I hope I have done my own small part in providing a response to Milton Friedman’s “The Methodology of Positive Economics” in the following essay I am providing a link to. I have also decided to dedicate it to the memory of a friend and not so long ago fellow classmate of Mises University, hosted by the venerable Ludwig Von Mises Institute.

http://www.yourfilehost.com/media.php?cat=other&file=1665Why_Friedman_misunderstood_Physics_and_Mises_was_right_about_Economics.doc

A succinct version of this essay shall soon be published at mises.org.

\”Fear the Boom and Bust\” a Hayek vs. Keynes Rap Anthem

Aside from the inaccurate portrayal of both men’s personalities (I think Hayek was much more of a lady’s man, while Keynes was a homosexual and not extraordinarily attractive to either men or women…), the video was excellent.

Keynes’s theory is portrayed fairly accurately as not much more than a scam based on the facile idea that keeping the money “moving around” lowering interest rates and boosting expenditure is somehow boosting the economy.

Hayek (or “Freddy H”) is then able to move in and flatly crush the theory, first pointing out that the policy consequences of credit expansion, thereby aritificially lowering interest rates then causes a false investment boom into certain projects that appear profitable, though this an illusion. The illusion is due to the fact the lowered interest rates result from central bank inflation of the money supply, and not increased saving and lowered consumption by the population at large. When this mismatch is finally communicated y the price system and the fact business owners can no longer find customers or returns to their long term investment projects a bust ensues. And we can thank “Lord Keynes” for that.

But hey, don’t take my word for it, here’s Freddy H!

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

It would have been nice to have a shout out to Mises and Rothbard too, but I guess you can’t have everything, perhaps a sequel is in store.  Kudos to John Papola and Russ Roberts in any case!

http://letskeepcrimedown.direct.gov.uk/index.html

Now the reader may be puzzled as to why I mention this scheme. Is it not surely the zenith of libertarian pedantry to be blogging about an issue involving a government scheme as defensible as this? Indeed, I surely do find its aims agreeable, it is surely in individuals’ and society’s interests that their property is not stolen by criminals, and this is one of the rare instances that the state’s interests align with those interests to an extent.

Of course, the reason why the state or government is eager that citizens are not robbed is the same reason a mafia or any protection racket would generally like to “keep the peace”, from other criminals unaffiliated with its organisation; it serves against the mafia’s own interests, perturbing the conditions that allow for its own collection of income to be as maximal and peaceful as possible. However, given that the government is a monopolist of final decision making over its territory, and by necessity its mode of achieving its ends is largely restricted to compulsion via threats of violence; it is hampered from utilising incentives that can only be achieved in a method of governance that could be achieved through voluntary contractual arrangements. The work of Hans Herman Hoppe is great at illustrating this principle of governance through private courts, insurance and defence, in the following essay.

We can illustrate this using the topic of this post as an example. The way in which governments, and therefore their police forces are funded is through taxation and debt financing. This is a system for the provision of security that is rather disconnected from those presumed to be its beneficiaries; the taxpayers. The incentives which allow for the best possible provision of services in a market scenario are considerably weakened, there is little choice and buying power the consumer and receiver of these services can exercise with such a monopoly can exercise. Hence, given the state is really only interested in protecting “vital interests” in preserving law and order, we see that it generally is not able to tackle and convict effectively the criminals that pursue small scale crime. We are expected not to “waste their time”, having paid for services that they cannot sufficiently complete, with the police concentrating mainly on limiting only heinous crimes like murder and victimless crimes like the possession and sale of drugs.

This is without regard to the problems that occur from disputes citizens may have with the state. If the mafia has committed a crime against you, and your only court of appeal comes from a part of the mafia, no sane person would argue that such a trial could be immune from bias, dictating the settlement.

In any case, this “problem” that is the topic of this article, insofar as it is not a consequence of the incompetence of police not being able to catch the criminals that perpetuate small scale robbery, thereby not providing a suitable deterrent to this behaviour; is one of citizens erring in protecting their valuables. This strikes me however, as something that would be a complete non-problem under a system of private governance.

Imagine that your security is not provided by the state, but by an insurance company under which you would be compensated for any damages to your person or property they were not able to prevent or correct. For such a company, providing insurance for those who are reckless with their property in the first place would be immensely damaging to their bottom line. Indeed, companies that did pursue such a policy could be expected to swiftly go out of business. Hence, in addition to providing and warning people with information relating to the risks associated with reckless show boating of their valuables; they would be able to issue a far more effective financial incentive for people to behave in a more responsible way, by charging higher premiums for their less risk averse customers.

This in many ways, could be reasoned to be far more effective in tackling this problem, than pouring money for years and years down a rabbit hole with a  largely ineffective PR scheme.

