Monday, June 24, 2019

Wieser, Like Menger, Was Particularly Critical of the Walrasian System; Wieser Objected to the Use of Calculus in Economic Theory Because Economic Phenomena Are Necessarily Discontinuous and Discrete

The considered rejection of the mathematical method as sterile, i.e., as incapable of shedding light on the vital questions of economic processes, has been one of the continuing themes of the Austrian School. Böhm-Bawerk, in his monumental work on Capital and Interest, steers clear of any suggestion of functional interdependence between the elements of his theoretical system. He maintains a strictly cause-and-effect analysis. Wieser, like Menger, was particularly critical of the Walrasian system.

Wieser raised the objection to the use of calculus in economic theory that economic phenomena are necessarily discontinuous and discrete. The Austrians, with their focus on the way in which agents perceive and act in the real world, have always been careful to formulate their marginalism in terms of discrete units and discontinuous points rather than infinitesimal units and smooth curves. Menger emphasized discontinuities at many places in the Grundstätze. Wieser was especially explicit about the discreteness of changes in marginal utility scales, and in developing the theory of imputation assumed a discontinuity among inputs. Böhm-Bawerk analyzed supply and demand in terms of discontinuous schedule, and used for illustration a market for a particularly indivisible commodity, horses. The discreteness of changes in marginal utility scales in Wieser and Böhm-Bawerk is directly due to their subjectivist concern only with changes that could actually be felt by the valuing individual, Schumpeter thus missed the intent of the Austrian theorists again when he suggested that differential calculus is necessary in order to “formulate their reasoning correctly.”

--Lawrence H. White, The Methodology of the Austrian School Economists, online ed. (Auburn, AL: Ludwig von Mises Institute, 2003), 10.

No One Familiar with the Primary Literature Can Doubt that Carl Menger's Treatment of the Structure of Wants in Relation to Evaluation Was More Profound and More Penetrating Than That of Walras and That of Jevons

Carl Menger clearly stands apart from the other two reputed founders of the modern marginal utility theory. Menger, of course, deserves to be celebrated no less than his two famous contemporaries as the discoverer of a method of incorporating utility and scarcity into a novel, pathbreaking explanation of value. In fact, so impressive was Menger’s performance that Stigler judges Menger’s theory “greatly superior to that of Jevons”  and Georgescu-Roegen deplores the placing of Menger “by almost every historian on a lower level than either Walras or Jevons.” Von Hayek goes so far as to hold that Menger’s Grundsätze der Volkswirschaftslehre [Principles of Economics] “provided a much more thorough account of the relations between utility, value and price, than is found in any of the works of Jevons and Walras.” No one familiar with the primary literature can doubt for a moment that Menger’s treatment of the structure of wants in relation to evaluation was more profound and more penetrating not only than that of Walras who evinced no particular interest in such questions, but also than that of Jevons to whom the theory was, however, conceived on the analogy of a mechanical balance of physical forces, whereas Menger’s theory was adorned with only one mechanical metaphor and that in the course of an argument purporting to prove that it is a mistake to regard “the magnitude of price as the essential feature of exchange.”

--William Jaffé, “Menger, Jevons and Walras De-Homogenized,” Economic Inquiry 14, no. 4 (December 1976): 518-519.

Richard Cantillon Used the Term “Intrinsic Value” Correctly (in Accordance with Its Most Commonly Understood Meaning, Circa 1730) to Signify “Opportunity Cost”

The claim here is that Richard Cantillon discovered the concept of opportunity cost one hundred and forty years earlier than its conventional dating. This finding is surprising given Cantillonʼs use of the term intrinsic value and his well-known search for a par value between land and labor. Even more shocking for modern readers of Cantillon is that he used the phrase intrinsic value to designate opportunity cost. Not only did Cantillon have the “flavor” of opportunity cost, as some have suggested, but he used it to construct key applications of economic analysis and integrated it into his theoretical understanding of cost and choice.

To sustain this claim, it will be shown that Cantillon used opportunity cost in three major applications in his Essai sur la nature du commerce en général (hereafter, the Essai), including one that corresponds to the classic textbook illustration of opportunity cost. Cantillon provided an illustration of the role that opportunity cost plays in the value of land similar to that provided by Mill in 1848. In another application, Cantillon incorporated opportunity cost into his demolition of the mercantilistsʼ views on money and interest and into his own defense of usury. The evidence shows that Cantillon had in fact used the term intrinsic value correctly (i.e., in accordance with its most commonly understood meaning, circa 1730) to signify opportunity cost. Furthermore, textual evidence demonstrates that his conception is consistent with all the tenets of our modern understanding of opportunity cost. Cantillonʼs life was one of many mysteries and his economics has presented many puzzles, but one of the central theoretical puzzles is solved here—Cantillon was the first to discover the concept of opportunity cost.

--Mark Thornton, “Richard Cantillon and the Discovery of Opportunity Cost,” History of Political Economy 39, no. 1 (Spring 2007): 98.

