One salient fact about this recession is that 90% of the working economists missed the warning signs, and those who predicted a disaster were ma
The Roman pontiffs have long insisted that something was missing. They have insisted on the role of distributive justice in economics. Beginning in 1891, with Leo XIII’s Rerum Novarum, they have insisted on the just wage as the basis of economic science, a position that has been repeated by every pope since Leo. The economists, on the other hand, have always found this problematic. A just wage can make no sense, since the wage is just the price of that particular “commodity” known as “labor.” Clearly, there is a dispute here about the nature of economic science. Given that the economists are presumed to be the experts in their own field, is there any reason for them to take the claims of the Roman Church seriously? In other words, can they subject their science to the moral claims of the Church and still be scientists, or would they be like Galileo, forced to recant what they know to be the truth?
Benedict XVI, in his latest encyclical, Caritas in Veritate, locates precisely the source of the disagreement.
The market is subject to the principles of so-called commutative justice, which regulates the relations of giving and receiving between parties to a transaction. But the social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy, not only because it belongs within a broader social and political context, but also because of the wider network of relations within which it operates. In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well. (35)
By insisting on the priority of distributive justice, the Pope poses a special problem for the economists, a problem that goes back to the late 19th century. At that time, the study was known as political economy, a discipline firmly located within political and social structures. However, many practitioners of the discipline felt that this was far too “philosophical” and hence insufficiently scientific. In order to become a true science, they would have to reduce economics to strict calculations. This could be accomplished by reducing all economics to a science of exchanges, that is, to commutative or corrective justice alone. The economy was to be modeled as a series of exchanges governed only by free contract and beginning with “an exchange with nature.” Of course, the absurdity of originating production with such an exchange is made clear when we ask, “Who negotiates in nature’s behalf, and what, precisely, does nature get in return? “Dear mountain, please give us your coal, and we will give you this nice slag heap in return.”
But leaving aside the question of the exchange with nature, the new economists claimed that exchanges under free contract would result in workers getting a fair wage and capital getting a fair return. There would be no reason to bring up the messy questions of distributive justice; commutative justice, the justice that regulates exchanges between individuals and firms, is sufficient to guarantee fair returns to labor and capital. “Fairness” was built in to the system, because free contracts are always fair, or so the theory has it.
All this seems very reasonable, but it is not. There are at least two problems. The first problem is that commutations deal only with change in ownership of already existing commodities, such as when we exchange money for bread or labor for money. But the primary problem for any economics is not exchange, but production. Before the bread comes into existence, it must be produced by human labor. When we take a tree and produce a set a chairs, we call the chairs into being; we are dealing with something that did not exist before. The great question of economics is how to divide this new thing among those who had a hand in creating it. Production produces values that did not exist before, hence commutations cannot answer the question, “How many of the new chairs should be given to the labor that produced them or to the owners of the tools by which they were produced?”
This is a matter for distributive justice. The problem that the new economists had with distributive justice is that it can never be (as Aristotle pointed out) a matter of calculation, but a matter of judgment, and different social arrangements would produce different answers. This reliance on reasonable judgments struck the new scientists as unreasonable, and certainly as unscientific. Without being subject to a strict mathematics, economics could never be “scientific.”
The problem of trying to describe production as a series of exchanges came to a head in the 50’s with the so-called “capital controversies.” Simplifying a very complex argument, the debate dealt with the adequacy of the standard production function, with purported to describe the appearance of new things by the function P=∫(K,L), where K aggregates all the different exchanges of capital and L of labor. However, K cannot be used directly in the formula, since capital comes in various shapes and sizes (trucks and tools and raw materials, etc.) without any common denominator. So in aggregating capital into the formula they used the price of the various capital goods. However, this turns out to be circular: The price of capital depends on the return to capital, but the formula is supposed to determine that return. In other words, in order to use the formula, you would first have to know the results of the formula. In trying to deny the role of reasonable judgments, they had to sneak a judgment into the formula. The whole thing is self-contradictory.
The interesting thing about the capital controversies is that the defenders of the commutative production function admitted defeat. In fact, Paul Samuelson, the leading economist of his day and chief defender of the function, not only admitted defeat, he actually refined the mathematics to show how the formula was internally self-contradictory. Samuelson did make some corrections to his textbook, but nevertheless the formula is still taught as if the controversies had never taken place. Why? Because there are no other alternatives available within a pure theory of exchanges.
