1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/9643/the-ambition-of-rothbards-treatise/

The Ambition of Rothbard’s Treatise

March 20, 2009 by

Rothbard’s primary mission in writing his treatise was to purge modern economic science of its alien positivist and mathematical-formalist elements and to reconstruct it along consistently causal-realist lines. The death knell is now tolling for the mathematical and positivist pretenders to the mainstream of economics. The time is ripe for Austrians to recover their rightful position as the true representatives of the central tendency of modern economic theory. FULL ARTICLE

{ 48 comments }

Stefan March 20, 2009 at 10:22 am

Kudos for this wonderful historical perspective. As someone who has only been aware of the “Austrian” tradition for less than a year, this article is a valuable resource. Additionally, as someone schooled in high-level mathematics and empirical analysis, I am of the belief that mathematical approaches cannot be extended into the general realm of social science without causing great harm. There are perhaps excellent opportunities to demonstrate simple thought experiments, but the wholesale prediction of prices and trends are doomed to fail, IMO.

Nick E March 20, 2009 at 10:43 am

You’re correct that mathematics (and in particular the careful logic needed to proceed through mathematical proofs and analysis) is a valuable tool in the social sciences. Where you can run into problems is when you allow the math to drive your thought process, rather than the other way around (e.g., you become more focused on producing fancy, hand-waving analyses at the expense of the underlying logic, or you stop questioning the simplifying assumptions you need to make a model mathematically tractable). As a classically trained economist, this is probably my greatest frustration with my discipline. What led me to Austrian theorists, more than anything else, was the clarity and simplicity of their logic: put simply, the theories make sense and are logically consistent.

Michael A. Clem March 20, 2009 at 2:53 pm

Yes, interesting perspective on Austrian economics. I had been wondering how to reconcile Hayek and Mises, but had been failing to consider Rothbard.

Alexander S. Peak March 20, 2009 at 3:08 pm

Also available here.

Once again, here’s to hoping we get a Jeff Riggenbach audiobook.

Cheers,
Alex Peak

Alexander S. Peak March 20, 2009 at 3:24 pm

Actually, it seems I posted that link prematurely. I ought to have checked to see whether the introduction to the first edition was identical to the introduction to the second, and had I checked this, I would have discovered that they are not identical.

In any event, the new introduction will have to be added to the .asp page of MESwPAM, I would think. Hopefully both introductions will be accessible from that page. I see only the second introduction is available in the actual publication.

Cheers,
Alex Peak

Austroglide March 20, 2009 at 4:47 pm

Awesome. Profoundly enriching and instructive. Thank you, Mr. Salerno.

Jim Stewart March 20, 2009 at 9:10 pm

Maybe, as Joseph claims, the time is ripe for Austrians to recover their rightful position as the true representatives of the central tendency of modern economic theory by affirming the praxeological method as the research method of economics. As Menger would admit, the proof of his prediction will depend on the value judgments of individual consumers who chose between concrete units of different goods [or in this case services] according to their subjective values.

I presume Joseph’s opinion reflects a global [billions of individuals] awareness of and interest in the what is increasingly called the on-going GFC. My first point is that those individuals [like most of us depend on the media, particularly television, for news. They are just too busy to discover facts that are being widely supressed or misrepresented by broadcasters and publishers.

To give a relevant example, how many readers of this post were aware of the online debate held here:
http://www.economist.com/debate/overview/140

Not only was Austrian theory the “elephant in the room” but the when question of fractional reserve banking was raised from the floor, it was also suppressed. Even after “mediamonitor” proved the fraud that sustains fractional reserve banking, the experts and moderator stayed silent.

For what it is worth there is still a week in which we and others can log on and see and comment on the roles of such widely respected publishers as those who publish the Economist. Rather than read through the 500 odd floor comments I suggest readers of this post click on the ‘Post debate comments and read the closing post of “mediamonitor”.

André Dorais March 20, 2009 at 9:11 pm

I have read the first edition of Man, Economy, and State a couple of years ago. It does not include professor Salerno’s preface. His understanding makes a difference. Prof. Salerno clarifies and enriches the ideas presented by Rothbard. I have read a lot of Austrian economics and I think Mr. Salerno knows Rothbard better than anyone. A joyous reading in this first day of spring. Thank You!

Jim Stewart March 20, 2009 at 9:26 pm

To clarify my prior post, I should add that the topic of the debate, which ran over two weeks, was:
‘We are all Keynsians now’. Also anyone visiting does not need to type to express an opinion. He/she may recommend particular comments and this can bring them to the “Most recommended” list on the home page.

Konrad Swart March 20, 2009 at 11:50 pm

Don’t be too enthusiastic about Austrian economy. It has to overcome a major hurdle, before it can be of great use.

Why do I say this?

I can prove that a mathematical, and even logical theory about Human Action is impossible.

The proof is as follows.

Let L be any theory. (It can be mathematical, a theory of physics, economics, or whatever.)

Let A and B be arbitrary statements expressible in the language of the theory L.

~A ->(A -> B) is a tautology. Therefore it is true within every theory L.

Assume

~A.

Then, through Modus Ponens, it follows that

(A -> B)

Assume

A

Then, through Modus Ponens, it follows that

B.

Since A and B are arbitrary statements, this proves that if L contains even a single contradiction {A, ~A}, every statement expressible in the language of the theory L follows from L, and therefore is ‘a truth’ within L.

Therefore it is impossible to give a counterexample of the theory, expressible in the language of the theory. And that means, that the theory cannot be refuted.

Conversely, a necessary condition for the ability to refute the theory is, that it is totally contradiction free.

Therefore, if there exists a counterexample of a theory L, then this, in itself, is enough to prove that the theory L is totally free from contradictions.

To give an example, I can write, in Newton’s theory of mechanics, the counterexample F = 2 dp/dt. This equation cannot be derived from Newton’s theory, is not part of the theory, although the statement is part of the language of the theory. Therefore you can imagine a counterexample of Newton’s theory, which is, by definition, wrong, and has to be. That you can imagine a counterexample (which is false) proves therefore, that Newton’s theory is free from contradictions, and is NOT a tautology. This proves that Newton’s theory is a science.

This whole construction, by the way, is nothing else than the insight behind Popper’s epistemology. A theory can only be called scientific, according to the above, if a counterexample to the theory can be imagined, but not made real, despite the best attempts to do so. If no such counterexample is possible, then for any A, both A and ~A belong to the theory. (If not, either A or ~A would not belong to the theory, and one of these would be a counterexample.) and therefore every other statement B expressible in the language of the theory follows from it, and the whole theory contains all possible meanings that can be constructed by the language of the theory, and therefore the theory is a tautology. That is why Popper is such a great breakthrough. It solved the Induction problem, in the sense that it showed that it is a false problem. There is no truth in science, only conjectures and refutations. Especially the fact that a possible refutation can be imagined shows that the theory excludes possibilities, and therefore it contains information.

Okay. Now let us go one step further, and apply the above insight to Praxeology.

Suppose K is a theory of Human Action. To be scientific, it has to be contradiction freel. And to be contradiction free, there has to be a counterexample. This has to be an action I can imagine, but not perform.

But if I can imagine an action, any action, I can perform it. It might not be wise to do, like jumping out of the window of a a 10 story building. Or it might be impossible to do physically, like flapping my arms and flying around, which goes against the laws of nature, or it might go against the laws of biology, like stretching my arm to touch the moon. But such restrictions on action are not because of economic reasons, but because of limitations due to other sciences.

This is, by the way, why Eugen von Böhm Bawerk placed so much value on the other sciences. He knew that if something was impossible because of a reason found in the other sciences, it is also impossible within economy. What he did not know, however, was that there does not exist such a restriction WITHIN economy. Likewise, von Mises did not know, that there does not exist such a restriction WITHIN Praxeology.

So, psychologically speaking, within the restriction of laws of nature, biology, etc, the faculty of Human Action is such, that anything I can imagine, which is not impossible according to the other sciences, I can translate into action.

Therefore a counterexample to Human Action is not possible.

Therefore, the reason why a theory of Human Action is irrefutable, is that it is a tautology.

And a tautology is not a science.

Why not? Because you cannot use a tautology to answer questions.

To give a simple example. Suppose I ask: ‘does it rain outside?’ I can then answer this question with: ‘it either rains or it does not rain’. This is a tautology, and therefore always a true statement, whether it rains or not. But it is a true statement precisely because it does not exclude anything. And therefore it is a true statement because it does not give any answer to the question.

Still, something is gained. For what is the function of a tautology? It is not to answer questions, but it is to clarify the question.

In particular, a tautology consists of all possible answers a question, and therefore clarifies exactly, what is meant by the question.

If I would give, as a response to the question: ‘the sun is shining or it is drizzling, or it is pouring, or it is foggy, or it is cloudy…’ on and on, until I have listed all possible answers to the question, I would have made clear what exactly I was asking, and at what level of detail I wanted the answer to be.

If I give as an answer to the question: ‘the cat is limping’, then this is not an answer to the question. Such an answer would make clear, that I would have not understood the question.

In the same manner, any ‘theory of Praxeology’, any ‘irrefutable theory of Human Action’ is irrefutable, precisely because it is a tautology.

Such a theory has one purpose only. It clarifies the question.

It is the business of philosophy to clarify questions, (by definition) and it is the business of science to answer them. Therefore philosophy is pre-science, but it is not science itself. It is necessary for a body of knowledge to be a science, but not sufficient.

The reason why Praxeology, and Austrian economics ‘is such a mess’, as this article makes clear at the end, is simply, because it is not a science. It is a philosophy.

As such it is a major step forward. Because all other economic visions are more primitive. They are religions. Austrian economics is the only direction in economics wherein lively debate and clarification occurs. All other economies just ‘state assertions’, and ‘ask of you to swallow them’ blindly.

This is why I have great respect for Austrian economics.

But it does not blind me for the fact, that economics in general, and Austrian economics in particular, is not yet a science.

Austrian economics is, when I compare it with physics, a forerunner of a genuine economics, just like Galileo’s ‘Two New Sciences’ was a forerunner of Newtonian Mechanics.

Austroglide March 21, 2009 at 9:17 am

Konrad,

Very interesting. The crux of your argument as applied to Human Action is not clear to me. If you would please be so kind as to clarify.

You seem to argue the following:

(1) Due to physical laws of nature, not every imaginable human action is performable.
(2) Praxeology, the ostensible ‘science’ of human action, takes no EXPLICIT account of these physical laws.
(3) Within Praxeology all imaginable human actions are, therefore, also performable.
(4) Therefore, within Praxeology, no counterexample to human action can be identified, the necessary condition for Praxeology to be considered a ‘science’.
(5) Therefore, Praxeology cannot be considered a ‘science’.

Is this a fair interpretation of your argument?

Konrad Swart March 21, 2009 at 10:19 am

To Austroglide, and others

I recommit this text, because there might be some unclarities. Moreover, I extend it here and there, because the subject, I think, is important.

Don’t be too enthusiastic about Austrian economy. It has to overcome a major hurdle, before it can be of great use.

Why do I say this?

I can prove that a mathematical, and even logical theory about Human Action is impossible.

The proof is as follows.

First a little notation. ~A stands for not A. And A -> B stands for ‘if A then B’.