Sunday, June 23, 2019

Wieser's Theory of Capital and Interest Is Mostly Still Unappreciated in the Literature; Instead, There Has Been Extensive Analysis of the Theory Provided by Böhm-Bawerk and Refined by Wicksell

It has been said of Wieser that he ‘occupies a position of indisputable importance in the history of economics’ and that he ‘presented one of the best theories of capital which had emerged’ in his time (Stigler 1941:158, 177). Yet Wieser’s ([1889] 1930) theory of capital and interest (which is later enunciated and extended in Wieser 1891; [1914] 1927) is mostly still unappreciated in the literature. Instead, there has been extensive analysis of the putative apotheosis of ‘Austrian’ capital and interest theory provided originally by Böhm-Bawerk in 1888 and later refined by Wicksell (e.g. Kregel 1976:28–33; Blaug 1978:498–569; Brems 1988; Negishi 1985; Niehans 1990). As well, Streissler (1972: 434–6) concentrated exclusively on those elements in Böhm-Bawerk’s capital and interest theory that possibly displeased Menger. To anticipate one of our conclusions in this chapter, Streissler omitted to give an account of Menger’s attitude to Wieser’s formulations of the capital and interest problem, and we suspect, from the evidence presented here, that Menger would have sympathized with many of Wieser’s ideas.

Accordingly, in this chapter we give special consideration to Wieser’s much-neglected capital and interest theory in order to assess its origins and composition, and ultimately to estimate the extent of Wieser’s departure from the Menger tradition. We compare, as and where the detail of our exposition demands, Wieser’s theory of capital and interest with other contemporary Austrian and non-Austrian treatments of that subject. Our attention will also be focused on the relations between Wieser’s theory and the broad directions given by Menger for the construction of an adequate theory of capital and interest . . . As far as interest theory was concerned, Menger’s ideas were very much inchoate. Among the other founding Austrians, Wieser offered an alternative to Böhm-Bawerk’s contribution on this subject.

--A. M. Endres, Neoclassical Microeconomic Theory: The Founding Austrian Version, Routledge Foundations of the Market Economy (London: Taylor and Francis e-Library, 2002), 180.

Socialism, Like Other Forms of Ressentiment, Is a Manifestation of the Will to Power of the “Least and Dumbest” Members of Society

Nietzsche’s critique of socialism can be divided into two major lines of argument. The first line is grounded in Nietzsche’s identification of socialism as a Rousseauian perfectionist political theory. For Nietzsche, Rousseau and socialist thought represent forms of idealism that ought to be met with “suspicion and malice” because they promise what they cannot deliver and even if they could, their ideals are undesirable (WP [Will to Power] 80). The primary source of their error lies in a flawed theory of human nature and an unjustified hope in the transformative power of institutions.

The second line of critique that Nietzsche offers is grounded in his identification of socialism as a political theory born of resentment and a desire for revenge. In Nietzsche’s view, socialism is “an attack of sickness” brought about by “underprivileged” human beings who blame “society” for their “lack of power and self-confidence” (WP 125 and 373). In other words, socialism, like other forms of ressentiment, is a manifestation of the will to power of the “least and dumbest” members of society (WP 125).

--Nicholas Buccola, “'The Tyranny of the Least and the Dumbest': Nietzsche's Critique of Socialism,” Quarterly Journal of Ideology 31, no. 3-4 (2009): 15.

Saturday, June 22, 2019

The Classical Concepts of a “Wage Fund” and of a “Subsistence Fund” (the Sum Total of All Funds Saved from Consumption and Available for Investment) Fell into Oblivion

Hahn (1920) and Keynes (1936) pushed Macleod’s approach to its logical conclusion. It was not savings that led to (credit-financed) investment but (credit-financed) investment that led to savings. Thus they had finally arrived at the exact antithesis of classical economics. If investments could easily be made without saving, then it would be superfluous to explore profound theories on the real economic importance of foregoing consumption. The classical concepts of a “wage fund” and of a “subsistence fund” (the sum total of all funds saved from consumption and available for investment) thus fell into oblivion. After the World War II, they were mentioned in textbooks only as a curious idea of the nineteenth century (see Braun 2012, 2014). Previously, cutting consumption was considered an indispensable prerequisite for the production of goods. Now it appeared to be superfluous, at best. More realistically, it appeared as a potential disruptive factor. After all, at least some part of income that was not spent on consumers’ goods would not be spent at all, but hoarded, with corresponding losses for “aggregate demand” and thus for production.

--Jörg Guido Hülsmann, “Mises' Monetary Theory,” in Banking and Monetary Policy from the Perspective of Austrian Economics, ed. Annette Godart-van der Kroon and Patrik Vonlanthen (Cham, CH: Springer International Publishing, 2018), 34-35.

The Neo-Mercantilist Movement Brushed Aside the Theory of the Wage Fund and Say's Law; Hence, the Foundations of the Theory of Finance Have Remained in an Unsatisfactory State for Decades

The youthful and boastful neo-mercantilist movement of the 1930s and the early postwar period did not bother to refute the classical conceptions in any detail. The theory of the wage fund was brushed aside, rather than carefully analyzed and criticized, just as Keynes had brushed aside Say’s Law without even making the attempt to dissect it. As a consequence, the foundations of the theory of finance have remained in an unsatisfactory state for many decades. A newer vision of finance had supplanted the older one. But was the latter without merit? The new theory appeared to be new. But was it true?

The present book is one of the very first modern discussions that attempts to come to grips with these basic questions. Steeped in the tradition of the Austrian school, Dr. Eduard Braun delivers a sweeping and original essay on the foundations of finance. Relying on sources in three languages, and delving deeply into the history of capital theory — most notably the neglected German-language literature of the 1920s and 1930s — his work sheds new light on a great variety of topics, in particular, on the history of the subsistence fund theory, on the relation between monetary theory and capital theory, on economics and business accounting, on price theory and interest theory, on financial markets, on business cycle theory, and on economic history.