This leads to a startling conclusion: Modern economic science—the science of production and exchange—lacks a coherent production function! And lacking such a function, it can never be a complete description of any economy. Hence, it can never accurately predict the course of any economy nor make any rational policy recommendations. Now we can understand how 90% of the economists fail to see its most obvious failures: they simply lack the tools with which to do a complete analysis of the economy.
The irony of this is that political economy became economics in the name of scientific computation, only to end up with a formula that can’t be computed. In attempting to explain everything in terms of numbers, they explain nothing at all. But they needn’t have worried for computation’s sake. Although distributions depend on judgments, or on power, the results can be computed and compared. For example, if it is determined that labor ought to receive no more than bare subsistence, then economists can accurately compute the results, most likely in terms of over-supplied capital markets and under-supplied consumer markets. And if it is decided that the capitalist shall live in rags and the worker as a king, then the under-supply in capital markets will reduce everyone to rags.
If the positive claims of economics break down, so do the normative ones. Fair contract, the argument goes, is supposed to ensure fair wages, but Adam Smith had already destroyed this argument. In any dispute over wages,
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms….A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.
In other words, wages depend not on productivity of the worker, but on power of the owners, and the more powerful party will prevail. Contract alone cannot insure fair wages. And without fair wages, there will be an oversupply of capital and a shortage of demand, and a recession is the result. Recessions can be delayed by using government spending to prop up demand, or by usury, that is, by supporting demand by lending money to consumers at ruinous rates. But both of these methods have their limits, and we are smack up against the limits of both remedies in the current crises. It is precisely this double failure which makes this recession so persistent.
With all this as background, we can ask, “Is economics a science?” The answer is, I think, “not in its present form.” The present form takes its cues from physical science, a science that rarely ventures into questions of justice. But economics, if it is to be a science, must obviously be a humane science, and such sciences cannot avoid questions of justice. This is to say, economics ought to be a science; it ought to be the science of political economy. In pointing to the importance of social and distributive justice, the Church is speaking only as a moral authority; but in doing so, she turns out to be a pretty shrewd economist. The moral requirement is not, as Benedict points out, something that is added to an otherwise complete science, but something that lies at its very core, and without which it cannot be a science at all.
I think asking whether economics is a science is too broad of a question.
Is macroeconomics a science?
Probably not yet. Largely because it’s been _based_ on abstract theory more than empirical observations.
The perspective of macroeconomics has been framed in a way that rarely answers the questions we really care about. I suppose that’s where distributive justice or social justice come in.
However other areas of economics provide scientific answers to more limited questions.
These areas have been studied experimentally (a controversial practice among Economists) lending some validity to their results.
The ability correctly to predict would certainly go some distance in validating an otherwise dismal science, but I rather doubt we’re ever going to see that kind of success in economics. It was in “Science and the Savages,” I think, that Chesterston said a thing becomes a mystery as soon as it passes through the mind of man. What in economics doesn’t suffer such a passage?
I speak of course from a fund of expertise that could barely fill half a thimble, but it seems to me that economics currently conceived suffers from two fatal tendencies: one is to simplify what is complex, and the other is to complexify what is simple. An example of the first would be an inclination to treat agriculture as a numerical variable in the GDP and ignore topsoil, which is a dark mystery we’re not going to come to the end of; an example of the latter would be the inclination to obscure basic financial relations, as when the mortgage John & Mary think the bank holds has been repackaged and hidden in so byzantine a labyrinth that bloodhounds couldn’t find it–until the walls collapse.
Submitted, as always, for correction and reproof …
And, a propos maybe of nothing, but funny nonetheless, Kunstler’s first pargraph from last week:
One can study economics using scientific methods, but what we have to day is the result of thinking humans can control economics…..they tinker with natural laws and disaster comes.
