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Source link: http://archive.mises.org/9623/supporters-of-capitalism-are-crazy-says-harvard/

Supporters of Capitalism are Crazy, Says Harvard

March 17, 2009 by

Last weekend, Harvard University sponsored a conference called (I am not making this up) “The Free Market Mindset: History, Psychology, and Consequences.” Its purpose was to try to figure out why, since everyone knows the current crisis amounts to a failure of the market economy, the stupid rubes continue to believe in it. The promotional literature for the conference opened with a quotation from the oracle Alan Greenspan.

Well, that does it, then! If our Soviet commissar in charge of money and interest rates says the free market doesn’t work, who are you to disagree? FULL ARTICLE

{ 111 comments }

TCK March 17, 2009 at 7:22 pm

Konrad Swart,

I may be misunderstanding the question you raise about interest. I completely agree with your assessment that fractional reserve banking is tantamount to theft. In regards to the justification for the charging of interest on a loan, I think the subject of ‘time preference’ addresses this.

Oil Shock March 17, 2009 at 8:19 pm

Frank V,

Here is something Murray Rothbard wrote in 1987…

Greenspan’s real qualification is that he can be trusted never to rock the establishment’s boat. He has long positioned himself in the very middle of the economic spectrum. He is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply.”

Konrad March 17, 2009 at 8:50 pm

Hi, TCK.

Thanks for you response.

To answer your question requires some digression.

The time preference theory is exactly what Eugen von Böhm Bawerk came up with, but afther long thought he rejected it.

Ludwig von Mises believed nevertheless, that the time theory of interest as put forward by Bawerk was the solution to both questions about interest. The reason why Ludwig von Mises thought that Eugen von Böhm Bawerk did not see this, was because Eugen von Böhm Bawerk did not have the concept of Human Action that is the cornerstone of Ludwig von Mises’ vision.

In particular there is the problem of ‘length of production lines’. Mises thought that Eugen von Böhm Bawerk became confused, because Bawerk thought he had to consider the whole ‘length of time’ for any capital good to even exist. So all of history, from the stone age, should be part of the production lines leading to the present wealth, if you wanted to have a sound theory of interest. Von Mises identified this as a mistake, because the concept of Human Action assumes (correctly) that, economically speaking, only the future is important. History does not play a part in economy, economically speaking. This is, because human action takes the present as a given, and considers it as less satisfactory than something imagined into the future. Human action is then the means that transforms the present (less satisfactory) condition into the more satisfactory condition in the future.

The only distinction that is important in Misean analysis is that between goods and land. A good is ‘something that disappears in time, even if not used’, while ‘land’ is something that MIGHT be the result of actions of the present, but do not disappear when no action is taken. So ‘land’ becomes a technical term. This insight solved the problem of Bawerk, Mises believed. And, indeed, it is a significant breakthrough.

Human action, at any moment in time, is driven by the difference between the less satisfactory condition of the present and the more satisfactory condition imagined in the future. When that last condition has been become an actuality, the aim of the action has been reached.

This means, that you do not have to consider all of history, as Eugen von Böhm Bawerk believed. And therefore von Mises had thought that he had given a single justification for time preference, and therefore for interest, which was fully convincing. While Eugen von Böhm Bawerk needed three, none of which were fully convincing.

The problem with the time preference theory is this: It states, that any good or service in the present has a greater value than that same good or service in the future. Therefore, if you exchange a present good against a future good in monetary terms, you must be compensated for this difference in value. This difference in value, expressed in monetary terms, IS interest.

This theory is the consequence from the ‘subjective evaluation theory of value’, worked out through the marginal utility theory of value.

The problem is, that the marginal utility theory of value is simply wrong. Why? Because it is based on three things. Utility, scarcity, and subjective evaluation.

I think that utility and value have nothing whatsoever to do with each other. Value is a totally different phenomenon than Ludwig von Mises thought it was. In that sense I am not a Misean.

To be frank, I have a completely new theory of value, which I consider to be the next step in the Austrian theory of value. I have succeeded to derive the concept of value DIRECTLY from the concept of Human Action in a way, that even leads to a Cardinal Measure of value.

My own theory of value has one thing in common with Ludwig von Mises’ theory of value, though. In that sense I ‘stand on his shoulders’. Both his concept of value and mine are dependent on the individual. The difference is that he makes it dependent on the valuation of the individual, while I make it only dependent on the action of the individual. (Action as defined by von Mises: ‘Human action is purposeful behavior.’) I think the step I have made might cause such a deepening of Austrian economics, that nobody is able to ignore it any more.

It is my opinion, that the very fact that value is based on subjective evaluation is the very reason why Austrian economics is not mainstream. As I said, I am writing it all down now in my own book, so I am not going to explain it here. I just point at some problems that might convince you that the Austrian theory of economic value just ‘does not cut it’.

To summarize, the Austrian theory of economic value assumes, that value is the result of three things: utility, scarcity and subjective evaluation. It is related to ‘action’, in the sense ‘that we prefer to have the results of our actions as soon as possible’. It then leads to the concept of ‘time preference’, which is identical with the concept of interest, when connected to money.

What is the problem with this? It is that scarcity is a very important part of the Austrian theory of value.

And that is exactly why I reject it. Why? Because if scarcity is part of a theory of value, then the same objection can be raised against it that can be raised against the Marxian theory of value. It ‘assumes that the goods and services are already there’, and therefore it implies that THE definition of economy in its full generality is:

“Economy is the science that studies the distribution of scarce means among competing ends”.

This is the definition accepted by Rothbard. I consider it strange, that nobody within the von Mises community has pointed out, that this definition is in essence socialist.

The problem with this definition is that it leaves production out of the picture. Why? Because production is a particular kind of human action. A kind of human action that has as its result the diminishing of scarcity. And that very fact shows, that economy has to be more than just ‘the DISTRIBUTION of scarce means among competing ends’.

Reisman’s definition is better. He defines economy as the science that studies the production of wealth under a system of division of labor. I almost agree with this definition. I would only like to replace the word: ‘production’ with ‘creation’. This is because I do not believe in the belief, that human action is not creative, because it ‘just rearranges the elements of nature’. A rearrangement can lead to actual creation in the sense that you can have a combination of elements, that unites into a whole, that does the exact opposite of its components. Just consider water. It consists of two gases, one highly explosive, hydrogen, and the other is a catalyzer of fire. But, both combined lead to water, which can be used to extinguish fire. If water was ‘just a rearrangement of hydrogen and oxygen’, and you knew that hydrogen is an explosive gas, while oxygen is a catalyzer of fire, then you would shrudder by the suggestion, that you must use water to extinguish fire.