The state cannot be in principle this effective, since it is not a voluntary entity. People have no choice over who provides their security, policemen are paid largely the same whether they catch criminals or not, and it is completely a lost concept that citizens would ever be redeemed on what property they lost. However, since everyone pays at the same rate for the provision of security, no matter how poor it may be; they would not have the same incentive provided by private system of security since they would be paying the same for security regardless of how careful they are of their property. To the extent they can “free-load” on the security services provided by other taxpayers, people will, and this helps explain why many people in modern society may be less careful in preventing their goods being stolen than they otherwise would be.

Uncertainty and the Role of
Bureaucratic Management within the Firm by

David Gernhard (Grove City
College)

A Combinatorial and Praxeological
Exploration of the Economic Calculation Problem by

Abhinandan Mallick (University of
Birmingham)

Stateless Law in the Highlands of
Guatemala by

Michelle Carrera (Universidad Francisco
Marroquin)

Economics is a little understood
branch of knowledge, and despite its ongoing relevance to our
everyday lives; is still relegated as a subject that must be left to
the specialists. This writer’s opinion is that modern man could
scarcely make a greater error. The present bust of our most recent
worldwide business cycle, provides us with a great exposition of the
dangers of leaving out analysis according to simple economic laws,
instead of highly abstracted models that idealise the rules they
follow and pretend to track cause and effect with complicated
statistical regressions.

Indeed the great delight one may
find, and this is a feeling I hope I am able to convey, is that
Economics should really tell you what you “already knew.” To give
an indication of what I mean by the statement, it is useful to dwell
on the fact that Phillip Wicksteed, a great economist in his own
right named his 1910 book: “The Common Sense of Political Economy.”

I feel it is worth mentioning
how I gained any of this knowledge in the first place. I am not a
student of Economics, indeed the discipline which I am studying at
the University of Birmingham is “Theoretical Physics”. I had an
interest in Economics at a younger age, mostly because I wondered why
my country of birth and early childhood, India; was still such an
underdeveloped country after so many decades of independence from
British rule. At the time, my search for explanations led me far and
wide, to come up with some, in retrospect; rather ridiculous
assertions. For one period of time, I even thought that our loss of
wealth had something to do with the Queen taking our jewels for her
crown!

It was not until I read “India
Unbound” by Gurcharan Das one week when I was about 17, that I
truly gained an appreciation of the impact free markets could have on
developing countries. The experience was life changing, and it
remains today one of only 3 books that I can say had a significant
impact on my philosophy and direction in life.

During the decades following
independence, many businessmen, small and big, made the dark joke
that once we were free from the British Raj; our country was captured
by the new “Licience Raj”, that strangulated investment,
development and private enterprise in India for many decades. When we
complain about corruption, we must realise that it is simply a result
of the perverse incentives created by draconian laws imposed on
entrepreneurs and already existing businesses. Indeed, it may sound
strange for the reader to hear this, but: as long as these laws
exist, we should actually be hoping for more dishonesty and
competition in corruption between public servants and officials, not
less! This competition between bureaucrats could lower the price of
bribes, improving the quality of service provided in navigating
restrictions, and would allow for smoother functioning of business,
in the midst of India’s strong regulatory atmosphere.

If the reader has ever read
India Unbound, one may quickly realise that my views today actually
differ to Mr Das’s, although I greatly respect him as a writer and
intellectual; his book was a stepping stone to my current position.
To cut a long story short, I was following the US presidential
campaign in late 2007, when I came across an obscure Republican
politician by the name of Ron Paul. Watching the Republican debates,
I was dumbfounded. It was the first time, and has remained one of the
only times I have heard a politician, of all people, make perfect
sense.

After viewing and searching for
several more clips of Dr Paul, I came across various sources on what
is known as the Austrian School of Economics. From this school I
found there were various significant historical figures like Ludwig
Von Mises, and his Nobel prize winning follower Friedrich August Von
Hayek. I also found some great sources, especially mises.org, the
website of the very institute I would have the honour to end up
studying this subject in the summer of 2009, with some of the world
leading scholars in the field. The experience I had with my week in
the “Mises University” program this year was by far the most
stimulating of my life.

So how did I myself join the
ranks of these “Austrian” economists (many of the current
followers of the school today are American) ? The path I took is not
a straight-forward one, and involved a long period of trying to
wrestle and reconcile the statements and theorems of a certain book.
That book was Human Action. This book greatly offended and
challenged my philosophical presuppositions, and it was a long time
before I finally came into agreement, now wholeheartedly, with its
author; Ludwig Von Mises.