This weekend, CSpan Book TV rebroadcast a 1993 interview with Neil Postman on his book “Technopoly” and an interesting aside in the interview was when Postman asserted that the “science” of Economics was no science at all and inasmuch as it should possess a moral foundation, he asserted that it might be more prudent to pull it out of the science curriculum and add it to the theological departments. Given certain , shall we say, indiscretions in the past, this might not make it any more moral but it would certainly take the chief abuse out of the subject: the conceit that it is “scientific” and predictably follows proven axiom.
There is an almost perfect poetry in the fact that this nation was founded upon a conceit….a lovely conceit but a conceit nonetheless….that “all men are created equal” and chose to continue an economic system that involves a steady state movement toward inequality, despite presumptions of quid pro quo. The Framers, generally in hock up to their eyeballs to the Factors of Britain very well knew equality was a pipe dream but they must have simply figured this continental honey jar would buy them some time and distance from the reality of human affairs. No doubt the documents were written toward gaining the ear of the French who are prone to pipe dream, thinking no matter what happens life and human affairs have a certain enjoyable art regardless of outcome.
The Framers might have better served the people if they had asserted instead, something along these lines:
“All Men and Woman are created unequal and it is the task of a successful polity to temper this condition with moral and pragmatic judgement so that the unequal might prosper together.”
This should have been followed by four more recommendations:
“Perfection self-contradicts and generally the Utopian is most interested in somebody else’s perfection than they are their own”
“The Pursuit of Happiness is something best done while not giving a damn about money. Give happiness too much time with money and it will vanish into thin air, leaving only the evidence of a monstrous “bill due now” to indicate the insecure contributions of money toward happiness”
“Don’t get too cute”.
“There are no Natural Laws…only the rumor of them”
Mr. Medaille, what is your (working) definition of science? I am uncertain whether any science can be abstracted from moral truths, for in doing science, man deals with a gift.
For many years I have asked my “free market” friends what their “scientific” economics does with two problems. One is that my grandfather was forced off the land by free market inheritance laws and went to work in a factory, whose owners and managers cared not one whit for the safety, health or living wage of their workers. When my grandfather tried to start a union he and his friends were fired, blackballed, and unable to work in the area of their birth and homestead of their families. Second is what has happened in virtually every small and medium sized city in my lifetime–a factory moves out (name the place, another state, another country, another universe) and leaves X people unemployed, many of them with children in schools, ties to churches and neighborhoods, no way to sell houses or money to move. In both cases I get the general answer that the “overall” economy is made better, and that the “overall” improvement justifies the pain caused by market forces, that after all are part of the order of things. Economics is not only not a science (most science is not “science”) but as it is argued by most economists it is amoral.
By the way D.W. Sabin, not only was the US not founded upon the proposition of equality, it was not “founded.”
Willson,
I believe I know what you are saying but would like a tad more elaboration. I assume you are gigging me on my resort to picturesque but tired and derivative phrasing as a means to illustrate a point, thus successfully reducing the sharpness of the point.
I know that taking the Framers at their word that “We hold these truths to be self evident that all men were created equal……” is perhaps a bit hasty and that there was no official groundbreaking for the edifice but what might you be asserting?
It seems best to me to look at the study of economics from the perspective of a social scientist anthropologist using the analytical tool of dominance theory. The introduction of farming produced defensive needs which led to property rights and money which ultimately led to extreme capital accumulation. This has allowed the few to subvert the natural and instinctive human reaction of the many to reject domination by the few. Originally tribal where the free-loaders, or cheaters, threatened the survival of the tribe the reaction became the basis of Marx’s class warfare in the age of capitalism. Put very simply economists in a society dominated by the capital dominating few will generally find it difficult to achieve professional advancement by not supporting theories of market fundamentalism. By market fundamentalism I mean the notion that markets always find equilibrium quickly and with minimal disruption and consequently best serve the common good thereby requiring no regulatory intervention by government, or others. To admit that markets and especially capitalism controlled by the few requires regulation opens upon the flood gates for control by the many. Elite capitalism will, consequently, hunt for any theory, and do its best to support any theory, that says elite capitalists should be left to do their thing which essentially is extortion from the three great externalities, Environment, Government and Others. The EGO theory of elite capitalism if you like, or the bottom line is always profit for the few!