Let L be any theory. (It can be mathematical, a theory of physics, economics, or whatever.)

Let A and B be arbitrary statements expressible in the language of the theory L.

~A ->(A -> B) is a tautology. Therefore it is true within every theory L.

Assume

~A.

Then, through Modus Ponens, it follows that

(A -> B)

Assume

A

Then, through Modus Ponens, it follows that

B.

Since A and B are arbitrary statements, this proves that if L contains even a single contradiction {A, ~A}, every statement expressible in the language of the theory L follows from L, and therefore is ‘a truth’ within L.

Therefore it is impossible to give a counterexample of the theory, expressible in the language of the theory. And that means, that the theory cannot be refuted.

Conversely, a necessary condition for the ability to refute the theory is, that it is totally contradiction free.

Therefore, if there exists a counterexample of a theory L, then this, in itself, is enough to prove that the theory L is totally free from contradictions.

To give an example, I can write, in Newton’s theory of mechanics, the counterexample F = 2 dp/dt. This equation cannot be derived from Newton’s theory, is not part of the theory, although the statement is part of the language of the theory.

Or, to give a more ‘realistic’example, for a long time people believed that a force is necessary for motion. In Newtonian language this can be expressed as F = p. (Force equals amount of motion.) This isAristotle’s vision of mechanics, which people believed for about 2000 years. Therefore you can imagine at least two counterexamples of Newton’s theory, which are both wrong, and have to be. One such counterexample is both necessary and sufficient to prove both that Newtonian mechanics is consistent, and that it is a scientific theory. That you can imagine at least one counterexample (which is false) proves therefore, that Newton’s theory is free from contradictions, and is NOT a tautology. This proves that Newton’s theory is a science.

This whole construction, by the way, is nothing else than the insight behind Popper’s epistemology. A theory can only be called scientific, according to the above, if a counterexample to the theory can be imagined, but not made real, despite the best attempts to do so. (This process is called refutation.) If no such counterexample is possible, then for any A, both A and ~A belong to the theory. (If not, either A or ~A would be a counterexample.) Therefore every other statement B expressible in the language of the theory follows from it, and the whole theory contains all possible meanings that can be constructed by the language of the theory, and therefore the theory is a tautology. That is why Popper’s epistemology is such a great breakthrough. It solved the Induction problem, in the sense that it showed that it is a false problem. There is no truth in science, only conjectures and refutations. Especially the fact that a possible refutation can be imagined shows that the theory excludes possibilities, and therefore it contains information.

Okay. Now let us go one step further, and apply the above insight to Praxeology.

Suppose K is a theory of Human Action. To be scientific, it has to be contradiction free. And to be contradiction free, there has to be a counterexample. This has to be an action I can imagine, but not perform.

But if I can imagine an action, any action, I can perform it. Exactly this is it, what distinguishes us from animals that have an innate repertoire they cannot deviate from. It is a vast subject as such, but the reason why only humans have this capability has to do with the fact that only human beings have language consisting of symbols, and, most importantly, grammar. It might not be wise to do any action we can imagine, like jumping out of the window of a a 10 story building. Or it might be impossible to do physically, like flapping my arms and flying around, which goes against the laws of nature. Or it might go against the laws of biology, like stretching my arm to touch the moon. But such restrictions on action are not because of purely Praxeological reasons, but because of limitations imposed on us, and which are the subject matter of ‘the other’ sciences.

This is, by the way, why Eugen von Böhm Bawerk placed so much value on the other sciences. He knew that if something was impossible because of a reason found in the other sciences, it is also impossible within economy. What he did not know, however, was that there does not exist such a restriction within economy. Likewise, von Mises did not know, that there does not exist such a restriction within Praxeology.

So, psychologically speaking, within the restriction of laws of nature, biology, etc, the faculty of Human Action is such, that anything I can imagine, which is not impossible according to the other sciences, I can translate into action.

Therefore a counterexample to Human Action is not possible.

Therefore, the reason why a theory of Human Action is irrefutable, is that it is one huge tautology.

And a tautology is not a science.

Why not? Because you cannot use a tautology to answer questions.

To give a simple example why this is so. Suppose I ask: ‘does it rain outside?’ I can then answer this question with: ‘it either rains or it does not rain’. This is a tautology, and therefore always a true statement, whether it rains or not. But it is a true statement precisely because it does not exclude anything. And therefore it is a true statement because it does not give any answer to the question. Moreover, because the statement does not exclude any possible answer, it is irrefutable.

This is the logical reason why the Axiom of Action is irrefutable. It is not because it is an axiom. No, it is because it is a tautology.

Still, something of very great significance is gained. For what is the function of a tautology? It is not to answer questions, but it is to clarify questions.

In particular, any statement can only be a tautology, when it consists of all possible answers to a question. This is why tautologies are very important. For, by stating all possible answers to a question you are basically explaining what you mean by a question, e.g., "Q1: Does it rain?" "Q2: What do you mean?" "Q1: It either rains, or it does not."

If I would give, as a response to the question: ‘the sun is shining or it is drizzling, or it is pouring, or it is foggy, or it is cloudy…’ on and on, until I have listed all possible answers to the question, I would have made clear what exactly I was asking, and at what level of detail I wanted the answer to be.

But if I answer to the question: ‘Does it rain?’ with: ‘the cat is limping’, then this might be a true sttatement, but is not an answer to the question. Such an answer would make clear, that I would have not understood the question.

In the same manner, any ‘theory of Praxeology’, any ‘irrefutable theory of Human Action’ is irrefutable, precisely because it is a tautology.

Such a theory has one purpose only. It clarifies the question.

It is the business of philosophy to clarify questions, (by definition) and it is the business of science to answer them. Therefore philosophy is pre-science, but it is not science itself. It is necessary for a body of knowledge to be a science, but not sufficient.

Nevertheless, Praxeology is a major step forward within Economy. This is because all other economic theories are not even philosophies. They are either religions or mystical visions. The often quoted "Wealth of Nations" contains many contradictions, like the Bible, the Koran, the Dhammapada, you name it. Moreover, it gave rise to lots of groups, Socialists, Communists, and even Capitalists (of the Rand kind) that, like religions, have resorted to either intimidation, personal attacks and even overt violence to make people comply to their particular explanation of the "Wealth of Nations". Just like it was with the Bible before, all of these groups fight with each other, either intellectually, or even physically, and assert ‘that the other does not really understand what Smith, Marx, Keynes really meant. Or, in the case of Rand, that people do not really understand what Capitalism is about.

If you compare philosophy with religion, you can see a huge improvement. Religion asks to accept on faith. Philosphy, although it does not produce answers to questions is committed to investigate the consequences of any assumption, whatever it is. The primary objective of philosophy is not to ‘arrive at the truth’, but to ‘arrive at full understanding and clarity’.

This is exactly what Ludwig von Mises says we must do within the field of economy. Ludwig von Mises is the Socrates of economy. He has liberated economy from religion, and brought it into the realm of philosophy. Everything that went before what Ludwig von Mises produced in the name of economy are religions. And even some things that came later, like Keyne’s vision. Again, this includes Objectivism. It is no coincidence, that Rand and von Mises didn’t go along in the end. von Mises hated the religions zeal of Rand, and Rand hated the fact, that von Mises did not accept her brand of Capitalism.

Austrian economics is the only direction in economics wherein there is a genuine wish for clarification. It is the only direction in economy, that points at the fact, that human acts have consequences, and that some acts can have the exact opposite consequences as the actors intend. It is the only direction in economy, that is directed at the clarification of those consequences. Again, this is typical of philosophy in general.

All other economies just ‘state assertions’, and ‘ask of you to swallow them’ blindly. Some even follow this with the statement: ‘or else…’.

This is why I have great respect for Austrian economics.

But it does not blind me for the fact, that economics in general, and Austrian economics in particular, is not yet a science.

Austrian economics is, when I compare it with physics, a forerunner of a genuine economics, just like Galileo’s ‘Two New Sciences’ was a forerunner of Newtonian Mechanics.

What Austrian economics lacks to become a real science, are two things.

1. A clear identification of the basic problem of economy.

2. A principle with which we can determine within economy what theories of action will lead to the consequences aimed at, and which do not.

To give an example of what I mean, look at mathematics.

1. The basic problem of mathematics is to discover proofs of abstract theorems.

The first mathematical scientist was therefore Euclid.

2. The principle with which a valid proof can be distinguished from an invalid one is logic. Logic is therefore the epistemology of mathematics. This as such solves an ancient problem within mathematics. Is logic a branch of mathematics, or is mathematics a branch of logic? It is neither. Logic is the epistemology of mathematics. It is a way to test mathematical proofs of their validity, and to distinguist these from mathematical nonsense.

Also look at physics. It contains both.

1. The basic problem of physics is the understanding of dead matter.

2. The principle with which we can decide, which theories about dead matter give us this control is the principle of experimentation. This principle first found by Archimedes, and later rediscovered by Galilei, has transformed what was then called ‘natural philosophy’, and which we now call ‘physics’ into a science. (Although Archimedes used this principle, Galilei was the first to understand it fully as something that went beyond Greek thinking.) Therefore the first scientist of Physics was Galilei.

Also look at biology.

1. The basic problem of biology is the understanding of life.

2. The principle with which we can decide which theories about life as such, apart from consisting of dead matter, are not biologican nonsense, is Darwin’s evolution. Darwin was therefore the first scientist of biology.

Now let us look at society.

1. The basic problem of society is Justice. That is, a society wherein there is no crime and violence. The question is, how to arrange society in such a way that it can deal with all forms of crime and violence in a just way. A viable society that has fully accomplished this goal you might call a society that is completely Civilized.

2. The principle with which we can decide which theories of social organization are just is discovered by nobody other than Murray N. Rothbard. He has explained the principle in ‘For a New Liberty’. He has shown in that book, that justice is coupled to individual rights. And that we must look at when the rights are violated. He has found the following test for social organizations to be civilized. Whenever property rights are violated, an act of Injustice has occurred. Therefore, any construction of social organization that violates property rights is in violation with Civilization.

Many acknowledge, that Rothbard was a Great Man. But I think that there are not many people who have realized, that Rothbard is the equal of Euclid, Galilei and Darwin. This is because Rothbard has found the basic principle of Civilization, and therefore should be considered their equal. It is a pity, that nobody has seen his greatness when he was alive.

Now if we turn to economy, von Mises is the one, who has shown the way to transform economy from religion into philosophy.

But he is not the man, who has shown us the next step. To say it bluntly, although von Mises was also a great man, he was not as great as Rothbard.

This was it, folks.

I hope you found this an interesting commentary.

Konrad Swart March 21, 2009 at 11:01 am

To Austroglide

You wrote:

Austroglide

You wrote:

You seem to argue the following:

(1) Due to physical laws of nature, not every imaginable human action is performable.
(2) Praxeology, the ostensible ‘science’ of human action, takes no EXPLICIT account of these physical laws.
(3) Within Praxeology all imaginable human actions are, therefore, also performable.
(4) Therefore, within Praxeology, no counterexample to human action can be identified, the necessary condition for Praxeology to be considered a ‘science’.
(5) Therefore, Praxeology cannot be considered a ‘science’.

Is this a fair interpretation of your argument?”

