Economic Reasoning

Structured, rational thinking about community, cooperation, and the market
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  • Per Bylund

Austrian Economics is Not More of the Same Jul 24, 2014

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...

By Per Bylund Vote2 0

It Is Best to Ignore Economists Jul 21, 2014

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...

By Per Bylund Vote3 0

The Great Problem of Planning Jul 14, 2014

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...

By Per Bylund Vote2 0

When the Market Suffers a Specialization Deadlock Jul 10, 2014

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...

By Per Bylund Vote2 0

Economists Do It With Models Jul 7, 2014

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...

By Per Bylund Vote3 4

Theory, Exaggerated or in Moderation? Jul 3, 2014

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...

By Per Bylund Vote2 0

What Economists Do Isn’t Economics Jun 30, 2014

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...

By Per Bylund Vote12 2

It’s Not About the Money Jun 26, 2014

I would probably give my left arm to once and for all rid the world of all misconceptions about economics. One such frustrating misconception is how everybody assumes that "economy" necessarily has to do with money - and only money. Perhaps this is the reason why I, as an economist, frequently get asked about investment tips, how to "beat the market" on the stock exchange, and things like that (you really don't want my investment advice). If anything "economy" is about money, then obviously an "economy-ist" knows how to make money. In a sense I do know how to make...

By Per Bylund Vote6 0

Ha-Joon Chang, Yet Another Economics Skeptic Jun 23, 2014

The Huffington Post recently published an excerpt of Cambridge University economist Ha-Joon Chang’s book Economics: The User’s Guide. It has then caused a little bit of a stir, mainly through progressive followers eagerly regurgitating some of Chang’s not-so-well-founded one-liners (this article, by almost ridiculously ignorant Tyler Darden, is a good example). But these regurgitations aside, it is interesting to look at the excerpt of Chang’s book and what it tells us about Chang and his view of economics. (I will not, out of respect for Chang, assume that the excerpt was chosen because it was one of the better parts...

By Per Bylund Vote9 2

The Mysterious Endowment Effect Jun 19, 2014

The development of modern neoclassical economics is the story of how a discipline lost its way. Before the mathematization of economics, economists tried to explain prices and macro patterns in the market place from individual human action. But modern "mathonomics" has evolved into a subfield of mathematics with no obvious ties to the real economy. Assuming "perfect" conditions and general equilibrium, the conclusions of economic analysis follow directly from the premises — as one would expect from solving mathematical equations — and are hence of little scientific interest. It follows that phenomena in the real economy that do not seem...

By Per Bylund Vote3 0

The Fundamental Importance of the Trade-Off Jun 16, 2014

Whereas the natural sciences study the physical world under the fundamental assumption that it is purely subject to the law of causality and therefore strictly laws-based, the social sciences wrestle a very different problem. In the social world, as Mises reminds us, there are no constants and no constant relations. This ultimately makes the mathematical, quantitative, and statistical methods of the natural sciences inapplicable (at best). Granted, there are many who disagree with Mises's statement and that claim that even social phenomena are subject to quantitative analysis - that idiosyncracies are balanced out if the population studied is just big...

By Per Bylund Vote9 1

The Problem of Production Jun 12, 2014

Believe it or not, but there is no good explanation in economic theory for why there are firms. This may seem like a rather fundamental oversight, but it actually has good reason. Economic theory, whether Austrian or mainstream, shows beyond reasonable doubt that the market is the least inefficient and therefore "best" means to allocate resources. While the market is terribly imperfect and subject to constantly changing conditions (consumer preferences, changing policy, etc.), it still beats the impossibility of "rational" top-down planning. There are several reasons for this, which we can discuss in a future post. But what is interesting...

By Per Bylund Vote4 0

Missing the Forest for a Tree or Two Jun 9, 2014

Being an economist in the field of entrepreneurship makes for a scary experience. The reason is that many of the "new" disciplines in business schools are developed without and sometimes as a contrast to existing, older disciplines. Rather than making use of what we have learned over the centuries in philosophy, economics and other disciplines, entrepreneurship and (though to a lesser extent) strategic management borrow individual concepts or theoretical approaches stripped of their contexts. It is true that economics as a field, as well as most economists, have done pretty much everything possible to make sure others discount their discipline. The...

By Per Bylund Vote3 0

How Visible Subsidies Cause Invisible Destruction Jun 5, 2014

Schumpeter's "creative destruction" describes how the free market's new and more efficient industries push out old ones, creating economic growth. The state's perversion of this process we may call uncreative destruction. The state overtly subsidizes some industries and groups (including itself and its employees), while covertly it destroys society's overall wealth and well-being, lowering economic growth and welfare. The state's magic act and trickery consists in attracting attention to the subsidies of its right-handed spending while obscuring the even greater destruction of its left-handed taxes and regulations. As French 19th century economist Bastiat wrote, in his essay That Which Is...

By Per Bylund Vote3 0

Discussing Why ‘Ceteris Paribus’ Matters with Jeff Tucker Jun 2, 2014

By Per Bylund Vote0 0

Deflation is the Normal “State” of the Market May 29, 2014

Austrians often stress that the definition of inflation used by both the State and the economics profession is "incorrect" and that the "general increase in price levels" definition should be replaced by the Austrian "increase in money supply" definition. It is true that the latter is a whole lot more correct in both explaining and describing the problem while pinpointing what is really going on and how these problems could be overcome. However, it is not simply the fact that the generally accepted definition is "wrong" — it is also "evil" in that it includes quite a bit of propaganda...

By Per Bylund Vote2 1

Reasoning: Structured versus Strange May 26, 2014

I recently experienced first-hand the terrible state of people's reasoning. It should come as no surprise that emotions almost always beat rational reasoning in discussions and debate, even though this is a sad state of affairs. Especially in politics, calls to emotions attract votes or at least an emotional response that can be somewhat predicted and therefore exploited. It is easy to see how this could contribute a core explanation to political correctness, which is a structural public morality that "teaches" people how to emotionally respond to certain opinions. As it does away with sound reasoning and therefore shuts out...

By Per Bylund Vote7 2

Ceteris Paribus for Dummies May 22, 2014

The economist’s analysis based on ceteris paribus (lat. “all other things being equal”) can, at least in certain contexts, seem almost laughable. After all, isn’t it pretty obvious that any economic system is a web of interdependent relations and interactions dependent on signaling through for instance the price system? Even so, certain so-called scientific models may require the ceteris paribus statement simply because we do not have powerful enough tools and lack sufficient knowledge of the interrelationships. It could make sense, in a scientific setting where some progress is the best possible (since aiming too high simply means no progress),...

By Per Bylund Vote8 0

The Minimum Wage May 19, 2014

Though a classic example of sound economic analysis, the doctrine on the effects of a minimum wage has lately been under heavy fire from progressive liberals. The President, naturally, favors an unprecedented increase in the minimum wage to "help the poor." But aside from political rhetoric, which hardly ever even resembles the facts of reality, there are also open letters from many renowned economists calling for an increase in the minimum wage. Nobel laureate Joseph Stiglitz has recently been one of the more vocal proponents of using political measures to rid society of the "costs of inequality." The Piketty frenzy...

By Per Bylund Vote8 2

Why Is Inflation So Bad? May 15, 2014

A cornerstone of government economic policy is to “fight” inflation and make sure we do not have too much of this problem, to make sure we minimize the costs of inflation. This is in a sense why we are taught there is a need for the Federal Reserve: they manage the currency and interest rates in such a way that inflation is kept at a minimum. This is an important task, and that is why the news media so frequently reports on inflation and talks of “inflationary” policies, etc. But why is inflation a problem? According to the common definition...

By Per Bylund Vote3 0

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