In the aftermath of the Great Depression of the Thirties elite capitalism took a great hammering. There was substantial regulatory intervention both by government and trade unions and redistribution of wealth actually took place and ownership of productive capital by the few was reduced to a limited degree by dissemination to the many through nationalization. The regulatory intervention, however, ran into trouble because of principal-agent problems in which power was used by government and trade unions in ways detrimental to economic production and the common good. This provided the opportunity in the late Seventies, early Eighties, for Manchester Libertarians such as Margaret Thatcher and Ronald Reagan (influenced by Friedrich Hayek and Milton Friedman) to reintroduce the ideas of market fundamentalism. They were assisted in this over the last thirty years by both Republican and Democratic governments including quasi government regulators like Alan Greenspan.
In the aftermath of the latest depression caused by the Sub-Prime Mortgage and Credit Crash market fundamentalism is again coming under intellectual attack most notably by the highly successful market manipulator George Soros with his concept of Reflexivity or “Self-Feeding Behavior.” Soros argues that the biases of individuals will always enter into market transactions and from time to time cause massive disequilibrium such as the bursting of a “property bubble” and its parent the “super credit bubble” caused by adverse global trading and fiscal and monetary management. For example, in the housing market according to Wikipedia’s article on George Soros:-
“Lenders began to make more money available to more people in the 1990s to buy houses. More people bought houses with this larger amount of money, thus increasing the prices of these houses. Lenders looked at their balance sheets which not only showed that they had made more loans, but that their equity backing the loans—the value of the houses, had gone up (because more money was chasing the same amount of housing, relatively). Thus they lent out more money because their balance sheets looked good, and prices went up more, and they lent more.”
In simple language there cannot always be an optimum working of the markets to achieve equilibrium, or its closely related cousin the Efficient Market Hypothesis, because investor’s objectivity is skewed by their actions. To counteract this situation there needs to be a cybernetic mechanism set up that chokes off investment when it over-heats and cybernetics means “steering” or regulation by somebody! I say “somebody” because Soros warns that government can on occasions also skew the markets. However, my main point is to say that since the purpose of an economy would be rationally defined by most of us as being for the benefit of the common good this does mean a need to regulate to avoid dominance by the few to the gross disadvantage of the many. I can also sum up by saying that Economics has now veered more towards being regarded as a social science than a natural science and today’s Nobel Prize Economics Awards clearly reflect this for the reasons I have outlined. Somehow I think if Adam Smith had been alive today he would have approved. I do not think he would have intended his “Invisible Hand” theory to be regarded with anything other than ambivalence, namely that the left hand (Many) would always have trouble working out what the right hand (Few) should be doing! That is after all our human nature having to be both self and other concerned, dominate or be dominated.
Doug, without “macro,” can economics really serve a useful purpose?
Jason, you correctly identify one of the major problems, the “externalities,” costs of a transaction not included in the price of a product. Loss of the topsoil is certainly a cost of our food system, but is not included in the price. I believe that on inspection, most of the “profits” and “efficiencies” of the current system will be shown to be merely externalities, which is to say, a failure in cost accounting. I believe that 3/4ths of social justice issues are simply proper cost accounting.
Junker, markets are man-made systems, not “natural” ones. Depending, of course, on what you mean by “natural.”
Albert and DW, Until about the 16th century, economics was a colony of philosophy and ethics. Indeed, even physical science was called “natural philosophy” up until Newton’s day. Without being a humane science, bound by ethics and teleology, economics cannot be a science at all. In its current state, it lags astrology in methodological rigor and predictive accuracy.
John W., the concerns you mention are the concerns of real persons, which seem to have no place in the “science,” since to do so would involve them in questions of value and ethics. But of course this stance of “objectivity” is just a cover for an ideology which serves a certain class, one that does not include you and me.
Bruce, the Efficient Market Hypothesis is at the intellectual basis of this meltdown. If the EMH was true, then the Black-Merton-Scholes formulas would also be true, a formula which states that you can eliminate risk from a portfolio using derivatives. Merton and Scholes received the so-called Nobel Prize for their work, but when they tried to apply it in an actual hedge fund (Long Term Capital Management) it collapsed, a clear warning. Greenspan bailed out LTCM, but still endorsed the methods. They became the basis for a quadtrillion (yes, QUADtrillion) in derivatives trading. Actual experience could not alter the mindset, because to question the EMH is to question the whole market edifice.
