Hazlitt’s Economics in One Lesson (Selections)

~ 250 words, ~ 1  min reading time.

The full book is available from the Mises Institute or Amazon.

Chapter 1 – The Lesson – In very brief, what distinguishes good economists from bad is that good economists consider the impacts of a policy on ALL groups and both the immediate term AND in the long run. Bad economists tend to focus on either the impacts on just one group, or on just the short run effects of a policy. (It is also technically possible for bad economists to focus only on the long run effects of a policy – but this seems to be a rare error today.)

Chapter 2 – The Broken Window – A hoodlum threw a brick through a baker’s window. People began gathering outside, and realized that this is a good thing for the economy. After all, buying a new window will create income for the glazier, who, in turn can spend this money on something else. On the surface, this seems right. It’s certainly true that the glazier and those who produce things he buys will benefit from this event. However, this ignores two sets of losers. (1) The baker himself has to pay to replace the window – that means giving up something else – say, a new suit. So, without the broken window, the baker would have had a window + a suit. Now, after replacement he simply has a window. (2) Had the window not been broken, the tailor would have gotten an income – as would those who produce the things the tailor would buy.

Garrison’s The Austrian Theory of the Trade Cycle and other Essays (Selections)

~400 words, ~ 2 min reading time

These are the Mises U selections from Garrison’s collection The Austrian Theory of the Trade Cycle and other Essays. The book is available from both the Mises Institute and Amazon.

Garrison – The Austrian Theory in Perspective – the Austrian business cycle theory (ABCT) incorporates capital structure in a way that Keynesian and Monetarist theories don’t. While ABCT doesn’t explain everything, it does provide the core theory for why business cycles happen. Details, however, are dependent on history and institutions. Thus, expositions of the theory will vary over time – and should! – as each exposition should reflect the concerns and institutions of the time.

Rothbard “Economic Depressions: Their Cause and Cure” – Any cycle theory should explain (1) the recurrence of business cycles, (2) the cluster of errors that gets revealed in the crisis, (3) the relatively large impacts on capital goods industries. ABCT does this by combining Humean arguments to explain recurrence, Mises’s argument about the information content of interest rates sending a false signal to entrepreneurs, and the relatively larger impact of interest rates on capital goods industries predicted by Austrian capital theory. To cure depressions, the government should refrain from credit expansion (which causes the problem in the first place, and can only prolong the malinvestments by covering up the errors as they grow) and cut back spending (freeing up resources for the private sector). This theory was on the edge of widespread acceptance until Keynes presented his theory – which did not refute Mises’s theory, but simply led many to forget about it.

Hayek’s “Can We Still Avoid Inflation?” – The answer: obviously yes, from a technical standpoint. However, politically, it’s not clear that it is possible, because, in industrialized countries, we have a combination of strong labor unions who will fight any drop in money wages – so that any change in relative wages requires that nearly all wages rise – and a central bank holding to a full employment policy – so they will increase the money supply in response to any increase in unemployment that the unions’ demand for higher wages brings about. [Lucas’s Note: Hayek’s essay is a bit dated. At least in the US, labor unions have seen a significant decline in recent years, and the Fed has developed a more balanced approach to employment and price inflation, and acknowledge that they have more impact on prices than employment in the medium to long run.]

Rothbard’s What Has Government Done to Our Money? – Parts 1-3

~1250 words, ~6 min reading time

[Since this series is focused on the Mises U readings, I focused only on the sections that are required for that. Full book available from the Institute or Amazon.]

I – Introduction – Discussions of money are confused, largely because of a desire to be “realistic” – to consider only minor deviations from the current system. This constraint on thinking prevents us from thinking about what a free market in money would really look like, since government has interfered in the monetary system for such a long time.

II – Money in a Free Society

1 – The Value of Exchange – because of the variety of locations of natural resources and the variety of people’s wants and abilities, exchange is a useful way to get what you want from those who are most able to provide it.

2 – Barter – barter runs into issues of the “double coincidence of wants” (that is, I have to have what you want and you have to have what I want) and indivisibility of many goods. So, barter’s ability to be the primary means of exchange is limited.

3 – Indirect Exchange – It may be beneficial to receive something that I don’t directly want if it is widely marketable. So, I will exchange what I have for something I don’t want, but can easily get rid of for what I DO want.

