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Structured, rational thinking about community, cooperation, and the market
“I’m a Total Believer In Gravity Too, Man!”

“I’m a Total Believer In Gravity Too, Man!”

It is strange how politicized the general perception of science is. One issue is the “scientism” that permeates any discussion on knowledge and research, which claims that there is only The Scientific Method (inductive data analysis). This issue is quite problematic in its own right, but the topic of this post is another: the eagerness with which the ignorant public dismisses certain scientific disciplines and expresses support of others. This is as strange as it is unfortunate – if not harmful. It is understandable that the social sciences are considered “soft” compared to the natural sciences. They are, so this perception is accurate. However, no one would think of simply dismissing sociology (though I probably would) or political science for being ideological opinion-making rather than scientific. Yet that is what happens all too often with economics, the so-called “queen” of the social sciences. It is difficult to understand why the oldest, most tested, and consequently most verified and reliable of the social sciences is commonly dismissed - by those who know close to nothing about it. I have previously mentioned this strange view of economics among the general public, but of interest here is how economic truths are treated. What economists…

Taking Science Seriously

Taking Science Seriously

If there is any knowledge or understanding among researchers that is scarce, it is the understanding for research. What I mean is not that researchers fail to use their methods correctly, that they fail to properly test for whatever biases, or that they fail to consider missing/omitted variables. No, there is a lack of understanding for what science is and can do. The key word here is “understanding,” which I mean in a quite Weberian sense. Research is so specialized that it is more about technique than about actual thinking. Sure, a lot of thinking goes into figuring out alternative hypotheses, finding the correct proxies, and so on. There is also some heavy thinking involved in figuring out how to interpret the results and to connect them to a theoretical framework. See the error here? The common denominator? No? Unfortunately, I’m willing to wager that this is the case among researchers as well (though I have no statistics to back it up). It is because research has become the art of quantitative, statistical analysis – it is not about understanding stuff. The common denominator in the paragraph above is exactly that: quantitative statistics. That’s taken for granted as the best…

Does Private Property Matter?

Does Private Property Matter?

From the perspective of the New Institutional Economics, the rather recent stream of research within neoclassical economics where social and market institutions are again put front and center in the analysis, we can adopt Oliver Williamson’s “levels” of institutional analysis. Douglass North similarly speaks of the “play of the game” versus the “rules of the game,” which is an important distinction. The former consists of the actions carried out in the market and the commonalities, patterns and structures to how people interact; the latter constitutes the demarcation of the market landscape and the “exogenous” limitation to what is permissive market action. Private property is an important “rule of the game” that facilitates a certain type of market action, voluntary exchange, and decentralized production. The question from a theoretical point of view, however, is whether private property is necessary. Or is it the case that any set of “rules of the game” suffices? One can produce interesting arguments for the general “any institution goes” view. If we rely on the Austrian perception of human action as a category rather than a relative quality, by which rationality and goal-orientedness as well as such things as time are derived, it appears obvious that actions will…

Money as a Market Institution vs. Money as a Veil

Money as a Market Institution vs. Money as a Veil

Money is generally referred to as the medium of exchange. Thus far most economists agree. Kind of. According to the Wikipedia article on money, which summarizes the common view, the functions of money are generally listed as “a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment.” This makes it a little more open what “is” a money, but to be a medium of exchange certainly is a core attribute or function. And, one can argue, if it is the generally accepted medium of exchange then it also functions as a unit of account, a store of value, and a standard for deferred (as contrasted by immediate) payment. The latter easily follow from the former, so let’s not add complexity where none is needed. Even the simple definition as a generally accepted medium of exchange can be confusing. The reason is that the term “medium” says nothing about the character or nature of money. One has to be careful, therefore, when speaking about money with other economists, and make sure that there is a shared understanding. Usually, if you’re an Austrian, there is not. The reason is that we, as Austrian economists, tend…

