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Source link: http://archive.mises.org/11603/why-friedman-misunderstood-physics-and-mises-was-right-about-economics/

Why Friedman Misunderstood Physics and Mises Was Right about Economics

February 4, 2010 by

If physics is truly the science that modern neoclassical economists seek to emulate, it is unfortunate for them that they have utterly misunderstood its methodology. FULL ARTICLE by Abhinandan Mallick

{ 112 comments }

MIke Sandifer February 9, 2010 at 12:16 am

I forgot to point out that all of the perspectives above on Hoover and Roosevelt are not original to me. I first learned about them on the blog I can link you to, and elsewhere.

MIke Sandifer February 9, 2010 at 12:20 am

mpolzkill,

“Not exactly on topic, but Mr. Realism, Russ, on another forum, just reminded me of this here: [sarcastically] “Hayek wasn’t Thatcher’s biggest influence”. Everyone here must realize how *horrible* it ultimately is to the cause of liberty when monsters like Thatcher, Reagan, W. or Pinochet spout freemarket rhetoric and take their half-measures toward its policies. People can laugh at the concept of “purity”, but we’ve *got* to be pure or the lefties will always eat us alive in the propaganda wars.”

I’m no fan of Thatcher or Reagan, but did they not publically support freer markets and leave them freer overall when they left office? The same is true in some ways of Bill Clinton.

Mike Sandifer February 9, 2010 at 1:06 am

Predrag,

You replied:

“Mike, I would probably benefit from a clearer explanation, but I’ll leave it up to you.”

Okay, let’s look at this like a monetary wealth effect, and it is very much like that. You own a store with a customer that buys 3 gallons of water for $1 each. You obviously earn $3 in revenue. So the water was converted to monetary currency, which is the ultimate currency financially.

Well, those same three gallons of water can also be converted into a consumer surplus, or the difference financially between the price the consumer paid and was willing to pay, if required. That consumer surplus is realized as gains in pleasure, or net reinforcement. Thus, the consumer’s mood is higher than it would have been without the water. Mood is the net rate of intake of reinforcement, and not just for water, but for everything anyone finds pleasureable or displeasurable. There is an additive relationship, though a non-linear one for most.

So, to ignore response costs or any other loss associated with changes in mood due to a pleasurable event, you simply have

N [ g / (h+g)], again where N = required rate of intake of net pleasure (reinforcement), g = expected objective gain, and h = baseline rate of intake of net pleasure. This is a simplification in many respects, but it serves the purpose.

So, the thirstier you are for water, and the thirstier you expect to be after considering all costs associated with obtaining the water, the higher N will be. This can vary, not only due to physiological arousal, but also due to salt intake, polydipsia, etc.

g is the objective amount of water you want to take in. If it’s 8 ounces, then the expected gain is 8 ounces. h, again, is present rate of intake of everything you find pleasureable.and everything you expect you’ll find pleasurable in the future, discounted for time. This includes what you may expect you’ll have for dinner, whether you expect to get along with a wife, whether gas prices will go up, etc. This implies a convertability between these different salient outcomes, and we see this perhaps most clearly in people who eat comfort foods.

The old cliche of a broken hearted woman sitting in front of the TV and eating a whole container of Ben and Jerry’s clearly applies. Also, higher suseptibility to drinking alcohol, or engaging in promiscusous sex are also examples. Women who are emotionally distressed and vulnerable are more likely to seek comfort in wine and/or the arms of an understanding man. Men do this too, but in these particular examples, it is more pronounced in women.

So, what do we call a unit of mood? Well, we can just used the term “unit of reinforcement” or economists like to use “utils” when describing human utility.

How to measure a util? Well, I mention one way in a post above, but there are others as well, including differential rates of marginal substitution, direct measures of risk aversion, increasing response costs, including sometimes punishment, while keeping reinforcment constant, etc.

newson February 9, 2010 at 3:22 am

so just for the record, sandifer is silent when asked for a real prediction with which to measure his pluck.

please come back when you can offer an sp500 forecast, that we may have a few belly-laughs at your expense. or better, try make some money yourself, and head off to hedgefundland.

Fallon February 9, 2010 at 4:10 am

In Bolshevik Russia, the Party was the Law to be obeyed without question. Mass imprisonment, murder by starvation, and executions on a scale previously unknown to man were the results.

If in place of “Party” you put “Equation” I think you may have the nascent mindset of Sandifer. Dehumanization in whatever form has real costs.

Beefcake the Mighty February 9, 2010 at 7:28 am

newson, there’s a much simpler question for this clown: he claims to be a consultant, so let’s hear from his satisfied customers (if there are any) just how potent his vaunted mathematical skills really are.

Fallon February 9, 2010 at 9:48 am

Beefcake,

If his customers are socialistic entities- e.g. a public school system- then his consulting contract should be seen as a consequence stemming from the initial socialism more than anything else. Augustus Comte’s posterity are doing amazingly well under Fed stimulus and No Child Left Behind Act artificiality. The irony is that these positivist consultants are usually brought in to create accountability when their instance serves as the greatest example of the system’s inherent unaccountability.