Before reading Mises, I must
confess that I was pretty much a run of the mill positivist, though
at the time I did not appreciate the full meaning of the term, nor
recognise that I was one. From my state of knowledge I felt that
positivist statements about science were so obvious, only a fool
would rise up to challenge them. Thankfully, such a “fool” called
Mises did rise up to challenge the statements of these philosophers,
whose views have become so widespread in scientific discourse, that
many not familiar with philosophy take their doctrine as the only
valid criterion for science.

I will not enter into a full
refutation of positivism here, but instead highlight Mises’ positive
case for a method in the social sciences. Mises in Human Action
identifies a methodological dualism between the social and the
natural sciences. This dualism is simply how we use teleology and
causality to explain different kinds of events. These terms are best
explained by use of examples. We do not, for instance, reason that
when we throw a ball it is guided in a “teleological” way by some
mystical spirit or “prime mover.” Instead we use the laws of
mechanics and causality, to relate the position, velocity and forces
acting on the ball; to predict the future position and velocity of
the ball. Similarly, one does not reason that there is some sort of
direct causal relation between the fact that the pedestrian lights
turn green at traffic lights, and bodies begin to cross the road.
Such an assertion reveals an ignorance of the fact that these are
acting individuals with purpose crossing the road, who only when the
lights turn green, and possibly other unforeseen conditions are
satisfied; reason that it is safe to cross the road and proceed to do
so. The reckless individual who is late for work may rush across the
road regardless of what the traffic lights show.

It is this insight, that humans
act purposefully which Mises uses to build Economics deductively. To
act purposefully means to aim at achieving an end via a means. To
act, means to choose one mode of action out of all other possible
alternatives, it is a demonstration of preference. Of course one may
make errors in one’s judgement, whereby one realises that the state
of affairs produced acting one way actually satisfies one less than
the unrealised alternative would have.

This framework, with which to
explain and interpret is amazingly general, can be used to explain
all kinds of actions, even those normally considered outside the
realm “economic.” Indeed the monk who shuns material riches and
gives food to another man does so because he values feeding this man
more highly than he does feeding himself with the same food. It is
this type of subjective analysis that helps form the root of good
economic analysis.

A classic example of the
application of subjectivism, can be produced if we want to work out
the value of a factor of production, for example, land. Let’s say we
have a good produced like Champagne in Champagne, France. When asked
why Champagne is so expensive, the classical economists would have
said; the businessman has to pay so much for the land in this area of
France, that he must subsequently charge a high price for the product
he produces from it. Yet, if people begin to be worried about
Champagne, perhaps they feel it causes them ill health, they will
begin to value and demand it less with regard to other goods, hence
the market price will have to drop, as no one will exchange for the
previous price. Subsequently, the fall in the price of the product,
will “impute” backwards to the price of the land on which it was
produced. Hence we would see a drop in the price of land in
Champagne.

Hence we see that the consumer,
and his valuations lie at the root of all economic considerations. It
is because we, as consumers, value products for the subjectively
defined ends we feel they help us achieve; that they have any value
at all on the market at all. Although this may seem so obvious to the
reader, telling you what you “already know”, it relies on one
seeing more than what is immediate to the eye, or obvious in a sense.

In essence, perhaps the most
elusive entity in the entirety of Economics, is the market, the very
concept at the heart of its investigations. “How does Paris get
fed?” asked Bastiat. The assumption, first undertaken in how one
could get man to cooperate with man, was that authoritarian
interference would be required to have every specialist serve his
fellow citizen. The shock which economists experienced in their
investigations was how this mysterious, truly anarchic state of
society known as the free market nevertheless allowed for the
coordination of production among different individuals pursuing their
own self interest, truly got “Paris fed”, pursuing innovations
and supplying consumers better than the orders of a centralised
government ever could.

We
can see the effects of Government interference in the world around
us, if only we open our eyes. At each instance they dis-coordinate
the motion of the entrepreneur the steerer of “our ship” known as
the market economy with the orders and demands made by his captain,
the consumer.

The dis-coordination of consumer
time preference for consumer goods now as opposed to saving for
later, with the production ratio of consumer and investment goods,
brought about by central bank manipulation lowering interest rates,
otherwise determined by consumer time preference; produces the
recession we see now, after an investment boom whereby businesses
wasted resources and money on goods that ultimately, were not desired
by consumers. We see, that when a maximum price is placed on a good
that is below its market price, we see the destruction of a price
‘signal’ from the consumers to the producers, to pursue profit and
self interest in order to increase and improve production of the
desired commodity. Instead, we see supply shortages.

The lesson ultimately learned
albeit no-doubt depressing for those who would like to command and
control the lives of others, is that it is better to “stay out of
it” and not interfere with the functioning of the market economy,
and ultimately with the voluntary contractual relations of others
pursuing the best they can in peaceful cooperation. As Mises notes in
Human Action, the conclusion of the classical liberals; “Observe
the functioning of the market system, they said, and you will
discover in it the finger of God.”