The fact is, that the ‘mere rearrangement’ of hydrogen and oxygen, two gases, leads to a liquid having properties that cannot be explained by just considering hydrogen and oxygen. This is because the properties of water are the result of the interaction between hydrogen and oxygen. Therefore, the term ‘mere rearrangement’ is a huge misnomer. Arrangement can lead to a whole having properties that is not present in any of its components, and which might not even have existed before. Therefore human action can lead, through rearrangements to creation. And that is why I want to replace ‘production of wealth’ with ‘creation of wealth’ in Reisman’s definition.

That this is very important can be seen by an article that appeared on this very website a short while ago. Somebody defended that file sharing (torrent websites) should be made completely legal, and that all products in the form of information, should have no price attached, because they were not scarce.

There has to be something very wrong about this, because movies, music, computer programs etc. are all definitely forms of wealth, created through human action. And therefore, in a completely honest economy, the makers should be paid for making them. The very fact, that file sharing websites were defended through using a scarcity argument on this very website shows to me, that the value theory of von Mises ‘just is not it’. And therefore, despite the genius of von Mises, this part of his theory is the archilles heel, and this is why it fails to convince the rest of the economic world.

Mind you, I consider the von Mises economic theory the best of all of the known economic theories there is. But it is just not good enough to really solve ‘the big problems’ we now have in our society. To give just one example, even the simple fact that making more money leads to a decrease in value of the monetary unit cannot be PROVED by the Misean economy theory, simply because value is based on ‘subjective evaluation’. The concept of ‘subjective evaluation’ is just too weak to prove this statement. A really convincing economic theory of value should be able to PROVE this statement, which we all know to be true. My point is, we know it (except when we are Keynesians), but it does not FOLLOW FROM Misean economics.

Or, to give a concrete example, if you assert that increasing the amount of money in circulation will cause a devaluation of the monetary unit, then a Keynesian could object, by stating that increases of the money supply wil STIMULATE more people to ‘get the extra money’, hence stimulate production, and, therefore, by the very fact that value is the result of subjective evaluation, will do the exact opposite. It will INCREASE the value of money. This means, that you can use Misean economics to defend Keynes! And this just because ‘subjective evaluation’ is one of the components of the value theory of Misean economics.

One of the the two words ‘time preference’ is ‘preference’, hence ‘subjective evaluation’. And therefore it is NOT a justification of interest. At most it is a different way to describe interest. It is a pseudo-explanation for the justification of the following sort: ‘Why does John drink milk? Because he is a Milk Drinker.’ It is a question reformulated as an answer.

And that is why ‘time preference’ is no justification for interest.

Frank Staheli March 17, 2009 at 9:10 pm

I’m trying to understand how these simple economic truths are not making it through to more mainstream Americans. The Establishment has a TON invested in the wishful thinking that they might not be true, but for the average person who spends very much time at all thinking about it, these simple economic facts take the simplest of common sense to understand.

Economic truths exist that are as embedded in law as are the laws of gravity.

Long before I read Mr. Woods’s “Meltdown”, I understood these principles innately. My 12-year-old son understands them. Yet, as my own weblog attests, people cannot or will not see that the elephant in the room, without which hardly any of this economic mayhem could have happened, is the Federal Reserve.

Konrad Swart March 17, 2009 at 9:39 pm

To Frank Staheli.

You wrote: ‘Economic truths exist that are as embedded in law as are the laws of gravity.’

Newton’s law of motion reads:

F = dp/dt

or, force is equal to the change in the amount of motion. Amount of motion being equal to mass times velocity.

For thousands of years people believed Aristotle’s statement, that a force is required to have motion. In Newton’s language, this statement is equivalent to

F = p

This was the common sense for thousands of years.

My point is: common sense does not have to make sense. It is only common.

Inquisitor March 17, 2009 at 11:10 pm

“To be frank, I have a completely new theory of value, which I consider to be the next step in the Austrian theory of value. I have succeeded to derive the concept of value DIRECTLY from the concept of Human Action in a way, that even leads to a Cardinal Measure of value.”

Elaborate. How does one derive a “cardinal” measure of “value”?

“I think that utility and value have nothing whatsoever to do with each other. Value is a totally different phenomenon than Ludwig von Mises thought it was.”

Same as before.

Jaycephus March 18, 2009 at 3:06 am

I’m not an economist, but I am a thinker…

I’m interested in reading more of what you have to say Konrad. I’ll be reading Human Action as soon as I am able, first.

It has always bothered me to hear that digital media, or IP or different sorts, should be free. (Information ‘wants’ to be free? Maybe that expresses a principle, but it’s an extremely poor way to do it. I do know there is a LOT of value in making sure it isn’t free. And as a documentation writer, I would have to point out that there is a lot of information that costs a hell of a lot to make it ‘free’.) I was surprised to find that argument here. Just because production costs are down to zero doesn’t mean it has no value.

Say I’m a chef in the future when I have a Star Trek matter-reconstitution device that lets me make any food items I can download from the internet, or come up with myself and copy into the system, i.e. ‘digitize’. Assuming energy costs are negligible, then this situation is no different than copying digitial music (the matter in question is obtained from organic wastes – instant recycling, assumed to be negligible cost, since the desired elements are trasported from the waste to the item being reconstituted).

The point is, as long as I don’t permit any of my creations to be pirated, if I am a good chef, I can make a living running my restuarant, and if I’m great, I get rich (relative to others in this futuristic scenario). Obviously, my creations have value, and it seems the only factor is their subjective evaluation by my patrons, a value that exists because I have created something that delights them.

I can only receive value for them as long as I keep them from being pirated. If my creation is pirated, anyone will be able to have it produced in his own matter-reconstitution system for dinner. The value is expressed then by how popular a download it becomes. The demand is still there, but I no longer receive any renumeration. I must keep my creation from being pirated, or I cease to earn anything from the creation.

But why is it not semantics that Reisman describes this as the production of wealth and you describe it as the creation of wealth? I see that my ‘production method’ is not the wealth generator. The ‘wealth generation’ (another alternative term for ‘wealth production’!) is my initial creation of something new. But whether I say I am producing or creating or generating wealth seems to be merely semantics.