The Process Logic of Economic Reasoning

The Process Logic of Economic Reasoning

For anyone who has already acquired the skill, economic reasoning appears to be so obvious that it requires no explanation. But to anyone who has not yet learned this logic, it can appear all but intuitive – perhaps even unreasonable. The reason, I have come to understand, is the dynamic nature of any economic setting, which necessitates a process logic. While most people have no trouble with simple logic, where for example x -> y -> z and therefore x -> z, everything is typically interrelated and, to some degree or in some sense, interdependent in an economy. The market process, in other words, has no constant relations and therefore simple logic may be inapplicable. This can be easily illustrated by the core economic concept opportunity cost, which pinpoints that every choice and action in a very real sense constitutes a trade-off. Simple logic in an unconnected (or, in a sense, exogenous) world would consider choices as “either-or-not.” I either purchase an automobile or I don’t. The economy is either dependent on oil or it is not. A plant either produces plastic or it doesn’t. This type of logic is inapplicable in economic reasoning. What matters to an economist, by which I here mean anyone interested…

What It Means to ‘Maximize Profit’

What It Means to ‘Maximize Profit’

Economists are often accused by members of the general public, political pundits, and others for being overly simplistic, using outrageously foreign assumptions, and being too narrow in scope. It isn’t all about money, they (non-economists) tell us (economists). Right, it isn’t. Some of this criticism is unfortunately accurate. Looking at what goes as economics nowadays, it is hard to draw a line between economics in practice and the straw man of the discipline. In this sense, the criticism is about as accurate as economists can expect – and deserve. Yet economics is much larger than the mainstream “mathturbation” with formalized models. What is generally taught in the “principles” courses is the economic way of thinking, the economic reasoning that is the supposed origin of the streamlined models. This is at the heart of economics, and the concepts and rationales taught to freshmen and sophomores in college is in fact much more important than being able to recite Hotelling’s lemma or mathematically prove ne econometric model or the other. We cannot learn about the world from a formalized, mathematical model: a model is always of the crap in-crap out kind – it isn’t better than the reasoning and assumptions on which it is built. (This…

Understanding Resources

Understanding Resources

I have recently experienced a discussion with environmentalists, which was as frustrating as it was educational. The discussion started around the concept of economic growth, to which environmentalists are often ideologically opposed, but quickly turned into a rather cross-paradigmatic attempt at educating the other side really only talking past each other. I, as an economist, was quickly dismissed by the environmentalists for being an economist and for that reason “fundamentally naïve” and “completely in lack of knowledge” of economics. The reason? I did not realize, they claimed, the strictly physical limitations to economic reasoning. While I didn’t take their word for it, which is hard to do when being lectured in my own area of expertise, they also refused to consider what I had to say. The difference here is that both sides talked about my expertise: economics. While they were beyond reach of any theory or argument, it quickly became clear that the problem was their environmentalist understanding of what makes a resource. To them, a resource is strictly its physical composition – wrapped in economic terms. What they argue is really a fundamental contradiction that emanates from a limited understanding of something of a straw man type of economics. This…

Fractional Thinking about Banking

Fractional Thinking about Banking

In a very long article in today’s Forbes, online edition, John Tamny writes on the Closing of the Austrian School’s Economic Mind. Tamny finds the “modern evolution” of the school “disappointing” in its “more and more … statist, monetarist” appearance. He especially addresses the never-ending debate on fractional reserve banking (and manages to find a single misspelling in an article referring to “fractural” such, which he makes fun of), and the “error” of Austrians who see something wrong with it. One cannot create money, Tamny informs us, so banks don’t. I must admit that I haven’t read all of Tamny’s very long article, but that should not be considered a problem for two reasons. First, because Tamny starts out making outrageous errors due to assumptions that are so clearly in line with his critique (and so unknown to him) that they cannot be corrected further down. And second, because Tamny himself obviously haven’t read much more than a couple of phrases spewed out by a quick google search. Nevertheless, I think my addressing these assumptions made by Tamny are relevant whether or not he (which is likely) adds more “errors” of Austrians to his list. Let’s look at what Tamny says. Regarding…

What Is Economics?

What Is Economics?