--Jörg Guido Hülsmann, foreword to Finance Behind the Veil of Money: The Economics of Capital, Interest, and the Financial Market, by Eduard Braun (West Palm Beach:, 2014), e-book.

Friday, June 21, 2019

Lachmann Suggests Dispensing with the Notion “Period of Production”and Replacing It with the Notion “Degree of Complexity”

An important aspect of the information revolution is that it allows for the formation and management of ever more complex capital structures. In his work on capital Lachmann proposed a reinterpretation of a controversial aspect of Böhm-Bawerk’s theory, his famous proposition concerning the superior productivity of roundabout production (i.e. of production processes that are more indirect, that take more “production time”) (Lachmann 1978: ch. V). Lachmann regarded Böhm-Bawerk's use of time as a unit of measurement for the capital stock as untenable and seriously misleading. He felt strongly, however, that Böhm-Bawerk’s intuition about the sources of economic progress was correct. “[T]he intuitive genius of Böhm-Bawerk gave an answer [that], to be sure we cannot fully accept and which, moreover, is marred by an excessive degree of simplification, yet an answer we cannot afford to disregard” (Lachmann 1978:73). Therefore he suggests dispensing with the notion “period of production” and replacing it with the notion “degree of complexity.” Whereas Böhm-Bawerk argued that the period of production increased with capital accumulation, Lachmann argues that capital accumulation results in the increasing complexity of the production process. In this way he hoped to have given a new and more appropriate meaning to the notion of increased roundaboutness.

--Peter Lewin, Capital in Disequilibrium: The Role of Capital in a Changing World, Routledge Foundations of the Market Economy (London: Taylor and Francis e-Library, 2003), 130.

In Order to Understand the Austrian Business Cycle Theory, We Must Distinguish Commodity Credit (Good Kind of Credit) from Circulation Credit (Bad Kind of Credit)

In order to understand the ABCT [Austrian Business Cycle Theory] it is necessary to grasp a distinction between two different kinds of credit first introduced by Ludwig von Mises himself. The first one, commodity credit, is, in Mises’s opinion, the healthy kind of credit. Somebody saves out of his income and transfers the savings to somebody else, mainly by means of financial intermediaries. As this kind of credit necessitates savings, it involves an exchange of present goods for future goods. In the words of Mises, credits of this kind are
characterized by the fact that they impose a sacrifice on that party who performs his part of the bargain before the other does—the foregoing of immediate power of disposal over the exchanged good.
In short, before commodity credit can be granted, somebody must have saved up goods or money that can now be lent to the debtors. The sacrifice of the savers is the necessary condition for this kind of credit.

The second kind of credit Mises calls circulation credit. In his opinion, it constitutes the unhealthy kind of credit. It does not stem from anybody’s savings, but from the power of banks to lend additional money into existence. It is not necessary to go into the details of fractional reserve banking here. That this kind of banking is able to create additional credit via lending out its own banknotes (in earlier times) or demand deposits that are at any time convertible into money is generally accepted by economists. The phenomenon is called the money multiplier. Mises’s point is that this kind of credit creation does not presuppose savings and therefore causes nearly no costs to either the issuing bank or anybody else. This
group of credit transactions is characterized by the fact that in them the gain of the party who receives before he pays is balanced by no sacrifice on the part of the other party.
According to Mises’s definition, what he calls circulation credit is not a proper credit transaction from an economic point of view. “[T]he essential element, the exchange of present goods for future goods, is absent.” No savings and no sacrifices are necessary:
If a creditor is able to confer a loan by issuing claims which are payable on demand, then the granting of the credit is bound up with no economic sacrifice for him.
Now, in all of his versions of the ABCT, Mises maintains that an expansion of circulation credit, as distinguished from an increase of commodity credit, causes a boom that must ultimately result in a bust. So far, the earlier and the later versions are homogeneous. However, they differ in the way that Mises explains the effect that an expansion of circulation credit has on the economy. It will be shown that it is on this point that Mises’s first theoretical book, The Theory of Money and Credit, has to be preferred to all of his later writings.

--Eduard Braun, “The Subsistence Fund in Ludwig von Mises's Explanation of the Business Cycle,” in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Mises Institute, 2012), 194-195.

Marginal Utility Theorists Were Accused of Having to Assume the Existence of the Very Thing (Prices) the Theory Was Meant to Explain; Similar Criticisms Were Leveled When It Was Used to Explain the Value of Money

An early criticism of marginal utility theory was that it claimed to explain the emergence of prices on the basis of the marginal evaluation of goods, but, the critics said, for a marginal evaluation of goods to occur, it was first necessary for there to exist ratios of exchange at which commodities could be traded and toward which evaluations could be directed; hence, the marginal utility theorists were accused of having to assume the existence of the very thing (prices) the theory was meant to explain, thus moving in a logical circle. On how the Austrians proposed to escape from the circle through the introduction of expectations and the distinction between expected prices and realized prices, see, Böhm-Bawerk, Capital and Interest vol. 2, pp. 240-43; Leo Schönfeld-Illy, Das Gesetz des Grenznutzen (Vienna: 1948), pp. 183-238; and Israel M. Kirzner, Market Theory and the Price System (Princeton, N.J.: D. Van Nostrand, 1963), pp. 105-41.