And why can’t an item have value merely for its subjective evaluation alone. Both before and after piracy, my creation is in demand. But in this sci-fi scenario, there is virtually no value that comes from ‘scarcity’.

However, something can be scarce, possibly even a one of a kind, and yet have virtually no value due to lack of subjective evaluation.

Just some thoughts you made me think.

Jay

Mrhuh March 18, 2009 at 3:23 am

If one gets irked by Harvard’s class, then I recommend reading the book, “Guilt, Blame, and Politics” by Allan Levite. Think of it as sort of the antithesis of the Harvard lectures. Another good book is “Conceit of the Annointed” by Thomas Sowell.

Mrhuh March 18, 2009 at 3:24 am

If one gets irked by Harvard’s class, then I recommend reading the book, “Guilt, Blame, and Politics” by Allan Levite. Think of it as sort of the antithesis of the Harvard lectures. Its lessons could easily be appolied to those eggheads. Another good book is “Conceit of the Annointed” by Thomas Sowell.

Kakugo March 18, 2009 at 6:37 am

Perhaps you got too carried out by personal issues to remember that the lunatic asylums of the “Communist” countries were stacked full with perfectly sane persons who happened to be “crazy” because, say, they said that Lysenko’s theories were not worth the paper they were printed on or that State-run schools and hospitals were falling to pieces and staffed by bureaucrats instead of teachers and physicians.
Calling the “enemy” crazy is an old rouse: the Fathers of the Church used to consider “heretics” like Marcion, Montanus or Priscilla either clinically insane or possessed by demons.
Has something changed?

David Ch March 18, 2009 at 6:51 am

‘To be frank, I have a completely new theory of value, which I consider to be the next step in the Austrian theory of value. I have succeeded to derive the concept of value DIRECTLY from the concept of Human Action in a way, that even leads to a Cardinal Measure of value’

thats not new. Its called the market price. But it is only a true measure at the instant the transaction takes place

joebhed March 18, 2009 at 8:01 am

central government planner here -

Sorry to jump in so late and being so stupid, but….

the FED didn’t create ALL the money that Fu*$ed up the system.
Ever hear of Investment banks?
TOTALLY unregulated free-marketeers of capitalism?

Got the power to “leverage” their meager equities in 80s.

Didn’t they have SOMETHING to do with it?
Like 40 or 50 to 1 ??

Yeah, capitalism as they have known it, is on its way out.
You all should be glad to hear it.

Even my friend Milton Friedman admonished AGAINST the private creation and destruction of capital.
And FOR 100 percent reserve banking.
Like y’all.

So, we’re heading for something new.
This is the Libertarians chance.
Polish it up.
Get it out there.
Compete agaist government-issue, debt-free moneyy with your free-banking.
Let’s get on with it.

Respectfully.

Yeti March 18, 2009 at 9:01 am

It seems a major problem is the practice of pricing derivatives by marking to model rather than by discovering price in a market. How does “mark to model” become a failure of capitalism???

Konrad Swart March 18, 2009 at 9:34 am

To Inquisitor.

I am not going to explain my value theory on this forum. My value theory is just too great a breakthrough to just spill on a forum.

What I am prepared to disclose here is what my value theory is not. My value theory is NOT the Mercantilistic value theory. (I.e. gold HAS a yellow color, and HAS value, as if these two properties are the same.) It is NOT the utility theory of value. It is NOT the labor theory of value. It is NOT the quantity theory of value. It is NOT the scarcity theory of value. It is NOT the service theory of value of Bastiat. It is NOT the marginal utility theory of value. It is NOT the subjective judgement theory of value. And, lastly, Cost and value are NOT the same thing. (This is also a response to David Ch.) .

Despite the fact that it is none of these, it has elements of all of them in it, in the sense that it explains why all of them at one time or another could have been mistaken as an explanation of value. Despite the fact, that my theory addresses all of the previous theories of value, it is not a complicated theory. Usually, when I describe it, I begin with an example that is a real surprise to many, and then I derive the basic principle from it, which most agree on to be ridiculously simple. Nevertheless, it does have the power to really explain the concept of economic value fully. In fact, because the concept is so simple, I usually have great trouble to convince people that it IS the solution. They cannot believe that it is THAT simple! That is why I am now writing a book about it. It is my intention to show that my principle of value IS the solution, and is able to solve ALL problems we now have about economic value. That is why I am now moving through all of economy, and show how it solves the problem of value in all cases.

Let me tell you what is the minimum I ask to disclose it. I am prepared to explain my value theory in a lecture. To persuade me to do that, you have to arrange it, and pay all of my expenses to deliver it, including the cost of travel and lodging. (I live in Holland.)

Recently, I gave a lecture on my value theory here, in Holland, in the Hague, to a group of libertarians. Two of them were economists. They both said they were so impressed, that they would teach it in their classes immediately.

* To Jaycephus.

There is an interesting book, with the title: The Pirate’s Dilemma.

http://www.amazon.com/Pirates-Dilemma-Culture-Reinventing-Capitalism/dp/1416532188

This book was a real challenge to my value theory, but it survived it, in the sense that it could show a way out. The exchange of information products through filesharing can be addressed in such a way, that this technology can become a new step to creating wealth just like the printing press once was.

The subject is too vast to do full justice here, but let me at least try.

My own vision on this, after reading this book and applying my own value theory on this particular problem, is that THIS technology, despite the havoc it causes now, is THE thing that will cause a revolution comparable to the Industrial revolution.

What I mean is this. Before the printing press, knowledge as such was not free. It was enclosed in the Guild system. Knowledge (which is not the same as information, there is a subtle difference) was so very closely guarded, that when a member of a guild moved from one country to another, and used his knowledge there, his family could be imprisoned, and there was a death warranty put onto his head.

Before the printing press, knowledge was a source of secure income. This changed with the printing press. The only way to make books that were worth while to buy, and to take on the work to learn to read and write, was to put the knowledge of the guilds in them.

There were some attempts to stop this, but it was no use. The security based on knowledge was gone. There had to be another source of secure income. And the funny thing is, that those same books played a role in it.