Glad to see you reference Long Term Capital Mgt. It was the dry run for the subsequent systemic crash and provided, along with increased computing power…the seeds of something that continues today. There may be some efficacious methods in what they originally proposed but like everything else in the Technocratic age, our technology and mania for group think exceeds our abilities when they are expressed in absence of moral restraints or pragmatic experienced judgement.
Wall Street announces it is reaching a record payroll this year, $140 Billion and I understand that the panic firings of last fall are now being re-hired at higher salaries than when they were fired.
Finance is our infrastructure now and the Emperors New Clothes our anthem. Checks and Balances are only effective if people have the judgement to observe them. The new generation of technocratic leadership think they can tinker their way out of systemic failure. Ho Ho Ho.
LTCM was the curtain-raiser, the dress rehearsal. And it was successful. Yes, the company failed, but once it was known that the gov’t (or at least the Fed) would bail out such risky instruments, the game was on. What is strange was that Warren Buffet was willing to bail out the firm–on his own terms. Greenspan rejected such free-market meddling in the affairs of govmint.
Here’s a sort of evolutionary response to EMH called AMH and based I guess on the ideas of Complexity Economics :-
http://www-stat.wharton.upenn.edu/~steele/Courses/434/434Context/EfficientMarket/AndyLoJPM2004.pdf
I think perhaps having to read such an article, or Soros’s Reflexivity theory, is the equivalent of eating glass for the libertarian conservative wing of the Republican party since regulation by some form of organisation with teeth is part of the cure and government shows up as the front-runner! It will be interesting to see long term how the Republican Party glosses over the Financial Crash with something more convincing than the CRA. Maybe it won’t bother on the reckoning that capturing the regulators is just really a matter of business as usual!
As John intimates, economics was a branch of “scientia,” applied philosophy if you will, or more accurately for this thread, a subset in the study of human action. The study of Divine action, aka the Mystery of Revelation, is more properly termed theology. The cognitive error in parsing “distributive” justice to imply an aggregate share determined centrally is a theological one, for apophatically-speaking, we can never fully “know” the measure of the Divine Gift, and most certainly not condemn all to a centrally-appointed “gift gauge” of public administration of the Creator’s gifts, obviously not scriptural (Man is appointed steward, not State). God in his Wisdom gifts us with senses, memory and reason. Rather than depend on the imperfect artifice of socialism, which denies Man’s free will to elect to use resources morally as his means to attain the eternal end that is our destiny, the science of economics is properly understood as a part of praxeology, the conduct of affairs necessary for human flourishing.
Could it perhaps be that in the case of the lost farm, interference in the free market by taxation was what led to the unfortunate expropriation? Rosmini’s ‘Constitution under Social Justice’ decries consumption taxes levied on income that exceeds that needed for survival (p73.) and indeed appeals to right reason for demanding UNEQUAL indirect taxation (as just, whereas random EQUAL levies — as titles of compensation for for public services provided by the state — are unjust since it is *impossible to calculate* [ergo to claim one can calculate such a thing is hubris, the unforgivable sin against the Holy Spirit] a true proportion of the burden (and therein lies the moral hazard behind all ‘distributive’ public welfare). Distributive justice can only be “justly” attained by just means (you cannot do evil that good may come of it) for example, thus loss of the farm may have been the appropriate just means in the following scenario:
“A poor family with many children may consume and thus pay to the state more than stingy grand seigneur who lives alone. Tax should be levied by what comes in and not on what goes out, consumption is what goes out not what comes in.
Thus it is licit to tax profits of a sole proprietor farm in excess of sales taxes levied on the purchasers of the produce of that farm. Proprietorship is not immutable. Transfer of wealth goes up (prosperity) and down (dearth). Fraternal relationships of gratuitousness are the key to understanding “Roman pontiffs .. positions” not a facile reading of a just wage! Mr. Medaille stumbles at this hurdle every time… and I haven’t even begun to address the injustices of centrally-planned US Fed “credit” that (p. 81)
“is greater than that produced by the fortune of citizens, a fictitious credit and thus an immorality and a public calamity. This last type of credit is founded on appearances and cunning, while the government must not favor anything but the truth… therefore the government must… favor… only that credit which is firm and supported by real wealth… if this credit [of a national bank] were to stay hidden from the eyes of the public, its credit would go up in smoke…”
and this from an author writing one and a half centuries ago, prophetic words indeed.
AUDIT THE FED (HR1207 and S601)
but better yet
END THE FED!
which so far Distributists of his ilk have failed to denounce (fractional reserve banking they seem to recognize as evil, but not FIAT money..?)
I am always amused by Austrian attempts to subvert Catholic Social Doctrine. Claire wants to claim the principle of gratuitousness for Austrian economics when the whole point of “Praxeology” is that all actions must be–of necessity–self-interested, and any attempt to to defy this principle will be counter-productive. The greatest opponent of any attempt to reconcile the Church and the Austrians comes not from me, but from Mises, who claimed (rightly, I believe) that his Praxeology was inconsistent with the existence of God, while the Church is inconsistent with the existence of Christianity. Of course, I disagree with Mises’s premises, but I agree that they logically lead where he says the do.
Claire incorrectly states that Distributists support the Fed. That is certainly not true of my writings, since I regularly rail against it, nor do I know of any distributist writers that fit her description. Perhaps she will enlighten us as to the identity of this mysterious writer that she has not cited.
But you cannot abolish the Fed without first abolishing FRB; otherwise the supply of money alternates between unlimited and zero, and always at inappropriate times. That is why all countries have a central bank; the economy tends to chaos without it, to gut-wrenching (and business destroying) alterations between inflation and deflation. That’s history.
And then she climbs on the favorite Austrian hobby horse (and their only real difference with neoclassical economics), gold buggery. But gold buggery is as “natural” as any other form of buggery. Of course, she rails against FIAT money (always in caps), which is silly, since all money is fiat money. In line with what your mother told you–and contrary to what Menger said–money does not grow on trees, nor in mines. Money is what Aristotle said it was: a unit of account to relate incommensurable products, answering such questions as “how many shoes equal one house?” It is called “money” (numisma) because it exists not by nature, but by nomos (law or custom).
There aren’t any Mengerian money systems; there never have been and never could be. Menger manages to write a “history” of money without a single historical footnote; he merely fantasizes about what the invention of money must have been if primitive men were all Austrian economists. On such fantases, Austrianism is built.
I prefer science.
Sabin,
I love your language. Will give more when I get back from watching my 6’2″ beast granddaughter play volleyball. She’s also a National Merit Scholar and drop-dead gorgeous. Can’t help it. I’m a jock.
Médaille, perhaps you will enlighten us how the only “real” difference between neoclassical economics and Austrian economics is over gold buggery. Perhaps, also, Médaille can enlighten us (isn’t he charitable to those who disagree with him?—check out his Amazon review of Tom Woods’ book, where he says Woods is stupid man who knows nothing about economics) on how the scientific method is appropriate for economics (maybe it is appropriate for pure mathematics, too, while we are at it). And perhaps he can tell us how a money develops without a pre-money demand. Then he can show a historical example of this refuting Menger. (While he is at it, maybe he can prove to us why diminishing marginal utility, based on praxeology as a starting point, is probably un-scientific and useless.) Next maybe he will enlighten us dumb folks on how praxeology denies that man can act based on helping other people. Then he can tell us if the normative and the positive is the same thing or different.
I was quite surprised to learn from “The Catholic Monarchist” that I had called Thomas Woods “a stupid man” in my Amazon review. So I looked it up, and sure enough, I said nothing of the kind. I merely pointed out that it would have been much better if you had used his real skills as an historian rather than his imaginary skills as an economist. In fact, I admire Tom Woods for being an open dissenter from Catholic social teaching. Unlike other Austrians, who try to subvert CST with Austrian nonsense, Woods forthrightly and honestly denies that the two can be reconciled. In doing so, Woods is being more faithful to Mises, who also denied that Christianity and capitalism were compatible. I agree with both of them. Unfortunately, Woods has decided that the Church is in the wrong and Mises in the right; I have decided the opposite.
As for normative and positive science, see https://www.frontporchrepublic.com/?p=3298
Marginal utility is a physical principle, Praxeology a psychological one. The two are unrelated. You get marginal utility because in a physical, finite world, all processes become non-linear at some point. Mises simply didn’t understand the term, and thought it had something to do with psychology.
As for the rest, you ask me to prove negatives. If you think there are other substantive differences with neoclassicism, then state them. Don’t ask me to prove your thesis for you. The same applies to Menger. There are no Mengerian gold systems in history. If you think there are, then you provide the example. Again, do not ask me to prove your thesis for you.
And I do find it ironic that a “Catholic Monarchist” becomes such a devoted acolyte of a man who declared himself a product of 1789, of the French revolution, of the declaration of the rights of man. The first acts of this revolution was to kill the Catholic monarchs. Go figure.
But I see its time to post my article, “Can Mises be Baptized?”
I [mostly] agree with Mises on economics, therefore I agree with Mises on everything. (Or: Mises was wrong on the French Revolution, therefore he was wrong on everything and no one should take anything he said seriously.) And, it turns out, I’m a (drone-like, I guess) “devoted acolyte,” who thinks Mises should be Baptized as a holy man, and you are a (non-drone-like) cool-headed man.
You might not have directly called Woods “stupid,” but you do state his understanding of economics is very weak and practically nonexistent. I guess one needs a degree in the subject otherwise they are unworthy. How is this charitable? Someone, who is clearly no dummy (and clearly has some real versus “imaginary” [!] skills in economics), disagrees with you and gives lots of reasonable arguments and then you seemingly act almost jerk-like in your review.
Marginal utility does not deny that there is, e.g., non-linear economies of scale. (Does “Man, Economy and State” say this? I guess I have to reread it.) And our different and repetitive actions are not detached from the physical world, anymore than our conceptual understandings of numbers are.
You say that there are no examples of Mengerian gold systems. But this is simply untrue. Money always develops because it has a non-monetary demand. It has never developed as, e.g., pure paper. It is not as if all of a sudden the genius law-maker said that such-in-such is money. A pricing system needs, so to speak, to exist so that people know how to use cardinal-calculating money. If this does not exist, no one would know how to use the money. Later it becomes legal tender. This is how money developed in America and elsewhere. (Why don’t you read, e.g., George Selgin’s work on an historical example in Britain of “private” money? Do you have an historical example of money with a non-monetary demand? Unless I do not understand, this does not seem to make any logical sense.)
Why should I state all of the differences between neoclassicism and Austrianism? There are tons of articles and books on the subject. It would take a very large essay to go through the major differences—and I do not have the time. I think you are very being disingenuous. I don’t want you to prove me right. I want you to prove me wrong. There are lots of differences from its understanding of methodology, mathematical modeling, money, the heterogeneous capital structure, etc. I do not see how the burden of all proof is on me in these matters.
CM, I’m sure you can give us all a lesson in charity. Some day.
As for Mises, are you quite convinced that his liberalism is unconnected with his libertarianism? I have my doubts on that score. In fact, I think they are just alternate spellings of the same word.
There are no mengerian gold systems. Gold is either a commodity or money, but never both, at least not in the same market. If it is money, its value is always fixed by the state, and hence it is not a commodity. Anybody who is serious about “commodity money” ought to consult a KitCo gold chart and see if they would really like to do business under those circumstances; you would have to read the papers each morning to find out if your dollar will buy a loaf of bread or just a slice.
But I must confess, I owe Menger a great deal, since I speculate in gold markets. I know that there will always be enough Austrian euphoria to push to price up, at which time I sell them some (like today) and enough market realism about a fairly useless metal to push the price back down, at which point I buy it back cheap in anticipation of the next round. As long as there are Austrian investment letters, I’ll keep doing well.
And by the way, gold money and fractional reserve banking are intimately connected in that one always leads to the other. In any expanding economy, there is never enough gold to serve the needs of the expansion. Hence, the goldsmiths learn that they can lend credits against their gold reserves at a multiple of the actual reserves, and these credits can circulate in place of the gold. Letters of credit replace real coins, and this is a near-universal phenomenon. Paper money is far older than the printing press.
And yes, I said that Woods doesn’t know anything about economics. So what. I did not use the terms you accuse me of using.
