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Source link: http://archive.mises.org/4806/production-versus-consumption/

Production versus Consumption

March 17, 2006 by

There are two fundamental views of economic life, writes George Reisman. One dominated the economic philosophy of the nineteenth century, under the influence of the British classical economists, such as Adam Smith and David Ricardo. The other dominated the economic philosophy of the seventeenth century, under the influence of Mercantilism, and has returned to dominate the economic philosophy of the twentieth century, largely under the influence of Lord Keynes. FULL ARTICLE

{ 31 comments }

Konrad Swart March 17, 2006 at 10:17 am

What Reisman says can be said, I think, more clearly. Consumerism assumes the following erroneous premise: The economy is formed and maintained solely out of consumer spending.

This statement is completely false!

The economic contribution of consumers is not only zero, but even negative!

Consumerism is what I hear everywhere in the news, mostly implicitly.

Whenever there is talk about ‘consumer trust in the economy’, it assumes consumerism.

Consumerism overlooks something. It is the simple fact, that before something can be sold, it must first be created!

This innocently looking statement implies, that all sales are preceded by production, and therefore, that the money used to create the consumption goods that are offered in exchange for money cannot possibly come from consumers, but has to come from savings, and savings alone!

Why? Because if the goods and services are created before they can be sold, they must exist already at the moment when the sales take place. So the money needed to create these goods and services cannot possibly come from consumers.

You simply cannot spend money if you have not received it first.

Even the fact that you can borrow money, loans, does not change this. You first must have money, either in actual possessing it, or in the form of control over it, before you can spend it. And you need it to create any good or service. The possibility of loans cause only one thing. An investor does not necessarily have to be a saver. The savings necessary for his investment can be done, and frequently is done by others.

Imagine what the economy would be like if it were otherwise. Suppose I go to a baker to buy some bread, and he has to create the bread with the money I pay for it. He first has to have lots of customers to collect enough money to buy the flour from the flour manufacturer. The flour manufacturer has to collect lots of money from lots of bakers to pay the wheat growers. And they must first receive the payment so that they can nourish themselves while the wheat is growing. So the simple act of buying a loaf of bread would take a minimum of one year before you could collect the bread.

The problem is even worse. For if it really was true that the whole economy is built out of consumer spending the factories that build the bread baking machines have to be built, the ground has to be cleared, the machines of the flour manufacturer has to be paid for, all advanced out of consumer spending. All of this would take decades, maybe centuries before I could collect the bread I bought!

So the whole concept of consumerism is not only false, but is so hilariously false that I am amazed why it could have been taken seriously in the first place.

Money has value, because you can exchange it against goods and services. You can only buy something if somebody else has not bough it already, and put into use.

This very innocently looking statement forms the basis of the explanation of the value of money. For it implies, that if something is offered in exchange for money, but is not yet actually bought by somebody, it is not in use. It is not yet consumed, or in the process of consumption.

Since money is a medium of exchange, its value lies in just this function. The value of money, i.e., the service that money fulfills, at any moment in time, consists of all the goods and services that are obtainable in exchange for it. In other words, it consists of all the goods and services that are created but not yet put into use.

In fact, this even implies the durable goods like houses, buildings, computers, television sets that are not yet completely worn out, i.e., consumed. For they are all capable of being exchanged for some money, if the owner desires it so, or, more subtly, if the price offered for them has a larger value than the objects themselves. So all durable consumer products in use, and not yet fully consumed also form part of the value of money.

In other words, the value of money consists of all goods and services that are either not, or not yet, in a state of consumption, or they are not yet fully consumed. This means that the value of money consists of all unconsumed or not yet fully consumed goods and services.

If we stick to just those goods offered in exchange for money, then anybody who works, and earns money, but does not spend it all on consumption, produces more than he consumes. He will always cause an increase in the amount of goods and services that can be exchanged against money. Not even investment, either directly by buying stocks or bonds, or indirectly by transforming it into capital goods is necessary to create this increase in the value of money. He does not even have to bring the money he does not use for his own consumption to the bank.

So whenever somebody, anybody, earns more than he spends, he will causes an increase, no matter how slight, into the total amount of unconsumed goods and services that are offered in exchange for money, and therefore an increase in the value of money.

I am amazed, that this simple train of thought is overlooked by so many people, especially economists. In particular it is a total refutation of consumerism. If these facts were generally understood, Keynes would not only be not taken seriously, but he would be shown to be a complete and utterly confused fool, and be laughed out of court!

Economists like George Reisman, who are fully aware of the nonsense of consumerisme are rare indeed!

The simple fact that goods and services first have to be created before they can be bought, while consumers only pay for goods and services that are already completely realized, implies that consumer spending does not contribute in any way to economy in the sense imagined by consumerism. Consumer spending does the exact opposite as what consumerism states. It always decreases the total amount of goods and services offered in exchange for money. It is always a force going against the value of money. It either causes a reduction in the growth of the value of money, or to a stand still of this growth, (by a complete counterbalance of consumption) or even to a reduction in the value of money. (Consumption of capital.)

If you understand this, then this is enough to see, that, for example, Keynes did not only have it wrong, but the exact opposite of what he says is what is actually happening.

His ‘multiplication factor’ does indeed exist, but works in exactly the opposite direction as what he imagined. The more people save, the more savings there are, no matter how savings are realized, the more means of production can be bought with a certain definite amount of money, and the more production itself is multiplied. (Physical production.)

This results in more goods and services that can be put against money, which means that more goods and services can be exchanged against a particular amount of money.

In other words, it makes money to have more value.

Speaking from this principled perspective, ‘the rich’ consists of the totality of people who do not spend their entire income on their own consumption, but who also save and invest. This includes both explicit investion, like in stocks and bonds, or in plain saving, by putting money in the bank or even in old socks or under the mattress, or implicit investion, like in buying goods and services to make money. So, according to this definition, each shop owner is an investor. Each person who has more money than he has used up in consumption is an investor. Everybody who is, on balance, debt free and has stashed some cash under his mattress is an investor. For they all are the sources of capital accumulation.

All savers are the people, who are responsible for the capital structure that pays the wages, in fact that makes money to have value at all.

Capital arises out of saving. Capital goods arises out of investment. What is investment? Each time money is spent with the expectation and intention to obtain future income is investment. For it is not used to obtain something for the benefit of the one spending the money, but for somebody else in the future

Each time money is spent with the intention to obtain something that is used without resulting in future income, it is consumption.

This means, that when a manufacturer errors, and fails realize future income that is at least equal to his original spending + interest, he has, economically speaking, been consuming. He has passed over some consumption he could have made himself to his customers. If he continues to make such mistakes, he will not remain in business long.

It also means, that all government spending is, economically speaking, consumption. Although the government is not the one doing all of the consumption, it is nevertheless consumption. Since both taxes and increases of the money supply are uniform, any increase of taxes, or government spending out of bonds they did not sell to the public results in destruction of capital, and therefore in a decrease in opportunity to create capital goods.

Note that Keynes both attacked savings, and favored inflation. So he was the theoretician who is responsible for much destruction of Capitalism, who is responsible for fiat money, and might very well become responsible for the total destruction of our society, if we forget the very simple facts I have described here. The Romans were not aware of it. Inflation was the root cause of the destruction of the Roman culture.

There are not many economists who understand these things. Reisman understands it. Rothbard understood it also. And Eugen von Böhm Bawerk also understood this. Still, I think they did, or do not put it into such simple statements as I have done in the above. They did not derive it from the most basic understanding about money you can have: that it is a medium of exchange that derives its value from those goods and services created by others, not yet bought, and therefore not yet consumed. (I myself got the statement (not the proof) from Ayn Rand.)

A capitalist is, by definition, somebody who has more value to consume or under his control than he has actually consumed, or is prepared to consume, either in the form of money, in which case he is a saver, or the money is used either directly or indirectly to create capital goods, in which case he is an investor.

The less people consume, the more capital there is, and the more room the economy has to increase the length of time of production processes, or to give room to innovative ideas to implement. Both lead to more and/or better products, which leads to an increase of the value of money. This makes the capitalists are the source of all value of money. Without the existence of capitalists money would not have any value at all! This is why Communism does not work, and Soviet Russia collapsed. If all possible consumption has taken place, there would be no capital, no capital goods, and in the end no consumption goods that can be bought with money.

So if the total amount of money in circulation would be fixed, and all capitalists decided to transform all of their savings and investment into consumption, this would result in a massive increase in the amount of money in circulation, and a massive decrease in the amount of goods and services offered against money, and also a massive decrease of job opportunity. In other words, this would result in massive inflation and regression.

