and later cooperated briefly in Moscow with the bureaucracy of the Bolsheviks.1 Knowing they cannot advance any tenable argument against the economists' critique of their plans, these passionate communists try to discredit economics wholesale on epistemological grounds.

The two main varieties of the neopositivistic assault on economics are panphysicalism and behaviorism. Both claim to substitute a purely causal treatment of human action for the — as they declare unscientific — teleological treatment.

Panphysicalism teaches that the procedures of physics are the only scientific method of all branches of science. It denies that any essential differences exist between the natural sciences and the sciences of human action. This denial lies behind the panphysicalists' slogan "unified science." Sense experience, which conveys to man his information about physical events, provides him also with all information about the behavior of his fellow men.

"The applied science of social physics, social engineering, can deal with man in the same way technology deals with copper and hydrogen."

Study of the way his fellows react to various stimuli does not differ essentially from study of the way other objects react. The language of physics is the universal language of all branches of knowledge, without exception. What cannot be rendered in the language of physics is metaphysical nonsense. It is arrogant pretension in man to believe that his role in the universe is different from that of other objects. In the eyes of the scientist all things are equal. All talk about consciousness, volition, and aiming at ends is empty. Man is just one of the elements in the universe. The applied science of social physics, social engineering, can deal with man in the same way technology deals with copper and hydrogen.

The panphysicalist might admit at least one essential difference between man and the objects of physics. The stones and the atoms reflect neither upon their own nature, properties, and behavior nor upon those of man. They do not engineer either themselves or man. Man is at least different from them insofar as he is a physicist and an engineer. It is difficult to conceive how one could deal with the activities of an engineer without realizing that he chooses between various possible lines of conduct and is intent upon attaining definite ends. Why does he build a bridge rather than a ferry? Why does he build one bridge with a capacity of ten tons and another with a capacity of twenty tons? Why is he intent upon constructing bridges that do not collapse? Or is it only an accident that most bridges do not collapse?

If one eliminates from the treatment of human action the notion of conscious aiming at definite ends, one must replace it by the — really metaphysical — idea that some superhuman agency leads men, independently of their will, toward a predestined goal: that what put the bridge-builder into motion was the preordained plan of Geist or the material productive forces which mortal men are forced to execute.

To say that man reacts to stimuli and adjusts himself to the conditions of his environment does not provide a satisfactory answer. To the stimulus offered by the English Channel some people have reacted by staying at home; others have crossed it in rowboats, sailing ships, steamers, or, in modern times simply by swimming. Some fly over it in planes; others design schemes for tunneling under it. It is vain to ascribe the differences in reaction to differences in attendant circumstances such as the state of technological knowledge and the supply of labor and capital goods. These other conditions too are of human origin and can only be explained by resorting to teleological methods.

The approach of behaviorism is in some respects different from that of panphysicalism, but it resembles the latter in its hopeless attempt to deal with human action without reference to consciousness and aiming at ends. It bases its reasoning on the slogan "adjustment." Like any other being, man adjusts himself to the conditions of his environment. But behaviorism fails to explain why different people adjust themselves to the same conditions in different ways. Why do some people flee violent aggression while others resist it? Why did the peoples of Western Europe adjust themselves to the scarcity of all things on which human well-being depends in a way entirely different from that of the Orientals?

Behaviorism proposes to study human behavior according to the methods developed by animal and infant psychology. It seeks to investigate reflexes and instincts, automatisms and unconscious reactions. But it has told us nothing about the reflexes that have built cathedrals, railroads, and fortresses, the instincts that have produced philosophies, poems, and legal systems, the automatisms that have resulted in the growth and decline of empires, the unconscious reactions that are splitting atoms. Behaviorism wants to observe human behavior from without and to deal with it merely as reaction to a definite situation. It punctiliously avoids any reference to meaning and purpose. However, a situation cannot be described without analyzing the meaning which the man concerned finds in it. If one avoids dealing with this meaning, one neglects the essential factor that decisively determines the mode of reaction. This reaction is not automatic but depends entirely upon the interpretation and value judgments of the individual, who aims to bring about, if feasible, a situation which he prefers to the state of affairs that would prevail if he were not to interfere. Consider a behaviorist describing the situation which an offer to sell brings about without reference to the meaning each party attaches to it!

"A situation cannot be described without analyzing the meaning which the man concerned finds in it."

In fact, behaviorism would outlaw the study of human action and substitute physiology for it. The behaviorists never succeeded in making clear the difference between physiology and behaviorism. Watson declared that physiology is "particularly interested in the functioning of parts of the animal… Behaviorism, on the other hand, while it is intensely interested in all of the functioning of these parts, is intrinsically interested in what the whole animal will do."2 However, such physiological phenomena as the resistance of the body to infection or the growth and aging of an individual can certainly not be called behavior of parts. On the other hand, if one wants to call such a gesture as the movement of an arm (either to strike or to caress) behavior of the whole human animal, the idea can only be that such a gesture cannot be imputed to any separate part of the being.