4 – Benefits of Money – Money allows for more specialization – and the resulting productivity boost. Money prices also allow for economic calculation, which opens the way to complicated production processes.

5 – The Monetary Unit – in a free market, money is a commodity like any other, and so will be denominated in the natural unit of physical goods: by weight.

6 – The Shape of Money – the entirety of the stock of the monetary commodity counts as the money supply – coins, bars, dust, etc. – as it is the commodity rather than the form that makes it money.

7 – Private Coinage – in a free market for money, private companies would mint the monetary commodity into easily recognizable coins. They would determine size, shape, etc. based on consumer demand, and consumer demand combined with reputation would ensure quality – just as happens with other goods.

8 – The “Proper” Supply of Money – like with any other good, the proper supply is the supply entrepreneurs provide. The purchasing power of money can adjust to accommodate any money supply. At the same time, production of the monetary commodity is not inherently unproductive because the commodity has nonmonetary uses.

9 – The Problem of “Hoarding” – all hoarding does is increase money’s purchasing power. And there is no clear distinction between hoarding and simple money holding.

10 – Stabilize the Price Level? – Like all commodities, the value of money would fluctuate based on changes in supply and demand. It’s not clear why this is a bad thing. Some suggest that it changes the relationship between creditors and debtors – yet, these are free to adjust based on a price index if they wish. Yet, we do not see private lenders and borrowers doing this, suggesting the alleged benefit of stabilizing the price level is minimal in the eyes of those who are supposed to be the ones benefiting.

11 – Coexisting Moneys – we can’t rule out that there may be more than one money in a free market for money. (Example: gold and silver) If so, the two would have a floating exchange rate between them.

12 – Money Warehouses – in a free market, banks would be money warehouses. They would simply charge fees to store money – they would not engage in fractional reserve banking. But, even if we adopt free banking, the extent of fractional reserve banking would be quite limited.

13 – Summary – in short, the free market can provide money just like it provides anything else.

III – Government Meddling with Money

1 – The Revenue of Government – Governments often resort to monetary inflation to fund themselves, as the effects are less obvious than the effects of taxation.

2 – The Economic Effects of Inflation – Inflation redistributes wealth from late receivers to early receivers of the newly created money, makes economic calculation more difficult, which leads to economic inefficiency, can destroy the monetary system through hyperinflation if it goes unchecked, and leads to business cycles.

3 – Compulsory Monopoly of the Mint – Government has to take over the monetary system step-by-step. The first step is claiming a monopoly over minting coins, which allows government to charge a monopoly premium for minting.

4 – Debasement – once they have a monopoly over minting, the government can begin decreasing the size or at least the precious metals content of coins. The profits from reminting old coins as new can be used for revenue.

5 – Gresham’s Law and Coinage

a. Bimetallism – in setting a fixed ratio between gold and silver prices, government ended up creating a situation in which one money was used while the other was hoarded – and the two would switch back and forth. This led to an elimination of bimetallism and adopting a gold standard.

b. Legal Tender – legal tender laws require people to accept the standardized money in payment for debts. This gives the legal monetary standard an advantage, which opens the way for government to intervene more in the monetary system.

6 – Summary: Government and Coinage – The final step is making use of all foreign coin illegal. This, in turn, disrupts international trade and therefore the international division of labor. To increase government control beyond this point, the economy must move beyond hard money.

7 – Permitting Banks to Refuse Payment – One privilege that banks have been given is the ability to simply refuse to pay their obligations while staying in business. This allows banks to inflate without having to worry about bank runs as much. However, it does not provide much control over the inflation from the government’s perspective.

8 – Central Banking: Removing the Checks on Inflation – One of the key moments in the government taking over the banking system’s operation is when they monopolize note issue and centralize reserves in the central bank. This removes one of the key limits on banks’ ability to create money: the extent of their own clientele.

9 – Central Banking: Directing the Inflation – Government effectively controls the money creation process by injecting new reserves into the banking system through open market operations and discount window lending, and by controlling the legal required reserve ratio.

10 – Going Off the Gold Standard – While central banking loosens the restrictions on individual banks in their ability to inflate, the system as a whole faces the problem of gold outflows if they overinflate compared to other countries. This problem leads governments to take their currencies off of the gold standard entirely – leading to currencies that are purely fiat.

11 – Fiat Money and the Gold Problem – By leaving the gold standard, government increases the number of moneys as it is unreasonable to assume that people will just stop using gold as money and instead rely entirely on paper. This leads governments to ban the holding of monetary gold.