Conversely, the more people save, the more capitalist there are,and the more capital there is, and the more opportunities there are to create capital goods. Since capital goods are a means to use the forces of nature to use to lift the burden of labor of everybody, it would cause a far more easy living for everybody, because it would extend a far larger physical production. This would reflect itself both in money to have more value and to be more easy to earn money.

I am glad to see that there are some economists, like Reisman, who continue to point this out.

Person March 17, 2006 at 10:33 am

Konrad: Try to avoid re-posting material posted elsewhere unless you explicitly state that it is. Even if it’s your own work. Thanks.

Tom Burger March 17, 2006 at 1:05 pm

For what it is worth, Konrad, I don’t find your exposition an improvement over Reisman’s. In my opinion, Reisman gets to the heart of the matter when he talks about the consumptionist’s motivations: “… the goal is to demonstrate the necessity and beneficial effect of parasitism…”

I am currently reading Rothbard’s History of Economic thought and it is striking how in every age there have been essayists or “economists” who specialized in telling the king or the government hacks whatever they wanted to hear.

The story they tell always includes a nice parasitic role for themselves as advisor to the power elite. In other words, I believe that economic logic is not a serious consideration for our contemporary consumptionists. They are just continuing this long tradition of providing an psuedo-intellectual cover for the powers that be.

billwald March 17, 2006 at 2:48 pm

On the other hand, in the 19th century half the population of the western nations lived in poverty and spent half their life’s energy obtaining sufficient food to stay alive. production was critical because half the population had insufficient consumer goods available to stay warm and dry.

In the 21st century less than 10% of one’s life’s energy is spent obtaining sufficient food and the poor people have all the same sorts of consumer goods as the rich people and in sufficient quantity for basic needs of them. The difference is that the rich people have better quality goods and services and don’t have to stand in line to get them. One can walk through a shopping mall and not see anything that is a basic necessity.

If consumers could not be convinced that they needed to trade in perfectly good cars for the new models our economy would collapse in 3 months or less.

Tom Burger March 17, 2006 at 3:20 pm

billwald,

Why would you say this? “If consumers could not be convinced that they needed to trade in perfectly good cars for the new models our economy would collapse in 3 months or less.”

Do you actually doubt that needs and desires are limitless? If people wanted fewer cars it would be because they wanted more of something else.

If people bought fewer cars, fewer resources would be dedicated to building cars and those resources would be employed to produce the goods that people actually desire.

Isn’t the purpose of an economy to produce the goods that are actually wanted? Posting a higher GDP number is not the same thing as meeting our diverse needs in the best possible way. Only a free, unfettered market will do that.

Paul Edwards March 17, 2006 at 5:22 pm

Great article.

“Economic theory in the twentieth century … proceeds as though the problem of economic life were not the production of wealth, but the production of consumption.”

Hilarious and spot on!

Jordan March 17, 2006 at 5:29 pm

Are Chevrolets really better than Volkswagens? Other than that–great article.

Ryan Fuller March 17, 2006 at 6:37 pm

Demand side economics are so absurd they just beg to be mocked.

Just remember, if you’re running out of food its because you’re not eating enough. Hopefully in the future we can prevent that by dropping money out of helicopters and burying it, where others will dig it up and spend it. This brilliant one paragraph plan will simultaneously eliminate world hunger, lackluster economic growth, and business cycles simultaneously. :)

Francisco Torres March 17, 2006 at 7:46 pm

The difference is that the rich people have better quality goods and services and don’t have to stand in line to get them. One can walk through a shopping mall and not see anything that is a basic necessity.

Only and idiot would go to a shopping mall to seek basic “necessities”. That is the reason for Walmart and Safeway to exist.

If consumers could not be convinced that they needed to trade in perfectly good cars for the new models our economy would collapse in 3 months or less.

The “perfectly good” car may be a POS for another person, billwald – VALUE IS SUBJECTIVE. That is why people will keep trading “perfectly good” cars even with car companies not resorting to efforts in convincing.

Brian Drum March 17, 2006 at 8:12 pm

Does anyone know or have a guestimate on how huch of the funds used to finance new cars come from real savings and how much comes from the great-magical-money-machine-in-the-sky?

L.T. March 18, 2006 at 8:03 am

It seems like this is about “supply side” vs “demand side” economics, even though the term “supply side” is not mentioned.

Correct me if I’m wrong, but this is how I understand it. What the article referres to as consumption, is the Keynesian viewpoint and the production is the viewpoint of “supply side” economics.

Allen Weingarten March 18, 2006 at 8:37 am

I appreciated the article by George Reisman and the exposition of Konrad Swart. Yet there is another dimension to be addressed, namely why it is that such irrational claims as consumerism win out in the war of ideas. (As Mr. Swart notes “consumerism is…so hilariously false that I am amazed it could have been taken seriously…”) The Austrians have the logic, but the Keynesians get the votes. Part of the explanation, of course, is the vested interest in government intervention. However, that could not hold sway without the support of the public. Here, consumerism points out that a given business is better off when his competitors provide fewer goods, or when there are artificial needs for his wares. The question then is why the public does not acknowledge that the overall situation is worsened at the same time. In my view, the public is influenced by such values as altruism, which seeks to bestow unearned benefits to the undeserving, and having scapegoats to punish, so as to feel self-righteous.

Dr. Reisman wrote (regarding production & consumption) “These two diametrically opposed and mutually exclusive basic premises concerning the fundamental problem of economic life play the same role in economic theory as do conflicting metaphysics in philosophy.” My point is that the opposed economic views reflect opposed moral views, namely who is to gain and who is to lose. Economics per se is Wertfrei, yet whether or not our economy develops is very much a matter of the values and beliefs of the public. Dr. Reisman notes that the economist has the duty of identifying the particular errors of every consumptionist argument. I submit that it would also help to identify the moral flaws behind these arguments

anarkhos March 19, 2006 at 9:18 pm

Allen, the reason consumerism prevails is easy to understand when you listen to the complaints people have during recession: Nobody is buying my stuff so I have to fire people.

Increased production comes from production lines which don’t exist yet, and the following reduction in prices is difficult to fathom, expecially given the central bank’s inflationary policies. The other side of the economic equasion (the social benefits to saving) exists in the abstract while the reason I have a job here, today, isn’t.

Allen Weingarten March 20, 2006 at 7:55 am

I concur with anarkhos that the appeal of consumerism is to immediate experience, while the appeal of productionism is to abstraction. This is reminiscent of Bastiat’s differentiation of the seen and the unseen.

Yet it remains to be answered why it is not made evident that what is unseen is more significant than the seen. For example, one sees that when he borrows money, he has something, but does not see that he will have to pay back more. Yet it becomes evident that borrowing a little, and paying back more, is not a path to wealth. So why is it that in the war of ideas, the Austrians do not trounce the Keynesians? Again, I submit that we need to refute the moral errors in the case for intervention. Perhaps here too, the economist sees the goods and services, while the moral dimension is unseen?

Sag March 20, 2006 at 11:56 am

Superb article by George Reisman. I’m still mulling on the implications. It’s really useful to see a clear exposition of the fundamental lines of thought in economics. It adds yet another dimension to debates such as as that over Say’s Law.

Yancey Ward March 20, 2006 at 11:58 am

The question of why the consumerism wins the votes over productionism is really very simple: it seems to be human nature to want something for nothing, and, due to our limited lifespan, most of us lack the ability of long-range understanding (or we just don’t care) that the former makes society worse off than the latter. Remember Keynes’ famous quote?

George Reisman March 20, 2006 at 10:44 pm

The word “consumptionism” should be used, not “consumerism.” “Consumerism” is a term already in wide use and means something very different than what I have described as “consumptionism.” For example, according to the Wikipedia, “Consumerism is a term used to describe the effects of equating personal happiness with purchasing material possessions and consumption.”

Use of the term “consumptionism” was endorsed by Henry Hazlitt in a Newsweek column he devoted to my article back in 1964.

Konrad Swart March 21, 2006 at 5:21 am

Economy still the dismal science

How come, that even the most basic facts about money, like I have explained in the above, are not thought true? I think it is because eoconomy as such still has not proved to be worth while. It lacks an epistemological criterion we can use to distinguish really useful theories from nonsense.

Mathematics has such a principle. It is logic. Physics has such a principle. It is the idea of experimentation. Biology has such a principle, it is the theory of evolution.

But economy lacks a generally acknowledged epistemological basis that both demarcates its boundaries and enables us to make a distinction between a vision that is really worth while, and rubbish. This is why there is no ‘mainstream body of solid economic theory’. No economic theory has become so convincing, that it is seen as the proper way to go, a standard to uphold against any economic vision brought forward. Economy lacks an epistemological base, and therefore is not science. And that is why the words of Eugen von Böhm Bawerk are still valid: ‘no economic theory has become dominant. Every economic theory has more or less followers.