Similar criticisms were leveled against the application of marginal utility theory to explain the value of money. Mises argued that it was true that the evaluation of the marginal utility of money was dependent upon the preexistence of the monetary unit having a specific purchasing power. Since money was directly serviceable neither for consumption nor for production but, rather, acquired its utility as a good on the basis that it could be held in the form of cash balances to facilitate future acts of exchange, any present demand for the money good presupposed it having an existing purchasing power. But logically no circular reasoning was involved, Mises argued. Money's present purchasing power could be “regressed” back to that point at which the money good was used for the first time as a medium of exchange, before which the commodity's exchange value would have been based purely upon its utility as a consumption and/or production good; Mises, The Theory of Money and Credit, pp. 129-46; also, Mises, Human Action, A Treatise on Economics 3rd ed. (Chicago: Henry Regnery, 1966), pp. 408-16.

--Richard M. Ebeling, “Ludwig von Mises and the Gold Standard,” in The Gold Standard: Perspectives in the Austrian School, ed. Llewellyn H. Rockwell Jr. (Auburn, AL: Ludwig von Mises Institute, 1992), 53n13.

Thursday, June 20, 2019

It Is Seldom Recognized that by 1888 Menger Had Changed His View on Capital Theory; He Turned Against All Capital Theories, Including His Own, If They Disregarded the Everyday Language Use of “Capital”

Carl Menger changed his point of view on capital theory considerably between 1871 and 1888 (Schumpeter 1997, p. 187; Braun 2014). He did not discuss capital very deeply in his Principles (Stigler 1937, p. 248), but to the extent he did, he advocated a capital theory that is concerned with production. His capital theory was connected to his vision of the production process as divided into several successive stages, where consumer goods result from the successive processing of combinations of higher-order goods to lower-order goods. Menger (1871, p. 155) says that one possesses capital if one “already has command of quantities of economic goods of higher order … in the present for future periods of time.” By adding this aspect to production theory and associating it with capital theory, he laid the groundwork for Austrian capital theory as developed by Böhm-Bawerk (1930), Friedrich von Hayek (1941), and Ludwig Lachmann (1978).

It is seldom recognized that by 1888 Menger had changed his view. In a long article on the subject — Zur Theorie des Kapitals (A Contribution to the theory of capital) — Menger proposed a radically different vision of the scope of capital theory. Streissler (2008, p. 371) is of the opinion that, by writing his article, Menger only made a prepublication attempt to refute the theory of Böhm-Bawerk. However, it seems more probable that Menger turned against all capital theories — including his own one — which have been developed by economists in disregard of everyday language use and established business practices. At the very outset, he declares that it is
a mistake that cannot be disapproved of enough when a science … denotes completely new concepts by words that, in common parlance, already describe a fundamentally different category of phenomena — a category that is also important for the respective discipline — correctly and properly (Menger 1888, 2).
It could be suggested that he was referring mainly to Böhm-Bawerk’s theory in this quote. However, there is every indication that Menger also implicitly revoked his earlier point of view. For the common parlance concept of capital is not identical with his own one from the Principles at all. In Menger’s (1888, p. 37; emphasis added) words, the common parlance view has nothing to do with the production process or the different orders of goods:
When businessmen and lawyers speak about capital, they do mean neither raw materials, nor auxiliary materials, nor articles of commerce, machines, buildings and other goods like this. Wherever the terminology of the Smithian school has not already penetrated common parlance, only sums of money are denoted by the above word.
He hastens to add that capital only embraces sums of money that are dedicated to the acquisition of income, and that “sums of money” not only refers to plain money, but to the monetary value of all kinds of business assets in economic calculation.

Menger thus switched sides in a debate that seems to be as old as economics itself. Does the term “capital” refer to a production factor or does it refer to the organization of the market economy by calculating entrepreneurs who maximize the monetary yield on their financial capital? At a first glance, the distinction between these two viewpoints does not seem to create a great problem. . . . the two sides of the term capital do not fit together harmoniously; rather they roughly correspond to the two sides of the Methodenstreit between the Austrian and the Historical school of economics. Menger’s earlier concept was elaborated to Austrian capital theory, whereas his concept of 1888 turns out to be the one endorsed by the Historical school.

--Eduard Braun, “Unsuspected Origins of Modern Austrian Economics: The Historical School of Economics on Capital and Economic Calculation,” in The Next Generation of Austrian Economics: Essays in Honor of Joseph T. Salerno, ed. Per Bylund and David Howden (Auburn, AL: Mises Institute, 2015), 76-78.

There Is No Perfectly Rigorous Way to Define the Length of a Production Process in Purely Physical Terms; This Fact Is at the Heart of the 3 Capital Controversies (Böhm-Bawerk v. Clark, Hayek v. Knight, and the Cambridges)

The Austrian economists emphasize that production takes time, and, other things constant, the longer the (linear) supply chain, the more “time” it takes. Thus, modern production is much more “roundabout” (Böhm-Bawerk’s term) than older, more rudimentary production processes. Rather than picking the fruit in our backyard and eating it, most of us today get our fruit from farms using complex picking, sorting, and packing machinery and specialists to process carefully engineered fruit products. Consider the amount of “time” (for example, in people-hours) involved in setting up and assembling all the pieces of this complex production process from scratch—from before the manufacture of the machines and so on—to appreciate what is meant by production methods that are “roundabout.” Doing things in a more complicated, specialized way is more difficult—loosely speaking, it takes more “time” because it is more roundabout, more indirect—it involves the construction of more intermediate products (or services) before moving to the next step in the process.