Yes. It is. But I say more than that, as I have just posted. I make a distinction between Praxeology and all other economic theories. I consider Praxeology a major step forward, because all other economic theories are either religions, or worse. (With ‘worse’ I mean ‘mystical theories’. Mystical theories are distinct from religions one’s, because mystical theories are accepted on feelings, while religions are accepted on blind acceptance (or else you will be doomed… ;-)’ Religions program the emotions, while mystical theories assume the emotions to be already there.)

Praxeology, on the other hand, makes clear, regardless of what you feel or believe. It allows us to investigate the consequences of human actions, despite the fact that we do not have a clear principle with which we can distinguish correct actions, that is, actions that bring the results we imagine, whatever they are, and which don’t.

It is this freedom what it has in common with philosophy in general. And you have to be allowed to be clear about whatever before progress can be made in any field. But what it misses is an epistemological principle with which we can decide which actions will bring the results aimed at, and which don’t.

To be precise, if I take action as completely unqualified, then we do know which actions will bring results, and which do not in some contexts. We know that the application of laws of physics (a form of action) lead to tools, machines, building, you name it. Therefore, if you take the notion of Human Action in its full generality, physics could be considered as a part of the science of praxeology. Namely that part giving us control over dead matter. The same applies to mathematics and logical thinking, and biology and life. So if praxeology is understood as really meaning to be about all action, then you might even argue that it is so general, that it is identical with the very concept of science. Interestingly, the concept of science is itself a philosophical concept, exactly because we have no general principle of science.

But what I understand about what von Mises says about Praxeology, he sees its scope more restricted. He sees it primary as directed at a science of society. Therefore, I think von Mises saw it as the following:

Praxeology is an attempt to find a science that studies the creation of wealth under a system of division of labor.

If you are familiar with Reisman, you can see that I have connected Reisman with von Mises here. For the above is nothing else than Reisman’s definition of economy as a science. Reisman defines economy as: ‘the science that studies the production of wealth under a system of division of labor’, and places it against the socialist definition of economy: ‘the science that deals with the allocation of scarce means among competing ends’, which many take mistakenly as the definition of economy. including Rothbard!

So what is missing is a principle with which we can decide which social orders bring wealth and which don’t. The only thing what you can do now with Praxeology (and that is as such far more than any other economic theory can do) is to alert people that there are consequences arising out of certain actions that might be very different from that what is intended. If you, for example, give bankers the liberty to allow practices of fractional banking, then inevitably you will have business cycles. Somebody trained in Misean thinking can point this out.

So partial problems can be made clear, just like people could make partial problems of building cathedrals clear before the invention of static mechanics, a subfield of engineering. But, just like in the middle ages, people could not know in advance whether they could make a cathedral that would not collapse, we are not able in advance to know whether the particular social order we design will lead to the creation of wealth for everybody who wants it. Only after Galilei came up with the principle of experimentation and Newton came up with fusing this with mathematics, a true science of physics could emerge. In the same manner, we need something more to make Praxeology (in the restricted sense I just explained) into a true science in its own right.

Inquisitor March 21, 2009 at 12:26 pm

“The reason why Praxeology, and Austrian economics ‘is such a mess’, as this article makes clear at the end, is simply, because it is not a science. It is a philosophy.”

It’s a mess? According to whom?

Konrad Swart March 21, 2009 at 2:56 pm

To Inquisitor.

My mistake and my apologies. I withdraw these words.

You can see in my second posting, that I have deleted that remark.

Austroglide March 21, 2009 at 3:26 pm

Konrad,

Thanks. To my reading, the following seem to be near the root of your argument:

(1) “But what [Praxeology] misses is an epistemological principle with which we can decide which actions will bring the results aimed at, and which don’t.”

(2) “So what is missing is a principle with which we can decide which social orders bring wealth and which don’t. The only thing what you can do now with Praxeology (and that is as such far more than any other economic theory can do) is to alert people that there are consequences arising out of certain actions that might be very different from that what is intended.”

(3) “Praxeology, on the other hand, makes clear, regardless of what you feel or believe. It allows us to investigate the consequences of human actions,
despite the fact that we do not have a clear principle with which we can distinguish correct actions, that is, actions that bring the results we imagine, whatever they are, and which don’t.”

It seems to me that logic is this principle you speak of, together with an implicit understanding within Praxeology that the physical laws of nature apply to human action.

This seems an obvious conclusion, one which you therefore likely disagree with, since you would already be aware of it and are nevertheless still seeking a solution. Given my understanding of your argument, however, I find my conclusion quite reasonable. Therefore, I doubt whether I’m understanding your argument fully.

Konrad Swart March 21, 2009 at 7:27 pm

Dear Austroglide.

Thank you for your response, and your attempt to really follow my argument.

The concept of Human Action, as defined in Man, Economy and State, is very general. In fact, it is so general, that it contains in it something remarkable about human beings.

I myself consider human beings to be nothing less than a third form of existence!

Why a third form? And what are the other two forms? The first form is dead matter. It is a long story, but dead matter ‘acts’ in accordance with laws of nature. All laws of nature can be expressed by a mathematical construct called a ‘differential equation’. The important part of it is that all such equations contain time as a second derivative. And that means, in philosophical terms, that only the present is ‘real’. This is the problem that you cannot make a distinction between past and future within the domain of dead matter. The mathematical reason is that a second order derivative is ‘some kind of square’ of an infinitesimal. And a square of a positive number is positive, but a square of a negative number is also positive. This makes that laws of nature cannot distinguish between past and future, and therefore only the present is real in the domain of dead matter. I should explain this more thoroughly, but I just sketch it here.

Life in the form of animals and plants is the second fundamental form of existence. It is based on an information carrier, DNA.

DNA brought a new form of structure formation into existence, the successor of laws of nature, evolution, that is, mutation and selection. DNA made that events happening far in the past still exert their influence on the present, and help shape them. Basically, through DNA the past exists. It exists as a form of memory imprinted on the DNA.

Human Action is something quite different. We can imagine something that exists nowhere, and act to make it exist

This has caused us to step out of evolution. And this step is so big, that it makes us into nothing less than a third form of existence. We are not dead matter, and we are not ‘just a species of animals’. We are something beyond animals as such. To say that we are ‘just a species of animals’ is exactly the same as saying that animals are ‘just complicated chemicals’. There is a fundamental difference between chemicals and animals. And there is a fundamental difference between animals and human beings. The intuition that many religions have about evolution, and what it says about Man, is basically correct. Man is far more than any species of animals. Man is a fundamentally different form of existence. Their intuition is right, but their arguments are wrong. We originate from animals, but this does not make us to be animals. Just like animals originate from chemicals, but it does not make them to be chemicals.

Why? Evolution is based on mutation and selection, that causes life forms to adapt to the environment.

Action allows us to do the reverse. We are capable of adapting the environment to ourselves. And therefore Human Action gives us the capability to step out of evolution, and even to use evolution itself to our own benefit. We can set up conditions of artificial selection, and have done so in the past. We used it to transform only one species of dog into all of the different dogs we now have. We used it to transform grass into corn. And now, with modern scientific methods, there is a subdiscipline of biology, called bioengineering, wherein evolution is used more and more.

Science is the investigation of how we can transform any thought into reality. And we do that in the following way.

First we look around us, and try to understand our environment in a symbolic way. The most primitive way is through language. More sophisticated tools to do that is through numbers and mathematics.

Then we manipulate those symbols in our mind, ant translate those symbols into something that only exists in our imagination, and project it as something that might exist in the future.

And then we use our understanding of the world (our scientific and technological knowledge) to construct an action with which we make our vision of the future into reality.

And that makes, that we ourselves are the carriers of purpose and future. So there exists purpose in existence , and it resides in us.

I have once heard a statement saying: ‘we have investigated who is the enemy, and we have discovered that it is us’. In the same manner I can say: ‘I have investigated whether there is purpose in the world, and I have discovered that it is us’. We are the embodiment of teleology in the same sense that laws of nature are the embodiment of existence, and life is the embodiment of causality. Purpose cannot be found in dead matter or in life. It also cannot be found in us. But we can make it in us. through our capability to understand, through creative thinking, and through translating that into action.

If Praxeology is about Human Action in its fullest generality, then the concept coincides with the concept of science itself. And therefore, in the widest sense of the meaning of the term ‘action’, any science is a further step into the development of Praxeology. And that is what I see in your response. You see part of it, but not the whole story.

To continue, you can consider the sciences of mathematics, physics, biology, and even the possible science of civilization, implicit in Rothbard’s work to be special cases of Praxeology, and even fulfillments of its aim.

And that is what I see in what you understand. So I do not disagree with you. All of what you say is indeed part of Praxeology. But either Praxeology coincides with the very concept of science, something von Mises did not seem to realize. Or Praxeology was meant to him to coincide with economy. But then it is not a science, because economy is not a science.

If Praxeology coincides with the concept of science itself, then there are some domains that are not yet ‘scientized’, so to speak. One is economy. And the other is psychology. (BTW, my argument against economy also applies to psychology. In fact, I came up with it for the first time when thinking about psychology as a science. Only much later I discovered, that the same argument could be applied to economy.)

Now that I think of it, the problem of economy is also not yet demarcated clearly.

Let me correct that. I think that Reisman’s definition of economy as ‘the science about the production of wealth through division of labor’, is a definition of the question of economy, and therefore the context of economy. Therefore this defines the philosophy of economy

Since Austrian economy presents itself as an economy, then the above definition makes the question clear, but it does not tell us what the answer is to this question. We do not know what, exactly is the principle behind wealth creation.

To be frank, the reason why I participate in this forum, is to test whether I can ‘get through’ to the Misean community. I wanted to test whether they are firstly open to my objections, and secondly to the solution I have found. I wanted to test whether there are people here who are interested in my reasoning.

I have attempted this before, but mostly I get negative responses, and avoidances of my basic arguments, like you can find in the above, that one of Inquisitor. He attacks a very minor point. He is right, but it is not what I want to communicate about. He just attacks me on a ‘slip of the pen(keyboard)’. That is not what I am looking for.

The reason is, that I am writing a book about my own solution to the problem of making economy into a science. Therefore I present some of my basic objections to Austrian economics as a science, to see what reactions I get.

My own solution has grown out of Austrian economy, and I consider it to be the next step.

Imagine what a true science of economy would make possible. If somebody comes with the argument, that you can create wealth through making an increase in the money supply, and defend this through a Keynesian argument, stating that ‘this is so because it stimulates the production, and therefore stimulates the creation of the goods and services that are put against money, and that is where the value of money comes from’, then a true science of economy based on a purely economic method of scientific proof would be able to give an economic proof that this statement is false!. Moreover, the body of the science of economics would consist of such deep insights into wealth, that we would have theorems of wealth creation that would be proved by a scientific method that is 100% economics . So the scientific method of economic would give us the means to prove statements about wealth creation that are sound .

Indeed, we would see the emergence of a totally new kind of proof. You can have mathematical proofs through logic, proofs of physics through experimentation, and a genuine economic proof through a genuinely scientific economic method. Moreover, this method would also define economics as a science distinct from mathematics, although it could use mathematics as physics does, distinct from empiricism, although it could use empiricism as biology does. The method of proof would be uniquely economic, and as undisputable as logic is for mathematics, and the method of experimentation is for physics, but nevertheless different. It would end every debate about whether economy is an empirical science. Anybody who would ask whether economy is an empirical science would be met with the answer, that economy is an economical science, and that would be it. Economicism would be recognized as just as valid for economy a logic is for mathematics, and empiricism is for physics and chemistry.