When I studied mathematics and physics, here in Holland, the consensus about sciences was as follows. Mathematics is the most difficult, and the most hard core science. Physics comes next. Then there is chemistry, biology, pharmacy, in this order.

Following that there are subjects that are barely sciences. Medicine is a bordercase, for obviously you can see whether somebody becomes well by a treatment. So there is some epistemology, although it becomes suspect due to the placebo effect.

And then there is philosophy. It is the job of philosophy to clarify questions, not answer them. Philosophy had some recognition, because it was seen as pre-science. Before you can answer questions you must make certain that you understand them. So philosophy had some recognition and acknowledgement, despite the fact that it is not science.

What about economy? Just like politicology and psychology I was not supposed to take it seriously. It was obvious that economy could not do that single important thing that is required of any science: making reliable predictions. On the contrary. It was generally known that economy failed continuously to ‘deliver this particular good’, and therefore a waste of time to study. That is what I believed for many years.

Only when I saw a very simple example of how you can answer simple problems of physics with terms belonging to an economic context I began to consider the possibility that there might be something useful in economy. The example that convinced me is this: Suppose you have a road of 30 km. From one side a person walks with a speed of 5 km/h, and from another side another person runs with a speed of 10 km/h. Where will they meet?

The answer, in terms of physics, is easily calculated. But you can also look at it from an economic perspective. In particular, from a production perspective.

Suppose the walker and the runner are not walking, but painting. The assignment is to paint the whole road of 30 km. The first person is then painting with a speed of 5 km/h, and the second with a speed of 10 km/h. So the total speed with which they paint is 15 km/h. Since the road is 30 km long, it takes them 2 hours to do the job. This means, that after 2 hours they meet each other, so that the first person has covered a distance of 2 times 5 km/h = 10 km, and the secnod has covered a distance of 2 times 10 km/h = 20 km. In total 10 + 20 km are then ‘painted’.

This simple example made me realize, that economy could, if its fundamentals were sound, become a science that could really contribute

But when I turned my attention to economy, what I saw was a mess. The best I could find was Rothbard’s Man, State and Economy, and Ludwig von Mises’ Praxeology. And later I found Eugen von Böhm Bawerk’s work, which I studied intensely.

But even the Austrian vision ‘is not there yet’.

For take the idea of ‘value’.

Menger defines it as: ‘value is the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfactions of our needs’.

Eugen von Böhm Bawerk has two definitions, objective and subjective value. He defines objective value as our estimate of the capacity of a good to bring about some definite extrinsic objective result.

He defines subjective value as the significance which a good or a quantity of goods possesses for the well-being of a certain subject. This definition is virtually identical to that of Menger.

Ludwig von Mises has a seemingly simpler definition: ‘Value is the importance that acting man attaches to ultimate ends.’ (Page 96 of Human Action, Third revised edition’.) This definition is only apparently simpler, because the complexity of the definitions of Menger and von Böhm Bawerk has been incorporated in von Mises’ theory of Praxeology, wherein he gives a formal definition of ‘ultimate ends’. So the simplicity is caused by a better theoretical framework. (The ‘law of conservation of misery’ still holds. You can hide the complexity, but not eliminate it.)

Rothbard just takes over the definition of value of von Mises.

When I compare it with physics, and translate their ‘findings’ in the language of physics it sounds to me like the following.

The concept of Force can only be explained as ‘effort expended’. You cannot understand the concept of ‘force’ without taking the psychological concept of ‘effort’ into account. Therefore, a ‘true physics’ has to be based on the subjective concept of ‘effort’.

And then, after this explanation I come up with the following definition of Force

Force is ‘the effort expended by one existent to make another existent move’. The effort does not necessarily be expended by human beings, but can also be expended by animals, dead matter, and even molecules.

It is clear, that if you take this as a point of departure, you cannot create a theory of physics that is able to produce results like Newtons’s force laws, his law of gravitation, or the Maxwell equations, the Schrödinger equation etc. Moreover, the definition contains psychological elements that are definitely not present in dead matter. Such a physics constantly has to struggle to rid itself from these psychological elements, just like Austrian economy does everywhere.

Even worse, if you insist on that this is the way to go, you might arrive at some understanding of some processes, but you cannot arrive at really fundamental results. You get a strange mixture of psychology and physics. It produces too much psychology, and too little physics.

In the same manner, by introducing valuation in the way Austrian economy does, you must arrive at the conclusion, that economy can never become a predictive science. But my simple example of the two walkers is already a refutation of this.

So what is required is to collect all the findings of the economists in the past, to think hard, and to try to arrive at a solid epistemological criterion belonging uniquely to economy. It must be so solid that it enables us to introduce mathematics in it, without founding it on such a psychologistic definition of value. However, it must revolve around value. For that is, I think, the most fundamental concept in economy.

Austrian economists think that this is impossible, due to the nature of the field. But at one time people considered it to be impossible to give mathematical definitions of such concepts as ‘force’, ‘energy’, ‘information’, and to arrive at ways to introduce mathematics into fields like biology. Biology is based on the DNA molecule as an information carrier. This is enough to use the definition of information of Shannon to provide it with a basis of mathematics that can be used within biology. A basis, that already enables us to make predictions just like the laws of Newton do.

In mathematics I learned, that ‘the inability to see that there is a solution’ is not equal to a proof that there is no solution. It might just be the case, that you are ‘too stupid’ to see it. If there is no solution, then this is something that you must prove just as much as the existence of a solution.

This is how I look upon the statement of von Mises, Rothbard etc. who assert, that it is impossible to give to economy such a solid foundation, that it becomes an exact science.

Reisman has made an attempt in this direction. He has tried to integrate both Classical and Austrian economy. He has even tried to introduce some mathematics in his Capitalism. In particular, he bases himself on the Quantity Theory of money and Fisher’s equation of exchange. However, he does not seem to be aware of Rothbard’s very thorough refutation of his approach. (Rothbard: Man, Economy and State, page 727-737.) I have pointed this out several times to him, to which he never responded. Apart from this, I think he did not succeed to integrate economy. To summarize a very large mixture of mutually contradictory theories into one book, containing mistakes, and also redefinitions so that there can no longer be a distinction between originary interest and profit, is definitely not an integration. An encyclopedia is not an integration.

I think I have found an epistemological basis, that is sound enough to show a way to mathematize economy. Moreover, I think I can use it to integrate that what is useful in Austrian economy with that what is useful in Classical Economy. It also demarcates the boundary between economics and the other sciences, and show what kind of questions are typically economic.I am working it out now in a book.

When it is finished, I shall inform the von Mises institute about it.

billwald March 21, 2006 at 11:07 pm

“If people wanted fewer cars it would be because they wanted more of something else.”

Doesn’t logically follow. People generally don’t quit smoking because they want to buy something else.

A third of all new car sales are “upside down.” “Nothing happens until someone sells something.” Wants are manipulated by advertising.

Yancey Ward March 22, 2006 at 8:41 am

billwald,

You should reread the the sentence you directly quoted- it says nothing about wanting to buy something else.

As for smokers who quit, they quit because they want to more and better life, but the money they don’t spend on cigarettes is used for some other purpose.

And advertising isn’t a gun to the head.

Allen Weingarten March 22, 2006 at 9:32 am

Konrad Swart writes that economics is not a science. I am not sure that I follow his reasoning, and may be insufficiently clear about the foundations of economics. (I shall define “economics” as the study of what is desired, scarce, and can be traded or produced, in a quantified manner.) Still, I wish to state why I view it as a science, and welcome correction of my position.

I view science as a methodical search for truth, whether in the analytic or synthetic realm. Now human action is akin to mathematics in having primitives. There is a disparity in that mathematical symbols, such as 0, 1, +, <, etc. needn’t have any explicit or implicit meaning, whereas primitives such as intent, cause, effect, random, etc. are known to each of us (by acculturation). This, if anything renders Austrian economics more consistent and complete than mathematics, whose axioms (if sufficiently developed) cannot be proven consistent or complete, whereas we know with certitude that human action exists in the world.

A mathematical model, say of Euclidean Geometry, is applied for better or worse to physical space, and can well be inaccurate for small sizes (as in string theory), for large sizes (such as in the growth of the universe), or for other spaces (such as black holes). Similarly, an economic model, such as people acting to better their material circumstances, may go awry for those who take a material loss for psychological gain. My point is that the application of models is an empirical matter, where the correspondence of a model to reality is no different for economics than for say physics. The fact that any given model may have a poor correspondence to reality does not render its discipline unscientific.