If he works for a market entity at least there might be some market feedback about his impact. However, consultants are sometimes brought in to serve as pointy-headed political back-up for managerial teams that already know what they want to do, or for one manager to use against a rival. The successful businessman will not be so unwise as to conflate sophisticated modeling with entrepreneurship at any rate.

Interesting question.

mpolzkill February 9, 2010 at 11:41 am

Sandifer, don’t forget Greenspan. A few more of these free-marketers in command and we should be completely unshackled. Please work the inputs and tell me if this is what we have to look forward to.

Mike Sandifer February 9, 2010 at 7:51 pm

mpolzkill,

“Sandifer, don’t forget Greenspan. A few more of these free-marketers in command and we should be completely unshackled. Please work the inputs and tell me if this is what we have to look forward to.”

Greenspan certainly didn’t run the Fed in a way I approve of. On the other hand, I don’t think he committed crimes there. He simply lacked competence.

He failed to keep money velocity constant before and during all of our recessions with him and he failed to regulate lending and leverage, which could have helped stem this crisis.

What do we have to look forward to? I don’t know, but all I see right now in Washington is a lack of both courage and competence.

EIS February 9, 2010 at 7:59 pm

“Sandifer, don’t forget Greenspan. A few more of these free-marketers in command and we should be completely unshackled. Please work the inputs and tell me if this is what we have to look forward to.”

Ah yes, the king of capitalism, the great central planner Alan Greenspan. His free-market ideology failed him when it came to centrally planning the monetary system.

Curt Doolittle March 6, 2010 at 8:43 am

RE: Greenspan

A little more analytical understanding of Greenspan:

First, If you read enough of Greenspan, he tried to master the processes by which businesses actually made decisions, to a degree that few economists ever attempt. He was intimately aware of the daily needs and habits of business. He was intimately informed in a way few others seem to have been.

Second, he actually believed the new devices for distributing risk (along with the formulae of the quants) would work as prescribed.

Third. like most people of the Regan/Thatcher era, he was trying to counteract socialist influences in society. They had very clear memories of the pre-johnson era and also had the unfortunate experience of living through the 1970′s, which was about as depressing and hopeless as the times we face today. It was from this contrast that they took their motivation. We forget that in retrospect, these people were trying to use monetary policy to reconstruct prior libertarian values. They hoped to rebuilt a society of individual responsibility (and ownership) using a tool which accomplishes the opposite, even if they felt using that tool was acceptable if it was only used for the short term.

It is in these three errors that Greenspan built his house of cards:

first, business can use credit to privatize wins and socialize losses, and did so. Deep knowledge of business is good, but deeper knowledge of human nature is even better.

Personally I am not sure this device to retrain people out of socialistic beliefs would not have worked had the state provided direct liquidity into competitive innovation in the Indian model rather than general liquidity, and regulated banking such that all originated loans must remain with their originators. In effect libertarian values need to come from somewhere. They are not terribly natural to man. And liberty has always, throughout history, been the objective of a minority. (PLease don’t beat on me for advocating state intention, i”m not attempting to do so, only explain what would have been possible in context.)

Second, the new devices and formulae were erroneous, and for commonly stood austrian reasons: the quantitative content of these devices is inseparable from the individual knowledge of the loan’s originator. Very little debt is predictable under duress, and it cannot be aggregated, because fundamentally all credit consists of unique categories, because these categories are determined by knowledge only available to the originator.

Third, the influence of these people on the momentum of the bureaucracy, was insufficient. And that is the real Misesian/Rothbardian problem. To enact such a thing at scale would require political force actively despised by the field’s advocates. Describing an ideal state of affairs is an impressive and important research program. It has yielded most of the answer we are looking for in solving the problem of economic, political and social theory.

People in our libertarian camp, have not supplied yet a sufficiently POSITIVE argument for political economy. Hoppe is closest. Hayek tried desperately. But Mises, Hayek, Parsons, and Popper all failed to provide a sufficiently positive argument. It certainly appears that Keynes did find a sufficiently positive argument even if it was an erroneous one. (Although the debate is open on whether he would have approved of how his ideas were used.)

But more importantly, libertarians are a minority. We have always been a minority. And we are likely to continue to be one. We have a philosophy of the entrepreneurial class. And as a class philosophy it is an insufficient philosophy as currently constructed. That is, unless we understand that in this division of labor we need at least three philosophical frameworks: one for each class.

As such, while Greenspan failed, I don’t blame him for failing, any more than I blame Rothbard, Mises, Hayek, Popper or Parsons for failing.

It is becoming clear that the dominant political structure of the future consists not of democratic capitalism, nor social democracy, but of totalitarian capitalism, because only totalitarian capitalism can concentrate capital in sufficient quantity and rapidly in time to maintain the status of elites in one nation against those of others.

And if we think that there will not be political elites who profit from their position, then we do not understand the history of mankind.

tom hepplewhite February 19, 2011 at 8:19 pm

First sentence is false. Science uses inductive reasoning and not deductive reasoning. Unacceptable mistake.

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