The scare quotes for “time” in the previous paragraph are used because, even for simple linear processes, there is no perfectly rigorous way to define the length of a production process in purely physical terms. This essential fact is at the heart of the three capital controversies that have occurred over the last one hundred years: the first in the late nineteenth and early twentieth century involving Böhm-Bawerk and his critics (notably J. B. Clark), the second in the 1930s and 1940s involving Hayek and his critics (notably Frank Knight), and the last from the 1970s onward, lingering until today, known as the Cambridge-Cambridge debate, involving, respectively, protagonists from Cambridge, England, and Cambridge, Massachusetts. ACT [Austrian Capital Theory] was explicit in the first two controversies and implicit in the third. All concerned the essential nature of production in a capital-using economy. Böhm-Bawerk was tackled because of his use of a simplifying, inconsistent theoretical construct: the “average period of production.” It can be easily shown that any attempt to calculate such a magnitude is fraught with insurmountable difficulties except in the simplest of cases—and even there, the calculation is impossible if we consider, as we should, the interest rate implicit in the formula to be compound interest. Böhm-Bawerk’s lengthy, intuitive discussion of the nature of capitalist production as an increasing reliance on produced means of production in specialized production processes became associated with this rather specific and limited formula. Though actually a small part of his work as a whole and arguably an aberration in his breadth of vision, it became the focus for the prolonged and energetic debate in capital theory.

--Peter Lewin and Howard Baetjer Jr., “The Capital-Using Economy,” in The Oxford Handbook of Austrian Economics, ed. Peter J. Boettke and Christopher J. Coyne (New York: Oxford University Press, 2015), 146.

Tuesday, June 18, 2019

In a Market with Many Buyers and Sellers, the Price Reflects the Valuations of the Buyer Least Willing to Buy and the Seller Least Willing to Sell (the “Marginal Pairs”)

Menger sought to explain prices as the outcome of the purposeful, voluntary interactions of buyers and sellers, each guided by their own subjective evaluations of the usefulness of various goods and services (what we now call marginal utility, a term later coined by Friedrich von Wieser). Trade is thus the result of people’s deliberate attempts to improve their well-being, not an innate “propensity to truck, barter, and exchange,” as suggested by Adam Smith. The exact quantities of goods exchanged—their prices, in other words—are determined by the values individuals attach to marginal units of these goods. With a single buyer and seller, goods are exchanged as long as participants can agree on an exchange ratio that leaves each better off than he was before. In a market with many buyers and sellers, the price reflects the valuations of the buyer least willing to buy and the seller least willing to sell, what Böhm-Bawerk would call the “marginal pairs.” Regardless of the exact structure of the market, then, voluntary exchange takes place until the gains from trade are momentarily exhausted. Menger’s highly general explanation of price formation continues to form the core of Austrian microeconomics.

--Peter G. Klein, foreword to Principles of Economics, by Carl Menger (1976; repr., Auburn, AL: Ludwig von Mises Institute, 2007), 7-8.

Menger Transformed Economics from a Discipline Focused on the Study of Objective Wealth to One Based on Exchange or Catallactics

This theory of capital in Menger’s founding work is completely consistent with his seminal contribution to the subjective theory of value that was a paradigm shift in economics, completely transforming the discipline from one focused on the study of wealth, perceived to be objective (plutology), to one based on exchange (catallactics).
Classical economics was, at least originally, a pragmatic discipline. Its aim was to study means to increase the “wealth of nations”. Its orientation is thus to a macroeconomic magnitude. It needed a measure of wealth, and the classical notion of value was primarily designed to serve this need. Production and distribution of wealth was what really mattered. The consumer was an outsider, not an economic agent . . . . Markets, in classical doctrine, contained producers and merchants only. All this changed when subjective utility replaced objective (and measurable) cost of production as the source of value.
Economics now had to find a place for the consumer. It was he, after all,  who now bestowed value on objects. All non-consumer goods were now shown to have at best purely derivative value. . . . each consumer as an individual would now assign value to objects which become economic goods as a result of his action. (Lachmann, 1986: 145)
--Peter Lewin and Nicolas Cachanosky, Austrian Capital Theory: A Modern Survey of the Essentials, Cambridge Elements in Austrian Economics (Cambridge, UK: Cambridge University Press, 2019), 7-8.

Monday, June 17, 2019

Future Goods Trade at a Discount or Present Goods Trade at a Premium; the Payment of Interest Is a Direct Reflection of This Intertemporal Value Differential; This Is Called Böhm-Bawerk's “Agio Theory”

Early in his career, Böhm-Bawerk took up a central question that was much discussed by his contemporaries and predecessors. “Is there any justification for the payment of interest to the owners of capital?” The justification, in his view, rests on a simple fact of reality: people value present goods more highly than future goods of the same quantity and quality. Future goods trade at a discount, or alternatively, present goods trade at a premium. The payment of interest is a direct reflection of this intertemporal value differential. This interest, or agio, paid to capitalists allows workers to receive income on a more timely basis than would otherwise be possible. Böhm-Bawerk's “agio theory” and its implications for the alternative “exploitation theory” were undoubtedly enough to win him recognition by historians of economic thought. But with it he broke new ground and was able to parlay his refutation of socialist doctrine into a new understanding of the capitalist system. His Positive Theory culminates in a macroeconomic model of general equilibrium that serves to illuminate the classical issues of capital accumulation and technical progress, to resolve the neoclassical problem of the existence and the determination of the rate of interest, and to do still more.