There was one thing you could not put into the book. SKILL. To be precies, the skill necessary to transform knowledge into products. So what happened is this. If you could COMBINE the knowledge of many books, you could make products that would not be possible before, because it was impossible that there was so much secret knowledge in the mind of ONE man. But now, with all of these books containing this previously secret knowledge lying around, no knowledge could be kept secret. This enabled people to spend a number of years in studying a whole collection of these books, and then learn to apply far more knowledge on one task than could ever be done before. But, as more people began to do this, they competed with each other in making more and more complex products and tools, which required longer and longer periods of studying.

This long period of studying in itself became the NEW source of secure income. Moreover, it led directly to the Industrial Revolution. How? The tools became larger and larger, and became machines. And the machines required complete buildings designed for them. This led to the phenomenon of ‘worker’ or ‘laborer’. (As Reisman has made clear in his book Capitalism, the first farmers were not workers, but, as economic agents, must be identified as early capitalists. I would rather say, that the distinction did not exist before the Industrial Revolution.)

This also led to the typical Industrial Revolution notion of ‘payment by years of experience’. For the longer the time you spent in a particular job, the better you became in applying more and more knowledge, which is the essence of skill, and the greater the value you had for your employer. This is the economic sense behind raises in payment for more years in experience.

All this basically ended, when the computer entered the scene. We look at the computer as an information tool, that is, a knowledge took, but, basically, it isn’t. With computers it is possible to do with SKILLS what the printing press did with KNOWLEDGE.

This point became clear to me a number of years ago. I had produced a music CD, and I wanted to have a jacket and a label for it, and didn’t know squad how to do that. I had two choices. Either I paid € 300 for a professional designer who did this for me, OR I bought a computer program for justs € 20 that was so user friendly, that I needed only 1 hour to master it, with which I could design my own jacket and label. Moreover, with that computer program it was not just a one time affair, but once I had the computer program under control, I could make such jackets and labels for any future product I liked, even when the box was not standard. In other words, a computer program does not only contain knowledge like a book, but also the skill like in a very experienced worker! This was quite a revelation to me.

This is also, why so many people lose their jobs in the Information revolution. It is mostly skilled workers who lose their job. If you learn to work with a computer, you, together with the computer, can learn to form a ‘system’ in just 3 to 6 MONTHS that is the equivalent of a worker with 20 to 30 YEARS of experience, if not more. And you can do that just by learning to work with computer programs containing the skills belonging to a certain field.

THE question of the information revolution is: where is the certainty?

It has to be in something that cannot be stored into a computer. Information can be stored into a computer. Skill can be stored into a computer. To give one more example, if you want to be the equivalent of a concert pianist, you just study notes, midi and steptime, and you can play any piano piece, complete with ocrhestra you like. You can be your own pianist and conductor and orchestra, just by yourself, with only one computer. I myself have made a church organ performance of the entire Das Wohltemperierte Klavier with a number of virtual church organs in that way. Before me, there were only three other complete church organ performances of the WTK. It took me 2 years, including the skill building. It took those others 20 years, EXCLUDING the skill building!

But no matter how user-friendly you try to make the interface (the graphical interface was a real breakthrough in this respect), the computer is unable to do two things. It is unable to UNDERSTAND, and it is unable to BE CREATIVE. And that is where the certainty moves to.

More and more people are paid for their ability to understand and for their creativity. The more you learn to use the computer, the more skills you are able to combine, the more you can make with your understanding and creativity.

History is now repeating itself. More and more people use their ability to understand and to create to open more and more possibilities. The money lies in people who can combine skills in months that, each separately, would take 20 to 30 years to master before. With spectacular results. To give just one example I found very impressive. With computer programs a SINGLE engineer can now design a ship that have the size of entire cities. This would be beyond the capability of any engineer, and even any team of engineers before the computer.

That is partly what the book “The Pirate’s Dilemma’ is addressing. Although it does not give a solution to the problem. It makes it very clear, and gives a hint to a direction of a solution.

So what filesharing will do, is giving people access to the skills of others. Skills as such become as valueless through the computer as knowledge became through the printing press. Value now moves from skill to creativity and understanding. And we are in the middle of this transition. If we move thrhoug this, we will see a tremendous increase in wealth, comparable to the difference between the Middle Ages and the mass production of the Industrial Revolution. We will see products appear, that will even dwarf the ships I just mention.

To return to my value theory. An economic theory that has solved the value problem is, I think, absolutely crucial to make this happen. A theory that can be applied to whatever the new source of value will be in the future. And that is what I think to have found.

Ken March 18, 2009 at 9:43 am

Attempting to pathologize political views with which one disagrees goes back to Adorno and beyond. The statist/populist “right” (Ann Coulter, Michael Savage, and the like) have begun to do it as well.

Konrad Swart March 18, 2009 at 9:53 am

Little correction: I wrote: And, lastly, Cost and value are NOT the same thing. (This is also a response to David Ch.)

I meant to say: price and value are not the same thing.

Frank V. March 18, 2009 at 10:17 am

Will someone on here please demonstrate to me that they have the basic knowledge of Austrian capital theory. Read Stefan Schmitz’s “Uncertainty in the Austrian Theory of Capital”,The Review of Austrian Economics,17:1,67-85,2004. Schmitz’s suggested remedy, for dealing with the failure of Austrians to deal with uncertainty in capital theory,is to integrate non additive capacities into Austrian capital theory. However,non additive capacities are merely one kind of probabilistic upper-lower interval bound first analyzed by J M Keynes and discussed in detail in chapters 15,17,20,22,and 26 of the 1921 A Treatise on Probability (TP).

While Rothbard realizes that uncertainty is important , he can’t provide any analysis to explain why and how.Only J M Keynes did this in the TP.The GT is based on the TP.In fact,the GT is merely an application of the general theory of decision making under uncertainty/ignorance/risk developed by Keynes.

Oil Shock:

Let me take a moment to correct some of your more egregious errors before I return to Keynes. Volcker is not a conservative Keynesian. Greenspan is not a conservative Keynesian. Keynes was a lifelong opponent of deficit finance/budget deficits.There is no such thing as monetary socialism except in your own private libertarian world.

Keynes has a theory and a model that explains and analyzes the roles of uncertainty and ignorance in human decision making.The Austrians have nothing except talk. Austrians like to talk about uncertainty.That’s it.

