05 Jul 2019

Bob Murphy Show Twin Spin

Bob Murphy Show 40 Comments

In episode 43 I talk to medical doctor Michel Accad on the development of neoclassical welfare and market failure theory.

In episode 44 I talk to Steve Patterson, who challenges Rothbardians on a priori theorizing.

40 Responses to “Bob Murphy Show Twin Spin”

  1. Bala says:

    Ep. 44 was a nice one but I think Steve’s argument rests on a redefinition of the scope of economics from being an explanatory science to a predictive one. The a priori method of economics should be judged only on its explanatory power and not on its predictive power. This point undercuts Steve’s entire argument.

    • Tel says:

      Explanation is rather useless unless you can deduce something from that.

      Saying “God wanted it that way” is the most powerful explanatory statement you can possibly make … but after you explained the entire world with that … what then?

      • Bala says:

        The explanation does make the consequences of human action clear. It is then up to each human being to decide on specific courses of action in specific circumstances. So it is indeed far from useless. The theory doesn’t fail humans. Rather it is humans who fail themselves when they fail to grasp the wisdom the theory and act foolishly. Accusing theory of being useless is just a case of a bad workman blaming his tools.

        • Tel says:

          In order for consequences of human action to be clear BEFORE you take action, you need a prediction … not an easy prediction in this case, when you consider that God is under no obligation to be consistent.

          Sure, you can explain the consequences AFTER the fact, once more “God wanted it that way” … but by that time the action is already taken, and the consequences are already history.

          The concept of acting foolishly doesn’t even make sense unless you can make predictions before you act. Anything else is merely hoping for the best.

          • Bala says:

            Sorry about the delay, Tel. I was up till 2 am waiting to watch Australia lose to South Africa after India beat Sri Lanka so that India may play NZ in Manchester leaving Australia the challenge of taking on a resurgent England on the trickier Birmingham wicket. Warner and then Carey did give me a few scares!!

            Actually, the explanatory theory does make a prediction, though not the kind you may like or want. For instance, the theory says that merely increasing the money supply does not enhance general well-being. It is simply because the best case outcome under ceteris paribus is that prices increase till they can increase no further at the increased level of money supply while the worst case outcome is that the money is injected as credit through an inflationary banking system, thus creating an inflationary bubble that must end in a deflationary bust with a lot of misery spread all around. No outcome is possible where overall wellbeing is enhanced in the long-term.

            I was just highlighting how Steve was looking at one half or part of the entire situation and coming to wrong conclusions. He also mixes up money and capital. He makes the mistake of saying that the mere fact of an entrepreneur spending the newly created money on producing something that momentarily enhances wellbeing by producing more consumers’ goods is a result of the money supply increase. Money in hand does not give new ideas. It just makes the realisation of existing ideas possible. So the idea or the possibility must have already been there. It would have been there whether or not he received the new money.

            In any case, the idea was clearly not worth it, i.e., out of sync with consumer preferences, as demonstrated by fact that it did not get the capital required on the free market and had to instead depend on the injection of new money through inflation. So, investing in implementing this idea is just another error in the cluster of entrepreneurial error at the start of an inflationary boom. Steve is glibly (though implicitly) claiming that the mere implementation of the idea enhances wellbeing without going through the further steps of reasoning that show that such “investment” is capital consumption that lowers wellbeing once the inevitable bust plays out as well.

            My point is that Steve is engaging in fractional-economics and therefore making fundamental mistakes like claiming that economics is more empirical than we think it is. As for your statement that economic theory needs to make predictions, I hope I have addressed it.

      • Matt Tanous says:

        The problem Steve has is that he fails to appreciate the unpredictable nature of human will, and thus goes “well, ceteris paribus never holds in reality, so we can’t know anything at all!”

        Then proceeds to demolish his own argument by relying instead on empiricism, which cannot make any predictions here as it is all just recording of history, without any constant trends to rely on.

        It’s true that ceteris paribus does not hold in reality, and thus any such attempts at prediction are bounded by having to try to consider all factors and account for free choice by individuals.

        However, this is literally true of all science. Physics is a huge science that assumes ceteris paribus (and often, worse, the absence of unbounded reality at all) in literally every problem. Take the prediction of projectile motions. It assumes a great many things to make this prediction – no significant disparity in air composition (or no effect from atmosphere at all), nothing moving into the path, the object is simplified to perfectly spherical, etc.

        There is a reason that physics students are familiar with “first, assume the horse is a sphere” as a common joke for the practice of their science.

        Engineering gets closer to avoiding the ceteris paribus “pitfall”, but it is still necessary to ignore a great many things to successfully perform engineering. All knowledge of scientific law is ceteris paribus. It literally cannot be any other way.

  2. Tel says:

    Here’s a puzzle about wages and marginal productivity.