--Roger W. Garrison, “Eugen von Böhm-Bawerk: Capital, Interest, and Time,” in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 116.

Albert Schäffle Characterized the Function of Capital and the Capitalist-Entrepreneur in Proto-Böhm-Bawerkian Terms; Capital Is Necessary for Exploiting the Benefits of the Division of Labor

In commenting on the debate over the fate of the working class under capitalism that raged in the 1860s between German social democrats led by Ferdinand Lassalle and German laissez-faire liberals led by Hermann Schulz-Delitzsch, Schäffle sought to illuminate the Wertfrei economic principles involved. In criticizing Lassalle’s position, he resorted to the concept of a “temporal structure of the economic process” developed by one of the eminent pioneers of the German subjective-value tradition, F. W. B. Hermann (1795-1868). Elaborating on this concept, Schäffle (quoted in Hennings 1997, p. 37) characterized the function of capital and the capitalist-entrepreneur in proto-Böhm-Bawerkian terms:
It is the particular way in which labour’s services are temporally structured, in which production is separated in time and space … which conditions the peculiar position of workers in the economy, and which points to the basic reason for the position of the entrepreneur … who advances out of his capital, in the form of wages, the value of labour’s services which are not yet consumable.
He went on to argue that if the capitalist did not perform this function, then the laborer would have to acquiesce in a lengthy wait for his labor product or else the division of labor would be impossible. Thus capital was necessary for exploiting the benefits of the division of labor. Furthermore, it is by virtue of his capital-advancing role that the entrepreneur becomes the director of production and pivotal agent of income distribution. Schäffle concluded that Lassalle’s call to abolish entrepreneurship was wrong because the entrepreneur was indispensable to the proper operation of the economic process.

--Joseph T. Salerno, “Böhm-Bawerk's Vision of the Capitalist Economic Process: Intellectual Influences and Conceptual Foundations,” New Perspectives on Political Economy 4, no. 2 (2008): 93-94.

Sunday, June 16, 2019

The Step Leading from Classical to Modern Economics Is the Realization that Classes of Goods in the Abstract Are Never Exchanged and Valued, But Always Only Concrete Units of a Class of Goods

Only the disintegration of the universalistic mentality brought about by the methodological individualism of the seventeenth and eighteenth centuries cleared the way for the development of a scientific catallactics. It was seen that on the market it is not mankind, the state, or the corporative unit that acts, but individual men and groups of men, and that their valuations and their action are decisive, not those of abstract collectivities. To recognize the relationship between valuation and use value and thus cope with the paradox of value, one had to realize that not classes of goods are involved in exchange, but concrete units of goods. This discovery signalized nothing less than a Copernican revolution in social science. Yet it required more than another hundred years for the step to be taken. This is a short span of time if we view the matter from the standpoint of world history and if we adequately appreciate the difficulties involved. But in the history of our science precisely this period acquired a special importance, inasmuch as it was during this time that the marvelous structure of Ricardo’s system was first elaborated. In spite of the serious misunderstanding on which it was constructed, it became so fruitful that it rightly bears the designation “classical.”

The step that leads from classical to modern economics is the realization that classes of goods in the abstract are never exchanged and valued, but always only concrete units of a class of goods. If I want to buy or sell one loaf of bread, I do not take into consideration what “bread” is worth to mankind, or what all the bread currently available is worth, or what 10,000 loaves of bread are worth, but only the worth of the one loaf in question. This realization is not a deduction from Gossen’s first law. It is attained through reflection on the essence of our action; or, expressed differently, the experience of our action makes any other supposition impossible for our thought.

--Ludwig von Mises, Epistemological Problems of Economics, trans. George Reisman, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2013), 139-140.

Saturday, June 15, 2019

Corruption Is Actually Just a Black Market for the Property Rights over which Politicians and Bureaucrats Have Allocative Power

“Chicago Cop Goes Undercover to Crack a Police Dope Ring,” “This Judge Is the Defendant,” “A Federal Judge Goes on Trial in Nevada on Bribery Charges,” “More Miami Cops Are Arrested,” “A Prosecutor on Trial,” “Jailed U.S. Judge Resists Resigning.” This sample of headlines from news magazine and newspaper articles only touches the surface of the corruption problem among law enforcement officials. Political corruption has been a fact of life since government got into the business of law enforcement. Corruption is actually just a black market for the property rights over which politicians and bureaucrats have allocative power. Rather than assigning rights according to political power, rights are sold to the highest bidder. If bureaucrats are not monitored closely, then self-interest motives may really take over and corruption is likely. To get some idea of the level of corruption in law enforcement, we must examine the opportunities for corruption and the institutionalized incentives to carry out corrupt acts that face public sector law enforcement officials.

--Bruce L. Benson, The Enterprise of Law: Justice Without the State (Oakland, CA: The Independent Institute, 2011), 159.