Where does Rothbard,von Mises or Hayek provide a theory and a model of dealing with uncertainty and ignorance ? The answer is that they don’t.Their assertion or claim is that decision making under ignorance and/ or uncertainty leads to the same result as decision making under risk or certainty.

filc March 18, 2009 at 12:37 pm

@ joebhed

Hello joebhed,

Yes member banks of the fed did play a roll. But only because their iresponsibility would be enforced and encouraged by a central bank, the fed. Had the fed not been there, and interest rates allowed to float on the market, (Like normal commodities) than these banks you speak of would have been far more responsible.

Unfortunately no matter how you twist it the finger will always point back at the fed. By your same logic we should be blaming homeowners who can no longer pay their mortgage, business who over invested, ect, ect, ect, and every other crappy argument you hear on fox news. These are only symptoms of the source however.

The truth is, those people acted rationally to a market that had an excess amount of credit. Now that the credit is retracting all the mal-investment becomes apparent.

It all started with the fed my friend. Had the big banking establishment not had a lender of last resort we may very well be in an entirely different economic situation right now. One that is vastly more healthy, even if it is still fiat based.

Inquisitor March 18, 2009 at 1:13 pm

Well I’ll have to suspend judgement on your claims then until you publish your book, since you remain cryptic.

Inquisitor March 18, 2009 at 1:18 pm

“There is no such thing as monetary socialism except in your own private libertarian world.”

Gee, what a clever statement. it exists, except for you and your own little world.

Frank V. March 18, 2009 at 1:34 pm

Inquisitor, When you have read (and understand) Schmitz, perhaps then you can reserve judgment on my comments.

Inquisitor March 18, 2009 at 1:54 pm

I need to read Schmitz to consider your statement there an exercise in pure bullshit? No, not really. Your rants on “uncertainty” seem to be a demand for a “formal model” of it. More of the same positivist nonsense. Shall we “model” commonsense too?

Frank V. March 18, 2009 at 2:05 pm

Inquisitor,

Nice excuse. Get back to me after you have absorbed the wisdom of Adam Smith. Smith recognized that speculators heavily distort price signals in the economy.These severe distortions lead to bubbles which leads to panics which leads to crashes which leads to recessions and depressions. Austrians stupidly, foolishly,and ignorantly confuse speculation with enterprise and entrepreneurship.This is why their literary assertions and claims,which they purport to be economic theories, always lead to failure.

Inquisitor March 18, 2009 at 2:10 pm

Ipse dixit/assertions ex cathedra. Get back to me when you’ve got more than that to deal. So far your claim is that they haven’t offered a “formal model” of uncertainty and the bizarre claim that they treat the decision-making under uncertainty on par when it is lacking, which is pure nonsense. In fact, it is you who stupidly confuses enterprise and entrepreneurship with the cause of the business cycle. And please, don’t appeal to Adam Smith for authority. He has very little here. Even less so Keynes, regardless of his “model” of uncertainty…

Frank V. March 18, 2009 at 2:17 pm

Perhaps you or Mr. Woods can explain why there are no more investment banks currently operating at present on Wall Street . This is due to the near unanimous ,desperate deleveraging undertaken , nearly simultaneously, by all of the Wall Street investment banks once they realized that their debt leveraging practices were collapsing. It was easy to see that this would only continue to drive the value of their assets down further and further.

The more important problem is the completely unregulated and unchecked “shadow” banking system ,composed of thousands of hedge funds and private equity (leveraged buyout) firms, that are still employing the same dangerous debt leverage speculative behavior that has led to the current financial collapse. This “shadow” banking system thrives in an atmosphere of secrecy. It seeks to engage in the use of financial instruments (securitization,derivatives,collateralized debt obligations,credit default swaps,etc.) that can be hidden from view. These financial instruments were deliberately made as complex as possible so that it would be very difficult for outside accountants and financial managers to be able to figure out what the risks of these financial ” products ” actually were. The usual approach of outsiders was to rely on the underwriters and the rating agencies’ risk assessment management evaluations. Unfortunately,the underwriters and the rating agencies had all been ” bought off “.

But it’s much easier to just blame the Fed than actually delve into the details, right? Yes, I thought so.

Morty March 18, 2009 at 2:21 pm

Frank V,

Since you know so much about Austrian economics, perhaps you can give a full and reasoned critique of their business cycle theory, which you seem to oppose in the strongest terms. You might also want to include your evidence as to why you consider Greenspan an Austrian, considering his actions as Fed Chairman and his statements about how the economy works.

Inquisitor March 18, 2009 at 2:22 pm

I have to ask, have you even read any Austrian works on the topic? Or are you just making up nonsense as you go along? There are countless articles going into the details of it. None of them just “blame the Fed” (unlike you, who simplistically blames “speculation” or the “market” or a “lack of regulation”. Undefined nonsense.) So much easier than actually acknowledging the Fed’s role and assert that it’s all due to “uncertainty”. I’m at a loss as to why you’d think Mr Woods would have any trouble explaining that, by the way.

Frank V. March 18, 2009 at 2:38 pm

The conclusion I reach is that you have NOT read Adam Smith’s Wealth of Nations, although maybe you have read little snippets that you quote out of context, which, of course, is all that Rothbard’s lame critique amounts to.

The utter nonsense written about Keynes on this forum is even more bizarre. Keynes opposed the use of expansionary-contractionary fiscal and monetary policy.His policies are identical to those listed by Smith on pp.339-340 of the Wealth of Nations. You will find that it is Keynes who is the one in opposition to budget deficits /deficit finance,etc.Keynes ‘s position is that the budget be split into two different categories -a capital budget and a current account budget.The current account budget would always be balanced.The capital budget would be unbalanced only in the case of constructing long run infrastructure projects that pay for themselves over time by borrowing the inactive balances available from the public during a recession/depression at very low rates of interest.No expansion of the money supply is involved.Keynes’s own position was that the money to build the new infrastructure in England during the 1930′s would be generated by simply slowing down the build up of the sinking fund set aside by the government to finance the national debt

fundamentalist March 18, 2009 at 4:26 pm

Frank V.: “Their assertion or claim is that decision making under ignorance and/ or uncertainty leads to the same result as decision making under risk or certainty.”

I think you need to read Stefan Schmitz’s article again. All he does is relate uncertainty, which he writes is a key component of Austrian economics, to the Austrian structure of capital. Boiled down, all he writes is that the further the stage of production is from consumption the greater is the uncertainty that the entrepreneur faces. While it might not be formally incorporated into the capital structure theory, it has certainly been a part of the business cycle theory.