    Suppose a factory owner has 10 machines (this number cannot change), and each machine when running at 100% capacity makes enough product to earn 100 coins in gross profit (after input supplies but before wages). To simplify things, presume demand is always at a fixed price, so there’s no appreciable influence of this factory on the overall market demand curve. Also presume that when hiring workers to operate the machines any worker can operate any machine equally effectively (i.e. there are no grades of workers, nor specialized workers).

    Here’s the productivity data:
    1 worker can easily operate 1 machine at 100% capacity.
    1 worker can manage to operate 2 machines simultaneously, but reduced output to 95% capacity per machine.
    1 worker can just barely operate 3 machines simultaneously at 90% capacity but that’s the absolute limit.

    How many workers should the factory owner hire for best efficiency? How much do they get paid? We can presume that every worker is paid exactly his or her marginal productivity and ignore complexity such as labour unions, minimum wage or what have you.

    • guest says:

      What is the least amount of money the factory owner is willing to make, and what is the lowest wage each worker will accept?

      Without these subjective components, all we can know is that the factory owner should at least try to pay 1 coin, and the workers should at least try to get a wage of “factory revenue per worker minus 1”.

      Also, with the 3 machines option, 1 person will have to operate the last machine by himself, yet the scenario says there are no grades of workers. Maybe that means that the most effective arrangement is one in which only 9 machines are running. I don’t know.

    • Harold says:

      This is an interesting problem. The marginal product of labor is the difference in output for each additional worker.

      With one worker, output is 3 x 90 = 270. Marginal productivity = 270
      With 2 workers, output is 6 x 90 = 540. Marginal productivity is 270
      With 3 workers, output is 9 x 90 = 810. Marginal productivity is 270
      With 4 workers, output is 6 x 90 plus 4 x 95 = 920. Marginal productivity is 110
      with 5 workers, output is 10 x 95 = 950. Marginal productivity is 30
      With 6 workers, output is 8 x 95 plus 2 x 100 = 960. Marginal productivity is 10
      With 7 workers, output is 6 x 95 plus 4 x 100 = 970. Marginal productivity is 10
      With 8 workers, output is 4 x 95 plus 6 x 100 = 980. marginal productivity = 10
      With 9 workers, output is 2 x 95 plus 8 x 100 = 990. Marginal productivity = 10
      With 10 workers output is 10 x 100 = 1000. Marginal productivity = 10

      There is a positive marginal productivity for each worker added. Adding the tenth worker gives a marginal productivity of 10. Does that mean we employ 10 workers and pay them each 10 coins?

    • Harold says:

      If the pay was 10 coins there would be no point the employer taking on employees 6-10. There is no profit in it for him. The total revenue would be 1000 and the wage bill 100, leaving 900 profit.

      However, should he employ 5 workers and pay them 30 coins. Total output = 950. Total wage bill = 150. Profit = 800.

      So it should be 6 workers and 10 coins wage. Total revenue = 960, total wages = 60, profit = 900. This would save non-wage costs of employment.

      I am not totally confident I have this right, but I think it is a good start.

      • Tel says:

        That’s about the answer I was expecting. You can employ 10 workers, and if any single worker doesn’t show up (doesn’t matter which one), some other worker can cover at a small loss of overall productivity … but no loss of nett profit for the factory owner. Anywhere down to 6 workers still gives the factory owner the same profit, so might as well offer to hire 10 and if a few don’t show up then it really doesn’t matter.

        But, hey why not go one better and employ 12 workers? With 2 sitting on the bench … the marginal productivity drops to zero and those spare workers can fill in for anyone who doesn’t show up for work. Now you can pay all the workers zero, and the factory owner makes 1000 coins neat. Mathematically that scenario fits the required constraints. The workers are earning a wage equal to their marginal productivity, it happens to be zero.

        Guest asks above:

        What is the least amount of money the factory owner is willing to make, and what is the lowest wage each worker will accept?

        Well the factory owner would probably be going for the largest nett profit I think, and the largest possible output from 10 machines is 1000 coins which he can achieve with 11 or more workers, and still pay them equal to their marginal productivity if they are willing to work for zero.

        As for the lowest wage each worker will accept, that brings in notion of labour supply. If ALL factory owners think along the same lines as THIS factory owner and it’s a competitive market, then the same marginal productivity rule would apply everywhere. Hence it depends on the global supply of workers.

        If workers are simply not available, or refuse to work, then wages go up as the supply is throttled. What this means is that marginal productivity theory is not in any way a substitute for good old fashioned knowledge of supply and demand. It might be helpful as augmentation, but the supply is still the controlling factor here.

        • guest says:

          “What this means is that marginal productivity theory is not in any way a substitute for good old fashioned knowledge of supply and demand. It might be helpful as augmentation, but the supply is still the controlling factor here.”