And I did not ask you to state ALL of the differences that the Austrians have with the neoclassicals, just any of them. You made an assertion that there were many, but won’t tell us even one. Okay.
I never addressed liberalism versus libertarianism as political philosophies. I find no interest in that particular debate. And, thank you, for saying that you think Thomas E. Woods, Jr. is a stupid man (or fill in the blank) when it comes -to- conversations about economic theory. As far as I am concerned it shows that your attitude to him is jerk-like. This is sad. If you ever get to debate him face-to-face, will you first say he knows nothing about anything in economics and then end the conversation with that sweet kindness? Or, will you treat him as a gentleman who knows something, -even- if it is muddled, and then debate him? Next, I guess, you will be saying that, e.g., F.A. Hayek knew nothing about economics at all. I suppose any summary of Hayek’s work on the business cycle that Woods has written on only therefore proves that Woods doesn’t know anything about economics.
Yes, I did give some examples of differences between the branches of economics at the end of my reply. I did not know you wanted me to summarize the points.
(And by the way, Mises deals with action as such. He differentiates the psychological from what human action entails. Fine, disagree. But saying he thought psychological theories explain praxeology is wrong. He did not base his deductions about marginal utility on that. He makes this very clear in his books.)
Actually, we are talking about one right now(!), i.e., the non-neutrality of money. Since, it appears you implicitly assume that money’s value can be fixed, like a price control, by the government. But if peoples’ demand for money changes, the value of that money changes despite what the government wants the money to be fixed to. They are the users of it, recall. Bimetallism never worked, in part, for this reason. If we have a “commodity money,” I can use it just as a “paper money” and use it for nonmonetary tasks as well. It furthermore appears you assume that government fixed money is more stable than alternatives. (Maybe the price of water needs to be fixed, too. Or, for that matter, everything else that changes in supplies and demands.) But is funny that you can say that today’s system has brought about stability versus an “Austrian” system. (Have you seen a chart of the value of the dollar? Have you seen how much of dollar buys today versus what it bought, say, 70 years ago? I think so. And, of course, gold is going more up and down these days. What should one expect in these economic conditions?) Well, I would rather have a very scarce money which expands slowly than one that has no expansionist limitations and which exclusively depends on the good nature of the political class, and one that results in the rising of purchasing power than the lowering thereof. Something, too, that makes the poor investors, in uncertain and risky Wall-Street, something a lot of us do not have the ability to do instead of simply hoarding which can only be done with a commodity money. And, quite potentially, “paper money” can drop to a value that reflects the “worth” of paper and ink. Something scarce—something costly provides protection against this possibility, a possibility that has happened under paper. Also, money is a universal medium of exchange that does not depend on some fixed ratio between it and the goods in the market. It is relative, so to speak, to it. We would not use money otherwise.
You say fractional reserve banking is the result of a commodity money. No, it is the result of making it legal versus illegal. More money, after it is being used, does not result in more exchanges. And so also, growing money on trees this way does not create more wealth. The infinite relative array of exchange ratios reflects money. (And, even if gold’s purchasing power went sky high, people could still switch over to something like silver. This ability also protects people from fraud, abuse, and so on.) Guido Hulsmann argues that things like bimetallism encouraged such things due to artificial deflations. And Jesus Huerta de Soto argues as well that it were views more similar to yours on the economics of money that encouraged these practices.
Let me be free to pick my money and free to make contracts in this money. Let me protect myself and my family from devaluation. You can do the same. I’ll take gold and silver. You take government paper, or whatever. We will get rid of fractional reserve banking and the fed. And we will leave each other alone…
CM, I would be more than happy to debate Mr. Woods in person, if you can arrange it. I do debate with him in the pages of the current issue of the Journal of Catholic Social Scientists, but a face to face debate would be just dandy.
As for our conversation, such as it is, you seem to excel at putting in my mouth words I never said and ascribing to me positions I never held. That is, you are carrying on both sides of the “debate.” Now, I see no reason to interfere in a man’s pastimes. If that’s what you want to do, have at it–maximize your utility and all that. I just don’t see any role for myself in your inner monologue. So keep it, and let us know how it all comes out.
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