A lot of people seem to believe that economics is the study of how one makes money. It is difficult to understand where this notion comes from, but since the price mechanism is prevalent and fundamental to what makes a market, perhaps the layman’s definition isn’t completely wide of the mark. However, money is neither necessary nor sufficient for the study of economics. Economics studies value, for which money may be a proxy. But a proxy is not that which it represents, just like a receipt may represent or even prove a purchase but isn’t, in itself, the purchase. Wikipedia notes JB Say’s classic definition of economics as the study of production, distribution, and consumption of wealth. Wealth denotes created and (justly) acquired value. It may be in the form of money, though money is really a means to and in fact a claim to (future) wealth through goods and services. Someone might argue that focusing on goods and services is too narrow, that there are other dimensions of wealth, and that it is too materialistic. It is true that such an interpretation is possible, but it is not accurate. Value lies not in the physical nature of “stuff,” but in our intended…

What Is Entrepreneurial Judgment?

What Is Entrepreneurial Judgment?

While Israel Kirzner asserts “alertness” as a quality among entrepreneurs that allow them to recognize (and then correct) errors through arbitrage, others (like Nicolai J. Foss and Peter G. Klein) rely on “judgment” as the distinctly entrepreneurial quality that explains success. While the latter is arguably a thicker conceptualization of what entrepreneurship entails than the former, both are supposedly derived from Ludwig von Mises’s theorizing on the entrepreneur as the “driving force” of the market – the “creator” of the market process. Kirzner’s “alert” entrepreneur has been both adopted and reinterpreted in the mainstream entrepreneurship literature (see here, ungated version here). So there is a lot of literature attempting to understand (and sometimes misunderstand) the concept, and Kirzner himself has published several books on this topic trying to clarify what he means. But what is entrepreneurial “judgment”? The original discussion on entrepreneurship as “superior” judgment can be found in Frank H. Knight’s dissertation (and book) Risk, Uncertainty, and Profit. But while the discussion is interesting, it isn’t all that helpful in terms of defining the quality. Rather, it comes across as almost a residual (though front and center) as entrepreneurship is often interpreted in Schumpeter’s Theory of Economic Development. But…

Diminishing Marginal Utility – What Does It Mean?

Diminishing Marginal Utility – What Does It Mean?

Economists talk about diminishing marginal utility, which is a generic way of saying that we value stuff less the more we already have of that particular “stuff.” In other words, if I have three eggs, a fourth egg is worth less to me that the third one (which is worth less than the second one, which is worth less than the first one). Perhaps you buy this without need for further argument, but many don’t. And the concept is actually problematic unless we already think as economists. The reason for this is that when illustrating economic problems we tend to use everyday examples that anyone understands, but the intuitive materialism of people’s thinking potentially undermines the economic case. In order to understand what diminishing marginal utility means, one cannot think solely about physical goods but about their “nature” as subjectively appreciated by a specific person. To put it differently, we are not discussing physical items but economic goods. An economic good is simply a scarce (or believed scarce) means that is usable toward an appreciated end. This is a fundamentally important point – in the example above, an economist isn’t really talking about eggs, but lets eggs illustrate a commonly traded good that…

Insurance, What It Really Means

Insurance, What It Really Means

America has become known worldwide for a high-quality failing health care system. As a foreigner moving to the United States, the enormous cost (to consumers) of health care and dental care are mind-boggling. Even with very expensive health care insurance offered through employers (and, lately, by government decree), one ends up paying quite a bit out of pocket. And pretty much all insurance policies include a maximum lifetime benefit amount as well as a cap for treatments. This raises a very interesting – but seldom raised – question: what is insurance? To make sure we are all on the same page here, let’s compare private health care insurance between two countries I have recent extensive experience living in: the United States and Sweden. In the US, my health care insurance costs some $200/month and covers, after a $20 deductible, about 80% of treatments with a lifetime benefits cap of $250,000. In Sweden, I would pay about $1,600 per year for worldwide coverage of any “reasonable” (meaning approximate market prices, that is non-usury level) expenses with no lifetime benefit cap but limited to $300,000 per treatment (only if outside of Sweden) and with a higher deductible ($90). So here we have it,…