          Ok, well, I wasn’t going to bring it up because I thought it was obvious, but when you said, “We can presume that every worker is paid exactly his or her marginal productivity …” that amount entails the restraint placed on the factory owner by the workers’ subjective ends which determine the lowest amount each worker will accept.

          Consumers’ ends determine the highest amount the factory owner can profitably charge (consumers have to want to buy the product).

          The factory owner determines the lowest amount to charge, since the owner is in business to make a profit.

          The worker determines how low his wage is (even if he accepts a low wage out of need, he is expressing the fact that, to him, he values the low wage over his alternatives).

          It’s the same if a worker accepts zero as a wage: it could be that he intends to leverage the experience he gets while working for free.

          At any rate, at no point is supply the controlling factor. It’s the demand, *given the supply* that’s the controlling factor (but even here, I would say that this ultimately reduces to demand – but not in the Keynesian sense, heh).

          Demand (a demand that expresses itself in a willingness to pay) for supplies of specific goods is what drives profitable production. When producers increase the supply of what people demand (as opposed to supply in general), that’s when people increase the quality of their lives.

          • Tel says:

            https://www.youtube.com/watch?v=G7ai5LAehqg

            These guys show that the marginal productivity only effects the demand side, but ultimately the supply side ends up being necessary to figure out where the final equilibrium point sits at.

            They have an example with janitors, based on a bunch of different activities that janitors might do.

            • guest says:

              I watched the video, and here are my thoughts.

              1) He claims that laborers increase the firm’s revenue, but then he says that the marginal product goes down as the supply increases.

              But both claims can’t be true at the same time. If laborers increase the firm’s revenue, as such, then the marginal product will logically always increase with an increase in supply.

              Now, he correctly notes that the first laborer will be assigned the most urgent task (presumably he means “the most urgent for a given skillset”), but that just means that a given laborer / skillset is not valuable *to the firm* above a certain quantity and at a particular wage.

              If the firm is deciding which skillset is valuable, then the laborer is not the source of increased revenues.

              Ultimately, it’s the consumer that is the source of increased revenues, and the laborer is useful to the firm only insofar as it results in more profit given what customers are willing to spend.

              The firm supplies laborers with capital that makes their labor more productive, and if the laborers had that capital, they’d just compete with that firm, but they don’t and that’s why they need the firm’s capital in order to be as productive as the firm wants them to be.

              The firm has all this capital that will make the products when operated, and the owner could technically learn how to do all of the tasks necessary to produce at least something that the consumer would want to buyy, but it would cost him too much in terms of opportunities foregone.

              And that’s why the firm hires workers: to reduce costs. Workers don’t increase revenue (or, as some people say “add value”). Rather, workers reduce costs.

              I believe Warren Mosler is wrong about MMT, but he did say something on The Bob Murphy Show that I agree with, and I was impressed that he noticed it.

              He said that “jobs are a cost”, or something to that effect. And that’s true. Workers are a cost, a burden, to any company.

              A worker’s value is in their capacity to reduce the cost of doing what the owner would otherwise have to do himself.

              2) “Joe’s supply curve” is actually trying to mesh two different supply curves together, which is why he gets the erroneous backwards-sloping supply curve. The first supply curve is under the condition that his otherwise higher-ranked preference (taking his family on vacations) is not currently able to be satisfied. The second curve is under the condition that he can afford to do so.

              To clarify, we don’t say that Joe’s supply of hours at Company A goes backwards due to him finding a better job at Company B. There are two different conditions, with two different supply curves.

              Also, “the market” doesn’t have a supply curve, because only individuals can demand the supply, and averaging two or more people’s curves results in a meaningless aggregate due to the fact that the values they place on opportunities foregone (in terms of the hours they’re willing to work) are subjective, and therefore there are no meaningful math operations that can be performed on them.

              What’s the average global temperature of Earth and Mars? (There’s no such thing as a “global temperature”, but I think people can see where I’m coming from.) You can perform math on the data, sure, but the answer wouldn’t tell you anything about Earth or Mars. Same with interpersonal utility comparisons.

              • Harold says:

                Seems a clear and well presented video.

                I don’t get some of your comments.

                ” and the owner could technically learn how to do all of the tasks necessary to produce at least something that the consumer would want to buy”

                Yes, but he can make many more with help. It is not opportunity costs but physical limitations. There are only 168 hours a week and the owner does not have the option of increasing that. If he works all of them in the most productive way possible he may still find that he could increase revenue by hiring someone else.

                On Joe’s backward-sloping supply curve. There is no company B. He works for company A and will supply 40 hours at $20 per hour. If company A pays him $40 per hour, then he supplies fewer hours.

                “averaging two or more people’s curves results in a meaningless aggregate ” But that does not seem to be what they are doing. They point out that at a higher rate more people are willing to offer some hours. That is surely simple and uncontroversial.

                Are you saying that we cannot say that more labor will be offered is wages rise (ceteris paribus, of course)?

