03 Apr 2017

Contra Krugman Episode 80: The Time Krugman Responded to Bob on ABCT

All Posts, Contra Krugman 74 Comments

Krugman was talking about health care again in his op eds, so Tom and I discussed this blast from the past. An outline:

3:00 Bob summarizes a really old Krugman column on “hangover theories” of the business cycle: why isn’t there a consumption boom during the “recession”?

4:15 Bob then summarizes Tyler Cowen’s related objection: Why is there a boom period at all? If investment rises, shouldn’t consumption fall? Why empirically do we see comovement in these variables over the course of the business cycle?

5:40 Bob says the key issue: capital consumption.

6:00 Bob summarizes his “sushi example.” 100 people on an island, then Krugman shows up.

7:35 Why an illusion?

8:35 Why should there be unemployment if people are poorer? Wouldn’t they work more?

10:30 Tom summarizes Krugman’s response to my “sushi article.”

14:55 Bob points out Krugman’s response to me, is actually a concession, a retreat from his original claim that ABCT was akin to phlogiston theory of fire.

17:10 The problem lying behind Krugman’s questions (he conflates Austrian with RBC).

18:50 Central banks *can* slow growth.

22:00 What evidence do we have of Austrian malinvestment?

26:45 Bob goes through two examples distinguishing Keynesian versus Recalculation view.

35:40 Why aren’t slumps associated with accelerating price inflation?

74 Responses to “Contra Krugman Episode 80: The Time Krugman Responded to Bob on ABCT”

  1. Andrew_FL says:

    “Why is there a boom period at all? If investment rises, shouldn’t consumption fall? Why empirically do we see comovement in these variables over the course of the business cycle?”

    There is a boom precisely because this doesn’t happen!

    • Andrew_FL says:

      The whole point of the theory is that there is an inconsistency between the plans of consumers-savers and producers-investors generated by a wedge of monetary inflation thrown into the markets for loanable funds.

      • guest says:

        To be clear, what you’re saying is that the assumption behind the question, “If investment rises, shouldn’t consumption fall?” is correct because the funds that get invested have to come from consumers choosing to forego consumption.

        EXCEPT when those funds are created out of thin air, which is the wedge of monetary inflation you’re talking about.

        And since consumers consume goods and not money, the consumers don’t slow their consumption until an unanticipated rise in prices occur after the new money has come out of the artificially stimulated capital sector.

        • Andrew_FL says:

          Yes, exactly.

          • Mike Sandifer says:

            There are lots of problems with this thinking, not least of which is the absence of particularly high inflation during supposed booms caused by supposely loose monetary policy. Also, It is not clear to me why there should be a lag in the rise in current prices sufficient to offset any such “boom”, even if one did occur.

            • guest says:

              “Also, It is not clear to me why there should be a lag in the rise in current prices sufficient to offset any such “boom”, even if one did occur.”

              The lag is due to the new money not being dispersed to everyone at once.

              The first users of the new money have to spend it before it can affect other sectors.

              It takes time for the new money to work its way through the economy.

              So, all prices don’t rise at the same time, but eventually and logically, it will at some point (for those transactions that are, in some way, connected to the new money).

              • Michael Sandifer says:

                Guest,

                The problem with that idea is, it doesn’t fit reality. Significant liquid asset prices increases, especially commodities, will be reflected in consumer prices very quickly, even in competitive industries if they’re believed to be permanent.

              • Mike Sandifer says:

                guest,

                Clearly, there is no such lag. The idea that “new money” would have differential effects on those first users without the rest of the economy taking it into account is ludicrous. Markets would be significantly less efficient than they are if changes in supply and demand were never anticipated.

                And the fact is, even if such a lag occurred, eventually there would be a general increase inflation, which hasn’t occurred during many so-called boom periods in the past.

              • guest says:

                “Markets would be significantly less efficient than they are if changes in supply and demand were never anticipated.”

                Ahh, but the government hides the inefficiency with rigged CPI numbers and irrelevant aggregates such as GDP.

            • guest says:

              “… not least of which is the absence of particularly high inflation during supposed booms caused by supposely loose monetary policy.”