Austrians never have asserted that “…decision making under ignorance and/ or uncertainty leads to the same result as decision making under risk or certainty.” They would have to be incredibly stupid to assert that. In fact, Mises attributes the origin of profits (economic profits above the rate of interest) to uncertainty. Certainty can only exist in the imaginary world of equilibrium. With certainty, no money exists because it is unnecessary. The existence of uncertainty characterizes the real world and gives rise to the demand for money to hold as cash in order to meet unplanned obligations.

You may be thinking of mainstream econ, which assumes that everyone has the same knowledge.

Frank: “While Rothbard realizes that uncertainty is important , he can’t provide any analysis to explain why and how.”

What explanation for uncertainty do you need other than that we are human; no one but God is omniscient and no one can accurately forecast the future because change happens and humans aren’t that predictable?

Frank: “the GT is merely an application of the general theory of decision making under uncertainty/ignorance/risk developed by Keynes.”

That explains why he was such an abysmal economist.

Frank: “Keynes opposed the use of expansionary-contractionary fiscal and monetary policy.”

You must be thinking of his younger brother, Leroy. JM Keynes was a socialist to the core.

Inquisitor March 18, 2009 at 4:30 pm

“”The conclusion I reach is that you have NOT read Adam Smith’s Wealth of Nations, although maybe you have read little snippets that you quote out of context, which, of course, is all that Rothbard’s lame critique amounts to.”

Kinda like your “critique” of Mises and Rothbard?

“The utter nonsense written about Keynes on this forum is even more bizarre. Keynes opposed the use of expansionary-contractionary fiscal and monetary policy.His policies are identical to those listed by Smith on pp.339-340 of the Wealth of Nations. You will find that it is Keynes who is the one in opposition to budget deficits /deficit finance,etc.Keynes ‘s position is that the budget be split into two different categories -a capital budget and a current account budget.The current account budget would always be balanced.The capital budget would be unbalanced only in the case of constructing long run infrastructure projects that pay for themselves over time by borrowing the inactive balances available from the public during a recession/depression at very low rates of interest.No expansion of the money supply is involved.Keynes’s own position was that the money to build the new infrastructure in England during the 1930′s would be generated by simply slowing down the build up of the sinking fund set aside by the government to finance the national debt”

Which is relevant to this article or what Keynesians in general advocate, how?

Frank V. March 18, 2009 at 4:32 pm

I believe I provided a good reference to where Keynes ACTUALLY stood versus where you BELIEVE he stood. Please check my last post again.

AC March 18, 2009 at 4:38 pm

Frank V said,

“You will find that it is Keynes who is the one in opposition to budget deficits /deficit finance,etc.Keynes ‘s position is that the budget be split into two different categories -a capital budget and a current account budget.The current account budget would always be balanced.”

AC asks, how’s that balanced budget working out for you? How about paying back that national debt as the infrastructure declines so that we’ve got it paid off by the time we need more infrastructure improvements, working out for you? I’ve got an idea, I could balance our $1,800,000,000,000 current deficit tomorrow by forcibly confiscating it from the citizens. Presto! Balanced budget.

Frank V, you advocate for tyranny. Gov’t spending is tyranny. Now, I’m willing to tolerate gov’t tyranny when it is extremely limited, as in limited gov’t, as in the US Constitution. You know why the gov’t won’t forcibly balance the budget and raise enough extra tax revenues to pay down the national debt, Frank V? It’s because there would be riots and a revolt, the members of the various branches of gov’t would be overthrown, probably violently.

Everytime the gov’t takes away money from me, it means I have less to enter into a voluntary transaction with someone else. Liberty is based on this premise, transactions are voluntary. The gov’t does not raise money through voluntary transactions. If you say they do when they sell US Treasury bonds, I’ll laugh at you. The money to repay those bonds will be raised through involuntary transactions, taxation. Gov’t exists to serve the people. You have it backwards, you’ve got people existing to serve the gov’t through paying taxes.

Ends don’t justify means.

Vanmind March 18, 2009 at 8:18 pm

Perhaps the conference is a hasty response to “Meltdown”

Frank V. March 18, 2009 at 8:28 pm

It’s just as I suspected: Austrians have no theory of how decisions are made under uncertainty or ignorance.That is why their capital theory assumes away uncertainty. That is why Hayek only started talking about uncertainty and ignorance after 1936.Keynes is the master of decision making under uncertainty,ignorance,and risk. Austrian business cycle theory is based on the loanable funds theory that excludes uncertaintycompletely.

Tom Woods March 18, 2009 at 8:43 pm

Frank, uncertainty is at the heart of Austrian economics, through and through, so I fail to understand your objection. No aspect of Austrian thought “excludes uncertainty completely.” As for Austrian capital theory, at least the Austrians HAVE a capital theory, unlike Keynes.

Evan March 18, 2009 at 9:04 pm

Frank V said:”Perhaps you or Mr. Woods can explain why there are no more investment banks currently operating at present on Wall Street . This is due to the near unanimous ,desperate deleveraging undertaken , nearly simultaneously, by all of the Wall Street investment banks once they realized that their debt leveraging practices were collapsing. It was easy to see that this would only continue to drive the value of their assets down further and further.”

The reason there are no more “investment banks” is that they reformulated themselves over the course of one weekend in order to be able to get federal bailout money. I fail to see how that is a result of leverage beyond the leverage of any other type of banking.

Frank V said:”Keynes opposed the use of expansionary-contractionary fiscal and monetary policy.”

It seems to me that when Keynes was advocating a zero-interest-rate policy, that is a de facto ‘expansionary-contractionary fiscal and monetary policy’, since the socialized investment policy would create bubbles in some areas and contractions in other areas due to government bumbling. Anybody ever ask Keynes how you can socialize investment but maintain private production?

Jaycephus March 18, 2009 at 9:45 pm

Konrad,

Thanks very much for the reply. I enjoyed reading it.

Jay

Inquisitor March 19, 2009 at 12:01 am

“I believe I provided a good reference to where Keynes ACTUALLY stood versus where you BELIEVE he stood. Please check my last post again. ”

I did. How do you know what I “believe” about where he “stood”?

“It’s just as I suspected: Austrians have no theory of how decisions are made under uncertainty or ignorance.That is why their capital theory assumes away uncertainty,”

You repeat this lie over and over. The theory is called “entrepreneurship”, which Hayek, Mises, Rothbard and even Knight cover. But it isn’t the garbled “formal” kind of model you’d like.

Paul S. Nofs March 19, 2009 at 12:26 am

Anyone that owns an asset is a capitalist. Capital is just stuff that one finds valuable. If someone else finds it valuable both parties might exchange capital in a market for mutual benefit. ‘Free’ indicates that there is no coercion involved.

The key question involves ownership. According to Soviet law, the state owned all capital. Is state capitalism == socialism?

When the individual capitalist make a decision he takes a risk with his private property. The risk of loss keeps greed at bay and promotes prudence. In a civil society the rule of law works to protect him from fraud and theft and to enforce contracts. thereby reducing the risk of owning and trading private property.

In the Soviet and similar systems the risk to the individual happens when they criticize or fail to follow the state’s edicts. Followers are rewarded and leaders disappear as they threaten the ruling class. The private capitalist can just fire you making you a free agent.

Both systems are merit systems. One often rewards individual effort, cleverness and prudent economic choices. State capitalism rewards the good slave.

It’s wealth of the individual vs. the Wealth of Nations. Those fond of suckling at the government teat are immediately tempted to use the force of government to loot other individuals for their own good.

.

Paul S. Nofs March 19, 2009 at 12:58 am

“how decisions are made under uncertainty or ignorance.”? They are made wisely, carelessly or stupidly. But this is a question for psychology not serious economics.

For the individual uncertainty and ignorance are part of the risk. Many would strive to prevent being foolishly parted from their money or capital.

For the state is is an unsolvable mystery meaning that they will spend too much money trying to solve it.

Frank V. March 19, 2009 at 8:34 am

I have already gone over Keynes’s policy recommendations repeatedly numerous times for other libertarians in other discussion forums. Keynes’s policies are identical to those of Adam Smith . The claim that Keynes advocated a zero interest rate policy and/or socialized investment policy means that either you reside in the Twilight Zone or have been a regular reader of Henry Hazlitt or The Freeman magazine for too long. Smith and Keynes both support fixing the long run rate of interest permanently at a low level. Smith and Keynes then support this policy with a policy of credit restriction aimed at (a) preventing projectors,prodigals,and imprudent risk takers from obtaining bank loans(Smith) or (b) preventing rentiers and speculators from obtaining bank loans (Keynes) . An ounce of Smithian or Keynesian prevention is worth a hundred pounds of empty libertarian claims about a free speculation economy,which is what libertarians mean by a free enterprise economy.

Austrian capital theory is based on the assumption that there is no uncertainty or ignorance of the future, only risk . Keynes’s capital theory is just an application of his general theory of decision making under conditions of risk,uncertainty,or ignorance as discussed in chapters 3,5 ,6,15,17,20,22,26,and 29 of the TP . Keynes uses lower-upper probability intervals and decision weights some 80 years before the current non-additive approach started with Tversky and Kahneman in 1979 and Gilboa and Schmeidler in 1987 . Austrian capital theory is just a very special case of Keynes’s general theory of decision making under conditions of risk,uncertainty,or ignorance. I’m going to let Inquisitor and other readers have the last word. Note that Keynes explicitly rejected socialism on p. 379 of the GT. Keynes rejected state ownership and control of the means of production and the means of distribution. This forum’s definition of socialism is a special, private definition that does not appear in any dictionaries. Under this special, private, llibertarian definition of socialism, George Washington, Alexander Hamilton, Benjamn Franklin, Abraham LIncoln, Theodore Roosevelt, Dwight D Eisenhower, Douglas MacArthur, and all Catholic Popes are socialists. Readers here should understand that membership in a group of people who hold such outlandish and wayout beliefs will never convince more than 1/2 of 1% of the population in any country.

Lou Ohls March 19, 2009 at 8:40 am

I really enjoyed Woods’ article. I laughed all the way through it, the condemned man laughing at the hangman’s attire. I am retired at the low side of comfortable, and have recently been telling my wife we need to consider our poverty options in five to ten years. I have watched my inflation hedges “freeze up”, and it is 10.6 miles from my house to the bread line; that is a long way for an old man to walk.
I often cannot tell the difference between cash and capital. I was educated in the Marxian “economic determinism of society” and “economics as a science”; so I am handicapped. But some of the assumptions made by our “representatives” are just plain silly. I made my living reading people; I find it incredible that anyone believes anything Bernanke says. Ben spends a tremendous amount of energy attempting to control his voice, eyes, head; he doesnt want to give up a poker “tell”, so you only know he’s lying when his lips are moving.

I have one quibble with the Austrian school, as I understand it: When two people sit down to draw up a contract, the well fed man always has the advantage over the starving man, and the starving man resents it. After the starving man eats, he wants to re-negotiate the contract. It takes force to keep the original contract in effect. That is the role of government, and government’s interest is in taxing that contract. Now that three parties are involved, it is no longer a contract. It is now a game, with a winner, a loser, and a score keeper.
But my quibble with the Austrian school doesn’t come close to my astonishment with the current events. The Keynesian threat of government spending to free up economies becomes hollow when the threat is actuated. Government runs on about a thirty year lag to society and takes so long to act that the acts mostly exacerbate current problems. When the thirty year lag is mandated, people die, by the trainload. Stalin killed between ten million and thirty million. When chairman Mao mandated the “cultural revolution,” about ten million died. A whole wad of those folks, in both cases, were “intellectuals.” If I was “expendable”, I dont know that I would be standing on a soapbox.

fundamentalist March 19, 2009 at 9:17 am

Frank: “Keynes’s policies are identical to those of Adam Smith .”

People have been trying to rehabilitate Keynes for a long time, ever since they realized he was a socialist. But any honest reading of what Keynes wrote demonstrates his devotion to socialism. Do you really think that every critic of Keynes was just stupid or mean? No one knew Keynes better than Hayek and his criticism of Keynes was not very different from that of Hazlitt and the Freeman. You might try actually reading Keynes instead of all the writers who try to make him a free market economist when he wasn’t. As for Keynes agreeing with Smith, so did Marx. Austrians don’t agree with everything Smith wrote.

Frank: “Austrian capital theory is based on the assumption that there is no uncertainty or ignorance of the future, only risk ”

That statement alone demonstrates that you don’t know a thing about Austrian economics.

Frank: “Keynes rejected state ownership and control of the means of production and the means of distribution. This forum’s definition of socialism is a special, private definition that does not appear in any dictionaries.”

Dictionaries just print the popular definitions of words. But consider that Germany regarded its system as socialist in the late 19th century under the Kaizer and NAZI stood for National Socialism. Nazis considered themselves to be socialists. The Soviet model of socialism is just another model. Germans never nationalized industries, but controlled every aspect of them. State control of industry is just as much socialism as is state ownership.

Frank: “Austrian capital theory is just a very special case of Keynes’s general theory of decision making under conditions of risk,uncertainty,or ignorance.”

Keynes didn’t have a theory of capital. Hayek pointed that out in his 1941 “Pure Theory of Capital.” To Keynes, capital was mush that recreated itself as needed.”

Inquisitor March 19, 2009 at 11:12 am

“The claim that Keynes advocated a zero interest rate policy and/or socialized investment policy means that either you reside in the Twilight Zone or have been a regular reader of Henry Hazlitt or The Freeman magazine for too long.”

Except he can be quoted saying as much….

“Smith and Keynes both support fixing the long run rate of interest permanently at a low level.”

Which is to say they’re both in favour of a price control over the interest rate.

“Austrian capital theory is based on the assumption that there is no uncertainty or ignorance of the future, only risk .”

You’ve asserted this repeatedly. It’s nonsense. Why repeat it?

Frank V. March 19, 2009 at 11:22 am

This is getting tiresome, but I’ll try again since you’re not paying attention to what I’m writing.

Speculative finance by the private commercial and investment banking institutions is at the core of the problem.Thus, the error was the deregulation of financial institutions, carried out in the 1920′s and 1980-2006 time period in the USA and in the period 1986-1992 in Japan.Speculative bubbles, inflated by a private banking system that no longer was subjected to oversight,no longer required to maintain sufficient capital reserves, and freed from the requirement to impose basic creditworthiness standards,inevitably leads to a panic, crash, and recession/depression.

Tom Woods March 19, 2009 at 11:28 am

See, Frank, there’s the problem. A “private banking system”? You mean the one we have, with its government-guaranteed deposits, with reserves pumped into it by a government-created central bank with government-granted monopoly privileges? That one?

You think banks just might keep higher capital reserves if they didn’t have their comfortable cartel arrangement with the Fed? If the “too big to fail” doctrine didn’t exist? If the government didn’t artificially prop them up, and give the public false assurances of their soundness?

You think the decline in creditworthiness standards might have something to do with all the money the Fed poured into the system, especially since standards of creditworthiness have consistently been thrown out the window during national bank-created artificial booms since at least the 1830s?

Just wondering.

Frank V. March 19, 2009 at 11:29 am

Furthermore, the basic problem can be traced back to the late 1970′s and early 1980′s to the Carter and Reagan administrations deregulation and privatization agendas.The problem was then exacerbated in the George H W Bush,Clinton-Gore,and George W. Bush-Cheney administration. Huge numbers of University of Chicago type economists and business school academics were hired ,who did not believe in any kind of regulation at all, by the Securities and Exchange Commission(SEC) Federal Reserve System (FRS), Federal Deposit Insurance Corporation(FDIC), Office of Thrift Supervision,etc.These individuals believed in a pseudo theory called the Efficient Market Hypothesis(EMH).This theory asserted ,without any empirical,historical,or statistical support or goodness of fit tests to support it,that all financial markets are normally distributed around a stable mean.The conclusions of this pseudo theory,still taught to every MBA candidate in finance worldwide and every PH.D candidate in every economics department,are that (a) bubbles are not possible,(b) financial markets are self regulating,(c) risk management techniques, based on the Mean -Variance model,the Capital Asset Pricing Model(CAPM),and the Black-Scholes equation for valuing put and call options,will create an efficient market where speculation on a massive scale can be engaged in using debt leverage to maximize profits ” safely “. Benoit Mandelbrot, Nassim Nichlas Taleb,and George Soros, like D Ellsberg and J M Keynes before them,demonstrated that there is no support for this pseudo theory.The EMH is very similar to Ptolomaic astronomy.It is a completely artificially created and constructed theory based on a priori claims and assertions that have ,as noted above,been disproved in a world of uncertainty (Keynes,Ellsberg,Soros) and wild risk (Mandelbrot,Taleb).

fundamentalist March 19, 2009 at 2:00 pm

Frank: “Speculative finance by the private commercial and investment banking institutions is at the core of the problem.”

Even mainstream economists admit that bubbles can’t happen without the consent of the Fed, even if they don’t see the Fed as the initiator. The reason is that none of the speculation could take place without huge increases in credit made possible by the Fed’s low interest rate policies. That’s very basic economics.

The changes in financial regulation under Republican presidents was miniscule compared to the amount of regulation in place. In addition, you had a huge increase in regulation with SOX. So you can’t blame a lack of regulation for the problem.

Blaming speculation for the crisis is like blaming gravity for airplane crashes, because like gravity it’s always there. What you have to explain is why speculation overcame the restrains put on it and got out of hand. The answer always and everywhere is loose monetary policies breeding credit like rabbits.

gene March 19, 2009 at 2:15 pm

Control of the banking system cartel, as it is today, is certainly socialism or at least socialization.

We don’t have control of the industrial system though, we have intervention mostly by way of subsidy, bailout, giveaway, etc. We have the innate advantage of “incorporation”.

This all points to corporatism as opposed to socialism. There is nothing “social” [the inherent nature of the corporation is anti-social] about corporatism other than the cost, but there is little “control” of the means [except it could be argued corporate control], if that is used as defining.

It’s a hybrid system based on the unnatural “capitalization” of corporate entities through the workings of the government. I think it is unique and don’t think “socialism” is that descriptive of the entire condition. The “socialized” capital system is manipulated to keep the corporate system thriving.

Inquisitor March 19, 2009 at 4:57 pm

“This is getting tiresome, but I’ll try again since you’re not paying attention to what I’m writing.”

No, I am (and if it’s getting tiresome that is your fault), but it’s just your rehashing the same nonsense over and over. And subsequently to that you post some bizarre collection of criticisms of neoclassical EMH theory. Well, so what? Austrians are also critical of it.

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