A genuinely science of economics would then result in a genuinely technology of economics that would result in a tremendous production of wealth . We would see such a tremendous production of wealth that might make everybody in the future at least as wealthy as the present multimillionnaires would be.

That is my vision. And that is what is at stake.

Inquisitor March 22, 2009 at 3:10 am

It’d help if you could put your points more concisely. That one merely stuck out most, that is why I questioned it. You have to understand that in any given day there are hundreds of posts, messages &c. to read, and it’s hard to do so if you don’t try keep things as succinct as possible. Given that I am interested in Reisman’s work, I am interested in whether you have anything good to say on the topic, so don’t interpret my question as an attack or evasion as opposed to a request for clarification.

Stavros Marangos March 22, 2009 at 5:13 am

A message from Cyprus, “on the other end of the world”, from a layman, NON ECONOMIST.
“Many thanks to Joseph Salerno for a brilliant exposition. I have been reading articles from MISES INSTITUTE for months, and though some were more stimulating Temporarily, in that they related to current affairs, your work on Rothbard is by far the most rigorous, intellectually taxing and informative piece yet.
You are doing the whole world a great service. Keep the lights shining.”

Konrad Swart March 22, 2009 at 9:53 am

To Inquisitor.

Thank you for your reaction, and explanation, Inquisitor.

Indeed. My messages are very long.

About Reisman I have lots of things to say.

Reisman’s work Capitalism is not really an integration of all of economy, as he claims it is. He does not, Like Rothbard, begin with one principle, and then builds on it. It looks more like patchwork.

Another thing is that he seems to favor the quantity theory of money, which is wrong. I have once tried to point this out to him, but he just ‘does not get this’.

Still, Capitalism is a great work, for it contains a lot of genuine insights. Some are even sheer genius.

Three are very important. The first is that he shows that the picture sketched by socialists, that society began with laborers is wrong. The concept of ‘laborer’ is, economically speaking, fairly recent.

Economically speaking, a laborer is somebody who gets the rewards of his labor in advance. That is, before the finished product

A Capitalist, on the other hand, gets the result of his actions after the goods and services are created and sold. Capitalists are therefore those who create the economic conditions for laborers to even exist. Without Capitalists (investors) there would be no civilization. That is one of the things Reisman almost completely gets. I say ‘almost’, because he does not see that consumers do not contribute to economy at all. If he would see that, his argument against Keynes would be much shorter. I have given this argument elsewhere.

Since the first farmers clearly fall in the category of those, who get the result of their labor after the products are created, (you cannot eat what you have grown first), the first farmers were, economically speaking, Capitalists, and not laborers, as the socialists and communists believe.

I found this quite an eye-opener.

The second thing is related to this insight. He has solved half of the Interest problem as formulated by Eugen von Böhm Bawerk. He has shown that, economically speaking, the origin of interest lies in the consumption of the Capitalists. The money flow in economy adjusts in such a way, that the difference between the investment and the profit, when spent, gives rise to profit. This solves a (pseudo) problem of Interest. (If you lend money, and you ask more money in return, where, economically speaking, does this ‘more money’, come from? Reisman’s answer: ‘it comes from the consumption of the Capitalists.)

To see this, is sheer genius.

And the third is really marvellous. He demonstrates, in Capitalism, that if you have a truly free market with a 100% reseverd Gold standard, then the free market itself causes the intelligence of all people to connect in such a way, that economic problems are going to be solved that no single individual is able to solve.

This is a refutation of politics itself, which has the implicit assumptions that there can be leaders who are so intelligent, that they can tell the rest what to do to solve problems of economics. Reisman basically says, that any individual, no matter how clever, is vastly more stupid than the market as a whole.

In his book there is even part of my own solution to the justification of Interest problem, which is the other half of the Interest problem. Even part of my own value theory is already in this book. I think the reason why he does not see this, is because he thinks that the problem is already solved in the Quantity Theory of money. Therefore he is not looking for the solution.

It is a real pity, that Reisman really dislikes me. If we could team up, we coud accomplish great things. But, as it stands now, the relationship between Reisman and me is much like the relationship between Newton and Leibniz. (He is Newton, and I am Leibniz.)

The origin is the same. I have arrived at certain insights he also arrived at independently from him. I have communicated them to him, and then he began to accuse me of stealing them from him. I do not intend to make a point of this, like Leibniz did. For this caused within the mathematical community a split, which continued for about 250 years. I am very careful to avoid that mistake.

Still, I recognize in Reisman an economic genius. In fact, I think I am one of the very few who really understand his entire book, especially the complicated flowchart at the end, and the insight it contains. It is exactly that what is in there I have found independently from him.

Again, thank you for your response.

Greetings,

Konrad Swart

Austroglide March 22, 2009 at 12:54 pm

Konrad,

Your argument, as I read it, is very creative. I really cannot offer you much here other than my response to it, given my (probably limited) understanding of it. Please forgive me if my response fails to do your argument justice.

You say the following:

“I think that Reisman’s definition of economy as ‘the science about the production of wealth through division of labor’, is a definition of the question of economy, and therefore the context of economy. Therefore this defines the philosophy of economy. Since Austrian economy presents itself as an economy, then the above definition makes the question clear, but it does not tell us what the answer is to this question. We do not know what, exactly is the principle behind wealth creation.”

You further argue that humans are a “third form of existence” because we “are capable of adapting the environment to ourselves”: which is to say, through a combination of imagination, volition, and technology humans act to purposefully change the future in significant ways. Further, you argue that “science is the investigation of how we can transform any thought into reality”: or, in other words, science is the identification of technologies through which humans may act to change the future in significant ways.

By this definition of ‘science’, then, a science of economics necessarily would entail the identification of technologies through which humans may act to create wealth through the division of labor. And what we mean by ‘technology’ here is not something like the telephone or the microprocessor, but (as you repeat throughout your argument) a ‘principle’ by which to comprehend and assess whether a given human action is indeed wealth promoting.

My response to this argument is that we already have a principle: it is private property. I argue that regarding a science of economics, THE PRIMARY CRITERION by which human actions can be judged to either be wealth promoting or wealth degrading is whether those actions adhere to the principle of private property.

I draw this conclusion primarily – perhaps solely – due to the fact that ‘wealth’ and ‘value’ are, ultimately, determined subjectively: consumers render final judgment as to whether a given human action/set of human actions accord with wealth creation. And given the ever-shifting nature of consumer tastes, and therefore the ever-shifting definition of that which is considered ‘valuable’, markets and prices need be flexible and free, and private property rights extended to a maximum. (Here I consider free markets, as well as the division of labor, subsets of private property.)

What’s more, were instead ‘value’ something determined objectively, surely a science of economics would be one full of specificity and empirics. But given that ‘value’ is determined subjectively, specificity in a science of economics is – in my opinion, given my current understandings – not possible. The principle of private property is as close to certainty as a science of human behavior, in terms of wealth creation, allows.

To close, I’ll repeat myself here by saying that this conclusion seems somewhat obvious, and likely therefore one which doesn’t follow from what you are arguing, but also that it is the conclusion I nevertheless draw from my understanding of your argument.

Austroglide March 22, 2009 at 3:44 pm

Forgive me, I misspoke when I said this:

“And what we mean by ‘technology’ here is not something like the telephone or the microprocessor, but (as you repeat throughout your argument) a ‘principle’ by which to comprehend and assess whether a given human action is indeed wealth promoting.”

Rather, it seems to me that if ‘economic science’ is defined as the identification of technologies through which humans may act to maximize wealth, then ‘technology’ in this sense is a proxy for all cause and effect relationships in the production of goods and services.

The principle of private property – or at least some yet to be identified principle which derives from or originates within the principle of private property – in conjunction with Human Action, must be the foundational concept and organizing principle. An economic science in which private property is not primary is an economic science in which markets will not be free and in which the division of labor will be malformed. The corpus of cause and effect relationships emerging from this version of economic science will not correspond to an economics which maximizes wealth.

Inquisitor March 22, 2009 at 4:51 pm

Well I look forward to reading your book when it comes out then, so as to properly evaluate your arguments etc. Make sure to mention it on the fora linked to this site. http://mises.org/Community/forums/

Konrad Swart March 22, 2009 at 6:13 pm

Dear Austroglide.

You are truly remarkable in your response. Up till now I have never seen somebody who paid me such a huge compliment in really trying to understand what I bring forward, and who gave such clear responses. You really understand much of what I bring forward, and that from so little.

Usually, when I teach such things to others, it takes them years to gain such deep understanding of what I say as you do.

I guess that you must have been thinking about such subjects for years. (As I have.)

Let me go into some points.

You note: “What’s more, were instead ‘value’ something determined objectively, surely a science of economics would be one full of specificity and empirics. But given that ‘value’ is determined subjectively, specificity in a science of economics is – in my opinion, given my current understandings – not possible.”

With my concept of value, this is exactly what is possible.

In a response to another article on this website, I have gone into the idea of value as much as I dare to do, without ‘giving it away’. I want people to read my solution in the book I am now writing.

You can find what I said previously at

http://blog.mises.org/archives/009623.asp

I have explained my objections against the Austrian theory of value there also, and therefore I am not going to repeat it here.

As I said there, there is a way to define value objectively, and even in a way that is cardinally measurable. This is a new concept of value. It has one thing in common with the Misean vision on value. It is dependent on the individual. Not in the sense that its origin is the subjective evaluation of the individual, but dependent on the individual in another way that is measurable, even in a cardinal way.

You write: “The principle of private property – or at least some yet to be identified principle which derives from or originates within the principle of private property – in conjunction with Human Action, must be the foundational concept and organizing principle. An economic science in which private property is not primary is an economic science in which markets will not be free and in which the division of labor will be malformed. The corpus of cause and effect relationships emerging from this version of economic science will not correspond to an economics which maximizes wealth.”

I agree, that private property is a necessary condition for the creation of wealth, but it is not sufficient.

Let me as simply as possible state how I see it.

If somebody produces something, then he is the owner. It is his private property. So, socially speaking, what somebody produces is rightfully his.

This means, that if somebody else sees him producing lots of things, he knows (or at least should know) that all of it belongs rightfully to the producer. It is as von Mises said. Redistribution can only occur by first disowning people from that what is rightfully them.

So what people produce, seen from the perspective of society, are rights. That is what it means, if you understand that all rights are property rights.

These rights are then put against money. In this way, rights are made exchangeable against money.

But why do we do that? We do that because we know that we can use the money thus received to obtain the goods and services others put against money. We obtain access to the goods and services created by others through money.

Let me turn to another concept: Freedom.

Now what is freedom? Freedom is the capacity to transform imaginations into reality. This is what is shown in many fairy tales. What is a sorcerer? An all powerful sorcerer is somebody who has total freedom. He is somebody who is capable to ‘wave his magic stick, and ‘create for himself anything he can imagine’. That is the attraction of such stories. I think this is the attraction of the Harry Potter novels. “If only this would be possible…”. But I digress.