Now economics embodies subjective value, such as where a first apple is worth more to an individual, than a fourth apple (after eating three of them), or where to one person, an apple is worth less than an orange, while to another the opposite holds. On the other hand, what renders economic policy effective is its objective value, in terms of wealth, such as an ounce of gold. Here, there is no contradiction between the existence of subjective value, and the consequent objective value. Nor is there any contradiction between Austrian and classical economics, where the latter is an extension of the former.

Consider George Reisman’s article “Production versus Consumption”. Robinson Crusoe must first produce (such as picking an apple from a tree, or catching a rabbit) before he can consume (or save, or invest). Is it not clear that what is consumed comes from production, and not the other way around? This follows from self-evident premises, and would not be made clearer by use of technical definitions which would undermine our a-priori reasoning. I am unaware of anything unscientific in Dr. Reisman’s writings, which does not mean he is infallible, but that his analyses can be examined on the basis of logic, and correspondence with reality.

So I do not follow Mr. Swart’s reasoning that economics lacks an epistemological criterion, for it employs what is known a-priori to what becomes measurable, as say by ounces of gold. It is true as he says, that there is no consensus in economics, as there is in other sciences. Yet as he pointed out, the consumption theory is preposterous, yet held to. This is not because it is not easily refuted, but because people have a desire to believe it. One might as well discard a fingerprint analysis as unscientific, when a jury prefers to judge the innocence of a defendant by their bias.

Nor do I see that economics does not deliver verified predictions. Comparative advantage is validated by trade, and similarly we experience how printing money fails to increase wealth. Again, the fact that most economists today prefer interventionist policies, is not due to lack of a better form of economics, but to their bias. I do not see how this limitation could be corrected by use of technical analyses (such as quantifying the time for workers to paint a road) which economists often do when they employ mathematical models. The problem is not a lack of technical formulations, but that of moral errors.

Mathematizing the economy would tend to disregard its essence, which is that of human action, as understood in common terms.

I am sure that Mr. Swart is familiar all of the above, so again, I might be missing something in my formulation.

Konrad Swart March 22, 2006 at 3:37 pm

To Allen Weingarten

Thank you for your response.

As you correctly inferred, I am familiar with with all you write.

There is a hierarchy in sciences.

The very first science is logic. Aristotle was the first genuine scientist. This is because he discovered the very first epistemology ever: logic. He even succeeded to apply it to the world, and became the first biologist. This first epistemology emerged as a generalization of Euclidean geometry, wherein the power of strict logic was demonstrated for the first time. Euclidean geometry was the first integration of a huge collection of results, which before the invention of the axiomatic approach used to be seen as unconnected.

It was Gauss, who showed that the axiomatic approach could also be applied to other areas of mathematics. If you use the criterion of ‘producing results’, mathematics is the ‘most easy’ science.

The second ‘most easy’ science is physics. It was the first to become accessible to mathematics. But it was a distinct science, because its epistemology was not only logic, but it added the criterion of the experimental test to it. In particular, Newton had not only formulated the very first law of nature: F = dp/dt, but he had made a far more basic discovery. He succeeded to give a precise mathematical formulation of the concept of causality: the concept of the differential equation. This is something, that has escaped many people, including physicists.

By capturing the essence of the concept of causality not only in a mathematical construct, but in the mathematical construct, and to add to this the discovery of Galileï of the idea of experimentation, physics has evolved after only a few hundred years to a level wherein it can make predictions about dead matter in certain circumstances that are so precise, that they are correct within an experimental error of 20 to 30 decimals. An extraordinary achievement indeed.

Mathematics is a science, because it has an epistemology: logic. If a statement or theory is not logical, then it is not sound mathematics.

However, if a theory of physics, whose subject area is dead matter is mathematically sound, but fails the experimental test, then it is not physics. I must add, that a theory of physics does not have to be mathematical. Faraday was definitely not a mathematician. He formulated his findings in drawings. Lines of force. It was Maxwell, who captured the drawings of Faraday into a differential equation, and thus made the causality explicit, consistent with Newton’s discovery of the necessary mathematical form any statement of causality must have. Still, Faraday’s lines of force did satisfy both the criterion of the experimental test and of logic.

What I want to say, is that everything that is logical is science. But to what science does it belong? If it is only logical, then it belongs to mathematics only. If it is logical and it is testable by experiment, and an experiment does not refute its predictions, and it is only about dead matter, then it belongs to physics and chemistry. If it is cast into the form of a differential equation then it is physics, otherwise it is in a large part chemical.

If it is logical, no test refutes it, and it is about living matter and it is not in contradiction with the theory of evolution, then it belongs to biology.

Lamarcism satisfies logic, it is testable and not refuted, but it is in contradiction with the criterion of evolution. Therefore it has many characteristics of a scientific theory. You might even make predictions on the basis of Lamarckism that materialize. You might even restrict the domain of applicability so that all predictions materialize. Still, from a biological point of view it is not sound.

We can say this, because biology has an epistemology, a test with which we can make a distinction between right and wrong theories.

Economics does not have such a test. As Eugen von Böhm Bawerk already remarked, any economic theory that is in contradiction with the other sciences has to be rejected. So the epistemologies of the other sciences, in particular logic and the laws of nature give some means to eliminate a lot of false economic theories. So the other sciences give necessary conditions a sound economics has to satisfy. However, it is not enough for the soundness of an economic theory to be not in contradiction with the other sciences to be scientific itself. So although the other sciences bring some epistemology into economy, they do not solve the problem of epistemology of economy completely. So when Eugen von Böhm Bawerk, for example, says that more roundabout ways of production lead to a far greater physical output, he says something that is true. You can even justify it, by giving the reason. The reason is, that more roundabout ways of production incorporate more capital goods, and usually lead to longer production lines. And capital goods are ways to redirect the forces of nature. This leads to a larger physical output, because we can then accomplish more than with only our bare hands. But its truth does not follow from economics, but from physics and biology. Physics provides us an understanding of how we can redirect the forces of nature. And biology tells us about the actions our bodies can perform.

The problem begins, if you want to explain the value that is the result of this larger physical production by more roundabout ways of production. As Eugen von Böhm Bawerk shows in his first book, it does not necessarily be so that if we succeed in creating more physical production we also produce more value. In fact, we have a real problem here. For if physical production increases, supply increases, and therefore you have to lower the prices to be able to sell the larger physical output. So income out of sales on a per unit basis diminishes. Moreover, when a new way of roundabout production has been found that is able to cause a much larger output of physical production, then two things usually happen. In the beginning the items are sold for only a little less than before, so that the entrepreneur has more profit. This will stimulate him to invest more. This will increase the demand of the particular types of capital goods he employs. Or, if he does not, others will. So demand of the capital goods for these kinds of production lines will increase, and this will raise the prices, reducing the profit. So you have two forces going against making profit out of an enlargement of physical production. These forces can even be so strong, that the larger physical output will eventually lead to a lower total income!

But it does not have to be so. The point is, we cannot really predict what the economical consequences are of better production methods. We cannot predict the one important factor that matters: the effect on value!

So, yes, we can make predictions that are scientific. But we cannot make predictions that are uniquely economic! That is the problem.

Let me demonstrate something of the power of logic, and show you something of a technical nature.

The idea of ‘human action’ of von Mises can be refuted! I can do this by applying logic. Not the modal logic of Aristotle, but the more powerful logic that has been developed from the middle of the 19th century: mathematical proposition logic.

The refutation is as follows:

~B->(B->A) is a tautology. Therefore its truth is independent of the subject matter you apply it to. B and A are symbols standing for any assertion, or, more precise, any thougt ~ stands for (not), and -> stands for if … then … .

Suppose a theory contains a contradiction. Then in it there is a thought B and its logical denial ~B.

I can then make the following logical derivation.

(1)~B (Hypothesis)

(2) ~B->(B->A) (Tautology)

(3) B->A (1, 2, modus ponens.)

(4) B (Hypothesis)

(5) A (3, 4, modus ponens.)

In other words, if a theory contains only one contradiction, then every conclusion can be deduced from it by a logically correct reasoning. Such a theory cannot be refuted because nothing can be in contradiction with it. Again, because everything follows from it.

This statement can be recast into a logical equivalent statement. It is: ‘If a theory is to be logically consistent (and therefore, a thought exist that corresponds to its contents), it has to satisfy one criterion. And that is, that there has to be a single thought that is in contradiction with the theory. For if everything follows from a theory containing a single contradiction, then if there is even one single thing that does not follow from the theory, the theory has to be completely free from contradictions.

Now it is a psychological fact, that we are so constituted, that we can transform any thought into action. Therefore no thought can possibly exist, and therefore no action exists that is in contradiction with the concept of human action.

So, logically speaking, a theory that bases itself on human action, and which tries to derive consequences of ‘the universal fact of human action’ as envisioned by von Mises is, from a logical perspective, a tautology. Because, whatever we imagine an action, we can, in principle at least, ‘put the imagined action into actual action’. Therefore there does not exist an action that is impossible.