But what else can this something to which it must be imputed be if not the meaning and the intention of the actor or that unnamed thing from which meaning and intention originate? Behaviorism asserts that it wants to predict human behavior. But it is impossible to predict the reaction of a man accosted by another with the words "you rat" without referring to the meaning that the man spoken to attaches to the epithet.

Both varieties of positivism decline to recognize the fact that men aim purposefully at definite ends. As they see it, all events must be interpreted in the relationship of stimulus and response, and there is no room left for a search for final causes. Against this rigid dogmatism it is necessary to stress the point that the rejection of finalism in dealing with events outside the sphere of human action is enjoined upon science only by the insufficiency of human reason. The natural sciences must refrain from dealing with final causes because they are unable to discover any final causes, not because they can prove that no final causes are operative. The cognizance of the interconnectedness of all phenomena and of the regularity in their concatenation and sequence, and the fact that causality research works and has enlarged human knowledge, do not peremptorily preclude the assumption that final causes are operative in the universe.

The reason for the natural sciences' neglect of final causes and their exclusive preoccupation with causality research is that this method works. The contrivances designed according to the scientific theories run the way the theories predicted and thus provide a pragmatic verification for their correctness. On the other hand the magic devices did not come up to expectations and do not bear witness to the magic world view.

It is obvious that it is also impossible to demonstrate satisfactorily by ratiocination that the alter ego is a being that aims purposively at ends. But the same pragmatic proof that can be advanced in favor of the exclusive use of causal research in the field of nature can be advanced in favor of the exclusive use of teleological methods in the field of human action. It works, while the idea of dealing with men as if they were stones or mice does not work. It works not only in the search for knowledge and theories but no less in daily practice.

The positivist arrives at his point of view surreptitiously. He denies to his fellow men the faculty of choosing ends and the means to attain these ends, but at the same time he claims for himself the ability to choose consciously between various methods of scientific procedure. He shifts his ground as soon as it comes to problems of engineering, whether technological or "social." He designs plans and policies which cannot be interpreted as merely being automatic reactions to stimuli. He wants to deprive all his fellows of the right to act in order to reserve this privilege for himself alone. He is a virtual dictator.

As the behaviorist tells us, man can be thought of as "an assembled organic machine ready to run."3 He disregards the fact that while machines run the way the engineer and the operator make them run, men run spontaneously here and there. "At birth human infants, regardless of their heredity, are as equal as Fords."4 Starting from this manifest falsehood, the behaviorist proposes to operate the "human Ford" the way the operator drives his car. He acts as if he owned humanity and were called upon to control and to shape it according to his own designs. For he himself is above the law, the godsent ruler of mankind.5

As long as positivism does not explain philosophies and theories, and the plans and policies derived from them, in terms of its stimulus-response scheme, it defeats itself.

This article is excerpted from chapter 11 of Theory and History. An audio version of this article, excerpted from the forthcoming audiobook version, read by John Pruden.

  • 1. Otto Neurath, "Foundations of the Social Sciences," International Encyclopedia of Unified Science, Vol. 2, No. 1.
  • 2. John B. Watson, Behaviorism (New York, W. W. Norton, 1930), p. 11.
  • 3. Watson, p. 269.
  • 4. Horace M. Kallen, "Behaviorism," Encyclopaedia of the Social Sciences, 2, 498.
  • 5. Karl Mannheim developed a comprehensive plan to produce the "best possible" human types by "deliberately" reorganizing the various groups of social factors. "We," that is Karl Mannheim and his friends, will determine what "the highest good of society and the peace of mind of the individual" require. Then "we" will revamp mankind. For our vocation is "the planned guidance of people's lives." Mannheim, Man and Society in an Age of Reconstruction (London, Routledge & Kegan Paul, 1940), p. 222. The most remarkable thing about such ideas is that in the thirties and forties they were styled democratic, liberal, and progressive. Joseph Goebbels was more modest than Mannheim in that he wanted only to revamp the German people and not the whole of mankind. But in his approach to the problem he did not differ essentially from Mannheim. In a letter of April 12, 1933, to Wilhelm Furtwangler he referred to the "we" to whom "the responsible task has been entrusted, to fashion out of the raw stuff of the masses the firm and well-shaped structure of the nation (denen die verantwortungsvolle Aufgabe anvertraut ist, aus dem rohen Stoff der Masse das feste und gestalthafte Gebilde des Volkes zu formen)." Berta Geissmar, Musik im Schatten der Politik (Zürich, Atlantis Verlag, 1945), pp. 97–9. Unfortunately neither Mannheim nor Goebbels told us who had entrusted them with the task of reconstructing and re-creating men.
Categories: Current Affairs

Pages

Additional Terms