Now take this definition of freedom, and look at money. Isn’t this what money can do for us? (Up to a point, at least.) Imagine you have lots of money. Then you can turn inside, and imagine something what you want for yourself. Now you can look at whether somebody else has realized, through his skill and effort, exactly that what you want. That what he has realized is rightfully his and therefore his right(s). He owns it.

You can then look at whether he has put it against money. Then you can turn to ‘the magic stuff of money’, and look at how much money he wants in return for you having it. You then offer him the amount of money he asks, the transaction is then made, and you have made, for yourself, that what only existed in your imagination into reality. Therefore money is the closest thing to a magic stick that exists.

What makes this possible? Apparently, before the transaction, and even before the imagination, money gave you a way to realize your thoughts for yourself, as far as these thoughts were realized by others. Money therefore represents freedom.

The more goods and services, in quantity, quality and kind, are put against money, the more you can buy for a certain amount of money. In other words, the greater the ‘magic power of money’, and the more owning any particular amount of money gives each of us the capacity to transform thought into reality (for ourselves). So all of the people working for money are causing money to ‘have magic power to realize thoughts’, that is, to ‘have value’ as is customary to say.

The value of money is therefore equal to ‘the magic power of money to transform imaginations into reality’.

Therefore, if you have a certain amount of money, then you have have a ‘certain amount of freedom’. It is as Dostojewski said: ‘money is minted freedom’.

How does ‘the magic of money’ works?

By working we create goods and services. We create our individual rights. And if we exchange our rights against money, we transform our individual rights into freedom. . And then, if we buy something with this money, we transform this freedom again into individual rights.

This insight has a very important corollary. The value of the money you have, that is the freedom in the money you have resides in the property rights of those who own the goods and services put against the money. What I mean is, that if others do not own the goods and services they put against money, you have no certainty that if you buy something with money, you actually obtain ownership of it. If you buy a stolen car, then you cannot be certain that you actually own it, and therefore you cannot be certain that you actually have transformed a wish into reality.

This is another reason why property rights should be taken very seriously.

So freedom and individual rights, that is, property rights, are closely linked. There can be no freedom without individual rights = property rights.

All this means that freedom is not something you fight for, but it is something you work for. What you fight for is individual rights. This is the same as fighting for property rights. Individual rights and property rights are the same thing.

The more a society respects individual rights the more it makes freedom possible. But not the more freedom there is! Freedom and individual rights are different things. Individual rights are embodied in property rights. Freedom is embodied in money.

Therefore individual rights are a necessary condition for economy. It is a necessary condition for wealth. But it is not the subject matter of economy. Economy is about feedom, not about property rights.

I would rather say, that individual rights, property rights, are the subject of another science. I call this science the science of Justice. It is a science that is necessary for the science of economy to exist, but it is not identical with the science itself.

A society is civilized in the degree and to the extent that it protects individual rights, which is the same as the degree and the extent wherein it allows people to have property rigths.

Only after property rights are guaranteed, established and secured there is the separate task of creating freedom. And the creation of freedom in the general sense happens through making money to have value.

I see economy as the science specifically directed at this problem, and this problem only.

All of us create freedom for each other by creating goods and services through our efforts, and putting them against money. This is also the reason why tampering with money, that is, tampering with the money supply, is a very deceitful way to rob people from their property rights, from their individual rights. If banks make money out of thin air, loan it, they do not use themselves. And in that sense they do not rob anyone. But what they are doing is stealing the freedom from others, and giving it to this individual. This is a form of fencing. That is the first violation of individual rights. If they then ask the money back at a future date, with interest, then this interest is a further violation of property rights. But now from the person who agreed to the loan, and has created, through his effort, the value the loaned money now has. (It is more complicated than this, but this is the gist of it.)

It is the typical way right wing governments finance their plans. They rob people from their property rights through deficit spending, as they call it. Left wing governments tend to rob people from their property rights in a more open way, through taxation. Right wing governments do it through bank fraud.

When I understood this last thing, it solved a puzzle. Why do right wing politicians, when they are in power, always create government debts, and why do they disappear when left wing politicians are in power? It did not make sense, until I understood fractional reserve banking. The funny thing is, that left wing politicians say they are for the poor, but they rob them the most, while right wing politicians say they are for the rich, but they rob them the most. The rich do not understand, that there is a reason why right wing politicians try to help the rich as much as they can. They are the best equipped to rob them through their wish to have more money. The rich indeed get more money when right wing politicians are in power. But through deficit spending they are robbed the most, through robbing them from the value the money has! And they are an easy target, too. Most millionnaires have no higher level in education than high school. So they are the easiest one’s to be deceived by right wing politicians.

I hope you found this interesting.

I leave it at this.

Greetings,

Konrad Swart.

Konrad Swart March 22, 2009 at 7:51 pm

Thanks, Inquisitor.

I shall do that.

Greetings,

Konrad Swart.

newson March 23, 2009 at 12:04 am

to konrad:
regarding interest: have you read jorg guido hulsmann’s view? he, too, criticizes the time-preference theory and comes up with his own alternative.
http://mises.org/journals/qjae/pdf/qjae5_4_7.pdf

Konrad Swart March 23, 2009 at 7:47 am

Hi, Newson.

No, I have not read jorg guido hulsmann’s view.

I shall look at it.

Konrad Swart March 23, 2009 at 8:40 am

Hi, again, Newson.

I have scanned Jorg Guido Hulsmann’s view.

I have applied my own value concept to Hulsmann’s explanation of interest, and I arrive at the conclusion that he is basically right.

What is missing from his theory is an economic proof, based on an objective theory of value. That is exactly, what my own value theory can do.

I have some problems with his explanations, though. The obvious one is that he assumes that the origin of value is subjective evaluation. In that sense he is a representative of the Austrian theory of value. It just happens to be, that the Austrian theory of value and my own can both give a justification of his theory.

Moreover, Hulsmann does not see, that the reason why the concept of time preference does not explain interest, is because it is a question presented as an answer. To give an example of this:

Question: ‘why does John drink milk?’

“Answer”: ‘Because John is a milk drinker’.

In the same manner, the time preference theory of interest is not a theory about interest at all. It does not explain interest. It is a transformation of the question of interest into the form of an “answer” by just transforming the question into a concept and giving it a name. Therefore the following what Hulsmann says is correct, namely:

“Mises’s time preference theory of interest does not explain why there should be, under any set of circumstances, a systematic relationship between time preference on the one hand, and the spread between selling receipts and cost expenditure on the other hand. It does not explain why the interest rate should ever be positive rather than zero or even negative. It does not even get to the point of explaining why interest does not tend to become eradicated through entrepreneurial competition. And it therefore does not give us any reason to believe that there is a factor that systematically causes interest rates to be positive.”

However, the reason why this is so is not because von Mises is incorrect. No, it is because von Mises just did not answer the question. Neither did Bawerk.

Hulsmann’s theory is not an alternative to the time preference theory of interest, but an answer to the question, hidden in the concept of “time preference theory of interest”.

I think this is a neat demonstration that you must have a clear understanding between the distinction of a philosophy and a science. A philosophy clarifies questions. In that sense the time preference theory of interest clarifies what the question of interest is. It clarifies what form an answer to the interest problem should have. It is a philosophical statement about interest.

Hulsmann’s theory of interest is a possible answer to this question.

newson March 23, 2009 at 9:21 am

to konrad:
à propos of hulsmann’s interest rate theory (means to ends) – i found his mp3 illuminating, though it covers the same ground. i think it’s this one:
http://media.mises.org/mp3/MU2005/mu05-Hulsmann2.mp3

if not, then this:
http://media.mises.org/MP3/mu2005/mu05-Hulsmann.mp3

it’s funny his article seems to have slipped under the austrian radar, and the time preference theory seems to be taken as a given by most of the contributors to the site.

i was quite shocked when i read bagus (one of hulsmann’s students) on deflation,(http://mises.org/journals/qjae/pdf/qjae6_4_3.pdf) and realized how unsatisfactorily the other austrians had treated this issue. ever since, i pay particular attention to jgh’s work.

i look forward to reading more of your work, though i can’t say i understand it all.

Konrad Swart March 23, 2009 at 10:30 am

To Newson.

Thank you very much for the material. I am going through Jorg Guido Hulsmann’s article more thoroughly, and also the article of Philipp Bagus looks very interesting.

I shall listen to the audio files later.

Great material!

By pointing to this material you have also directed my attention to the existence of the QJAE.

I am contemplating to write an article for the QJAE wherein I explain my own value theory.

Thanks!

fundamentalist March 23, 2009 at 10:33 am

Mises concluded, “The specific method of economics is the method of imaginary constructions…. [I]t is the only method of praxeological and economic inquiry.”

That’s a very important insight. Natural sciences have controlled experiments; economics has imaginary constructions. Mainstream econ deals with imaginary constructs more than they would like to admit. For example, perfect competition is pure imagination with no basis in reality. It is used to demonstrate the effect of price on demand and supply. Unfortunately, some people don’t understand that it is imaginary and think it is the goal and that the state should bring it to reality. But without the imaginary construct of perfect competition, it’s impossible to prove that higher prices reduce demand and increase supply because other factors, such as quality and advertising, affect the results.

I have been re-reading my college text on mainstream macroecon and was pleased to see that it uses imaginary constructs a lot. It holds things like prices and interest rates constant, another imaginary construct, in order to elucidate the effects of the variables under consideration at the time.

However, I am pessimistic about the possibility of change in mainstream econ. The field went through a similar crisis in the 1970′s and didn’t learn a thing. When empiricism failed them during the current crisis, most economists have fallen back on the only theory they know—Keynes.

Notice that the recent pro-Austrian articles have come from the financial media. My guess is that finance will become increasingly Austrian because it works. Econ will spend the next decade trying to rehabilitate Keynes because it can’t afford to admit that it has been wrong the past 70 years and state regulation of the economy is very popular. As a result, the next battles will be between financial econ and mainstream macro econ.

fundamentalist March 23, 2009 at 10:35 am

PS, the state is the primary market for graduates with economic degrees, and politicians want to hire economists who confirm their own prejudices about the efficacy of state intervention. So colleges will continue to crank out Keynesian economists no matter how bad their theory or how many times they fail to predict anything of any consequence.

Konrad Swart March 23, 2009 at 12:06 pm

To Fundamentalist.

You wrote: “However, I am pessimistic about the possibility of change in mainstream econ.”

I am not. The simple fact is, that we have not hit yet upon a theory that is strong enough to defeat the others.

You write: “Natural sciences have controlled experiments; economics has imaginary constructions.”

All sciences only have imaginary constructions. The controlled experiments within natural sciences are only to test whether they work, not to come up with them. Moreover, controlled experiments can only test causal connections. Mathematics has another test, logic. Biology has evolution as its epistemological test.

The reason why there is no change in mainstream economics, is that it lacks an epistemological test like that of controlled experiments in the natural sciences, and logic in mathematics, and evolution in biology. If it has, there will be a major change that is unstoppable. This was so within mathematics since Euclid, within the natural sciences since Galilei, and within biology since Darwin and Mendel fused with the discovery of the DNA molecule, and evolution became irrefutable.

I am glad that I am not a professional economist. I have a very extensive background, both trained in theory and practice. From the practical side, I am an electrician, carpenter, metal worker and musician.

