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Source link: http://archive.mises.org/13061/the-distinction-between-theory-and-history/

The Distinction between Theory and History

June 23, 2010 by

Not all theories are moderately correct, and not all theoretical problems can be solved by asserting that each competing theory is partially valid. Some theories — even in economics — are just plain wrong; others are correct, regardless of the decade or century we are dealing with. FULL ARTICLE by Murray Rothbard

{ 15 comments }

michael June 23, 2010 at 8:32 am

“Typically, when dealing with the great modern debate between the Keynesians and neoclassical economists, Garraty can only record both points of view. And he cautiously, if lamely, concludes that the Keynesians were basically correct for the 1930s, while the neoclassicals are largely right today, now that the Keynesian nostrums have been pushed too far, and have brought about chronic inflation.”

Seemingly true in 1977. But not true since then. We’ve settled into a mode with a very moderate, managed and stable rate of inflation. And since the recession began in 2007 we’ve actually had a net deflation in pricing. So I’m wondering why the site saw fit to reinforce misimpressions by republishing a very dated piece.

I think the root cause of a lot of problems is the way Austrians use something other than the standard definition for the word ‘inflation’. For you, it’s any increase in the money supply. For the outside world, it’s any general increase in prices. This makes issues unnecessarily harder to discuss.

G8R HED June 23, 2010 at 9:15 am

michael – “I think the root cause of a lot of problems is the way Austrians use something other than the standard definition for the word ‘inflation’. For you, it’s any increase in the money supply. For the outside world, it’s any general increase in prices. This makes issues unnecessarily harder to discuss.”

No, the inability to discern theory from history “makes issues unnecessarily harder to discuss.”

Del Lindley June 23, 2010 at 2:48 pm

One of the counter-intuitive insights (for the modern mind) of the Austrian school is not to fear secular increases in money’s purchasing power (PPM). It is not to be feared because it is the natural outcome of a free market where the most urgently demanded needs of society are satisfied first. It has been demonstrated deductively that in this circumstance a rising PPM is associated with rising real rents and wages and increasing absolute consumption.

The “moderate” secular decline in the PPM that has been experienced needs to be set against the more than moderate increases in the PPM that would have occurred in the absence of perennial malinvestment and market distortion. Seen from this perspective even moderate “price inflation” signifies serious damage and lost opportunity.

The worry that a secular increase in the PPM will “cause” people to delay their spending and thus stall the economy not only gets the theory backwards it is practically refuted by common observation. The PPM rises because people reduce their time preferences knowing that when they do they leverage new divisions of labor (via capital spending) that yield more commodities and spawn wholly new goods and services. In essence it is the demand for the truly new and improved that creates and tempers the reduction in social time preference.

Consider the history of the personal electronics market over the past few decades. The old saying was: “You’ll get your best computer deal the day you die,” and this is still true today. Has this fact prevented sales growth in a product category that, for any particular member, has averaged over 1% price depreciation per week? Hardly. The point is made obvious within an industry whose capital spending has been driven by Moore’s law. The Austrian argument is that the growth in capital goods spending caused by lowered time preferences will have a similar impact on all goods and service categories.

BioTube June 23, 2010 at 6:07 pm

michael, calling price increases “inflation” pretty much started with Keynesianism; since the Austrian school is older than that, it continues to use the original definition.

fakename June 23, 2010 at 10:15 am

as for inflation, just give it time, the lack of motivation to lend damming up supply of money will ultimately end which will usher in hyperinflation.

Allen Weingarten June 23, 2010 at 1:38 pm

I believe that Rothbard is correct to note that economic history is limited when it cannot differentiate between whether a theory is right or wrong, but only whether it gains acceptance. I submit that this can be generalized to scientific history. By extension, history will itself be limited if it cannot differentiate between the parties that are morally right or wrong, but only between which has gained acceptance.

Jake_nonphixion June 23, 2010 at 8:55 pm

I’ve never read Garraty, but I have read several textbook accounts of the great depression, and before stumbling upon Mises.org, I believed what I had always been taught from these textbooks; the great depression was caused by greed. The same history is currently being written about the modern crash, I’m sure. The problem is that there are a very select few historians who have even heard of Austrian economics, let alone been exposed to it’s business cycle theory. I have asked random people about what they think caused the great depression and I have never once heard anything about price controls and interventionism, instead I hear consistently about Hoover letting the rich hoard all the money. I ask them if they’ve heard of the Austrian theory and people wonder why I’m talking about Austria. The sad fact is that most historians are horribly misinformed by other historians and perpetuate their ignorance to the next generation. This is a really big problem in my mind, because had I not stumbled upon Mises.org, I’d be toting the same line as everyone else and thereby contributing to the misinformation. The Austrian school is in dire need of historians who can get their material into classrooms.

michael June 24, 2010 at 11:22 am

“The Austrian school is in dire need of historians who can get their material into classrooms.”

The Austrian School is in dire need of economists who can become more widely read… and so become historians.

Were they to expose themselves to more history, they’d find abundant evidence to measure their theories against. And those theories, once tempered by the study of reality, would undergo transformation.

Or, conceivably, it would be reality that has to be twisted and bent, until it conforms to the desired theories.

Inquisitor June 25, 2010 at 2:52 am

“The Austrian School is in dire need of economists who can become more widely read… and so become historians.

Were they to expose themselves to more history, they’d find abundant evidence to measure their theories against. And those theories, once tempered by the study of reality, would undergo transformation.”

And your evidence that they’re not is…? You do realise you’re bullshitting, right?

Paul Marks June 24, 2010 at 5:56 am

Of course a key element in the National Socialist removal of unemployment was the breaking of union power – not by the free market (i.e. by removing the powers that governments had given to unions right from the time of Imperal Germany) and allowing freedom of wage rates.

Quite the contrary – the Nazis broke the unions by state power (May 1st 1933 the normal union marches – but they then find their HQ buildings are occupied by the S.A. and things start to go very badly for independent unions) and by holding down wage rates whilst prices are rising (due to Nazi monetary expansion).

Interestingly Keynes praises this Nazi approach (the use of state power to hold down wage rates by force – and then increasing prices by monetary expansion) in the introduction to the German edition of his “General Theory…” although this pro Nazi element in the work has been put down the memory hole by the modern supporters of J.M. Keynes.

michael June 24, 2010 at 10:56 am

“Garraty stresses Lionel (now Lord) Robbins’s theory (in The Great Depression [1934]) that the government had been prolonging the Depression by propping up prices, wage rates, and unsound enterprises, and that that had to stop. Specifically on unemployment, Garraty notes the view of Robbins, Ludwig von Mises, and Jacques Rueff (a longtime economic adviser to the French government) that wages must not be artificially kept above the market level, an action which generated massive unemployment. So far, so objective — except that Garraty cannot resist appending a snide sentence: “Their proposals thus required further deflation, although by early 1933 prices had been falling for over three years.”

So we see that for four years following the 1929 Crash, the Austrian Cure was being applied to the crisis. That is, no one was doing anything, and they were all just waiting for the problem to work itself out. And during that time it only got worse. So what to do? Obviously more of the same! Apply more leeches! The patient is still ill!

“It is true that prices had been falling since 1929, but — remarkably in the history of depressions — they were falling faster than wage rates. This meant that real wage rates (wage rates corrected for changes in the purchasing power of the dollar or pound sterling) were going up, thereby generating massive unemployment.”

Wow! Do you mean people were doing much better, the more the Great Depression progressed unhindered? That’s not what I heard from everyone who went through it. For many, wage rates dropped to zero when their employers went out of business. And without federal deposit insurance, their life’s savings were lost when the banks went bust.

The reason the prices were dropping was that the remaining businesses were all chasing anyone who still had a little money. The money had disappeared.

Now we all know that money doesn’t really just disappear. It goes someplace where you can’t find it any more. And in this instance the money went to the people who sold off assets at the top of the market, just before the collapse. And also, much of it accrued to those banks that staved off collapse and kept some locked up in their vaults. But out on the street? There was no money to be found.

Apply more leeches! The patient still has too much blood.

Seattle June 24, 2010 at 11:52 am

This has got to be the dumbest thing I’ve ever heard come out of you, and that’s saying a lot.

First, the “do nothing” policy was NOT done during the first 4 years of the depression, and Rothbard never says this.

And I have no idea how you pulled off the utter stupidity in that second part, I mean, WOW! His damn point is unemployment was created by the forced propping-up of wages. Without the ability to cut wages in times of falling revenue business owners had no choice but to lay off workers.

By the way, money can disappear. At least, out-of-nothing funny money created when a bank decides to hold only fractional reserves and lend out the rest. And when the loan-holders go broke, the extra money disappears.

Jake_nonphixion June 24, 2010 at 10:07 pm

“So we see that for four years following the 1929 Crash, the Austrian Cure was being applied to the crisis.”

This is precisely the misinformation perpetrated by unknowing historians. Michael, Hoover was one of the most interventionist presidents America had ever seen.

http://mises.org/daily/4197
http://mises.org/daily/4350

This article talks explicitly about the dangers of historians recounting the past that they don’t understand, and the myth that nothing was done in the early years of the great depression is one of the most insidious pieces of misinformation that exists. It is consistently cited as proof that interventionism is necessary, and it is COMPLETELY wrong. Please re-read your history from some true historians so that you don’t keep carrying on the tradition of ignorance.

Richard Moss June 24, 2010 at 11:49 am

Michael,

From 1929-1932 Hoover’s government intervened in the economy to prop prices and wages up. He did exactly the opposite of what Austrian economists recommend. Still, prices overall fell faster than wages, which were not allowed to fall. Hold wages higher than what the market demanded through people out of work.

How you can claim this is consistent with what Austrian economists recommend is very puzzling.

Richard Moss June 24, 2010 at 9:46 pm

Change that last sentence in the first paragraph to:

Holding wages higher than what the market demanded threw people out of work.

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