                Or that we can in a general way say that this is the case, but we cannot do meaningful calculations on the shape and slope of the curve? We know it slopes up, but how steep must remain a mystery?

        • Harold says:

          From wikipedia on marginal productivity “In the aftermath of the marginal revolution in economics, a number of economists including John Bates Clark and Thomas Nixon Carver sought to derive an ethical theory of income distribution based on the idea that workers were morally entitled to receive a wage exactly equal to their marginal product.”

          Given the example above, such a moral case would be hard to make since it would result in the factory owner taking all the profit and the workers working for nothing.

          Given an existing wage rate, the employer will keep adding until the marginal productivity drops below the marginal rate. If the rate was 100, he would employ 4 workers and each would be paid about their marginal productivity, so that seems sort of OK. But that is a case for number of employees given an existing wage rate, not for justifying that workers should morally be paid their marginal productivity

          • Tel says:

            I doubt it’s worth arguing the moral case … unless someone has good first principles. Point is a lot of people think this “marginal productivity” concept is a complete explanation, but really it only explains the employer’s demand side of the situation.

            Given an existing wage rate, the employer will keep adding until the marginal productivity drops below the marginal rate.

            Therefore wages would determine marginal productivity, not the other way around. Although as an expression of one thing being equal to another, it’s correct … but there’s a tendency to see the causality backwards.

            Of course, in the real world you naturally have a supply curve not a fixed wage, unless government has interfered. Either way, the supply of labour becomes the controlling element, whether that be the least wage workers will accept, or whether that be a government imposed minimum wage, or an actual shortage of available labour driving up wages.

            Here’s an example of what I would consider thinking about this the wrong way:

            Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce. Otherwise, competitive firms would have an incentive to alter the number of workers they hire, and these adjustments would bring wages and productivity in line. If the wage were below productivity, firms would find it profitable to hire more workers. This would put upward pressure on wages and, because of diminishing returns, downward pressure on productivity. Conversely, if the wage were above productivity, firms would find it profitable to shed labor, putting downward pressure on wages and upward pressure on productivity. The equilibrium requires the wage of a worker equaling what that worker can produce.

            https://gregmankiw.blogspot.com/2006/08/how-are-wages-and-productivity-related.html

            Not specifically trashing that guy in particular, it’s only one example I found while searching around. I would grumble that the word “marginal” has strangely failed to appear in the above paragraph. A better explanation is that firms have a strong incentive to hire more workers in order to reduce the marginal productivity of each worker as low as possible, and hence pay lower wage to every worker … because the cost of workers quitting is minimal under those conditions. That does not mean the overall productivity of each worker is low, they might well be producing a lot on average. What it means is that on the margin the firm can afford to lose a few employees.

            Suppose I say, “All workers must have union membership before they can be employed, and the union makes membership difficult to obtain … in order to raise the marginal productivity of each worker.” Would most economists agree?

            Suppose I say, “Raising the minimum wage is a great way to increase worker’s marginal productivity.” Who agrees with that one?

            How about this? “Immigration will boost the supply of labour, so workers can all enjoy lower marginal productivity and lower wages!”

            I’ll bet a lot of people jump up and down about the last one …

            And yes, I realize that my example started with the unrealistic assumption that all workers are equivalent and exchangeable, and in practice certain people are more vulnerable to this situation than other people … depending on skills, etc. If your skills are unique then it becomes expensive for the firm when you quit.

            • Harold says:

              “And yes, I realize that my example started with the unrealistic assumption that all workers are equivalent and exchangeable,”
              To be fair, the whole concept of marginal productivity of labor assumes this. It is reasonable in some circumstances, particularly at the lower end of the pay scale.

              Fascinating stuff.

  3. Todd says:

    I thought Steve had a good realization concerning how much power ceterus peribus does in these conversations. I think it reflects the same issues we have in economics in general about getting randomized trials. Everything is always changing so empiricists always fight about what might have been too.

    But I thought his critque on Hoppe was lacking a bit of charity. Hoppe may have been loose with his words but I think his audience understood his meaning.

    When using deductive logic or statistics to discuss trends, you can never say “for each and every instance”. That’s not how trends work. Expectations are for a general case, like saying ‘a high enough minimum wage will cause higher unemployment’ uses either ceterus paribus or statistics. It could always be the case a productivity shock nullifies the legislation (suddenly workers are worth the new minimum). So Hoppe et al would avoid “For each and every”.

    So these economic discussions, by design, are trying to tease out the marginal effect of any given intervention. I believe the austrian/deductive approach is very helpful to provide guidance on what factors would tend to be positive, neutral, or negative on some dependent variable, and try to rank order those magnitudes. Even if they leave it up to statisticians to try to quantify the magnitudes.

    For instance ‘debt cycles create the business cycle’ is getting to be a pretty mainstream idea. But from a deductive standpoint, it stands to reason the rank of most unstable to least is:
    1. Central banks.
    2. Fractional reserve banking.
    3. Private debt.

    To the extent any of these factors are reigned in by competition; competing global currencies, competing bank risk taking, competing companies credit issuance. These factors may be mitigated, but the more correlated the decision-making the worse the cycle.

    Austrian/deduction helps me identify when someone is making a claim counter to what would be expected, and points to where to look to identify what might be really going on in the specific situation.

    So when people point out how lending standards dropped across all companies, I know to look at what political intervention caused that, and how the fuel poured on the fire by central banks created the size of the financial crisis. If I recall, this is where ‘the big short’ came up short by not following the ‘why now’ to the source.

  4. guest says:

    Haven’t watched Episode 44, yet, but I saw the description and read 1/4 of his article.

    It seems to me that this guy is just creatijng unnecessary work for us a priorists.

    The Abuse of Apriorism in Economics
    [www]http://steve-patterson.com/abuse-apriorism-economics/

    “”It’s that an increase in the minimum wage causes disemployment, ceteris paribus. You have to hold every other variable constant.”

    I concede this point, and this new, more precise proposition is indeed true.

    “It’s true and neutered.

    And then, later, Steve says:

    “I’ve had to change my own beliefs on this subject, having been more on the dogmatic side before realizing my ideas were true yet neutered.

    “Let’s take a simple example. Say I ask, “Will increasing the minimum wage in Seattle cause disemployment effects?” An extreme apriorist answers, “Yes, certainly, because of these particular causal connections…”

    Now imagine I follow up with the question, “But what if nobody follows the minimum wage law? If nobody follows the law, then surely it won’t cause disemployment.”

    I’ve actually asked this questions several times to economists in person, and I’ve heard some interesting answers. One prominent apriorist told me, “Well, they’ve got to follow the law!”

    But surely, in the real world, people don’t have to follow the law.

    *Facepalm*

    So, having a more precise definition in the first example is neutered, but in this second example, the qualification is meaningful?

    Here’s Henry Hazlitt on this subject, from Failure of the New Economics:

    “It is a mistake to believe that we can skip over all “static” assumptions for the superficial reason that such assumptions are “unreal.” This would be as foolish as it would be for a ballistic-missile designer to skip over all preliminary calculations of the probable flight or parabola of his missile through a frictionless medium, on the ground that no actual medium is every really frictionless.”

    A priori explanations aren’t neutered explanations – they isolate specific logical implications of human action *as such* so that we can know that such and such is the result, even if the expression of that result is being muted by some other factor.

    (For example, if I never go to work, then I won’t be able to support myself. That’s true whether or not someone else is willing to just give me money all the time such that I live a wealthy life.)

    Yes, your “prominent apriorist” was right: a priori economic laws manifest themselves in different ways under different circumstances, and a careful examination of the ways and circumstances will show this.

    For example, what is meant by “The Minimum Wage always causes disemployment” is, in fact, that the law is being enforced. That law isn’t disproved if we observe the law being ignored.

    (The economic law isn’t that minimum wage laws “always” cause unemployment, anyway. If the Minimum Wage law is to be raised from zero to a penny, that’s not going to bear on an employer’s costs because he’s factoring into his payroll plausible losses that are far in excess of a penny.

    (A more rigorously stated version of this law could go something like this: Minimum Wage laws which raise an employers’ costs in such a way as to reduce his profits below what he is willing to bear, will always cause disemployment.)

    Thanks for playing.

    I’ll listen to this episode at some point, but I’m pretty sure I’m going to remain an “extreme a priorist” after doing so.

    • Tel says:

      In engineering we have what’s called “Open Loop Analysis” and then we have “Closed Loop Analysis“.

      Let’s suppose you have an engine and you simply set the throttle to a certain point and see what the engine does at that point. The throttle controls then engine, so you can make a note of a range of throttle settings and what the engine did at each setting.

      Now you might say, “What if there’s a load on the engine?” … no problem, we build up a dummy load (like a dynamometer for example) and step through all the possible throttle settings against all the possible loads we can apply, check what the engine does in each situation. That’s Open Loop Analysis.

      But now we have a real driver who watches the speedo, wants to drive at a constant speed, and will continuously adjust the throttle to whatever seems about right to compensate for road conditions, uphill, downhill, whatever else might apply. That’s a closed loop, as follows:

      driver → throttle → engine → vehicle load → speed → measurement of speed → driver.

      The starting point, is also the end point, hence a loop, or “feedback” if you prefer.

      This is a different type of calculation … but you can use the same values that you measured during those open loop tests as information for understanding how the closed loop operates. You presume that the engine is the same engine in either case, the throttle operates the same way, etc. It also requires a bunch of new tools to help understand the concept of feedback, and what to expect … stability theory, control theory, etc.

      In economics it’s difficult to get a meaningful open loop test … because you cannot yank out a few pieces of the economy and run them stand-alone on the test bench. That said, most of the thought experiments used by economists do presume to understand the input/output relation of the various components in the system (as if they had done those open loop tests).

      Here’s a practical example to help think about what’s happening here: I place a broom standing upright on a table and it falls over. Repeat the experiment again and again, the broom always falls over. One might be tempted to conclude that a broom never stands up on one end … it must simply impossible … empiricism right? You tried it thoroughly, and it failed, therefore it can’t work.

      A member of the audience holds out his hand and says, “Place the broom so it stands upwards on my fingertip!” In the name of science you put the broom on his finger and it stays up. How about that?

      You take the same member of the audience and say, “Let’s try this by standing a pencil up on your fingertip.” You try it, and the pencil always falls over. But hey … standing a pencil on one end is pretty much the same as standing a broom … the pencil is merely a bit smaller. Empiricism must be crap or something.

      To make things even worse, with some care, you can indeed get the pencil to stand up on the table even though the broom never did that.

      • guest says:

        “… but you can use the same values that you measured during those open loop tests as information for understanding how the closed loop operates.”

        Right. You don’t conclude that the concepts discovered in the open loop tests were wrong, but rather that there’s something in the closed loop that’s offsetting the expression of those concepts (or, perhaps, that the results of the open loop tests were misinterpreted – but never that there are different sets of laws operating in open loop tests vs. closed loops).

        “That said, most of the thought experiments used by economists do presume to understand the input/output relation of the various components in the system (as if they had done those open loop tests).”

        With Austrian Economics, the “open loop tests” (we claim) are comprised of logically necessary laws, so isolated laws aren’t run in a lab, but rather follow logically from more fundamental laws, ultimately originating with the Action Axiom.

        (Rothbard, making a caveat, speaks of “… a few subsidiary postulates which are actually empirical.”, but about which he concludes that “… they are so generally true as to be self-evident, as to be seen by all to be obviously true once they are stated, and hence they are not in practice empirically falsifiable and therefore not “operationally meaningful.”:

        (
        In Defense of “Extreme Apriorism”
        [www]https://mises.org/library/defense-extreme-apriorism
        )

        I mention this for Steve’s readers’ benefit (since I’m going to presume that he’s been reading Austrian works for some time, and already knows this article).

    • Harold says:

      “The former is an apriorist claim: on purely logical grounds, we can know that increasing the minimum wage causes disemployment.”

      I do not believe we can know any such thing. What are the logical steps that produce this conclusion?

      Human action says that which is done by a human is the thing the human at that instant preferred to do. This is essentially the definition of the action. And that is it.

      Human action as described by Mises specifically and emphatically isolates itself from the reasons for those preferences.

      Yet we have this “When I worked for FEE, I remember listening to a lecture by Israel Kirzner, who was a student of Mises. He and some fellow students apparently asked Mises, “But how do we know that humans act?” To which Mises replied, “We observe it.”

      Clearly we do not observe human action. We have no way to tell if an action is purposeful. We observe behaviour and assume it is purposeful because we know that purposeful action exists. The apriori claim really takes us nowhere.

      “What careful thinkers like Ludwig Von Mises point out is that we interpret data about humans through the lens of purposeful action.”

      No, Mises may do so but we do not all have to fall into the same trap.

      • guest says:

        “We have no way to tell if an action is purposeful.” If a meat slab moves or talks of its own accord, then it’s a purposeful action.

        For example, walking requires intent.

        But I think the question of “how we know that humans act” is irrelevant to the Austrian claim that “at the moment of purposeful action, the action, in some way, is an expression of his highest-ranked preference at that time”.

        The point is, *when* humans act purposefully, such and such follows logically.

        If I can guess the Acting Man’s preferences by watching his actions (which is essentially what an entrepreneur does on some level) his actions can be useful for leveraging his preferences for my profit.

        Actions don’t only reveal preferences, actions can also be thought of as the prices that Acting Man is willing to pay to attain whatever goal he has in mind. And since actions require means, those means can, on some level, be used as a proxy for Acting Man’s prefrerences – and that’s where we get prices in every form, whether it be barter prices or money prices.

        See, Praxeology is useful.

        • Harold says:

          “If a meat slab moves or talks of its own accord, then it’s a purposeful action.”

          This is “animal action” not “human action.”

          I believe that Mises attributed human action only to humans.

          If so, then we clearly have behaviour without action. When an insect moves, for example. We could say the same for a plant growing. We observe movement in a particular direction.

          ” actions can also be thought of as the prices that Acting Man is willing to pay to attain whatever goal he has in mind.” As is the case for woodlice. They move quicker in the dry, which means they tend to spend more time in the damp. That is the price they pay to attain their goal.

          • guest says:

            “This is “animal action” not “human action.”

            “I believe that Mises attributed human action only to humans.

            “If so, then we clearly have behaviour without action.”

            Mises, unfortunately, makes a distinction without a difference.

            The laws of economics apply to all purposeful action, whether human or animal.

            A purposeful action means that the actor is attempting to alleviate some kind of uneasiness, otherwise there’d be no reason to act purposefully..

            Even if that uneasiness is the base animal impulse to eat something. It wants to eat something, it looks for something to chase down and eat.

            “We could say the same for a plant growing. We observe movement in a particular direction.”

            Plants aren’t sentient, so plant movement would not be an example of purposeful action.

            • Harold says:

              Thank you for being so clear on that one.

              When combined with Rothbard’s admission about “postulates which are actually empirical” I suspect Mises construction is crumbling.

              However, that is not to say he had nothing useful to say. Theories develop. Darwin could not be expected to get everything right and evolution does not stand or fall on his work.

              • guest says:

                “When combined with Rothbard’s admission about “postulates which are actually empirical” I suspect Mises construction is crumbling.”

                How I understand the few postulates which are empirical is that that is just how economic laws are expressed under the conditions of our reality.

                For example, if there weren’t different kinds of goods, there would be no division of labor. But the logic of human action would still be true.

                (I still have not listened to this episode, but I will.)

            • Andrew in MD says:

              Plants aren’t sentient, so plant movement would not be an example of purposeful action.

              Interesting. I’ll have to think on that one. I’m not sure I can endorse that. I agree that plants are not sentient, but I think I would have to argue that their actions are indeed purposeful and that their actions attempt to alleviate “uneasiness,” even if that “uneasiness” isn’t experienced in the same way as sentient animals.

              I would even argue that plants are required to make decisions based on limited time and resources, even if you want to argue that all of those decisions are pre-coded into their DNA and not made dynamically at the time of execution.

              Finally, plants that make “poor decisions” will fail in the “marketplace of vegetation” and be replaced by better performing plant-life.

            • Matt Tanous says:

              Do animals act to relieve uneasiness, or because of instinct?

              In other words, if my dog chases a bird, does it do so because it has a goal it is trying to reach, or because it is “programmed” to respond in such a way to the inputs provided?

              I would argue the capacity to train a dog indicates that it is the latter. Of the animals, I think it can be reasonably argued that only Man can act outside of these constraints (while still having some of that responsive nature).

              • Andrew in MD says:

                I don’t know how you could back up a claim that animals don’t feel uneasiness and act to relieve it. That feeling of uneasiness is most likely itself an instinct, spurring the feeler of unease to act.

                Men and women can be trained as well. And if a man or woman has been properly trained, he or she will feel uneasy about breaking with his or her programming.

              • Harold says:

                “Of the animals, I think it can be reasonably argued that only Man can act outside of these constraints.”

                The ability to train a dog through rewards indicates the opposite of your claim. I train my dog to sit and wait before eating. I observe behaviour very much like I observe in humans. Fidgeting and vocalisations indicating a dilemma between two sources of unease. There us hunger (or desire to eat) and unease at disobeying the human. Sometimes the desire to eat will win out.

                If we can conclude that other humans are acting, it is reasonable to also conclude the dog is acting.

                We can reject both, but that is solipsism.

                Mises is very clear that we do not consider the origin of the unease. That is the realm of psychology or biology, not praxeology. Whether it is instinct, conditioning or something else is immaterial.

                For plants I am not so sure. Mises was working at a time where he felt human action had to be taken as an “ultimate given”. We have moved well beyond that now and have begun to explore the underlying factors. I don’t believe we can say that plants and humans are doing the same thing.

                The ability to be trained could well be a reasonable demarcation between what we may call action and just programming. We can train animals to behave differently to essentially the same stimulus. I don’t think we can train plants. We can train insects. There may also be a difference between classical conditioning and more complex training. The exact place of demarcation may be interesting, but not central to the discussion.

              • guest says:

                I don’t consider dog training to be programming.

                Rather, the dog has just come to expect certain things from his owner under certain conditions.

                That’s why Pavlov’s dog’s mouth waters at the sound of a bell; Not because the bell causes his mouth to water, but because the dog has come to a reasonable expectation that he’ll get food when the bell rings.

  5. liquid150 says:

    Bob,

    Please read my comment on your recent article at Mises.org:

    Bob,

    In actual fact, Mises DID make the modern free banking claim that responsible FRB promotes stability in a changing economy. He made the claim in The Theory of Money and Fiduciary Media (The Theory of Money and Credit). The Mises Institute needs to ends its Rothbardian fetishism of fully reserved banks: Rothbard’s theory is a clear and noticeable step backward from Mises.