This very strong derivation is not only applicable to ‘human action’ but also to psychology. In plain language, economy, as envisioned by von Mises is in contradiction with one of the most basic epistemological principle that has been discovered: logic. Although von Mises saw the concept of ‘human action’ as an epistemological criterion, it isn’t. For it is incapable of doing the one thing required from an epistemological criterion: ‘making a distinction between true economic statements and false economic statements’.

Therefore, his whole ‘praxeology’ is a tautology. As a tautology it does not belong to science, but to philosophy. So von Mises is not an economic scientist, but an economic philosopher.

This does not mean, that Austrian economics is useless. No. Its use is that of any philosophy: a clarificator of questions. And that is the true contribution of von Mises. His praxeology makes us understand the field of economy. It makes us ask the right questions. But it does not provide us a way to make a distinction between economic sound statements and economic false statements. For anything can be made consistent with it.

Paul Edwards March 22, 2006 at 4:26 pm

“The idea of ‘human action’ of von Mises can be refuted!”

Konrad,

You cannot refute that humans act. The refutation is an action itself and is therefore a performative contradiction making it incoherent.

Logical symbols merely provide confusion and a distraction from the simple observations of praxeology. The science of praxeology is logical and practical. It doesn’t need logical symbols to make it a science. Furthermore, it certainly does provide economists a way to distinguish between true and false economic statements. And if one starts with true premises, and reasons accurately, as the Austrians are prone to do, praxeology leads to conclusions that are necessarily and undeniably correct.

And the axiom of human action is quite irrefutable.

Peter March 22, 2006 at 6:15 pm

“Therefore there does not exist an action that is impossible.”

Taking that literally, it’s equivalent to “there does not exist an even number that is odd”. If that’s enough to prevent praxeologists from “making a distinction between true economic statements and false economic statements” (note: it isn’t) then it’s enough to prevent mathematicians from “making a distinction between true mathematical statements and false mathematical statements”; ergo, mathematics is useless (note: it isn’t), so why do you want to “mathematize economics”?

Allen Weingarten March 22, 2006 at 7:26 pm

Konrad Swart writes that “everything that is logical is science” and adds that there needs to be “an epistemology, a test with which we can make a distinction between right and wrong theories.” Let us use Robinson Crusoe to illustrate the ontology of economics. We know a-priori that man can have needs, as is known from within. This does not prove that a particular man has a particular need, but when Crusoe takes an apple from a tree, or says he will do so, we interpret this by saying that he intended to satisfy a need. In this manner, the model of an individual having a need is applied to Crusoe. The model of human action is necessarily consistent (as we know from within) but any given model might not apply, as if say Crusoe picked the apple inadvertently, or perhaps it was actually a stone.

I presume that Mr. Swart either denies that we know that one can act to satisfy a need, or that we can know that Crusoe can do so, or that we cannot know whether in fact he has done so. Yet it seems evident that only the latter is questionable, and as in any empirical matter, it can turn out that a model might not apply (such as in the application of Euclidean geometry). I aver that when we conclude, based on the evidence, that when someone took an apple, he did so to satisfy a need, this means that we “know” so, for that is what the definition of “know” means.

Now, I recognize that when in ordinary language one says that we “know” something, it is not the same as a statement in a physical science. So one could say, by his definition, that statements in ordinary language do not constitute science, but say a discipline. Yet in this case, I doubt that what we want in economics is ‘science’ for we rather need that which deals with the human situation, and employs ordinary language.

Next, I question whether the proof that roundabout ways of production lead to greater output, is validated by ‘science’ rather than by economics. We know that if instead of people picking cotton, there is a machine built to do so, it can be more productive, by common sense. Here, a thorough analysis from physics and biology is not helpful, but rather that an individual, without a machine can be paid $100 dollars to pick a batch, while with a rented machine can do so for $30. That is the method and language of the entrepreneur, and not the ‘scientist’. This is not to deny that businessmen employ accountants who employ the logic of arithmetic, and engineers who employ the experimentation or physics (regarding the rapidity of a machine process). *It is rather that such quantification is secondary regarding the business decisions to be made.*

Mr. Swart’s next example is that physical production increases supply, which lowers prices, and perhaps profit. I interpret his position as that we do not know the extent to which value is decreased with production. Now, if I had two helpings of ice cream, the third helping would be worth little to me, while my friend might have four helpings and still want more. The economist takes this as a given unknown, which might be estimated empirically, especially for large numbers of people. Here, economists lack understanding as to how much pope will value various amounts of products. Yet the issue is not math or physics, but psychology, philosophy, and other matters dealing with the human condition. Perhaps such matters are what Mr. Swart is concerned with. However, the fact that economists take subjective value qualitatively, and admit ignorance as to what the quantities will be, does not undermine their discipline for what it does know.

Then Mr. Swart demonstrates how a logical proposition precludes contradiction (which could be easily shown, by if aa). Also, as is known, if a single contradiction occurs in logic, then anything can be derived. I do not see how this refutes anything in human action, for when it comes to the a-priori models there can be no contradiction. The fact that praxeology necessarily holds, renders it as much of a science as logic (or the tautological sentential calculus), whereas the fact that the application of a model to an empirical situation can go awry, is true for all science.

In sum, I can see how by Mr. Swart’s definition (which differs from mine) economics is not a science. Yet I doubt that improving economics is a matter of what he calls science, but is instead the need to develop the consequences and applications of human action.

I concur with Paul Edwards that: one cannot refute that humans act, for the refutation constitutes an action; logical symbols distract from the simple observations of praxeology, which in turn is logical and practical; it distinguishes between true and false economic statements. However, herein is a problem, for my criteria in these discussions is that truth is found by what disagrees with Paul. Consequently, I have to agree with Mr. Swart that my view of human action is fundamentally contradictory.

Konrad Swart March 23, 2006 at 6:40 pm

Some responses
Let me go into some of the arguments put forward here. For I see that there are some misunderstandings.
Paul Edwards: “You cannot refute that humans act. The refutation is an action itself and is therefore a performative contradiction making it incoherent.”
KS. Of course, you cannot refute that humans act. But that is not what I said. What I said is, that you cannot use the fact that humans act as a basis of an epistemology. The reason is, that any thought can be transformed into action. So you cannot imagine an action that is not at the same time executable. (Of course, within the restrictions physics and biology impose.) This makes that the statement that humans act is, logically speaking, a tautology. And therefore you cannot deduce the concept of value from praxeology. That is my point.
Paul Edwards: “Logical symbols merely provide confusion and a distraction from the simple observations of praxeology. The science of praxeology is logical and practical. It doesn’t need logical symbols to make it a science.”
This is both a misunderstanding and shows an unawareness of the power of modern logic. What I did was applying propositional logic to praxeology, (ten years ago for the first time) and what I discovered was, that praxeology is not a science but a philosophy. It is not a science, because any science consists of two components.

  1. A description of a context. The context has to be describable into some language, that is, a collection of terms and rules of formation of all the concepts relevant to the context. The context is needed for the understanding of the relevant questions. This means that the construction of the context (or the discovery) has to be done in such a way, that the formulation is consistent, complete and categorical. Consistency means, that no concept or term can be made that contradicts another. Completeness means, that every problem belonging to the context, and therefore all relevant questions can be represented in the language of the context. And categorical means, that the language is so unambiguous, that it can be understood in one and only one way, so that there is no confusion about what, exactly, the problems are. Whenever a question is put forward, and the context is categorical, there can be no room for ambiguity about what the question exactly is.
  2. An epistemological criterion, which, within this context, is able to make a distinction with which to determine true or useful or valuable statements, and nonsense.