From the theoretical side I am a computer programmer (I have a command over several computer languages), I have studied mathematics and physics for 10 years at the university of Leyden, Holland. After that, I have been studying many things on my own, including such things as philosophy and psychology. My life is much like that of Bastiat, who also was a life long student. A major difference between Bastiat and me is that I have an extensive understanding of ‘the hard sciences’, like mathematics and physics. I am a practitioner of meditation, and have given several courses in formal logic. I am totally independent from any institute.

The reason why I am interested in economy is that a sound economy creates freedom for as many people as possible. It is my mission in life to help others develop their mental powers.

I found out that a precondition to this is freedom from material worries. This is why I do not accept any bullshit theories. I am only interested in theories that work, or at least are stepping stones to theories that lead to this. Austrian economy is my best bet. It is, in my eyes at least, unfinished, but it is the best there is.

It only needs an epistemological criterion with which we can make a distinction between theories that work, and bullshit theories.

So brace yourself! This is coming! Economy has reached a critical mass, and will cause a major explosion in wealth. There is an economic theory coming that will be as unstoppable as Galilei’s method of experimentation was to promote correct theories. Religious people, who had a huge vested interest in false theories, could place him under house arrest, but they could not prevent his approach to become mainstream within the natural sciences.

In the same manner, a sound economic science equipped with a sound epistemological criterion will be just as unstoppable, no matter how huge the vested interests are.

fundamentalist March 23, 2009 at 1:46 pm

Konrad Swart: “In the same manner, a sound economic science equipped with a sound epistemological criterion will be just as unstoppable, no matter how huge the vested interests are.”

I wish I could be as optimistic. I think you assume that people are looking for the truth. I don’t. If they were looking for the truth, there wouldn’t be any socialists left. The majority of Americans are socialists as are politicians. They don’t want the truth; they want to hear from people who will promote socialism. Simply from a supply/demand perspective, I think the supply of socialist economists will increase because the demand will increase, both from the public and from the state, which employs most economists.

Years ago I read some public relations research that divided ideas into opinions, attitudes and world views. He placed them in concentric circles with world views at the center, attitudes in the middle and opinions on the outer circle. Opinions are the easiest to change. His example for opinions was the choice between brands of toothpaste. Attitudes were represented by the outlook on hygene, for example, the decision whether brushing your teeth is a good idea or not. World views are people’s outlook on how the universe functions. Opinions are easy to change. Attitude changes require a significant personal crisis, or long-term counseling, to change. World views are almost impossible to change.

I think economics falls in the middle in the class of attitudes and American economics won’t change until there is a major economic crisis. I think it will take a crisis on par with the Great Depression because it was largely responsible for the major shift to the left in the US. It took 50 years of brutal communism to change the minds of most Chinese. On the other hand, Russians endured 70 years of it and most still haven’t changed.

Konrad Swart March 23, 2009 at 6:16 pm

To Fundamentalist.

Well, what can I say. What you say reminds me of something I heard of Mahatma Ghandi. He was that man with the spinning wheel, and who was pointing out, that people should not be so greedy. One of the things he said: “The world provides more than enough to fulfill the needs, but vastly too little to satisfy the desires of people.” And he demonstrated it in his own life.

But, the funny thing is, that when he had appendicitis, he did not rely on the ‘simple life’ and on meditation, but he ran to the hospital to treat it. In other words, in his normal actions he condemned science and technology, and only allowed the simplest of it for his followers, but when his life was at stake, his behavior showed, that he had more faith in modern science than in his own view.

That is the power of science.

My point is, economy is not yet a science. But when it has become one, even those who express that they are against it, know that it is the only thing that really has demonstrated to work.

BTW. I don’t want “The Truth” either. “The Truth” is a religious concept. The very notion of “The Truth” is an invention of religious people, who do not understand the least thing about how our mind works.

I could produce a huge digression of this point, but I rather refer to a book written by David Deutsch: “The Fabric of Reality”, wherein he explains Popper’s vision. That book made me study Popper. Before that I was a Randian, almost exactly the opposite. I turned to Popper, because Objectivism contained the promise of producing many geniuses, but the only person of any prominence emerging from that group was Alan Greenspan. And we know what his “brilliant insights” “ahem” did for us!

As a physicists I went through three major paradigm shifts in understanding reality, which made me aware that there is no such thing as “the Truth”. The first was the paradigm shift from Aristotle’s mechanics to Newtonian mechanics. The second was from Newtoninan mechanics to the special theory of relativity. And the third was from that to the General theory of relativity.

Let me explain in ordinary terms what these paradigm shifts mean. According to Aristotle, things can only move when a force is exerted on them. In Newtonian mechanics this means F= p. According to Newton, there is no such thing as a state at rest. Whenever you see something that is at rest, you can also see another observer according to which that same something is moving. This vision causes the concept of rest to be integrated with the concept of motion. Therefore a force is not necessary for things to move. What a force does, is causing changes in states of motions, which are also states of rest. So if you want to cause something to move with respect to you, then you apply a force, which causes a change in its state of motion, which you happen to observe as a state of rest, and it changes it in another state of motion, which you then happen to observe as a state of motion in the Aristotelian sense.

In Newton’s languate, a force does not cause things to move, but it causes changes in state of motion. You can express this as F= dp/dt.

With this vision you can understand that planets moving around the sun do not need a force to keep moving. The sun attracts them which causes changes in their states of motion in such a way that they orbit the sun.

Einstein puts another twist on this, by stating that, in the case of gravity, the force given by dp/dt is not really a force, but a ‘dent in spacetime’. Therefore the planets do not even circle the sun, but they are ‘standing still’ in a curved spacetime, which appears to us as orbital motion.

When I went to no less than two major paradigm shifts in my ‘common sense’, I understood that this as such shatters any concept of ‘The Truth’.

I went on to investigate what is the appeal of the concept of “The Truth”. I then saw, that the reason why people want “The Truth” is because they want certainty. And truth promises infinite certainty, but does not deliver it.

I then began to think about certainty as such. Popper showed me, that you can only be absolutely certain when some statement is false!

And then you have the question, how can you use the fact that there can only be found certainty about something being false arrive at a grip on the world? How can you go from understanding of falsities to things that work?

The key word is context. Take, for example, Newton’s theory. We know that it is refuted by quantum mechanics and the special and general theory of relativity. However, these other two theories do not just say that Newtonian mechanics is just false, and we must discard it completely. No, what these other two theories tell us, is that when we apply Newtonian mechanics to objects that are not too small. They must be larger than atoms, say. And when we apply it to objects that are not too large. Say, the size of mountains. We also have to keep the speeds down, say, to no more than 40% of the speed of light. If we then restrict our measurements to an accuracy of only two decimals, it is impossible to construct an experiment that refutes Newton. And that means, that within this domain we can be certain that applying Newton’s theory will work! We can even calculate the certainty, and that is much greater than 2 decimals.

All scientific theories are of this form. All scientific theories do not begin by observation, and then deducing ‘the truth’ from them. No, all theories begin as fantasies. And then you use some scientific method to try to find some domain of validity, some context, wherein you can be certain that this theory works!

It is Certainty what we really are after. Certainty is something that is not identical with Truth. Therefore it is not important that a theory is “The Truth”. The only thing that is important is: ‘if we base our actions on these theories, can we be confident that they produce the results we try to accomplish?. And how certain is this? If you really grasp this, you can be without The Truth altogether. It has no place in science, and it does not have to. I myself even rejoice in understanding this.

Your very example shows this. People stick to socialism and communism, because these promise certainty. But they sell themselves by appealing to Truth.

Moreover, if you understand that there is no such thing as a Positive “The Truth”, then you also understand that you cannot refute a theory believed to be “The Truth” by showing “The Real Truth” that refutes it.

“The Truth” and belng religious are, psychologically speaking, linked to each other. If you accept a theory because you are convinced that it is The Truth, then this acceptance programs your emotionan apparatus in such a way, that whenever you are confronted with something that corresponds to your “The Truth”, it will generate a positive emotion. And whenever you are confronted with something that is in violation with your “The Truth”, it will generate a negative emotion. In fact, this is the psychological source of all arrogance, anger, violence, terrorism, and even war.

In other words, the stubbornness you observe in those who stick to Socialism and Communism, is because they are not scientists. They are not even philosophers. They are emotionally attached to their vision in a religious way. And that makes them to fight for those visions, and to oppose any vision that is different from theirs, with whatever means available to them. The reason why they do this, emotionally, is because their certainty is at stake!

You wrote: “I think economics falls in the middle in the class of attitudes and American economics won’t change until there is a major economic crisis. I think it will take a crisis on par with the Great Depression because it was largely responsible for the major shift to the left in the US. It took 50 years of brutal communism to change the minds of most Chinese. On the other hand, Russians endured 70 years of it and most still haven’t changed.”

There are two reasons for this. The first reason is, that it is better to have something that at least gives some social organization which gives some certainty. A ruled society, in whatever form, at least tells you what to do and what not to do. It gives certainty. Being extremely wealthy, but living in a society that is very uncertain is not appealing. The second reason is, that there was (and is) no alternative. There was (and is) no economic theory that can be called truly scientific. There is no economic theory that promises and delivers the certainty people crave for. Moreover, all economic theories before that of von Mises were, and are religions. They make people accept them as “The Truth”. They do not realize that whatever it is you accept based on “The Truth”, you accept it because of religious reasons. And the deepest core of this is the quest for certainty. All of these theories promise effortless certainty through Truth which is the Great Deception of Religion.

The route to certainty through science looks, from the perspective of the religious person, not very appealing. You must abandon Absolute Certainty. Therefore you must abandon the hope of finding “The Truth”, no matter what is presented in this name.

In its place there is a very cumbersome process. You begin with a conjecture, which is just another word for fantasy.

Then you translate the fantasy in some action of which you hope that it will bring the result imagined. You can understand, that in most cases you will fail, because our fantasy is infinite.

By the way. this is the reason why primitive societies and communities begin with acts that we now recognize as superstition. The Babylonians had endless tablets containing statements like: ‘If you see a black cat, then unhappiness will befall you, unless you stand on one foot, and flap with your arms’. If you observe yourself closely, you might even find remnants of such ‘thinking’, like: ‘If I can throw this piece of paper in that basked, and I succeed, then the meeting I shall have will be a great success’. Every healthy individual, I think, finds similar things in himself.

So reason does not begin with observation, but with fantasies, which are acted out blindly. But then, in this process, in some cases, you see that the action does lead to the result you intended. You repeat the action, and find that it does it again. you modify the action, and you find that it still produces the result expected. You keep on modifying, and making the conditions more extreme, until it no longer produces the result expected. Then you know that you cannot trust your action to produce the result you aim at when you modify the conditions that extreme. But implicitly this also means, that you can trust the results if you do not go that far! And that is where the certainty is!

From all of these experiments you arrive at a generalization, which is much like the following.

“All swans on this island are white.” “How do you know?” “Because I have made certain that there were no swans on this island before I put swans on them, and I have put only white swans on it.”

This is the form of all induction. A general statement is valid because you yourself have made certain that the invalid cases are excluded. This is the reason why, logically speaking, the Universal statement: “All Swans are White” is fully equivalent with the Existential Statement “There is no Swan that is not White”. In other words, universal statements are not generalizations of particulars, but exclusions of particulars that do not correspond to the general statement.