Locke, Jefferson, and Others Never Tired of Pointing out that Tyrannical Rulers, Not Those Who Resist Them, Are the True Rebels

The right of resistance therefore functions as a kind of safety valve, alerting rulers that they are overstepping their legitimate boundaries. If this right is denied, if the abuse of power is allowed to grow unchecked until it becomes tyrannical, then no remedy will be available except a complete revolution. The right of resistance provides citizens with another option. By resisting unjust laws before the onset of total tyranny, we may be able to reverse the growth of power, thereby avoiding tyranny – and the need for revolution.

This is more or less how John Locke viewed this issue. The “state of Mankind is not so miserable that they are not capable of using this Remedy, till it be too late to look for any.” It does no good to tell people that “they may expect Relief, when it is too late, and the evil is past Cure.” Locke continues:
This is in effect no more than to bid them first be Slaves, and then to take care of their Liberty; and when their Chains are on, tell them, they may act like Freemen. This, if barely so, is rather Mockery than Relief; and Men can never be secure from Tyranny, if there be no means to escape it, till they are perfectly under it: And therefore it is that they have not only a Right to get out of it, but to prevent it.
The classic objection to the right of resistance – that it will undercut the authority of all law – was answered by pointing out that law can retain its authority only so long as it is generally regarded as just. When a government enacts and enforces unjust laws, it rebels against the principles of natural right and undercuts its own authority. Locke, Jefferson, and others never tired of pointing out that tyrannical rulers, not those who resist them, are the true rebels. As Locke put it, “For Rebellion being an Opposition, not to Persons, but Authority, which is founded only in the Constitutions and Laws of the Government; those, whoever they be, who by force break through, and by force justify their violation of them, are truly and properly Rebels.”

The ruler must obey the same laws that are constitutionally prescribed for everyone else. Thus, whenever a ruler exceeds his or her constitutional limits, it is that ruler who rebels against the legal order and undermines legitimate authority. The right of resistance, therefore, is essential for preserving the authority of law, because it demands that everyone must abide by it, including those in power.

--George H. Smith, The System of Liberty: Themes in the History of Classical Liberalism (New York: Cambridge University Press, 2013), e-book.

Inalienable Rights Could Never Have Been Transferred to Government in a Social Contract, So No Government Can Properly Claim Jurisdiction Over Them

Let us now consider Jefferson's mention of “unalienable rights.” Unalienable (or “inalienable”) rights stood in contrast to alienable rights, so we might wonder why Jefferson found it necessary to refer to this rather technical distinction, especially in a political document that was intended for popular consumption. Why didn't Jefferson simply speak of “rights” in general, instead of focusing on inalienable rights?

Inalienable rights were regarded as fundamental corollaries of a person's essential nature, especially his or her reason and volition, so these rights could never be surrendered or transferred to another person (including a government), even with the agent's consent. People can no more transfer their inalienable rights than they can transfer their moral agency, their ability to reason, and so forth. This means that inalienable rights could never have been transferred to government in a social contract, so no government can properly claim jurisdiction over them. Consequently, any government that systematically violates inalienable rights is necessarily tyrannical and vulnerable to revolution. As Francis Hutcheson put it, “Unalienable Rights are essential Limitations to all Governments.”

According to this theory, legitimate disagreements may occur between subjects and rulers when alienable rights are involved, but no such disputes are possible between people of good will when inalienable rights are involved. No government can claim jurisdiction over inalienable rights, because they are incapable of alienation and so could never have been delegated or surrendered to a government in the first place. This means there can be no excuse for the systematic violation of inalienable rights. This is the bright-line test that enables us to distinguish the incidental or well-intentioned violation of rights, which even just governments may occasionally commit, from the deliberate and inexcusable violations of a tyrannical government.

This is why Jefferson focused on inalienable rights in his effort to fasten the charge of tyranny on the British government. The violation of inalienable rights was a defining characteristic of a tyrannical government, and only against such a government is revolution clearly justified.

--George H. Smith, The System of Liberty: Themes in the History of Classical Liberalism (New York: Cambridge University Press, 2013), e-book.

Friday, June 14, 2019

Classical Liberalism Is Based on Commutative Justice; Social or Distributive Justice Requires Constant and Repeated Coercion to Maintain Equality over Time

The ‘new liberals’, by contrast, think that income redistribution is exactly what governments should do. They see inequality and poverty as the result of unequal power and unjust property laws that benefit employers and the rich but harm employees and the poor. To promote ‘social justice’, therefore, government must correct the power imbalance and redirect wealth and income from better off to worse off people.

Classical liberals think this a gross misuse of the word ‘justice’. To them, justice is commutative justice, the resolution of conflicts between individuals and upholding the rights and freedoms of individuals by punishing those who intrude on them. It is about restraining threats and violence, and granting restitution to people who are made worse off by coercion. It is about the conduct we expect, and have a right to expect, from each other.

Real justice, therefore, focuses solely on how people behave towards each other. Being robbed is unjust; catching flu is a misfortune but it is not unjust, because nobody has acted unjustly. Social or distributive justice, on the other hand, is quite different. It is about the distribution of things between different members of a group. It seeks to alter that distribution – generally towards greater equality
– even if the existing distribution is simply the outcome of events, and nobody has behaved badly or acted unjustly.