Praxeology satisfies the first criterion. That is the great contribution of von Mises. It allows you to see that statements that appear to belong to economics do not belong to economics at all, but to other fields. It also allows you to recognize in other sciences statements that belong also to economics. That is what my example of the two persons walking to each other demonstrates. It demonstrates that you can transform some problems of physics into economic problems.
Paul Edwards: “Furthermore, it certainly does provide economists a way to distinguish between true and false economic statements. And if one starts with true premises, and reasons accurately, as the Austrians are prone to do, praxeology leads to conclusions that are necessarily and undeniably correct.”
KS. Again, a misunderstanding. To begin with, truth in an absolute sense does not exist. The only kind of truths that are possible are contextual. Moreover, the only absolute certain statements that are possible are of a negative kind.
To give a simple example, I can make the statement: ‘all swans are white’. As was the point of Popper, this statement can never be proved to be true no matter how many white swans I produce. This is because only a single black swan is enough to not only refute the universal validity, but even to be be absolutely certain that the statement ‘all swans are white’ as a generalization is false. So absolute certainty is possible, scientifically speaking, but only about negative statements.
This is why science differs from philosophy, because philosophy is about understanding questions, not answering them. Therefore a typical philosopher wants to be as ‘open minded’ as possible, in order to be able to arrive at statements to the effect that ‘such and so can never be made certain’.
However, although I admire Popper, I am not a Popperian. For Popper overlooks that I can make things true, by the following action. (Note, that I use action.) I collect swans, making certain that they are all white. And then I put them in a closed, empty room. After having done that, I can say, with equal certainty, that all swans in that room are white. In fact, I make use of the fact that I am absolutely certain that the statement ‘all swans are white’ is false, to make it true, by deliberately eliminating the exceptions. I deliberately create restrictions that make it true. So by introducing the restriction of the empty room, (the context) I can make certain that I create a domain of validity of universal statements. So this example shows that universal statements can never said to be true, but they can be made true. Moreover, I can be certain of it, by making use of the fact that I am aware of the exceptions. For this awareness makes it possible for me to avoid the exceptions.  I make the statements ‘as universally valid as I can’, by restricting the context. This shows, I think, an aspect of praxeology that might be new. You can deliberately make a connection to praxeology and logic.
By the way, this example shows, that science and technology are complementary. Science tries to gather the ultimate limits of the validity of conditional statements, and therefore is actively looking at those conditions wherein statements are no longer valid. Technology uses this knowledge to deliberately avoiding the conditions that refute the statements, and therefore tries to restrict itself to those conditions wherein the exceptions do not occur. In this way technology aims at materializing certain imagined actions, while science aims at refuting the realization of certain imagined actions.
Now what praxeology is capable of doing is identifying statements as belonging to the context of economics. It ‘creates an abstract room’ of true statements. And as such it is valuable, because the demarcation causes the ambiguity of economic questions to disappear. But within this demarcation the most important problem of economics, the problem of value, is still unsolved. Although Austrian economics is very, very close to it.
Paul Edwards: “And the axiom of human action is quite irrefutable.”
KS. The reason why human action is irrefutable is not because it is an axiom, but because it is a tautology. And that is exactly why it cannot be a basis of a science, but only the basis of a philosophy. Whenever a context is consistent, complete and categorical, it is irrefutable because it has become a tautology. The logical denial of the statement is unimaginable, and therefore it can neither be tested nor be used as a test for other statements within the context it defines. It defines the context itself. No exceptions exist, and therefore no conditions wherein certain results can be guaranteed can be constructed. No economic science is possible, and therefore no economic technology is possible. Not with Austrian economics, that is.
"Therefore there does not exist an action that is impossible."
Peter: Taking that literally, it’s equivalent to "there does not exist an even number that is odd".
KS. No. These statements are not equivalent. The distinction between even and odd numbers consists of two kinds of numbers within one context, namely the context consisting of the set of integers. (I restrict this example to the positive whole numbers, the integers, in order to avoid mathematics as much as I can.) This set can be split into two subsets, whose intersection is empty, and whose union is equal to the set of integers. The definition of even number then can be used within this set of integers to look at an arbitrary integer in this set to see whether it is even or odd. (E.g. for any x belonging to the set of integers, if x/2 also belongs to this set of integers, x is even, and if x/2 does not belong to the set, then x is odd.) So this definition can then be used as a test to make a distinction between even and odd numbers within the set of integers. Moreover, if you define the concept of ‘predictable number’ as ‘a predictable number is an even number’, then you can use the definition of even number as an epistemological test to distinguish the ‘predictable numbers’ from the false numbers. You can construct a subset in which the statement: ‘all numbers are even’ is true. (See the ‘swan example’ in the above.)
So the statements are not equivalent.
An equivalent statement would be: ‘all integers within the set of integers are integers’ or, ‘there is no integer within the set of integers that is not an integer’. Or, ‘any symbol defined by the Peano postulates (which is a set of axioms (and one meta-axiom) that has formalized the process of counting in mathematical terms) is an integer.
Praxeology is of such a nature. It defines the context, just as the Peano axioms define the context of the integers.
Of course, the idea of ‘predictable number’ I used in the above is very contrived. But that is because the epistemology of mathematics is logic itself. Logic is the epistemological test of mathematics. It is what makes mathematics a science. Whenever a train of reasoning is consistent with logic, it is mathematically sound, and therefore mathematics. If a train of reasoning is not consistent with logic, it is not mathematics. Therefore, the only thing mathematics investigates is, after introducing a context, which concepts can be logically derived from which.
So mathematical truths are, as is the case with all truths, conditional, dependent on context. If I enlarge the context of natural numbers, for example, so that it becomes the set of rational numbers, and I apply the above definition of even number to this context, then I get: for any x belonging to the set of rational numbers, x/2 is also rational. And that is true for every rational number. Therefore the set of even rational numbers and the set of rational numbers is not distinct. So within the set of rational numbers, the concept of ‘even number’ is a tautology, and therefore useless. (Division itself distinguishes rational numbers from whole numbers. That causes this trouble.)
So with this modification ‘there does not exist an even number that is odd’ becomes, indeed, equivalent to what I say about praxeology.
Peter: “If that’s enough to prevent praxeologists from "making a distinction between true economic statements and false economic statements" (note: it isn’t) then it’s enough to prevent mathematicians from "making a distinction between true mathematical statements and false mathematical statements"; ergo, mathematics is useless (note: it isn’t), so why do you want to "mathematize economics"?
KS. As you can see, matters are not that simple, not even within mathematics. You make the implicit mistake to think that there is one context that defines all of mathematics. Mathematics is not one field, but consists of many theories that are so mutually contradictory that it has been actually proved that it is impossible to integrate it into one huge domain. This is one of Hilbert’s conjectures, which has been refuted by Gödel’s theorem.
Allen Weingarten: We know a-priori that man can have needs, as is known from within.
KS.  This statement is equivalent to the basic statement of ‘Human Action’. For a ‘need’ is any picture the brain accepts as something to realize in the future. A ‘need’ is a ‘purpose’. Therefore this is not something we infer from inspection, and therefore see as something that is a-priori true, but it is a statement, whose denial is not imaginable, and therefore is understood to be irrefutably true. That is, by the way, another mistake of von Mises.
Human action is a tautology. As such it even applies to suicide. For the purpose is then ‘to end it all’, and the (imagined and subsequently executed) action consists of the actual imagination and execution of a series of actions leading to the end of your own life.
Allen Weingarten: This does not prove that a particular man has a particular need, but when Crusoe takes an apple from a tree, or says he will do so, we interpret this by saying that he intended to satisfy a need. In this manner, the model of an individual having a need is applied to Crusoe. The model of human action is necessarily consistent (as we know from within) but any given model might not apply, as if say Crusoe picked the apple inadvertently, or perhaps it was actually a stone.
KS: This does not demonstrate that human action is a model. For the ‘inadvertently picking of an apple’ is not something ‘outside the model of human action itself, a but different action belonging to the tautology of human action, because the purpose of that act is different. And the ‘stone picking’ is a mistake, if the intention was to pick an apple’, and therefore yet another form of action. So these examples show that they are in contradiction with each other, because they are different actions. However, they are not in contradiction with action as such. Action is always tautologous.
Allen Weingarten: I presume that Mr. Swart either denies that we know that one can act to satisfy a need, or that we can know that Crusoe can do so, or that we cannot know whether in fact he has done so.
KS. Wrong presumption. It is not a matter of knowledge, but a matter of it being a tautology, and it being understood as such. An understanding arising out of the greater power of modern logic.
A tautology cannot be denied, because the denial of a tautology is a contradiction. Praxeology is consistent with every action, and therefore not a model, but a tautology. That what distinguishes a model from a tautology is that you can imagine an exception of a model, but not of a tautology. Therefore the denial of an action within praxeology corresponds to no action at all. But ‘taking no action’ an act of a particular kind. So the denial of action can literally not be imagined.
<snip, because it has become irrelevant.>
Allen Weingarten: Now, I recognize that when in ordinary language one says that we “know” something, it is not the same as a statement in a physical science. So one could say, by his definition, that statements in ordinary language do not constitute science, but say a discipline. Yet in this case, I doubt that what we want in economics is ‘science’ for we rather need that which deals with the human situation, and employs ordinary language.
KS. Well, I am far more optimistic. Just like physics has led to far better houses, to sky scrapers, to machines, to airplanes that actually work, to televisions, you name it, a truly scientific economy could produce goods in such an astonishing abundance no ‘common sense’ theory lacking the strength of science could ever match. And that is what is at stake here. I envision an economy that is not only prevented from cyclic collapsing, but even strengthened immensely by proper scientific thinking. Instead of making everybody poor, what an economy that pretends to be scientific does, like communism, such a science would make everybody rich beyond his wildest dreams.
Allen Weingarten: Next, I question whether the proof that roundabout ways of production lead to greater output, is validated by ‘science’ rather than by economics. We know that if instead of people picking cotton, there is a machine built to do so, it can be more productive, by common sense.
KS. You make a distinction between common sense and science I do not subscribe. Science and common sense differ only in degree, not in essence. Science differs only in one respect from common sense: it is far more precise. It derives its larger precision from mathematics. That is why we must strive to make any science mathematical. For the more precise your theories are, the more likely they are wrong. For the more precise your statements are, the more distinctive they are, and therefore the greater the chances are that the thoughts you can have are in contradiction with it. But if, nevertheless it is very hard to find a thought, that actually refutes a very precise statement, it is reliable in exactly the same measure as its capacity to withstand refutation.
What I mean is this. Newton’s laws are a very precise mathematical description of the causality within dead matter. Therefore, you can imagine far more possibilities that violate it. Think, for example, about a ventilator on a boat producing wind in the sails. It will not make the boat move. But I can imagine that happening. It has taken scientists hundreds of years to actually produce situations in violation with Newton’s laws. And this was mostly because the precision increased dramatically, so that such differences could be noticed.
The point is, that if deviations are difficult to find, even under a tremendous increase in precision, then you are far more likely to come up with imaginations you can realize. And that is why scientific thinking is superior to common sense thinking. And that is also, why I find it so important to make a discipline scientific.
Allen Weingarten: Here, a thorough analysis from physics and biology is not helpful, but rather that an individual, without a machine can be paid $100 dollars to pick a batch, while with a rented machine can do so for $30. That is the method and language of the entrepreneur, and not the ‘scientist’. This is not to deny that businessmen employ accountants who employ the logic of arithmetic, and engineers who employ the experimentation or physics (regarding the rapidity of a machine process). *It is rather that such quantification is secondary regarding the business decisions to be made.*
KS. Businessmen are not economists. What is true for the businessman is not true for economics as a whole. It is the purpose of the businessman to make a profit. But, to borrow an example of Eugen von Böhm Bawerk, it is just as impossible to have an economy wherein every businessman can make a profit as it is to have a race course wherein every runner outruns every other runner. So the perspective of economy is fundamentally different than that of the businessman, and so is its purpose. The purpose of economy is to find those conditions that cause a(n immensely) abundance for everybody, or, in Austrian economic terms, to have an economy wherein as many people can realize their purposes, whatever they are, with as little toil and trouble, i.e., action as possible.
That is, by the way, why I consider von Mises’ praxeology a real breakthrough. He has ‘defined the ball-game’. He has clarified the context. He has shown, what economy is really about. It is about human action, so it is future directed, goal directed, purposeful behavior.
Allen Weingarten: Mr. Swart’s next example is that physical production increases supply, which lowers prices, and perhaps profit. I interpret his position as that we do not know the extent to which value is decreased with production.
KS. Indeed. That is the point. We do not have a scientific theory of value. Physical production is not the same as production of value. A point that Eugen von Böhm Bawerk continuously stresses. We know a negative, but not a positive.
Eugen von Böhm Bawerk had a belief about value and production, though. He assumed, that although a larger physical production leads to cheaper products, and therefore less income on a per unit basis, the totality of the larger production will always lead to a total value that is larger. So if you produce 10.000 kilos of butter, and you sell it for 1 dollar a kilo, your income will be 10.000 dollars. But if you increase production to 20.000 kilos of butter, the price per kilo will not drop below 50 cents, so that the total amount will produce at least an income of the 10.000 dollars, as before. But I have fundamental grounds, and examples, to demonstrate that this belief is wrong. I shall go into them in my book.
Allen Weingarten: Now, if I had two helpings of ice cream, the third helping would be worth little to me, while my friend might have four helpings and still want more. The economist takes this as a given unknown, which might be estimated empirically, especially for large numbers of people. Here, economists lack understanding as to how much pope will value various amounts of products. Yet the issue is not math or physics, but psychology, philosophy, and other matters dealing with the human condition. Perhaps such matters are what Mr. Swart is concerned with. However, the fact that economists take subjective value qualitatively, and admit ignorance as to what the quantities will be, does not undermine their discipline for what it does know.
KS. It is not the case, that economists take subjective value qualitatively. Austrian economists take value both subjective and qualitatively. It is exactly at this point where I have found a way out, and what my own book is based on. I have a fourth understanding of value. Classical economists see value as the result of production. Socialistic economists see value as the result of distribution. And Austrian economists see value as the result of value as an evaluation of consumer needs and consumer wants, imputed to capital. Moreover it expresses that evaluation is ordinal, and the next step is marginal utility. Indeed, if you follow that route, the concept of value cannot benefit of the tremendous increase of precision mathematics has to offer. In particular the connection between cardinals and value cannot be made. Austrian economics cannot make the next step, because it requires a far greater precision: the precision needed to bring economics within the scope of cardinal mathematics. There is a fundamental misunderstanding (actually two) that prevents Austrian economics make this step, and to become a science. Nevertheless, from all the three economic approaches, Classical, Socialistic, and Austrian, it is the closest to the solution I envision. Without having made a thorough study of Austrian economics I would not have found my way out. So I see my own solution as a next step in Austrian economics.
<snipped, because not relevant>
Dear discussion people. This is my last response.
I thank you all for your valuable input. I joined this blog, because I wanted have some experience about the arguments I would encounter if I shared some of my findings with you. I thank you all. I shall direct the rest of my energies to my book.

Paul Edwards March 24, 2006 at 1:00 am

“Paul Edwards: “You cannot refute that humans act. The refutation is an action itself and is therefore a performative contradiction making it incoherent.”
KS. Of course, you cannot refute that humans act. But that is not what I said.”

Konrad? What didn’t you say? I think you said this: “The idea of ‘human action’ of von Mises can be refuted!” and then you said this: “The refutation is as follows:…”

“What I said is, that you cannot use the fact that humans act as a basis of an epistemology. The reason is, that any thought can be transformed into action. So you cannot imagine an action that is not at the same time executable. (Of course, within the restrictions physics and biology impose.) This makes that the statement that humans act is, logically speaking, a tautology. And therefore you cannot deduce the concept of value from praxeology. That is my point.”

Logic provides the foundation for both epistemology and praxeology. Through logic, we can see that the fact that humans act is far more than a tautology. That humans act means that we recognize cause and effect. Our minds are able to recognize that we can use means to achieve ends in the physical world. Because we can act, we therefore know of the existence of true synthetic a priori propositions. In other words, the fact that humans act, while necessarily true, also has practical implications that are also indisputably true.

“Paul Edwards: “Logical symbols merely provide confusion and a distraction from the simple observations of praxeology. The science of praxeology is logical and practical. It doesn’t need logical symbols to make it a science.”
This is both a misunderstanding and shows an unawareness of the power of modern logic. What I did was applying propositional logic to praxeology, (ten years ago for the first time) and what I discovered was, that praxeology is not a science but a philosophy. It is not a science, because any science consists of two components.
1. …
2. …
“Praxeology satisfies the first criterion. That is the great contribution of von Mises. It allows you to see that statements that appear to belong to economics do not belong to economics at all, but to other fields. It also allows you to recognize in other sciences statements that belong also to economics. That is what my example of the two persons walking to each other demonstrates. It demonstrates that you can transform some problems of physics into economic problems.”

You cannot transform problems of physics into economic problems. This is part of your fundamental confusion. Physics deals with inanimate objects that do not act. To study them, we must watch how they behave and build theories based on what we observe. Economics studies human action in the real world of scarce resources. To study this, we start with grasping undeniable truths of how humans interfere with their surroundings to achieve ends, and then we use logic to derive other necessary truths based on that.

“Paul Edwards: “Furthermore, it certainly does provide economists a way to distinguish between true and false economic statements. And if one starts with true premises, and reasons accurately, as the Austrians are prone to do, praxeology leads to conclusions that are necessarily and undeniably correct.”
KS. Again, a misunderstanding. To begin with, truth in an absolute sense does not exist.”

But the misunderstanding (and confusion) is yours: Let’s talk about your proposition that “truth in an absolute sense does not exist.” Is this proposition absolutely true? If so, it suffers from an internal contradiction given that it states there is no such thing. It is therefore incoherent. But perhaps the proposition is not absolutely true, but then it would just be useless wouldn’t it.

“The only kind of truths that are possible are contextual.”

This is yet another incoherent contradiction: Is this proposition universally valid? If so, it is again simply a contradiction given that it states that truths can only be “contextual”. Or is this proposition itself subject to context. And if so, there are contexts where it is false and again, useless.

