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Structured, rational thinking about community, cooperation, and the market
No Choice Or No Alternatives?

No Choice Or No Alternatives?

The discussion on what is fair and just has to do with choice. It is unfair and unjust to place an individual in a situation where he or she has no choice. A system or structure can be denounced as unfair and unjust if it takes away people’s choices. This has to do with the hopelessness of not being able to choose one’s own path, and the utter devastation and hopelessness of dependence. Without having a choice, we are not and cannot be responsible for our actions – responsibility (even the morality of it) requires choice. In other words, to have “no choice” implies dependence and subjection. It means victimhood to something more powerful. This is why a system is unfair or unjust if it does not offer choices but removes alternatives. Likewise, a relation between any two individuals is unfair, unjust, and becomes a “power relation” whenever one party leaves the other “no choice.” Choice therefore, at least from the perspective of inter-personal relations, has to do with power, with freedom, and with responsibility – it has to do with what it means to be human. This is sufficient reason to be appalled by a situation where someone in desperation did something that…

Deflation Hysteria

Deflation Hysteria

In a recent blog post at the Wall Street Journal, linked to by Paul Krugman and discussed almost endlessly in social media, we are presented with five reasons to worry about deflation. According to Krugman, the blog post is “a very nice explainer.” Krugman notes that there is only one important piece missing from the blog post: that “zero is not a magic red line,” and the lesson that “too-low inflation has all the adverse effects of outright deflation, just to a lesser degree.” And further, “This means that Europe is already in a lowflationary trap, qualitatively the same as a deflationary trap.” Yet no matter how one reads the blog post, which lists five supposedly worrisome consequences of deflation, it falls short of any real argument. Unless one has already adopted the normative position that an economy must engineered to minimize unemployment, these points are nowhere near to being worrisome. To David Wessel, the author of the blog post and a director in the Brookings Institution, the five listed reasons, lauded by Krugman, we should be worried are as follows. 1. Deflation is a generalized decline in prices and, sometimes, wages. 2. It can be hard (though, as we’ve seen, not impossible) for…

About the “Terrible, Horrible, No Good, Very Bad Idea”

About the “Terrible, Horrible, No Good, Very Bad Idea”

In a column last week in The Week, Damon Linker does a good job at showing how difficult it can be to understand an uncomplicated (if not simple) idea. Linker’s column is some sort of hit piece on libertarianism through attacking an economic concept because it was explicitly discussed by the classical liberal Nobel laureate FA Hayek. “W.W” at The Economist blog responds well to the ridiculousness of Linker’s attempted attack, so I don’t have to. However, I would like to continue on points brought up by “W.W.” that are important – and show a fundamental (yet erroneous) bias that is so common that it might be a human trait: the bias toward intentional design. It is true that Hayek has already discussed many of the issues involved in both planned and spontaneous orders as well as our biases toward their understanding (see e.g., Law, Legislation and Liberty vols 1-3), but I think Mises provides a better explanation to the phenomenon of “order” as well as a greater and more productive understanding for it. Economics is by far the social science that has adopted this elemental idea that any undirected “system” will, assuming there are no exogenous changes, eventually lead to repeatable, stable, or even unchanging…

The Economics of E-mail: Responsibility Dumping

The Economics of E-mail: Responsibility Dumping

“Never send me a project e-mail.” This was one of the first things the owner-CEO told me after employing me in a small but highly tech-oriented marketing firm. It may seem counterproductive, but he had his reasons. Sending an e-mail, he noted, is akin to dumping tasks on somebody else’s desk. It is a way of fleeing responsibility by making it somebody else’s – asynchronously. Can this be right? In a heavily tech-oriented business in the computer era, surely e-mails is a great way of communicating. Even if we’re in the same office, sharing information and asking questions in an e-mail is a great way of getting and receiving the information we want – when we want it. (Of course, it is also a way of drowning in information – as well as spam.) E-mails leave a “paper” trail of inquiry that can be very useful, and it is certainly a great way of communicating over distances or when the sender and receiver are not simultaneously present. The problem with a phone call (or a meeting) is that all parties need to be present at the same time and focused on that very communication process. This may be very inefficient as…

Throwing Babies, Keeping the Bath Water

Throwing Babies, Keeping the Bath Water

In a strangely vague and unspecific opinion piece at Reuters today, economic editor Edward Hadas lauds the CORE initiative to change economics teaching to “what it should be.” The only thing obvious about Hadas’ column is how well it fits in the same camp as the State Science Institute’s assessment of Rearden Metal in Ayn Rand’s novel Atlas Shrugged. There is a lot of critique of economics along those lines floating around, which only “notes” that economics has “failed” and that it “must change” and – it is implied – it must change in a certain very politicized (leftist) way. We already know that leftists despise (or dismiss, depending on their purposes) economics. Indeed, so-called “Scientific Marxists” (ideologues) have long dismissed economics (the science) by stating that it is “ideology.” There is good reason for those wishing for forceful redistribution of wealth (or, which is simply an extension, the dismantling of prosperity and economic growth) to pretend economics has no relevance: it stands between them and their attempts at establishing their Utopia. Hadas’ column says nothing of the sort, of course. He only refers to the “CORE” project and its aim to support “teaching economics as if the last three decades had happened.” The tag…

Guest Post: Capitalism Explored

Guest Post: Capitalism Explored

This post is by guest blogger Dr. Sarah Ali. As I bought my groceries today in an affluent neighborhood outside of Washington D.C., it was entertaining and surprising to see some people bring in their shopping cloth bags, driving energy efficient cars, sporting clothing attire that screams ‘Green lives on’, and then shopping at Whole Foods, a corporation—it just screams contradiction! How can you oppose capitalism and then shop at a corporation? Why is Whole Foods okay, but not Wal-Mart? Let’s explore this further. There’s nothing wrong with capitalism. Opponents of capitalism argue that it marginalizes people resulting in the inequitable distribution of wealth. But as economists we know that there will always be a tradeoff between equity and efficiency, tracing this back to the concept of opportunity costs. Opportunity costs are the cost of giving up something in order to obtain something else. Many opponents of capitalism argue that all economics is evil. It is a simplistic argument that fails to present any rationale, and instead relies on the emotional state of people. These same individuals also argue that big box retailers such as Wal-Mart are blood-sucking, evil corporations. The reason why big box retailers like Wal-Mart are successful is…

There Is No Unemployment

There Is No Unemployment

Yes, you read that correctly: there is no unemployment. There is only voluntarily chosen leisure. This is not a joke or an outrageous view of “naïve economists” with their common (lacking) sense of empathic. It is actually true. But only under certain circumstances. It is certainly not true today in most western civilizations (and eastern too), as we know all too well. Following the financial crisis, most of us probably know someone who is unemployed, was unemployed, or has been ever since the bubble burst. So obviously there is unemployment in the world. The real question, however, is if this is “natural” and if there is such a thing as “necessary” (or even “equilibrium”) unemployment. The answer to this question should be a resounding NO, and the reason for this is that labor is the most useful, most usable, and most valuable resource we have. We will run out of supply of this treasured resource as soon as we have satisfied all human wants, but not sooner than this. And, as we know, human wants are practically (if not literally) insatiable – so there is necessarily an unlimited demand for labor. So why is there unemployment? Luddites might claim it…

“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…