              In ABCT, the artificial boom is an overproduction (NOT a general overproduction, which is not possible) of capital goods relative to consumer demand for the goods that the capital is intended to produce.

              For example, it’s possible to waste materials building something you need less of now than something else; More tractors than is needed, for example, verses some other use for the materials that would be of more benefit at the moment.

              But, yes, this has come up before (I can’t find the discussion, but it was with LK), and Rothbard noted that you don’t need inflation to accompany a boom, so I should refine my answer.

              Here’s Rothbard:

              Money Inflation and Price Inflation
              http://www.epjresearchroom.com/2016/05/money-inflation-and-price-inflation.html

              “In the last few months, the Reagan administration seems to have achieved the culmination of its “economic miracle” of the last several years: while the money supply has skyrocketed upward in double digits, the consumer price index has remained virtually flat. Money cheap and abundant, stock and bond markets booming, and yet prices remaining stable: what could be better than that? …”

              “… The fundamental insight of the “Austrian,” or Misesian, theory of the business cycle is that monetary inflation via loans to business causes over-investment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real estate prices are titles to capital goods, there tends as well to be an excessive boom. It is not necessary for consumer prices to go up, and therefore to register as price inflation. And this is precisely what happened in the 1920s, fooling economists and financiers unfamiliar with Austrian analysis, and lulling them into the belief that no great crash or recession would be possible. The rest is history.”

              • Mike Sandifer says:

                Guest,

                To convince non-ABC types, you have to demonstrate why your view of inflation is superior.

              • guest says:

                “… you have to demonstrate why your view of inflation is superior.”

                Hmm. I’m not sure that we could justify calling our view “superior” so much as “different” in the sense of “not misleading”, given that the purpose of defining “inflation” as a rise in prices was to obscure the deleterious effects of monetary inflation.

                Had the definition of inflation always meant a rise in prices, I’m sure we would be content to simply use the term “monetary inflation” or some such.

                At any rate, the Austrian view that printing money has deleterious effects is superior to the mainstream view that printing money in a recession helps to sustain a supposed optimal demand, is because optimality of demand is something that can only be subjectively assessed by the consumer.

                If the consumer wants to withhold spending, it is not an optimizing act to make people believe it is economical to increase investment or consumption against an otherwise unchanged resource supply and production structure.

            • Andrew_FL says:

              “the absence of particularly high inflation during supposed booms caused by supposely loose monetary policy.”

              This is because you incorrectly view loose monetary policy as meaning high price inflation.

              • Mike Sandifer says:

                Andrew,

                My view on inflation is the standard macro view, as far as I know. I see no evidence to support a heterodox view.

              • Andrew_FL says:

                I said “incorrect” not “heterodox” but the fact that orthodox = correct shows why speaking to you is a waste of time.

              • guest says:

                “My view on inflation is the standard macro view …”

                Austrians Are Not Redefining Inflation
                http://consultingbyrpm.com/blog/2013/08/austrians-are-not-redefining-inflation.html

                “… Austrians are not “redefining words” for ideological purposes. We claim that there was an ideological redefinition in the past, which we are trying to undo!”

              • Mike Sandifer says:

                Yes, there is nothing wrong with mainstream business cycle theory. If you want to convince most economists they’re wrong, you have to point out flaws in the mainstream approach such as lack of empirical fit and/or present a better model.

              • guest says:

                “… such as lack of empirical fit and/or present a better model.”

                The main flaw in the mainstream theory is that they get the order of value wrong, such that they believe tweaking the money supply *causes* consumer behavior X.

                But that’s a logical impossibility since consumers are the source of all valuations of economic goods.

                So no empirical data could prove or disprove either the mainstream or the Austrian theory of business cycles.

                You have to use deduction to determine which, if either, is correct.

              • Harold says:

                “But that’s a logical impossibility since consumers are the source of all valuations of economic goods.”

                But what causes the consumer’s valuation? It is their preferences. But what causes their preferences?

                This is an interesting point, because it seems to me that Mises and Rothbard avoid this question. The origin of these preferences are outside the scope of economics, so they say.

                So there does not seem to be any logical impossibility, just that these considerations are nothing to do with economics according to Mises.

                This is not a trivial point, but to me seems to be why the Praxeology approach is not a very good one.

                I have read quite about this but maybe you could explain if I have misunderstood.

              • Andrew_FL says:

                “there is nothing wrong with mainstream business cycle theory.”

                There is no mainstream business cycle theory. “Mainstream” econ has no theory of the business cycle at all.

              • guest says:

                “So there does not seem to be any logical impossibility, just that these considerations are nothing to do with economics according to Mises.”

                You don’t need to know the origin of consumer preferences to conclude that they are the source of all economic valuations, and that therefore they Keynesians, et al, are throwing monkey wrenches into an economy that works itself out just fine without them.

                Wherever the source of consumer preferences, consumers have to value the good offered in order for it to be profitably produced.

                Producers or money-printers don’t cause consumers to value anything.

                They can guess at what consumers will choose to value when a good or extra fiat money is produced, but that’s not the same thing.

                And given that value is imputed to the higher order stages of production by those who wish to make a profit off of the consumer,

                by violently imposing costs on the consumer’s highest-ranked preferences in the act of devaluing their currency for the benefit of banks and certain producers (of housing, for example),

                these would-be planners are actually causing chaos in the economy rather than creating sustainability.

              • Harold says:

                “You don’t need to know the origin of consumer preferences to conclude that they are the source of all economic valuations,..”

                We certainly know that they are an essential link, but that is not the same as the source.

                We could have an economy where the preferences of the agents are programmed into each agent instead of arising from within each agent. This could operate exactly the same. However, I would say the programmer, rather than the preferences themselves were the source of the valuations.

                The original statement was “…they believe tweaking the money supply *causes* consumer behavior X. But that’s a logical impossibility since consumers are the source of all valuations of economic goods.”

                If the money supply affected the programmer, so they programmed different preferences into the agents then the money supply could cause behavior X.

                This may seem a pedantic or unimportant point, but it is actually central and essential. It is not a logical impossibility if preferences are not the source.

              • guest says:

                “We certainly know that they are an essential link, but that is not the same as the source.”

                For all economic valuations, any causal source that would be prior to consumer preferences would have no bearing on whether or not consumer preferences logically determine what will or will not be profitable production processes.

                “However, I would say the programmer, rather than the preferences themselves were the source of the valuations.”

                Irrelevant, with regard to economic valuations, since prices obtain from consumers’ acts of choosing – for whatever reason they choose.

                “If the money supply affected the programmer …”

                The programmer must first value the money [money substitute] before it will make sense to print more of it. Here, the programmer is playing the part of the consumer of money.

                You’ve moved the problem back, but it’s the same thing, ultimately.

                (The money printer could print money for fun, but then he’d be the consumer.)

              • Harold says:

                Guest, this is an interesting discussion.

                Any prior cause “would have no bearing on whether or not consumer preferences logically determine what will or will not be profitable production processes”

                Agreed – this seems to be true.

                “… prices obtain from consumers’ acts of choosing – for whatever reason they choose.”

                Well, I agree with this also.

                “You’ve moved the problem back, but it’s the same thing, ultimately.”

                Here is where I disagree. It is not the same thing at all.

                In one case we have the economically active agents’ preferences as the origin of prices and in the other we have a programmer.

                It s true that we have simply pushed the problem back rather than answer it, but in doing so we have a completely different problem. Instead of asking about preferences of individuals it now makes much more sense to ask about the programmer’s motivations. Does it want to cause harm?, Is it a capricious demon? Does it want to maximise anything at all?

                One possibility is that when this entity sees the money supply rising it programmes a greater preference for strawberries.

                If we go back to the original disagreement, you said that “they believe tweaking the money supply *causes* consumer behavior X.”
                was a logical impossibility.

                Yet in my programmer case the money supply causes an increase in strawberry buying.

                Therefore it cannot be a logical impossibility.

              • Harold says:

                Guest, on further consideration the introduction of the programmer is an unnecessary complication. You are right in that this is merely pushing the problem back one level. However that does not fundamentally alter my argument.

                Since you do not know where the preferences come from, it is not valid say that it is a logical impossibility that money supply causes consumer behavior X.
                You acknowledge that the origin f the preferences is a mystery, so there is no logical reason that it could not be the money supply.

                This may seem a silly argument – of course it is not the money supply you may reasonably say. But my point gets to the heart of the argument – there is nothing in accepting the view that individual’s preferences set the market price that logically forbids the money supply being the cause of those preferences.

                So when you say it is a logical impossibility, that is not correct. It may or may not be true, but it s not a logical impossibility.

  2. Mike Sandifer says:

    Bob,

    If I understand the point you make in the podcast, ABC, as you see it, says that loose monetary policy incents a move forward in consumption at the expense of growing the capital stock sufficiently to maintain that near-term increase in consumption.

    This view is problematic both empirically and theoretically. First, in what you might call booms, it seems that long-term capital investment increases. Second, even if this weren’t the case, I would think that falling long-run capital investment would begin to increase prices on consumption immediately, discounted for time, even apart from inflation-related hot potato effects. Otherwise, markets wouldn’t be efficient enough to even function.

    • Andrew_FL says:

      “This view is problematic both empirically and theoretically. First, in what you might call booms, it seems that long-term capital investment increases.”

      On the contrary, increasingly roundabout means of production are exactly what we expect to see in booms.

      You are fundamentally failing to grasp that the theory is about the inconsistency between lengthening the capital structure at the same time as increasing rather than decreasing present consumption.

      • Mike Sandifer says:

        Andrew,

        If I understand you correctly, you are saying that ABC theory actually predicts over-investment in long-term capital projects. Okay, so then how does consumption increase in the short-run, especially without an increase in prices?

        • Andrew_FL says:

          If you assume it is impossible for consumption and investment to rise simultaneously it seems to me you are the one with the views that are empirically problematic.

          • Mike Sandifer says:

            Andrew,

            What am I missing? Currently levels of investment and prices already reflect future expected variables. What’s the explicit model you’re using?

            • Andrew_FL says:

              Not ratspec/effmark on steroids that you seem to be using.

              • Mike Sandifer says:

                So, can you show me your model?

          • Mike Sandifer says:

            What you’re describing would be a market failure, and the only market failure I’m familiar with as it relates to business cycles is wage stickiness. Markets are demonstrably more efficient than you seem to be suggesting. That’s the whole reason stocks and other liquid asset prices reflect the integral of future expected discounted cash flows.

            • guest says:

              Good entrepreneurship is based on an understanding of your consumers’ demand – you’re planning your production processes according to what they want.

              But if price signals are originating from somewhere other than consumer demand, stocks *can’t* reflect future expected discounted cash flows.

              The printed money is syphoning away resources in a way that is inconsistent with consumer demand. How can we know this? Because if consumers were sufficiently demanding goods so as to justify an increase in capital investment (and therefore higher stock prices), then investors wouldn’t need to be enticed to do so with printed money.

            • Andrew_FL says:

              “Markets are demonstrably more efficient than you seem to be suggesting.”

              This is nonsense.

              “What you’re describing would be a market failure”

              This is even greater nonsense, since the entire theory is premised on government intervention in the form of banking regulation and/or monopoly of note issue/fiat money. Which would be government, not market failure.

        • guest says:

          Artificially low interest rates that entice consumers to borrow in order to consume.

          • Mike Sandifer says:

            That doesn’t make sense to me. Show me how you represent that mathematically.

            • guest says:

              The rise or fall of any objective metric does not – strictly speaking – bear on consumer preferences, so equations don’t apply to them.

              You have to represent it, logically, not quantitatively.

              All other things equal, a consumer will buy the same, or less, of a good as the price rises – but only because his second-, and lower-, ranked preferences are deemed by himself to be more cost effective as his opportunity costs rise for his highest-ranked preference.

              (If he would buy X at some price, his preferences are satisfied with the quantity purchased at that price. It *logically* follows, then – all other things equal – that he would not be willing to buy more at a higher price.)

              If a consumer values a good high enough, and if he values less the opportunities that accompany a rise in prices for his highest-ranked preferences, a consumer could be willing to spend more on a good as the price rises.

              In that scenario, not all things are being held equal, though.

              At any rate, it is a consumer’s own subjective preferences that bear on his willingness to borrow, so you can’t represent it mathematically.

          • Mike Sandifer says:

            Interest rates are a red herring. We have a fiat monetary system, so the Fed has to set money supply growth. There is no natural money supply growth rate, but rules can be established to keep nominal spending constant, for example.

            • guest says:

              “Interest rates are a red herring.”

              It costs people time and resources to acquire the fiat money they believe is worth something, so interest rates – in terms of what they believe they can receive in exchange for what they give up for fiat money – affect consumers’ willingness to borrow.

              Assume for a moment that World A has the same production structures as World B, and the same consumer demand.

              These structures are currently optimized for current consumer demand (also the same in both worlds).

              Printing money will not directly change the physical structures of production in either world, but it *will* make the first recipients of that printed money *believe* they have more purchasing power than they do – even though nothing has changed in the production structures.

              So you have business activity that is being enticed that was not sparked by signals from consumer demand.

              That’s logically unsustainable because if consumers wanted to save so as to make capital investments profitable, they’d already be doing it.

              Ergo, the tug of war between the capital sector and consumption levels.

              • Mike Sandifer says:

                What you’re describing doesn’t fit reality as I’ve seen it in the market data over many years, nor does it seem to make sense a priori. If you want to talk about “natural” interest rates, we can talk about the Wicksellian rate, but that rate falls with output and prices, while wages remain very sticky in the short-to-medium term. so I don’t know why you’d want to talk about natural rates.

              • Craw says:

                Mike, ask our host, Dr Murphy, about the, as in singular, natural interest rate so beloved of Austrians. He agrees that there is no such thing.

            • Andrew_FL says:

              There is no point in talking to you if you don’t understand the purpose that interest rates serve in a market economy.

  3. Bob Roddis says:

    John has a tuna sandwich. Bill has a ham sandwich. They trade sandwiches.

    Show me how YOU represent that mathematically.

    Joe buys real estate as an inflation hedge because he fears the future depreciation of the government fiat currency due to its dilution by the government.

    Show me how YOU represent that mathematically.

    Sam takes out a loan from Big Fiat Bank which created the loan electronically out of nothing.

    Show me how YOU represent that mathematically.

    Sam uses his loan to outbid Jeff to buy a home.

    Show me how YOU represent that mathematically.

    Willie takes out a loan from Big Fiat Bank which created the loan electronically out of nothing.

    Willie uses his loan to outbid Lou to buy Sam’s home for more than Sam paid for it.

    Show me how YOU represent that mathematically.

  4. Bob Roddis says:

    “We have a fiat monetary system, so the Fed has to set money supply growth. There is no natural money supply growth rate, but rules can be established……..” M. Sandifer

    “The accounting and control necessary for this (socialism) have been simplified by capitalism to the utmost, till they have become the extraordinarily simple operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.” V.I.Lenin

    • Mike Sandifer says:

      Bob Roddis,

      I don’t think you’re following the thread of the conversation. Not a bit of your reply has anything to do with it. As I model it, which is very conventional, the Wicksellian interest rate falls during recessions, because the value of the dollar rises versus output. Interest rates fall in proportion, keeping real rates constant. Unemployment results in the following proportion:

      U3 unemployment = 1 – 1 / [ U + %G – %W (1 + %P)],

      Where:

      U = baseline U3(headline) unemployment rate

      %G = % change in NGDP growth

      %W = % change in total labor costs(usually wages), where total labor cost = total labor compensation + taxes and other costs of hiring

      %P = change in labor productivity, where labor productivity = RGDP/labor hour

      But, for sudden negative NGDP shocks, the above formula reduces to this, to give the total unemployment rate:

      U3 uemployment = 1 – 1 / (U – %G)

      It can be simplified, because total labor cost and labor productivity don’t change during a rapid fall in NGDP. Sticky wages are the whole reason nominal shocks cause recessions.

      See graph here: http://www.themoneyillusion.com/?p=16463
      So, to test this extremely simple model against a bit of data, take the Great Recession, for example. NGDP fell 6.2% below the trend growth rate.
      https://fred.stlouisfed.org/graph/fredgraph.png?g=cxqg
      And at the beginning of the recession, U3 unemployment was at 5%.
      https://data.bls.gov/timeseries/LNS14000000

      So, U3 = 1 – 1 / [.05 – (-.062) = ~10.01%, which is very close to the 10% max. rate during the recession.

      How about the Great Depression? I don’t have the nominal GDP figure, but the long-run average inflation rate during the gold standard era was zero, with some large fluctuations. The statistics available for the Great Depression aren’t as precise as those available today. According to this source, GDP fell 30% during the Depression:

      https://www.britannica.com/event/Great-Depression
      Taking that figure, and the baseline unemployment rate of 3.14% in 1929:

      http://www.u-s-history.com/pages/h1528.html
      So, I get the following:

      U3 = 1 – [1 / [.0314 – (-.3)] = ~24.9%

      It’s generally stated that the unemployment rate during the Great Depression was about 25%. For examples:
      http://2.bp.blogspot.com/…/NgFKdo…/s1600/greatdepression.jpg
      https://www.quora.com/How-greatly-did-the-New-Deal-change-t…

      As you can see, the result is pretty precise. Results are similarly precise for other stress-test predictions, including the effect of changes in GDP growth on stocks, bonds, gold, silver, and foreign exchange rates..
      Modeling more gradual changes in unemployment requires the entire equation above.

  5. Bob Roddis says:

    Mike Sandifer:

    ABCT and its variants are DERIVED from the underlying ubiquitous phenomenon of Human Action and catallactics. Austrians should be talking about interest rates and prices that are determined by voluntary exchanges and contracts in a world with private property and contract enforcement. Those rates and prices will be determined by people exchanging only the property, assets and skills that they own and control (aka actual “savings” and earnings) and which they obtained honestly. The use of the term “natural rates” is confusing. Loans to businesses and/or consumers which are created out of nothing by the fiat banking system at rates set by the system are going to distort the pricing process in an unsustainable direction.

    ABCT is based upon the observation that artificial money and credit creation distort the investment, capital and price structure in an unsustainable direction because rates and prices are not determined by voluntary exchanges of actual savings and earnings honestly earned. The additional new money makes everyone think that everyone is suddenly richer than they were before and they behave as such. The price system, upon which we rely for that information, is now telling a false and dangerous story due to the distorted pricing induced by the new fiat money.
    Implicit and undeniable are the following implications:

    1. The investment, capital and price structure under a fiat system MUST be different than what would obtain under a voluntary system if only because THAT IS THE BASIS OF THE ARGUMENT PUT FORTH BY THE ADVOCATES OF THE FIAT SYSTEM FOR HAVING SUCH A SYSTEM;

    2. There is no present day data available to be examined of a system based upon voluntary exchanges of actual savings and earnings honestly earned BECAUSE IT DOES NOT NOW EXIST. You cannot quantify or measure the road not taken.

    3. What is the point of a “mathematical” model to explain activities that are easily explained in plain language and are not fundamentally mathematical or numerical?

    Query: What is the date to which you refer?

    “What you’re describing doesn’t fit reality as I’ve seen it in the market data over many years….”

    • Bob Roddis says:

      Typo:

      Query: What is the DATA to which you refer?

  6. Mike Sandifer says:

    Bob Roddis,

    I provided an example of my modeling and how it fits data, but it got caught in the comment filter.

    • Bob Roddis says:

      I think that only happens if there are more than two links in the post.

  7. Mike Sandifer says:

    Yes, I had some links to data that the model fits pretty well. Given a change in NGDP growth, the model predicts the immediate effects on broad stock indexes, bonds, gold/silver, and unemployment. I detailed the unemployment model.

    • Andrew_FL says:

      This is not a business cycle theory, this is bunch of equations spitting out the historical statistical relationships between various statistics. A conceptual error so basic that until you understand it, will make it impossible for you to understand anything else.

      • Mike Sandifer says:

        Andrew,

        What are you referringto? Surely not my model, which you haven’t seen. My model is deterministic, not statistical.

        • Andrew_FL says:

          You brag about its fit to historical statistics.

          • Mike Sandifer says:

            Andrew,

            it seems you have a reading comprehension problem. Above I clearly stated that I don’t have an original business cycle theory, accepting the conventional theory. The above model is simply a reflection of that, and again, is not statistical. There are no statistical tools utilized at all.

            You seem to confuse your lack of understanding as some kind of superior understanding and excuse to be smug.

            If you actually understood what I posted, and understood conventional business cycle theory and it’s implications, you would see the business cycle theory is implicit in my model.

            • Craw says:

              Mike,
              Andrew_FL rejects the very idea that a model of the economy can have equations. If it makes predictions it’s not economics. He’s not the only one: look at Roddis’s ham sandwich comment above, or guest’s explicit denial above.
              Austrians have all sorts of such interesting ideas. Austrian Chemistry has no equilibrium, Austrian Physics has no Hamiltonian equations, and Austrian Aerodymanics knows neither Navier nor Stokes.

              • Mike Sandifer says:

                Craw,

                Yes, your statement certainly seems plausible, given the responses. Usually equations are the beginning of the real conversation.

                What I wonder is, based on what you said, are they opposed to math in economics because they don’t understand math, don’t understand math because they are opposed to math in economics, or both?

              • Bob Roddis says:

                Mike Sandifer: Murray Rothbard has a degree in math from Columbia. Prof. Murphy’s pal, Tom Woods (who has an A.B. from Harvard and a Ph.D. from Columbia) was a Massachusetts state math champion in high school. Bob Murphy has a Ph.D in econ from NYU. I think they can do math.

                There is no basis for using math to make interpersonal comparisons of value which can only be displayed via honest pricing and voluntary exchange. You know nothing whatsoever about Austrian analysis or concepts.

                https://mises.org/library/note-mathematical-economics

              • Tel says:

                Bob Roddis, I don’t want to be rude, but even a simple greater-than or less-than comparison is still “math” even if it isn’t the most ostentatious example of that art.

                You can take a math equation and spell it out in words, but that doesn’t change the equation, merely the notation.

                Mathematics is applied logic. Mises used logical deduction therefore he used math.

                Perhaps a better question is to ask what type of math is of relevance to economics? For example, differential equations have proven popular from time to time as a macroeconomic tool. These are incompatible with Austrian theory (IMHO).

              • Tel says:

                If it makes predictions it’s not economics.

                Yeah, I’ve never been happy with that one either. Firstly, Mises did make some predictions. He predicted that each government intervention would lead to the need for further government interventions.

                Secondly, coming from an empiricist engineering background, yes I recognize there are limits to what you can do with empiricism but if you are down to making no predictions at all then you don’t have a lot left.

                Even something as simple as Pythagoras Theorem can make predictions. Get some planks of wood 3′, 4′ and 5′ and make a triangle. I predict that the corner between the 3′ and 4′ plank will be pretty close to a right angle.

              • Mike Sandifer says:

                Bob Rodis,

                i wasn’t commenting on anyone, but some of the commenters here.

              • Bob Roddis says:

                Math in economics

                Personal preferences:

                Rick James > Rush

                Sales totals:

                Beyonce: $100 million
                Good music $10

              • Mike Sandifer says:

                Bob Roddis,

                Some of you seem to be full of assumptions about what I know, what others know, and what can be known. Of course math can be used to make interpersonal comparisons of value. There’re whole fields of mathematical experimental psychology, neuroscience, and behavioral economics. It seems you’ve adopted a 19th or early 20th century philosophy that relied on 19th and early 20th century technology.

                Just look up Herrnstein’s matching law, neuroeconomics, or any number of other research programs.

            • Harold says:

              “In physics, the facts of nature are given to us. They may be broken down into their simple elements in the laboratory and their movements observed. On the” other hand, we do not know the laws explaining the movements of physical particles; they are unmotivated.”

              What does he mean – we do know the laws governing the movement of particles. Is this just nonsense?

              “The reasoning runs like this: Physics is the only really successful science. The “social sciences” are backward because they cannot measure, predict exactly, etc. Therefore, they must adopt the method of physics in order to become successful. And one of the keystones of physics, of course, is the use of mathematics.”

              This is just nonsense. That is not how the reasoning runs at all. people find mathematics useful in lots of different fields and it has nothing to do with “physics envy”.

              “In economics, however, the conditions are almost reversed. Here we know the cause, for human action, unlike the movement of stones, is motivated. Therefore, we may build economics on the basis of axioms — such as the existence of human action and the logical implications of action — which are originally known as true.”

              More bollocks. Mises said “Human action is one of the agencies bringing about change. It is an element of cosmic activity and becoming. Therefore it is a legitimate object of scientific investigation. As–at least under present conditions–it cannot be traced back to its causes, it must be considered as an ultimate given and must be studied as such..”

              See – at least under present coditions. These were conditions in 1949. We have moved on, and we can now start to see the mechanisms that cause actions. far from an “ultimate given” Mises himself acknowledges that human action is something that at the time should be treated as a given, although there was no acknowledgement that it was really an “ultimate” given. rather he says it is a “pseudo ultimate given”

              At which point the entire edifice collapses. Far from being an axiom that we “know” is true, it turns out to be a working approximation.

              This is why I find Mises and Rothbard to be second rat philosophers, however great their contribution to economics.

              • Dan says:

                Nobody else on this blog can get me to roll my eyes harder than you.

              • Harold says:

                Dan, the trouble with an eye roll is that it does not convey much information other than exasperated disapproval. It might help if you said what you don’t agree with.

                In case it was not clear, the above was response to the link Bob Roddis posted
                https://mises.org/library/note-mathematical-economics

              • Craw says:

                Tweedle-Dee and Tweedle-Dum, together at last.

  8. Bob Roddis says:

    Is there a math formula to determine which is more sappy, “To the Morning” by Dan Fogelberg (1972) or “I Am The Mercury” by Jimmie Spheeris (1971)?

    Fogelberg:

    https://www.youtube.com/watch?v=cLaOArTts4M

  9. Bob Roddis says:

    Spheeris:

    https://www.youtube.com/watch?v=mfiV9TcVa7w

    Every single transaction involved in building a factory or home involves similar individual and subjective decision making.

    • Craw says:

      Which does nothing to establish mathematical models cannot be profitably used. It is impossible to know the position and movements of every atom or proton or molecule, yet equations of flow are quite useful in aerodynamics, and statistical mechanics quite a precise field. Your argument is that models must be exact or they are worthless. That is a foolish and obviously false assertion.

    • Harold says:

      I would also say that the determination is not which is more sappy but which do I prefer right now.

    • Bob Roddis says:

      My iPod uses “math” to count the number of “plays”.

      “Recapitalizing the banks but decapitating the economy” by Robert P. Murphy has 4 plays.

      “To the Morning’ by Dan Fogelberg has 21 plays.

      “I Am the Mercury” by Jimmie Spheeris has 26 plays.

      “Give it to me Baby” by Rick James has 46 plays.

      “Burn Rubber on Me” by The Gap Band has 130 plays.

  10. guest says:

    Craw said:

    “Mike, ask our host, Dr Murphy, about the, as in singular, natural interest rate so beloved of Austrians. He agrees that there is no such thing.”

    Smashed forever in Human Action:

    “In the market economy it is entrepreneurial action that again and again reshuffles exchange ratios and the allocation of the factors of production. An enterprising man discovers a discrepancy between the prices of the complementary factors of production and the future prices of the products as he anticipates them, and tries to take advantage of this discrepancy for his own profit. The future price which he has in mind is, to be sure, not the hypothetical equilibrium price. No actor has anything to do with equilibrium and equilibrium prices; these notions are foreign to real life and action; they are auxiliary tools of praxeological reasoning for which there is no mental means to conceive the ceaseless restlessness of action other than to contrast it with the notion of perfect quiet. For the theorists’ reasoning every change is a step forward on a road which, provided no further new data appear, finally leads to a state of equilibrium. Neither the theorists, nor the capitalists and entrepreneurs, nor the consumers, are in a position to form, on the ground of their familiarity with present conditions, an opinion about the height of such an equilibrium price. There is no need for such an opinion. What impels a man toward change and innovation is not the vision of equilibrium prices, but the anticipation of the height of the prices of a limited number of articles as they will prevail on the market on the date at which he plans to sell. What the entrepreneur, in embarking upon a definite project, has in mind is only the first steps of a transformation which, provided no changes in the data occur other than those induced by his project, would result in establishing the state of equilibrium.

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