“Moreover, the only absolute certain statements that are possible are of a negative kind.”

Are you certain about this? It sounds like a positive kind of statement to me. But then if it is not a negative statement, we can’t be absolutely certain about it can we. This represents the third of three consecutive self-contradictory statements you have made. I do not think an example is able to rescue this proposition.

“Paul Edwards: “And the axiom of human action is quite irrefutable.”
KS. The reason why human action is irrefutable is not because it is an axiom, but because it is a tautology.”

That humans act is something we recognize as a true synthetic a priori proposition, which has many practical and necessarily true implications, which is why it is science.

“And that is exactly why it cannot be a basis of a science, but only the basis of a philosophy. Whenever a context is consistent, complete and categorical, it is irrefutable because it has become a tautology.”

So to sum it up, the axiom of human action has practical implications that are useful in drawing necessarily true conclusions in the realm of economics.

“The logical denial of the statement is unimaginable, and therefore it can neither be tested nor be used as a test for other statements within the context it defines. It defines the context itself. No exceptions exist, and therefore no conditions wherein certain results can be guaranteed can be constructed. No economic science is possible, and therefore no economic technology is possible. Not with Austrian economics, that is.”

I think we have established that you are using contradictory and incoherent logic on which to base your conclusion that Austrian economics is not a science. It is clear that the axiom that humans act, while undeniably true, also has real world physical and practical implications, which allow us to draw necessarily true conclusions in the field of economics. Austrian economics is definitely scientific.

Konrad Swart March 24, 2006 at 5:12 am

Just one remark to Paul Edwards.

I am making a distinction between truth and certainty, while you don’t. This distinction is very important. For it solves the problem of how science can be so effective, while taking the criticism of Popper into account. For he had a real point with his white swan example. I think many people dismiss him too easily with the sweeping statement: ‘Popper had it wrong’ and leave it at that, without going into his white swan argument. I have never seen an attack on Popper that addresses his discovery, and shows how, exactly, Popper was confused. On the contrary, I always see an evasion of his particular example. (Appealing only to the emotions. He has to be wrong, because everybody knows that truth is possible. An essentially ‘ad hominem’ argument.)

To go to the heart of the matter: if I know that the universal statement: ‘all swans are white’ is not universally true, (because of the single counterexample of the discovery of a black swan), then I am absolutely certain that the statement ‘all swans are white’ is not universally true. So I know with absolute certainty that the statement is not universally true

But this does not make the statement: “it is not the case that all swans are white” to become a truth. Why not? Because a truth is by definition a thought expressed in some language (natural or mathematical or otherwise) whose contents corresponds to reality. The contents of the statement ‘it is not the case that all swans are white’ does not mention the black swan. Therefore, it does not correspond to reality!

And therefore it is not a truth.

But what, then, is it?

It is a certainty that is not a truth.

In other words, it is possible to have statements about which I am absolutely certain, without them being truths. Such statements are understandings.

Statements like:

‘the only kind of truths that are possible are contextual’,

and

‘the only absolute certain statements that are possible are of a negative kind’

are such statements. They are certainties without being truths. They are understandings.

Or, to be more exact, when they are not (yet) understood, they are paradoxes, not contradictions. For a paradox is an ‘apparent contradiction’, or, more precise, a contradiction that can be eliminated by an extension of the context. (“All Kretenzers are liars, says the Kretenzer” is a paradox, that can be made to disappear by extending the meaning of ‘lying’, so that ‘lying’ does no longer mean: always lying, but means: sometimes lying.)

With this new meaning, the Kretenzer is uttering a truth at that moment.

In this case I extend the context by introducing a a distinction between truth and certainty.

So my thinking allows for a distinction which you do not make, namely the distinction between truth and certainty. And this distinction causes the contradictions you observe to disappear.

If you allow me, (I do not intend to insult you. It is just an illustration of the contextual nature of understanding, and how it might led to misunderstanding, because of colliding contexts.) The position you are in is that of a ‘flat earth’ believer, who hears, for the first time about facts contradicting his world view. Because his world view of a flat earth is so obviously ‘true’, he is not capable of even understanding the facts that refute his vision. As far as he is concerned, his vision is not his vision but ‘reality itself’. That is why evidence contradicting his vision feels like ‘being logically contradictory’. It causes confusion.

Only after having gone through a revolution, and allowing for the possibility that what is taken as reality itself (the flat earth) is wrong, the possibility of trying out a round earth is able to resolve the confusion, and therefore to eliminate the contradiction.

In the same manner, if you make the ‘switch’ to realize that truth and certainty are distinct, the logical contradiction you think to see in what I say disappears.

Greetings, KS.

Allen Weingarten March 24, 2006 at 11:56 am

Konrad Swart claims that truth in an absolute sense cannot exist, and gives the example that we cannot prove that all swans are white. It is true that in physics, all conclusions are tentative. Yet consider the statement that ‘some people have an intention’. For this to be refuted, it must be demonstrated that no person has an intention. Yet performing that demonstration in itself constitutes an intention.

I do not see why he says that the human action view of Crusoe picking an apple to satisfy a need, “does not demonstrate that human action is a model”. If it were inadvertent, such as hitting it by an unconscious movement, it would not be human action. (Sometimes, in one’s sleep, one can move his hand and hit an apple on a side table.) Thus, it is not a tautology to say that the man intended to pick an apple. Moreover, if one intended to take a stone, this would refute the false human action model (of wanting an apple). Again, there is no tautology when applying the specific model , because that model could be mistaken.

Konrad does not distinguish between common sense and science, except in degree. I fail to see this, because a science employs a fully specified set of definitions and rules. It is precisely by employing this notion that he concludes that human action is not a science. It may be noted that this is precisely why engineering is often superior to science, for it employs methods that cannot meet its requirements.

I was going to deal with the rest of his comments, when I noticed that in his ending, Konrad wrote that he was no longer going to continue this interchange. So instead, I shall offer some thoughts of my own, on different forms of knowledge.

There is objective-knowledge, where a mechanism validates, such as a machine that measures, or a computer program that validates a theorem. Here, no human is needed. Then there is subjective-knowledge of two forms. ‘Inter-subjective’ is shared by individuals, where all of us know what it means to act for some end, while ‘personal-subjective’ could be unshared, as when Hamlet knows that he loves Ophelia, while others thought he did not.

The inter-subjective cannot be denied, for it is needed to validate objective-lnowledge. How else could we read the dial of a mechanism, or the printout of a computer? Moreover, it is better for all sorts of practical applications. When we say that a car gets about 20 mpg, we would not be well-served by a scientific study that determined the speed of the car, the curve in the road, the weather, the driver, the tires, the gasoline, etc., etc, and came up with a value of 19.2039… mpg.

The personal-objective cannot be denied, for it is the basis on which each of us understands the inter-subjective. That is, one could not agree that John felt sad when he lost his house, if one had no sense of what it means to feel sad. One can infer that Hamlet felt sad when Ophelia died, but cannot know it to be true, for Hamlet could have been acting. Only Hamlet knew what he truly believed.

I submit that acknowledgment of the necessity of these three forms of knowledge is the answer to those to wish to reduce all knowledge to the objective form.

Paul Edwards March 24, 2006 at 1:11 pm

Konrad,

I agree that there is a difference between certainty and truth and I’m fine with your description of truth. But I disagree with you on certainty. The example of certainty that you give is this:

“So I know with absolute certainty that the statement is not universally true”

for instance can be expressed this way also

“So I know it is true that the statement is not universally true”

There is no significant difference between what you call absolutely certain, and the truth. On the other hand, a more useful treatment of certainty is more in the psychological realm. As the degree to which a person believes his perception to be accurate.

In any event, I think the distinction you attempt to apply to absolute certainty and truth fails to yield any benefit, but rather adds to confusion. In fact, I think arriving at the conclusion that praxeology is not science depends to a very great extent on the introduction of unnecessary confusion such as false distinctions such as those.

Regarding the flat earth analogy, (it wasn’t insulting at all), i think it fails because the introduction of a third dimension will not lead to any contradiction. Unfortunately, while not introducing a new “dimension” to our discussion, your comments that i picked on, did indeed represent performative contradictions and hence incoherence that cannot be explained by saying they reveal a new dimension in thought. It is instead the opposite, where the confusion hinders us from applying clear logic to the reality we experience and act on all the time.

Lionel June 19, 2007 at 12:09 am

Consumerism and Keynsian economics are so clearly linked, that it seems to make sense to me that anyone authentically concerned with environmental degradation (and not just caught up in an atavistic collectivist frenzy) would first set their sites at abolishing inflationary monetary policy. IMO, sound money and a more sustainable, less superficial/materialistic society go together.

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