    “Of course, all of this [lack of a natural limit to bank-issued money] is true only under the assumption that all banks issue fiduciary media according to uniform principles, or that there is only one bank that issues fiduciary media. A single bank carrying on its business in

    competition with numerous others is not in a position to enter upon an independent discount policy. If regard to the behavior of its competitors prevents it from further reducing the rate of interest in bank-credit transactions, then — apart from an extension of its clientele — it will be able to circulate more fiduciary media only if there is a demand for them even when the rate of interest charged is not lower than that charged by the banks competing with it. Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money. They increase and decrease their circulation pari passu with the variations in the demand for money, so far as the lack of a uniform procedure makes it impossible forthem to follow an independent interest policy. But in doing so, they help to stabilize the objective exchange value of money.” ~LvM, ToMaC

    “If the arguments for and against state regulation of the bank-of-issue
    system and of the whole system of fiduciary media are examined without
    the etatistic prejudice in favor of rules and prohibitions, they can
    lead to no other conclusion than that of one of the last of the
    defenders of banking freedom: “There is only one danger that is peculiar
    to the issue of notes; that of its being released from the common-law
    obligation under which everybody who enters into a commitment is
    strictly required to fulfill it at all times and in all places. This
    danger is infinitely greater and more threatening under a system of
    monopoly.”

    Mises was a free banking advocate. Full stop. No hyphenations or conditions. While he admitted the full reserve banking principle would prevent the trade cycle and be an improvement ON WHAT ALREADY EXISTS, he thought free banking was EVEN BETTER.

    The reason is because under a full reserve standard, the objective exchange value of money will fluctuate by greater magnitudes than under FRB due to non-monetary causal factors: the demand for money caused by non-monetary real factors. There will be more redistribution of property due to the “early mover” Cantillon effects as the value of money changes greatly.

    The purpose of FRB is twofold as Mises stated in ToMaC: 1. reduce the cost of financial system by eliminating large amounts of transfers which would have needed to happen under a 100% reserve system, and 2. to utilize market dynamics to stabilize the objective exchange value of money, thereby improving the precision of economic calculation.

    Please, STOP pretending Mises was a Rothbardian, and please stop pretending Rothbard was a good monetary economist. He wasn’t. His production theory is amazing. His monetary theory is complete garbage.

  6. Tel says:

    Suppose you had two small buildings, each of which had a hole in one wall and a drive shaft poking out the hole.

    I tell you that in one building is an engine turning the drive shaft, which is merely following basic rules of chemistry and physics therefore not turning in any “purposeful” manner, but still steadily turning. Whereas in the other building several humans are working in a treadmill to turn a similar drive shaft, this being the result of so called “Human Action” and therefore this drive shaft turns in a “purposeful” way.

    So from outside the buildings all you see is two drive shafts turning about the same speed … how can you measure the purposeful drive from the other?

    • Andrew in MD says:

      You could shout at both buildings, “Woah, woah, woah! STOP! STOP! Oh God STOP!” as if someone were being injured by the turning drive shaft. There’s a pretty good chance that the “purposeful” drive shaft would stop turning but the other one would definitely keep going.

    • Andrew in MD says:

      You could also apply different levels of resistance / assistance to each drive shaft and measure how each one responds and try to reason from that. You might expect the “purposeful” drive shaft’s torque to reduce with the “disincentive” of increased resistance, while the other one should keep a relatively constant torque under resistance.

      • Andrew in MD says:

        Then again, we don’t know how the people in the treadmill were instructed to operate, so they may dig deeper and push harder while under resistance. So really, what you’d be looking for is a non-mechanical response out of one of the two drive shafts.

        Of course, you could set up these two buildings in such a way that the observer fails to discern the difference between the two buildings. But either way, the difference is that the engine is going to respond to external pressures in relatively deterministic, mechanical fashion and the “purposeful” drive-shaft is going to respond in a relatively non-deterministic fashion according to the abilities and incentive structure of the humans turning it.

  7. guest says:

    “So from outside the buildings all you see is two drive shafts turning about the same speed … how can you measure the purposeful drive from the other?”

    That’s not relevant to the claim that certain things are true of purposeful action.

    To answer your question, all we can say about the two buildings is that if there are humans in one of the buildings, then they value walking on a treadmill, for some reason, more than doing something else.

  8. Harold says:

    I agree here. We cannot infer purpose unless we observe the people. The automated shaft could be driven by a computer controlled mechanism designed to replicate the observed behaviour of a human driven shaft. It could in principle be constructed in such a way as to make the distinction impossible from the outside.

    In principle, this is the same as observing other humans. Chalmer’s famous “philosophical zombies” argument was intended to discuss property dualism, but can be applied here. We see other people and we assume they have feelings, but they may be philosophical zombies with no consciousness.

    Occam’s Razor comes to our aid here. Newton expressed it as “We are to admit no more causes of natural things other than such as are both true and sufficient to explain their appearances.” We accept that we exist. If everyone else were an automaton different from us we need to assume that there are two types of thing things, us and them. Whilst we cannot prove other people also feel, it is sensible to operate on the principle that they do.

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