If, for example, 100,000 people each pay to watch a popular singer at a stadium, they end the evening slightly poorer and the singer ends it significantly richer. But nobody has done anything wrong, and nobody has been coerced. Classical liberals would therefore ask: how can the resulting distribution of wealth possibly be unjust? And they point out that to return things to equality would require coercion – taking the singer’s new wealth by force in order to return it to the audience. Indeed, as Nozick says, it would require constant and repeated coercion to maintain that equality over the future.

--Eamonn Butler, Classical Liberalism: A Primer (London: Institute of Economic Affairs, 2015), 54-55.

Hard Money Is Based on the Rule of Law; Soft Money Is Monopoly Money and Is Based on the Rule of Man

Hard money is intended to be as stable and reliable as possible. It is represented as a definite, inviolable, mutually agreed-upon contract, such as the definition of the currency as a specified amount of gold. It is thus said that hard money is based on the rule of law, although any naturally occurring commodity money, such as cowrie shells, are also hard monies.

Soft money is usually intended to be adaptable to short-term policy goals, and because it is subject to the changing whims of its managers, soft money is said to be based on the rule of man. Soft money has no definition. Soft money is really only possible when the monetary system has been monopolized, since, if given the choice, citizens will naturally conduct their business in terms that are definite, inviolable, and mutually agreed upon. The only entities that have been able to monopolize the monetary system are governments and private entities in collusion with governments. (Most central banks today are privately owned.) Soft money is, literally, monopoly money. History has produced a natural cycle between hard and soft money, which has also typically been a cycle between government and private market control over the monetary system. The world is now in a soft money cycle; there are no hard currencies today.

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 19-20.

Thursday, June 13, 2019

Keynesian Deflation Phobia Leads to an Exaggerated View of Balance Sheet Recession Danger

Let's turn to a further source of Keynesian phobia about deflation--balance sheet recessions. In severe cases of deflation phobia, this concern might even extend to the essential rhythm of prices both in a downward and upward direction which would be evident in a well-functioning capitalist economy under conditions of monetary stability (including a fixed anchor to prices in the very long run). Balance sheet recessions were first analysed by Irving Fisher in the context of the Great Depression and have been made much of by some inflation target proponents such as Bernanke (2000). Their trumpeted fear is that the fall in the price level would bring an increase in the real indebtedness of businesses which would hinder their prospects of weathering the recession and moving forward to take advantage of new investment opportunities.

The antidote to this fear is the realization that the recovery of the price level further ahead (beyond the present fall related to recession or start of secular stagnation) will go along with a decline in the real value of the debt (or equivalently there will be a period of substantially negative real interest rates) offsetting the rise in real value during the price fall. . . .

In sum, the harmful balance sheet effects of deflation (rising real indebtedness) only appear where markets fail to put any significant weight on a possible later price level recovery--meaning that substantially negative real interest rates do not emerge.

--Brendan Brown, A Global Monetary Plague: Asset Price Inflation and Federal Reserve Quantitative Easing (Houndmills, UK: Palgrave Macmillan, 2015), Kobo e-book.

Technically, a Business Cycle Is Generated by Movements of Interest Rates Which Affect Relative Prices in Such a Way as to Cause False Expectation, According to Lionel Robbins

Robbins discussed the basic cause of business cycles. Technically “a business cycle is generated by movements of interest rates which affect relative prices in such a way as to cause false expectation.” In his explanation, he made a distinction between consumers' goods and producers' goods. Interest rates are pushed lower.
This means that the profitability of all forms of production which involve making things which only yield services at a later date, or over a long period of time, in increased. . . . The longer-lived the capital instrument, or the greater its distance from consumption, the more its value is affected by the change in the rate of interest. The shorter-lived it is, or the less its distance from consumption, the less it is affected. The value of flour in the baker's shop is hardly affected by a cheapening of the cost of borrowing. The value of mines, forest, houses and heavy factory equipment is enormously affected.
Robbins' plan for recovery included the reestablishment of an international gold standard, stable exchange rates, removal of trade barriers, and greater flexibility in prices and wage rates. He opposed the interventionist policies of maintaining wages and consumer demand, propping up business bankruptcies, and limiting farm output.

--Mark Skousen, The Structure of Production, new rev. ed. (New York: New York University Press, 2015), Kobo e-book.

It Was Keynes's Reading of the Malthus Side of the Malthus-Ricardo Correspondence That Turned Keynes's Mind to the Possibility of Demand Deficiency As a Cause of Recession

The Keynesian Revolution, and therefore the origins of virtually all macroeconomic theory today, can only be understood in relation to Keynes's coming across Malthus's economic writings in 1932. In particular, it was his reading of the Malthus side of the Malthus-Ricardo correspondence, which had been unearthed in 1930 by his close associate Piero Sraffa, that turned Keynes's mind to the possibility of demand deficiency as a cause of recession. Until that time, economists had been near unanimous in arguing that insufficient demand as a cause of recession was fallacious, and until reading the Malthus-Ricardo correspondence, this possibility had never crossed Keynes's mind. . . .

It was Malthus, of course, who had been the leading advocate in the nineteenth century of demand deficiency as a cause of recession, and of increased levels of unproductive spending as the cure. Reading Malthus's letters to Ricardo, and then the text of Chapter VII of Malthus's Principles, both of which Keynes did at the end of 1932, ought to be recognized as the single most important reason why Keynes was to write what he wrote in the way that he did.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.