Real Science Is with the Critics

Real Science Is with the Critics

Science is becoming ever more politicized. Or perhaps it always was, but we’re only now finding out thanks to hyper communication via the Internet. In either case, it makes it necessary for a consumer of ostensibly true (or at least fact-based) reporting to have a critical mind and be careful about the source of a claim or “fact.” Unfortunately, it is almost impossible to get a balanced view from someone else, so one must figure some kind of short hand for finding truth. This is vital when consuming debates with political implications (or even claims), and a lot of what is written nowadays is just that. I propose that one should, as a rule of thumb, listen more carefully to the critics, not the supporters. Why do I say this? Simply for this fact: the real scientific contribution is stressed by critics – it is seldom even considered by supporters. I realize this may sound unfair, but it appears to be true at a read the critics to get an idea of the claim.as worth. But do not read commentary by supporters, since they will hardly ever discuss the scientific worth of an argument, but the advantage of the politics derived from…

Austrian Economics is Not More of the Same

Austrian Economics is Not More of the Same

Whether or not it is true, as they say, that they first ignore you, then ridicule you, then attack you, and then you win, the financial crisis as well as Ron Paul’s candidacy for becoming the republican party’s presidential nominee have made Austrian economics somewhat of a household name. So it is no longer ignored, but it is certainly is both ridiculed and attacked (more of the latter more recently). So if Gandhi was right, then we’re transitioning from ridicule to attack. An example of such an attack is a (rather unbelievably ignorant and disturbingly dishonest) hit piece by Noah Smith, a professor of Stony brook university who’s dedicated to his career as an internet troll (as “Noahpinion”). I took a previous piece of his apart over at the Mises Institute blog a couple of months ago, to which he responded on Twitter as a true troll (in stark contrast to a true scholar) saying he would not even read my rebuttal because the post’s title wasn’t sufficiently original or witty. (He later deleted his tweet, but my initial and response tweets still exist…) Apparently the attention only made Smith more dedicated to trolling. His hit piece on Austrian economics as “brain worms”…

It Is Best to Ignore Economists

It Is Best to Ignore Economists

This may sound strange, coming from an economist, but it is unfortunately quite true that we would all be better off not listening to economists. What I mean by this is that economics over the past eight or so decades has been misguided and therefore blind, which means pretty much everything economists have to offer in terms of explanations, predictions, and policy recommendations are… wrong. I have already argued (for example, here and here) that the method used in economics is wrong because it is the so-called Scientific Method (better capitalized) that is a pretty good fit for the natural sciences but a disaster in the study of social phenomena. The reason for this can, though it is a gross simplification, be illustrated by the fact that the Scientific Method relies on experiments that are repeatable and rely on comparatively simple causality. You can let a stone roll down a hill and measure the gravitational pull as well as frictions and other things. You can even take the same stone from the bottom and place it at the top to do it again. If you take human beings and put them through a specific experiment they may behave in a…

The Great Problem of Planning

The Great Problem of Planning

The issue of economic planning has been a major component of Austrian theorizing since Mises’s 1920 article on the impossibility of calculating in a socialist commonwealth. But as both Mises and Hayek noted, the position is not one against planning per se but about who does the planning. Ronald Coase made a similar point, though from the very opposite perspective, saying that there is a large degree of planning even in market economies – but it is decentralized (through firms). Whatever we may think of the concept in economic or political terms, planning is a core part of human endeavor. In fact, it is the reason we are vulnerable to changes in nature and that we spend vast sums on trying to stop more or less natural processes. The reason is that we develop capital, and the capital structure (a path-dependent, cumulative development of the prerequisites for production) is productive only by being specific – and therefore lacking in flexibility. This is the reason natural changes are so very costly. Consider as an example a city harbor in the delta of a large river, which supplies a great service to people in the city as well as upstream the river and, likely,…