12 – Fiat Money and Gresham’s Law – in a world of fiat currencies, any attempt to peg exchange rates will lead Gresham’s Law to kick in – that is, the overvalued currency will fall out of use in international transactions while the undervalued currency (historically the dollar) will find more use. This leads to a shortage of the undervalued currency. The end result of this intervention seems to be a single, world fiat currency.

13 – Government and Money – In the end we have seen that the government got into money to acquire an easy source of revenue, and that to take full advantage of this required a series of increasing interventions – but each of these created a series of problems leading to more intervention. The world of national paper moneys creates barriers to the international division of labor – lowering our productivity.

Leonard Read’s “I, Pencil”

~100 words, ~1 min reading time

This is a short essay that I will attempt to make shorter…

No one knows the full process of how to make even a simple pencil. Rather, it is accomplished by each person using their limited know-how to accomplish tiny steps in the process, with the steps being coordinated by mutually beneficial exchange.

Because simple things are so complicated, it is important to allow people maximum freedom to create and improve processes, and to engage in exchange.

Lessons from Bullet Journaling

~500 words, ~3 min read time

I started using a bullet journal back in early April in an attempt to have some kind of organizational system that would actually match what I wanted. I made some mistakes along the way, but on the whole I like the bullet journal method. So, here are some lessons I’ve learned in the past couple months.

(1) Choose your size wisely – My first attempt at using a BuJo failed because I tried to use a standard sized composition book. This was too big to fit in my pocket, so I could only carry it if I was bringing my briefcase, or if I specifically decided to carry a notebook with me. This was inconvenient, so I stopped using it. This time around, I chose a small notebook – about 3.5″x5.5″ (like this), so roughly cell phone sized. This fits in my pocket with my phone, and is FAR more convenient. At the same time, I’m sure many would find the thing cramped.

(2) Dedicate enough space for your index – My notebook has 131 pages in it. But, I only dedicated 34 lines to an index at first. Surprise! I ran out of lines in the index, so now I have a secondary index around page 80. Dedicate a line per page, just to be safe.

(3) It’s okay to be simply functional – I’ll be honest. I am not artistic. So, my BuJo is not pretty. Mostly, it’s a dated task list with a few pages of checklists. That’s it. But, it works for me.

(4) Don’t dedicate a page to each day ahead of time – I should have known better. The BuJo guidelines on Bulletjournal.com say this. I had used a Franklin Covey page a day planner for years. I should have known that with a dedicated page per day, many pages would be basically empty while others would be full. Poor planning.

(5) Don’t rewrite your to-do list every day. It’s easy to flip through the Daily Log and find what you need to do. Just migrate at the beginning of the month and you’ll be fine.

(6) A BuJo is not a productivity strategy. It is simply a tracking system that is beautifully flexible. But, you still need a separate strategy for how to deal with the information you store in it. But, in my experience, a BuJo can pair extremely well with Mark Forster’s Do It Tomorrow. I suspect it would also work well with David Allen’s Getting Things Done, but I always found GTD too undirected to motivate me. Now, not everyone needs a system for dealing with tasks. I find it very useful, as it removes the mental load of having to figure out what to do. But, as always, it’s up to you and what works for you.

(7) Use checklists for routine tasks. I have 3 checklists: a yearly, a monthly, and a daily. I prioritize in that order, making exceptions in the evening’s  for particularly pressing tasks.

Mises’s Profit and Loss

~650 words, ~4 min reading time

Full text here.

The Economic Nature of Profit and Loss

The Emergence of Profit and Loss – Profit and loss emerge as entrepreneurs purchase factors of production in anticipation of future prices of consumer goods. If the future were perfectly predictable, profit and loss would not exist. They only exist because change is constant.

The Distinction Between Profits and Other Proceeds – Entrepreneurial profit is not interest. It is not wages for the labor of entrepreneurs. It is not monopoly gains. Entrepreneurial profit or loss is what is earned because of the quality of decision making. If you want to identify an entrepreneur, identify who would take a loss if things went badly.

Non-Profit Conduct of Affairs – In the absence of profit and loss, bureaucratic rules and regulations are the only viable alternative. This applies to governments as well as other non-profit organizations.

The Ballot of the Market – while entrepreneurs are the decision makers in the market, consumers have the final say, as they vote with their dollars for what they want.

The Social Functions of Profit and Loss – Profit and loss are the return on good (or bad…) entrepreneurial decision making – that is redirecting resources to their highest valued ends, in the minds of the consumers.

Profit and Loss in the Progressive and the Retrogressing Economy – in a progressing economy, profits are greater than losses, allowing for an accumulation of capital, which allows increased production. This requires real saving. An economy that is consuming capital will have greater losses than profits, and will retrogress.

The Computation of Profit and Loss – profit and loss are naturally psychological. However, in a monetary economy we can calculate them.

The Condemnation of Profit

Economics and the Abolition of Profit – Some, inspired by Marxism, have declared that profit should be abolished. If this is a purely moral claim, then economics has little to say about it. However, if the claim is that this would benefit workers and consumers, then economics can analyze whether this is true.

The Consequences of the Abolition of Profit – profit is what makes entrepreneurs accountable to the consumer. Abolition of profit would then turn entrepreneurs into unaccountable managers, resulting in chaos.

The Antiprofit Arguments – All the arguments against profit are  wrong. They ignore that profit and loss put the consumer in charge. The reasonn the US is so rich is that it has tolerated the existence of very rich entrepreneurs.

The Equality Argument – The typical progressive argument against profit is that it leads to inequality. However, for some reason, those advocating for equality only believe in “leveling out upward” – expropriating those wealthier – not “leveling out downward” – giving to those who have less than the equality advocates. A true belief in equality would result in nearly every American having a substantially lower income, since even poor Americans are wealthy by world standards.

Communism and Poverty – Some say that people turn to communism and socialism because they are poor. But, this skips a step. People turn to a set of policies because they think it will improve their situation. However, people often don’t understand the long run impacts, resulting in choosing policies that are harmful in the end.

The Moral Condemnation of the Profit Motive – Some people treat the pursuit of profit as morally dubious. But the rational pursuit of long-run profits is what best serves society and encourages social cooperation.

The Static Mentality – Most people treat reality as if it were static. As such, they don’t understand the importance of entrepreneurs adjusting production in the face of uncertainty and change. So, socializing production looks feasible – as all you have to do is keep doing what we’ve been doing. This, however, is unrealistic, since the world changes and the content of changes is uncertain.

The Alternative – socialism. Production will either be driven by entrepreneurs seeking profit or by some kind of central planner. There is no third option.

Fitness Friday – Lunges are Slaughtering Me

~200 words, ~1 min reading time

So, I started a new routine about 3 weeks ago. I think it’s going pretty well. . 5 days per week, usually 20-45 min per day. Very workable. But, the new routine is putting more emphasis on legs than my previous did, and it’s introduced an exercise that I’ve not really done before: lunges.

To work myself into it, I started with very light dumbbells (5lb a side). Weirdly, the lunges are far more exhausting than exercises where I am lifting FAR heavier weight.

It turns out a lot of what it comes down to is what you’re used to. Lunges use a different set of stabilizing muscles than the other exercises I do. So, it’s the stabilizing muscles that make the exercise feel so demanding.

This routine also brings back a few exercises that I had set aside for a couple months. What I found: I have regressed significantly. I mean, I’m not back to where I started – but I’m also nowhere close to where I left off.

This is an amazing thing about humans. We are amazingly adaptable. But, to adapt, we have to be put into circumstances that require it.

Selgin’s Praxeology and Understanding

~550 words. ~3 min reading time.

Full text here.

Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics – Austrian economics faces the challenge of skepticism. GLS Shackle has suggested that economic laws aren’t really useful because the economy is typified by patternless “kaleidic” change. Some Austrians have adopted this view as well on some level.

Praxeology: The Method of Economic Theory – Economic laws come from logically deducing from the action axiom, which is undeniable.

Ideal Types and “Exact Laws” – Praxeological laws are true regardless the specific content of people’s preferences or the specific circumstances in which they find themselves. The question is simply whether they apply in a specific case or not. This means that praxeological laws cannot be “exact” (in the sense of being numerically precise). We may use ideal types to fill in some “common sense” preferences and so on when doing historical work. However, Mises draws a sharp distinction between history and theory. Theory is purely the logic of choice. History allows for (and requires) consideration of specific preferences and interpretations of situations.