You can also say, that “there is no such thing as a Universal Statement”, or a “Generalization”. A generalization is just a rewriting of a particular statement containing two negations. And the reason why a general statement is valid is not because it is “The Truth”, but because you have found, after lots of work, through one or another epistemological process, a domain of validity. That is, a domain wherein you can be certain that if you base your action on the generalization, you avoid going outside of the domain of validity.

The point of all this is, that the only thing we have are fantasies. The Scientific Method consists of nothing else than lots of hard work to gain certainty. So certainty is not just guaranteed because it is The Truth, but it is guaranteed because you have put a lot of conjecturing and a lot of refutation work in it to find domains wherein you can be certain that your theory works. So you get certainty, but not because your theory is The Truth, but because you have made certain that the conditions necessary for making it work are clear.

This also means, that what you say about major change is probably right. People have great trouble to change their minds, and it usually takes a major crisis. What the crisis then shows is that the certainty promised is not delivered. If there is then no alternative offering more certainty, or at least the minimum certainty they had before, is presented. Or if it is so, that they get less certainty they still do not change their minds.

The Chinese saw in Capitalism a system that is clearly better. But that is not what convinced them. The leaders were so emotionally attached to their Communism, that they were religious zealots. This made them treat the citizens much worse than the Russian leaders did. Moreover, Mao believed in Constant Revolution, which is constant uncertainty. These two things together made them see, that the less appealing Capitalism, although also uncertain, gave them far more certainty than they already had. And that made them reluctantly embrace it.

But Russia was different in one essential. The Communism of Russia did not have this component of a Constant Revolution. It was imagined as a constant implementation of 5 years plans, aimed at constructing a stable society, and therefore explicitly aimed at certainty. And if you promise certainty, you can get away with much more mischief than if you don’t.

Add to this the fact, that although Capitalism promises more wealth, it does not promise absolute certainty. On the contrary, Capitalism is seen to have a huge problem. The problem of the Business Cycle, and therefore there is observed in it something like the instability Mao has put explicitly in his own system. Therefore it was more close to what the Chinese thought they already had, but only better.

And the reason why this is still a problem, is as you know, fractional reserve banking. And the reason why this is not exposed as the problem it is, is because Capitalism has not solved the value problem.

Add also to this that the understanding of certainty I present here is something that is unknown. Therefore there is, in most cases, absolutely no reason to embrace Capitalism and the free market. In fact, the free market is dreaded because no theoretician deals with certainty in a proper way.

Maybe part of the appeal of Keynes is that he does speak about uncertainty. So he, at least, addresses this very important issue. Of course, he does not deliver, but he is at least trying to deal with it, while my own remarks on this subject elsewhere on this website,

http://blog.mises.org/archives/009623.asp

passed by unnoticed.

I therefore think, that a major way to convince is by explicitly dealing with how within Capitalism the problem of certainty can be solved. I think, this very writing contains an outline of the solution.

So to return to your remark at the beginning. The basic reason why I am optimistic is not, because I believe people want The Truth, but because people want to have Certainty. This implies, that the very fact that there can be Credit Crises, and no solution is delivered, is observed by people as a major source of uncertainty. And that gives “economists” that have a basic religious approach to slander Capitalism, and blame their own mistakes on it. This is because their own mistakes manifest themselves as money problems. And for many people Capitalism is just simply about money. They do not look further.

But if you produce a sound theory about value, and how it relates to money, this loophole is completely plugged. With such a theory they become the one’s who are to blame about these problems.

And that is what I think I can deliver. My theory deals uncertainty. It shows that it cannot be removed completely, because it is not a religion, but a science. Religious certainty rests on The Truth, which promises Absolute Certainty, but delivers social unrest like terrorism and war, the exact opposite. My theory goes directly at the heart of the matter, certainty, shows that it can be realized, but not effortlessly. It takes effort. But it has the advantage that it delivers. Just like machines based on Newtonian mechanics, although this theory is supposed to be refuted, work, so does my own vision.

This is not just blind optimism, but because I can see, from the literature of economics and history, in each case I have studied it, that when it worked, my theory could explain it. And when it did not, my theory could explain that also.

That is really where my optimism comes from.

The really important question therefore is not: “is it True”, but does it work?

Okay. This was it.

newson March 23, 2009 at 7:59 pm

to fundamentalist:
i share your pessimism about economics, as it’s perceived by the populace. but i think you’re wrong about finance being a bright spot. emh stills rules.

like an alcoholic, it’s only an epiphany, or a close encounter with death that causes any real change. in the mean time, the best cure is hair of the dog!

newson March 23, 2009 at 9:30 pm

to konrad:
i admit to being a tyro on epistemology, and so struggle to understand all of your points. i do, however, appreciate your comments on uncertainty and the comfort it brings.
frb, especially, though not exclusively, under a fiat money order, turns everybody into hedge-fund-managers.

it’s almost quaint to read victorian-era novels like hear characters speak of annuities, the income streams of which were reliable enough (in real terms) to guarantee a certain lifestyle for decades in advance.

newson March 23, 2009 at 11:20 pm

oops, “uncertainty, and the discomfort it brings”

stefan March 24, 2009 at 7:25 am

Konrad,

I appreciate the immense consideration you’ve given your comments. It is a rare pleasure to watch an interesting discussion unfold.

I especially enjoy your treatment of certain interpretations of economics as religious. I am a recent University graduate (physics and engineering), and thought it would be a good idea to take a class or two in “micro” and “macro” economics. I’m afraid that I didn’t do terribly well. It wasn’t that I couldn’t answer the questions… but I was literally disgusted with the prospect of using the ‘magical multiplier’ and other ridiculous tools. You cannot question the logic of the content… for that would be heresy. Just believe… and you shall receive endless wealth. After all, “we owe it to ourselves”.

Konrad Swart March 24, 2009 at 12:10 pm

Hi, Stefan.

Yes, the ‘magical multiplier’. Rothbard has written about it.

Rothbard’s treatment of the Keynesian multiplier.

******************
The once highly esteemed “multiplier” has now happily faded in popularity, as economists have begun to realize that it is simply the obverse of the stable consumption function. However, the complete absurdity of the multiplier has not yet been fully appreciated. The theory of the “investment multiplier” runs somewhat as follows:

Social Income = Consumption + investment

Consumption is a stable function of income, as revealed by statistical correlation, etc. Let us say, for the sake of simplicity, that Consumption will always be .80 (Income).76 In that case, Income = .80 (Income) + Investment.
0.20 (Income) = Investment; or

Income = 5 (Investment).

The “5” is the “investment multiplier.” It is then obvious that all we need to increase social money income by a desired amount is to increase investment by 1/5 of that amount; and the multiplier magic will do the rest.
The early “pump primers” believed in approaching this goal through stimulating private investment; later Keynesians realized that if investment is an “active” volatile factor, government spending is no less active and more certain, so that government spending must be relied upon to provide the needed multiplier effect. Creating new money would be most effective, since the government would then be sure not to reduce private funds. Hence the basis for calling all government spending “investment”: it is “investment” because it is not tied passively to income.

The following is offered as a far more potent “multiplier,” on Keynesian grounds even more potent and effective than the investment multiplier, and on Keynesian grounds there can be no objection to it. It is a reductio ad absurdum, but it is not simply a parody, for it is in keeping with the Keynesian method.

Social Income = Income of (insert name of any person, say the reader) + Income of everyone else.

Let us use symbols:

Social income = Y
Income of the Reader = R
Income of everyone else = V

We find that V is a completely stable function of Y. Plot the two on coordinates, and we find historical one-to-one correspondence between them. It is a tremendously stable function,
far more stable than the “consumption function.” On the other hand, plot R against Y. Here we find, instead of perfect correlation, only the remotest of connections between the fluctuating income of the reader of these lines and the social income. Therefore, this reader’s income is the active, volatile, uncertain element in the social income, while everyone else’s income is passive, stable, determined by the social income.

Let us say the equation arrived at is:

V = .99999 Y
Then, Y = .99999 Y + R
.00001 Y = R
Y = 100,000 R

This is the reader’s own personal multiplier, a far more powerful one than the investment multiplier. To increase social income and thereby cure depression and unemployment, it is only necessary for the government to print a certain number of dollars and give them to the reader of these lines. The reader’s spending will prime the pump of a 100,000-fold increase in the national income.

*****************
This is Rothbard’s refutation. But, as a matter of fact, it is no refutation at all. The only thing he says is: ‘look, how absurd’, which he hides by using the words ‘reduction ad absurdum’. He appeals to common sense. But both you and I, schooled in mathematics and physics, know that common sense is no reliable guide to the best understanding possible. Things can be completely counterintuitive, and therefore go completely against common sense, and still work. It is, for example, absurd to say that the planets do not revolve around the sun at all, but they are standing still. This is exactly what Einstein’s general theory of relativity, however, is asserting. Moreover, this same theory states that there is no gravity at all. Things do not fall to the floor, but the floor moves up. Therefore it appears to us that the objects are attracted to the floor. This is also, why all objects, regardless of their weight, and released at the same moment, fall with equal velocity and acceleration to the floor. From this insight his whole General Theory of Relativity follows.

There must be something in the argument of the multiplier that made people fall for it. When I worked out my own Capital theory, I began to see what the problem was, and I could show a refutation on its contents. Moreover, I saw what really was happening.

The point is, that the above argument tacitly assumes that most income goes to consumers. Money, however, only has value because of the goods and services you can get in exchange for it. To put it very simple, the value of money lies in what you can buy for it at the moment you have it. But that implies, that the goods and services you can get for money you have now must already have been produced in the past. And that means, that the value money now has, is the result of investment spending in the past. This also implies, that if something is made, and put against money, but it is not yet bought, the money needed to create it, has been spent in the past. This money is therefore investment.

This means, that the analysis has to be different.

The first step:

Social Income = Consumption + Investment

is correct. But then you have to realize that Consumption is equal to money that is spent now, whose value comes form Investment in the past. Moreover, production processes consist of many stages. This means, that if I buy a pencil, then to make this pencil possible, it has been brought to the shop. This requires means of transportation, like trains, ships etc. The graphite in the pencil has to be created, which requires mining and machinery etc. The list is endless if you think about it. But all of this activity is done by entrepreneurs buying and selling to each other, and all of this takes place before the pencil is in the shop. This applies to all other things you can buy for money as a consumer. This means, that you cannot say that Consumption = 0.80 Income. Considering all of the steps leading to the possibility to income, the formula is more like

Consumption = 0.05 Income.

Therefore we get

Income = 0.05 Income + Investment.

0.95 Income = Investment

Or: Income = 1.053 Investment.

Moreover, most of this Income does not go to the pockets of consumers, which the argument implicitly assumes, but it consists of transactions in various stages of production.That is, it consists of businesses buying and selling to each other. Moreover, all of this business activity has to precede consumption spending. That is the inevitable consequence of the fact, that you can only buy something now when it has been produced in the past. In fact, not many people realize, that this is the bulk of all business in a Capitalist society. This means, that the future Consumption must be written as:

Consumption = 0.05 Income = 0.05 × 1.053 Investment = 0.053 Investment.

So if there is growth, then there can be more consumption.