When the Market Suffers a Specialization Deadlock

When the Market Suffers a Specialization Deadlock

Whereas economic theory, especially the Austrian variety, discusses and ‘problematizes’ the coordination of plans, interests, and production in the market, these theories tend to emphasize generalized phenomena and, consequently, aggregates. For instance, Hayek’s interesting and highly relevant Pure Theory of Capital provides well over 400 pages discussing the intricacies of capital, production, and entrepreneurship. Yet Hayek never gets to the bottom of things. He only talks about production structures, processes, investments, and interest rates. When the interest rate (which he, in stark contrast to Moses, defines as the return on capital) changes, how does this affect the production structure? The question is important, but Hayek (as many economists, including Austrians) discusses adjustments in the market as though they are automatic – without specific or at least important problems. But this is not the same world as individual actors face. The latter never deal with aggregates, and therefore the problems that do not emerge on the aggregate level (for instance, when “adjusting a production process”) can in fact be prohibitively costly or difficult to overcome. One such potential problem is the lack of density through the division of labor, which effectively makes implementations of innovations activities that take place outside the market and…

Economists Do It With Models

Economists Do It With Models

It is funny, really, how the general perception of economists is that they are math geeks who simply draw conclusions (that is, inductively) from statistical data. Whereas there may be some truth to that, what is it in the math and stats that make economists different from other social scientists? What is it that makes such economics economics? To say that economists do it with models is not really to point to an obvious distinction from other social scientists. Anyone going through advanced studies in political science, business management or (yes, even) sociology have to take courses in advanced statistical analysis (though they’re called different things: econometrics, psychometrics, and so on). So “doing it with models” is hardly an economics deal – it is a scientistic deal, it is how “we” do research in this highly positivistic, empiristic day and age. It is distinct for economics in one way only: economics was the first of the social sciences to seriously adopt the “mathods” of the natural sciences. And, sort of consequently, economics therefore has the most developed and advanced methods – which is why for example many doctoral students in business get to (must) study econometrics. But it is really…

Theory, Exaggerated or in Moderation?

Theory, Exaggerated or in Moderation?

F. A. Hayek notes in his introduction to Mises’s autobiography Memoirs that “considering the kind of battle that he [Mises] had to lead, I also understand that he was driven to certain exaggerations, like that of the a priori character of economic theory, where I could not follow him” (p. xx). The comment refers to the many setbacks and unfortunate developments that Mises experienced during his life. But the conclusion is very interesting, and parallels with a common sentiment in present science as well as public debate: the threat of extremism or radicalism. Hayek’s statement is very interesting from a theoretical point of view, since it subjects theorizing and science to a type of Aristotelian (okay, Nicomachian) moral standard. The latter is the well known golden middle, where e.g. courage is a virtue but deviating exaggerations in both directions are vices: neither recklessness nor cowardice are virtuous. It should be noted that these “exaggerations” of both ends of a virtue create vices not because the virtue is virtuous in moderation – but because the virtue itself is moderated by the unvirtuous extremes. It is not the case that the “middle” is necessarily better, just like the middle ground “hungry” is not…

What Economists Do Isn’t Economics

What Economists Do Isn’t Economics

Jacob Viner (1892-1970) famously claimed that “economics is what economists do.” While this is a fun play on words, it really means nothing at all. And this has become even more the case over the past decades as economists have almost completely turned their backs on their discipline’s history and tradition and instead gone “all in” with advanced-seeming statistical methods and mechanist design of economic systems through oversimplified models. Considering the over-use of mathematical notation and statistical mumbo-jumbo rather than economic logic, it is safe to say that whatever economists do is not economics. Or, at least, it is nowhere close to what economics used to be and always has been. There are two parts to this statement, both of which are equally interesting on their own: (1) the lack of proper methods and (2) the refusal to consider the real market in economic research. These are fundamentally related, and I have already treated the first of these points in other posts (see e.g. The Fundamental Importance of the Trade-Off). I doubt I will have to elaborate on the second point. Whether or not these points have been made sufficiently clear, they should at least suggest that there is a…