From Mises to Lachmann: Austrian Revisionism – Three thinkers led some Austrians to question the value of praxeological reasoning. (1) Hayek suggested that praxeology by itself provides very little real-world insight, and suggested supplementing it with “common sense” assumptions about the content of preferences. (2) Shackle focused on the importance of uncertainty – but in a radical form. In the strong form, Shackle’s view is that economics cannot deal with the “kaleidic” nature of the future. In this, Shackle confuses determinism in concrete application with determinism in logical patterns. (3) Lachmann emphasizes the need to deal with “divergent expectations”. Profit and loss provide good feedback for past expectations – but provide little guidance for future expectations.

Equilibration and Coordination – the praxeological understanding of equilibration is really just about the removal of a felt uneasiness. So, while we may never reach “equilibrium” (a state where there is no felt uneasiness), action is equilibrating in as far as it is successful. But, to be successful requires foresight. If the future is “kaleidic” (that is, basically unpredictable), then there is no reason to expect that action will generally be successful. The claim from Shackle and Lachmann is that human action is radically unpredictable. So, in as far as my action being successful requires the action of others, there is no reason to expect that it will be successful.

Implications of the Kaleidic Society – In short: praxeology can’t really “prove” that society isn’t kaleidic. Rather, what it can prove is that a kaleidic society is one where action doesn’t really happen in any meaningful sense. If the future is kaleidic, then one can’t really undertake purposeful behavior – that is, action – in any meaningful sense. Since there is no clear connection between our behavior and the effects of our behavior, we will never be able to remove any specific felt uneasiness except by pure chance. In addition, the advocates of the kaleidic view have failed to explain their own bothering to engage in economic theorizing. If the future is kaleidic, then engaging in economic research can’t be expected to serve any particular purpose. So, why do it? Rather, their own behavior suggests that those that claim to believe in a kaleidic future don’t actually believe in it in any practical sense.

Gordon’s The Philosophical Origins of Austrian Economics

Full text here.

My brief summary:

Austrian economists Menger, Bohm-Bawerk, and Mises all had various philosophical influences.

Aristotle – influenced Menger through Bentrano. Against the German Historical School, which emphasized the interconnectedness of everything and denied the existence of any kind of universal economic laws that would apply across different societies, Bentrano emphasized the ability to separate pieces of reality in our analysis. Specifically, Bentrano separated the acts of the mind from the objects of those acts. In Menger, this showed up as people making judgments of value. So, value is not intrinsic to the good – or even to the mind. Rather, it is a matter of a judgment that the mind makes about the good. Aristotle also emphasized that true science is deductive – treating empirical science as a stand-in for true science until our understanding of the deductive structure develops sufficiently.

Occam – had a big influence on Bohm-Bawerk – especially in the need to trace all concepts back to their origin in perception. This led Bohm-Bawerk to reject mystical sorts of notions in social science and to be very concerned with clarity and thoroughness in the analysis. This is especially obvious in his criticism of Marx. Rather than settling at criticizing the labor theory of value (which would have been sufficient), Bohm-Bawerk criticized Marx more or less line-by-line.

Kant – Not as big an influence as you’d expect. He provided some of the Misesian language, but Mises doesn’t rely on Kant’s philosophical system.

The Logical Positivists – probably the biggest influence on Mises, but in the negative direction. Much of Mises’s more philosophical work was defending a deductive method against the logical positivists, who favored empirical methods as being the only real way to do “science”.

Rothbard’s Anatomy of the State

~200 words, ~1 min reading time

Confession: Despite having been on the faculty for Mises University for a few years now, I haven’t actually done all the readings. Now, don’t get me wrong, I read the readings for when I was a student back in 2003 and 2004. But, things have changed a bit. So, I’ve decided to try to read through some of the Mises U readings this year – anything I’ve not read, or have too vague a memory of. Then, I’ll offer a (very!) brief synopsis here. So, here’s the first – which I had never previously read!

Anatomy of the StateMurray Rothbard

What the State isn’t – us.

What the State is – a regional monopoly on the use of force.

How the State preserves itself – creating vested economic interests, but ideology that supports the State as good or at least inevitable even moreso.

How the State transcends its limits – by controling the power of interpretation of its limits.

What the State fears – losing its power through conquest or revolution.

How States relate to one another – mostly through war. Though we used to recognize that war was between States rather than between peoples.

History as a race between social power and State power – sometimes the creative forces run ahead of the State – leading to an increase in freedom. Other times, the State catches up. We have yet to find a good method of limiting State power.