In other words, the income for all consumers together is a small fraction of the total income. It has to be. This is because the bulk of all income consists of businesses buying and selling to each other, to ‘bring the products to the consumers’. Moreover, because the production process consists of many stages, all of the money that makes the whole structure of stages possible must be, of necessity, Investment. This is the inevitable consequence of the fact, that something can only be bought now when it has already been produced in the past.

Or, equivalently, the more we invest now, the greater the amount of products consumers can buy for their money in the future.

This means, that the conclusion has to be the very opposite of what Keynes asserts. There is a multiplier. But it works exactly the other way around. More investment now leads to greater wealth in the future. And this makes sense, because the more investment there is, the more laborers can be hired, the more machines can be built etc. And all of this greater investment will only lead in the future to greater wealth.

This is the real refutation Rothbard should have been given. I know that Keynes has a more complicated theory that Rothbard presents it here, but I happen not only to have solved the value problem of money, but also the Capital Structure problem. My value theory is unique, while my analysis of the Capital Structure has also been found by others. In particular Reisman’s book contains a flowchart at the end, that is much more cumbersome than my own way of picturing it, and that is probably why not many people understand it. But when I saw it, and compared it with my own Capital Theory, I saw that it contained essentially the same insight. Hayek also has come up with a forerunner of this insight.

I have always found it amazing, that economists, even when they were antagonistic to Keynes, as Rothbard and Reisman were, did not come up with the basic flaw in Keynes’ reasoning. Namely, he did not see that products can only be bought by consumers after they have been produced by producers. And that this has the for many devastating consequence, that consumers do not contribute to the production structure in any way. The economic contribution of consumers is exactly zero, zilch, nada, while almost everyone seems to believe the completely wrong exact opposite: that all of the production is paid by the consumers!

The only role the consumers play, economically speaking, is that they form the reason why the production processes are set up. But they do not contribute to the actual realization of these production processes. I have explained this many time to people, and when they really ‘got it’, they were often shocked by it! The response was: ‘can we be that much deceived? Can we be that stupid?’. Yes, you can! Yes, you are!

Everywhere in the media you hear statements like: ‘the economy is stagnating because consumers spend less’. Nonsense! If consumers indeed spend less, then this means, that they do not spend the money they earn. But the greatest part of the market does not consist of consumer buying, but consists of businesses buying and selling to each other. What therefore happens, is that there are more resources available to the business part of the market. This leads to two things. An increase in the number of stages of production. And a lowering of the prices of lower order (more in the direction of the consumer) and an increase of the prices of higher order. In the short run this just means that almost exactly the same amount of goods and services are going to be sold, but at lower prices, adapting to the reduced consumer spending. In the long run this means that the more technically advanced products, those that take more stages to produce, or the more productive methods leading to more mass production become economically viable. So the overall effect is, that the less consumers spend, the more wealth there will be created.

And all of this follows from the simple understanding, that you can only buy now that what has already been produced in the past.

If you are trained in physics, like you and I, then you know exactly what a sound argument looks like. I am also repelled by standard works on economics. I had the good fortune not to have any education in economics from high school or from the university. My first ‘economy’ training consisted of the book: ‘Capitalism, who needs it’ from Ayn Rand. She pointed me to Ludwig von Mises. And to make sense of him, I studied Rothbard next. Rothbard pointed me to Eugen von Böhm Bawerk, and he pointed me to Carl Menger. Later I began to study the others, like Smith and Ricardo. And then I hit on Reisman’s book Capitalism.

Being well trained in applied mathematics and physics, I tried to make sense of it in the terms I was trained to do. And, fortunately for me, I was not exposed to the trash that is now produced in the name of economy in the mainstream. I was not ‘academically imbecilized’. When something did not make sense, I looked at the problem it tried to solve, and solved it myself. I had learnt, through my training in physics, especially through the book: ‘Physics for students of Science and Engineering’, from Halliday and Resnick, which contains several thousands of problems, to solve problems on my own. I had gone through H&R even before I studied physics in Leiden. In fact, I learnt english from that book! I got my high school diploma through buying books and self-study, in three years.

Only much later, after all of this studying, and with making contact with ‘real economists’, I realized that I had solved many problems on my own that were as yet unsolved in economics. And in it there was one biggy, the value problem of money. Moreover, my physics training has given me the ability to see through the mathematics, and see what really has been said, like I just have demonstrated with Rothbard’s treatment of Keynes. I had developed that early on through H&R.

There is one anecdote that might illustrate this. I had just followed a lecture on statistical physics, which, as you know, typically contains lots of advanced calculus. After that lecture I remarked to one of my fellow students: ‘Don’t you find it amazing that so much can be said in a mathematical way about just one molecule in a container?’. He responded: ‘was the lecture about just one molecule?’ Apparently, all of this mathematics had caused him to lose sight of the physics.

Being trained in physics and mathematics gives you one great advantage. It causes you to not be easily intimidated. I have met some students and ex students of economy, who, like you, just could not make sense of economics. But contrary to you, they thought it was their fault. They thought they were too stupid to grasp it, while it was not their stupidity, but mainstream economy itself which is a big mess. But if you are in the position like you, wherein you have mastered a subject that is generally considered to be the toughest there is, you know that it cannot be your stupidity that causes you to be unable to understand economics. It has to be that the economics presented itself must be a mess!

Thanks for your response.

I hope you found this also informative.

Greetings,

Konrad.

Stefan March 24, 2009 at 10:27 pm

Konrad,

Many thanks.
Please continue to post in the future.
It appears I have many years of learning ahead.

Stefan

Austroglide March 25, 2009 at 2:35 pm

Konrad,

I appreciate your description of the relationship between individual (i.e. property) rights and economic freedom – that the magnitude of one’s economic freedom consists in the measure of one’s ability to acquire the right of property in goods + services, through exchange for money, produced by others. I find your above description of the cause and effect relationship between property rights and economic freedom to be a very nice conceptualization.

Also, I agree wholeheartedly with your identification of the religious impulse – namely, the seeking of absolute certainty – and an effortless one at that. This impulse, as you say, explains the difficulty many have regarding the acceptance of a scientific world view, with its relatively slow crawl toward non-absolute certainty.

For this reason, however, I don’t share your enthusiasm that, were (as you argue) economics to become a true science, an economic revolution would necessarily ensue. Indeed, many consider praxeology to be a legitimate science, and we see how unwelcome is Austrian economics.

Which brings me to a question: You’ve made clear above your view that Austrian economics is philosophical, not scientific. And also your view that Menger’s subjective theory of value is incorrect. But were Menger’s value theory acceptable to you, would you then consider Austrian economics to be scientific?

Also, your value theory is still sketchy to me. I know you are keeping it a secret, but I think I’m approaching an understanding. I have one question about one of the causal elements which I will refrain from asking here. However, were you to answer this question for me, I think I may then understand your solution. I must say the theory indeed seems to be sound, and if so, I’m very curious the implications your nimble mind will draw from it.

Konrad Swart March 25, 2009 at 11:54 pm

Dear Austroglide.

You asked: “Were Menger’s value theory acceptable to you, would you then consider Austrian economics to be scientific?”

Yes, I would. But it would not be an exact science. And therefore it would be constantly debated. It would that have in common with a science like biology, which also has an epistemological criterion that is not exact, namely Darwin’s evolution.

Biology also can become an exact science. And maybe it already is. Darwin’s evolution is not enough. But it is based on DNA. And DNA itself explains evolution because it is an information carrier. And information has become a measurable quantity, since the publication of Shannon’s book: A Mathematical Theory of Communication.

So the fusion of Darwin’s evolution with the discovery of Crick and Watson of the structure of the DNA molecule, together with Shannon’s definition of information has created an epistemological basis for the testing of exact biological theories . Therefore, biology has become an exact science.

Dawkins, in his books: ‘The Blind Watchmaker’ and ‘The Extended Phenotype’ has shown the power of this approach. These books show some remarkable things about life you would never come up with without such a fusion of these three things.

What I can see is that whenever somebody debates with Dawkins, he loses. Of course, losing a debate will still not cause acceptance. About quantum mechanics it is said many times that it became mainstream only because the opponents of the theory just died. Moreover, although many physicists still debate over the meaning of quantum mechanics, no physicist today will dispute the validity of quantum mechanics. Quantum mechanics works. About that there is no doubt.

Why do I say this? I have seen in some documentaries, that when Dawkins reaches out to young people, he almost always convinces them of the validity of evolution, even when these were children of very orthodox religious persons.

Dennett, in his book: Darwin’s dangerous idea’ has compared evolution with an ‘universal acid’, unstoppable burning through everything it touches, and transforming more and more sciences. This means that the revolution evolution causes is slow, but it is unstoppable . There are even people who apply evolution to the whole universe, although personally I think this is a mistake. (There is, however, something in dead matter that is similar to evolution. It is the variational principle , also called the ‘minimax principle’. Every law of nature found up till now satisfies it. The variational principle itself, however, is not a law of nature, because you can also have equations that are not laws of nature which also satisfy the variational principle.)

In the same manner, what we need to make economy into a true exact science is a principle that explains exactly what value is. With such a principle we can test whether an economic theory will lead to wealth creation or whether it will lead to wealth destruction.

With Menger’s subjective theory of value this is not possible.

About your pessimism, I repeat something I said earlier here, and elaborate a little bit on it.

Well, what can I say. What you say reminds me of something I heard of Mahatma Ghandi. He was that man with the spinning wheel, and who was pointing out, that people should not be so greedy. One of the things he said: “The world provides more than enough to fulfill the needs, but vastly too little to satisfy the desires of people.” And he demonstrated it in his own life.

But, the funny thing is, that when he had appendicitis, he did not rely on the ‘simple life’ and on meditation, but he ran to the hospital to treat it. In other words, in his normal actions he condemned science and technology, and only allowed the simplest of it for his followers, but when his life was at stake, his behavior showed, that he had more faith in modern science than in his own view.

That is the power of science.

My point is, economy is not yet a science. But when it has become one, even those who express that they are against it, know that it is the only thing that really has demonstrated to work. They may oppose it with their words, but in their actions they show, that denying it might have devastating consequences. In the same manner, if you have a theory that shows how tremendous amounts of wealth can be created, and a group applies it, then others will see this. And this will cause the exact same acceptance in actions, no matter how much they express in words that they are against it.

Greetings,

Konrad.

Austroglide March 26, 2009 at 8:29 am

Konrad,

Excellent. Thank you for your response.

Michael A. Clem March 26, 2009 at 11:45 am

Geez, Konrad. It does indeed look like you have some very interesting things to say, but blogs like this one are a poor way to say them. Get a website! Or your own blog.
;-)

Austroglide March 26, 2009 at 8:29 pm

Konrad,

One more thing: Congratulations for the hard work you’ve put into being a scientist. I truly respect your openness to ideas, the strength of your intellectual creativity, and your breadth of knowledge. I’ve learned several valuable things in our discussion. Continued success to you.

Regards,
Austroglide

Konrad Swart March 27, 2009 at 4:30 pm

Okay.

Thank you all. I am now going to put my intention to the books I am writing.

I’ll be back. ;-)

Konrad Swart March 27, 2009 at 4:31 pm

Okay.

Thank you all. I am now going to put my attention to the books I am writing.

I’ll be back. ;-)

Comments on this entry are closed.

Previous post:

Next post: