WorldSys: Austrian Home Study Course, Week 10

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

READINGS: Chapter 2 of Murray Rothbard’s For a New Liberty

1 What is the nonaggression axiom?

The nonaggression is the beginning of libertarian political and ethical philosophy. It states that no one may initiate the use of force against anyone else. You may defend yourself from me, but you may not attack me. From this flows everything else.

2 How does the axiom imply “civil liberties”?

Any activity which can be shown to accord with the nonaggression axiom under any sensible interpretation is defensible. Saying unpopular things, declining to participate in religious events, marrying a person of the same sex, watching pornography, and using drugs all become what are usually called ‘civil liberties.’ If you aren’t hurting anyone, you can do as you please.

3 What constitutes a crime to the libertarian?

Violence committed against someone’s person or property, period.

4 Are libertarians left- or right-wingers?

In many ways libertarians are orthogonal to the standard left/right axis. Libertarians don’t believe drug use should be a crime, which is a typical leftist view; they also believe that gun ownership should be a right, which is a typical rightist view. Libertarians don’t have a problem with gay marriage, a typical leftist view; and they believe strongly in small (or no) government and free markets, typical rightist views.

5 Can a libertarian support taxation?

The only way to be totally consistent with the nonaggression axiom is to oppose compulsory taxation in all its forms. In reality there are quite a lot of ‘minarchist’ libertarians who believe in a very limited and manageable rate of taxation to support only those services which are spectacularly difficult to provide on the market, like national defense.

6 What are the three different approaches to libertarian ethics?

Natural rights — which asserts that humans have moral rights by virtue of their being human.

Utilitarian — which defends various propositions on the grounds of its created ‘the greatest good for the greatest number’

Emotivist — which bases all endorsements purely on subjective, emotional considerations. In other words, the nonaggression principle is good because they feel like it’s good.

7 Describe [Murray] Rothbard’s objections to the utilitarian approach?

Rothbard has two primary objections to the utilitarian approach: first, the failure of classical liberalism (a phrase which is just another way of saying ‘libertarian’) was due in large part to an explicit or implicit embrace of utilitarianism. Even when one is otherwise a principled defender of freedom it is all too easy to make little utilitarian concessions to statism here and there, and before long the whole structure has moved considerably closer to tyranny.

Second, utilitarianism is opposed to radicalism of any sort. Rothbard makes the claim that there has never been a utilitarian radical; I don’t know if he is right or not, but I personally am unaware of anyone who fits the bill. If we want a principled, free society, we cannot build one on utilitarian grounds.

8 What is natural law theory?

Natural law theory is the preferred foundation for a defense of libertarianism. It begins by noting that all things have a nature specific to them. Water behaves in certain ways and not others. So do trees. So do cantaloupe and giraffes.

Human beings, possessing no automatic instincts like squirrels or salmon, must choose their ends and choose their means to survive. They must learn about the world and how to use it. Coercion of any sort is therefore not just vicious, but actively violates fundamental properties of human nature by interfering with the exercise of a person’s free choice.

9 What is the right to self-ownership, and how does Rothbard justify it?

Everyone owns their own body and has the right to use it. Each individual must use their own stomach to digest food, their own feet to walk, and their own mind to think, so who could possibly have a better claim to a person’s body than that person?

Consider the alternatives: if we reject the principle of self-ownership we are left with two possibilities. Either there is some caste of people who have a greater claim to your body than you do, or everyone on Earth has a partial claim to your body.

The first alternative confers humanity on the ruling caste and renders everyone else subhuman, while at the same time making it impossible to fulfill the economic requirements of life. If the elites can dictate where you work and what you consume you are a slave, plain and simple.

The second alternative simply isn’t workable. What would it mean for all seven billion people on Earth to own a part share in my body and its use? How are they to assert their claim? Am I to divide up my earnings and give a pitiful fraction to everyone? But then do I have the freedom to exercise on my own, because it isn’t as though the rest of humanity will get any benefit from my being in better shape!

Rothbard argues that this notion is actually worse than unworkable, it’s illogical. How could everyone have a right to own little bits of other people but not have a right to own themselves?

10 What is the homestead principle of ownership?

Having argued for the right to self-ownership we now need a theory of property. When does a person own a thing? The homestead principle says that ownership is conferred when several conditions obtain: either you mixed your labor with nature to make the thing or you traded with someone who did, and you didn’t steal the thing from anyone.

You own an apple tree when you planted it or bought it from the person who did. You own a hat when you made it or bought it from the person who did. If you stole either of these things you don’t own them, you are an aggressor who should be punished.

Here we face the same alternatives we did when grappling with the problem of self-ownership: either labor confers ownership, or ownership accrues to a special elite, or everyone on Earth enjoys partial ownership of everything.

The same analysis applies.

11 Don’t the needs of society sometimes outweigh the rights of individuals?

Rothbard contents that this question doesn’t make sense. Individuals need things, individuals make things, individuals have rights; societies are just collections of individuals. The concept of ‘societal needs’ is therefore moribund, and can only ever be useful insofar as it can be shown to derive from the needs of individuals within the society.

12 How does Rothbard explain the foundations of exchange and contract?

Exchange and contract grow directly out of the right to self-ownership and the homesteading principle discussed above. I own myself, I own my labor, I use my labor to make a hat, and I can trade the hat to someone in exchange for something I’d like more.

Contract is yet another extension, and consists in promising some future goods, services, or terms to another person as part of an exchange.

13 Don’t we need to balance property rights against human rights?

This question doesn’t make sense from the Libertarian perspective, as human rights are continuous with property rights. A typical human right, such as free speech, doesn’t have teeth if the state can seize a dissident’s property at any time and under any pretense.

Moreover, in the natural rights tradition property rights and human rights are derived through the same analysis and from the same source.

WorldSys: Austrian Home Study Course, Week 9

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

READINGS: Chapters 6 & 7 from Gene Callahan’s Economics for Real People and Chapter 7 of Thomas Taylor’s An Introduction to Austrian Economics

1 What is the difference between profit and interest?

The market establishes an interest rate for the long-term use of, say, capital goods or funds loaned out, but profit consists in a rate of return above the market interest rate. If an entrepreneur is only earning the interest rate they aren’t really profiting.

2 Which imaginary construction is useful for illustrating this difference?

The ‘evenly rotating economy’, in which goods and services are provided in the exact same amounts day-in and day-out. There is never an increase or decrease in demand for anything, and a lettuce farmer knows exactly how much lettuce they need to grow, what price they can command for it, and what expenditures will need to be made on resources like fertilizer.

In a situation like this it is possible to earn interest but not to earn profit. Earning a profit requires an entrepreneur to spot opportunities by correctly forecasting supply and demand. If nothing ever changes there is nothing to forecast; all supply and all demand is known in advance by everyone.

3 How do Austrians justify the use of imaginary constructions?

Imaginary constructions are just a kind of thought experiment. We use imaginary constructions insofar as they elucidate some aspect of the economy which otherwise might be hard to focus on amidst the blooming, buzzing confusion of the actual market.

Having established the concept of an evenly rotating economy in the question above, we might then imagine one solitary change (a sudden increase in the demand for ice cream), and then ask ourselves what happens as a result.

This procedure clearly abstracts away vast amounts of complexity, but if we do it carefully there’s no reason to think that nothing can be learned.

4 Is there a “normal rate of profit” in a market economy?

The ‘normal’ profit is just the profit made from interest. All things being equal people would prefer $1,000 today for $1,000 next year, so if I invest $1,000 in a venture to be cashed out in one year I expect to make back more than I put in. Of course this kind of profit exists in a market economy.

The normal rate of profit is contrasted with entrepreneurial profit, which consists primarily of adjusting the structure of production to better meet consumer demand.

5 In what sense is all action entrepreneurial?

Most people think of someone like Elon Musk or Jeff Bezos when they hear the word “entrepreneur”, but Mises noted that as a kind of activity entrepreneurship really just means acting in the face of a future made uncertain by shifting market conditions. Since none of us possesses a crystal ball by which to divine what’s coming, we are all entrepreneurs in this regard.

6 How does entrepreneurship relate to consumer satisfaction?

Entrepreneurs are the class of people who look at the ways in which the current configuration of the economy fails to maximize consumer satisfaction as much as it could and act to change this. If people are not getting all the designer jeans, handmade soap, or bee pollen extract that they want some entrepreneur will see this and invest time, money, and capital resources in supplying the demand.

7 What is the connection between disequilibrium and entrepreneurship?

In an evenly rotating economy there would be no role for entrepreneurs because everyone has exactly as much of everything as they want. It is only in a state of disequilibrium, when there are needs unmet, opportunities unseen, and resources un-utilized that entrepreneurs have anything to do.

8 What does “market process” mean?

The ceaseless churning of market activity. The constant buying, selling, trading, renting, consuming, leasing, paying, and so forth which all of us engage in on a daily basis.

9 What does Mises say is the “ultimate source” of profits and losses?

The uncertainty of the future. In an evenly rotating economy nothing ever changes and everything is known in advance, so there is no possibility of making a profit or taking a loss. But in a dynamic economy there is much uncertainty about the future, so anyone can take their savings and invest in a new venture if they anticipate that future demand for their product or service will exceed their current expenditures. Sometimes they will predict correctly, sometimes they will predict incorrectly, but it is this lack of omniscience which gives rise to profit and loss.

10 Isn’t it true that one man’s profit is another’s loss?

No; economic activity needn’t be zero-sum. Of course it is possible for one man to profit at another’s expense, but this should not be our default assumption. When a person makes exorbitant profits it is most likely that they are providing a superlative good or service which many, many people are willing to pay for. Capitalism is unique in its effectiveness at channeling ‘greed’ toward pro-social ends.

WorldSys: Austrian Home Study Course, Week 8

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

READINGS: Chapter 8 of Gene Callahan’s Economics for Real People

1 What is capital?

Capital has had many definitions throughout the history of economics, but I like Israel Kirzner’s view of capital as being like a way station on the path to producing a consumer good. Capital is any higher-order good, like a robotic assembly line or a harvester, which allows for the production of a consumer good.

2 In what sense is the classification of capital goods a subjective enterprise?

It is subjective in the same way that classification of all goods is subjective: a given capital good matters only insofar as it can be used to produce a good that is ranked in someone’s ordinal scale of values. This kind of ranking percolates upward through the structure of production and gives a capital good its value.

3 Why did [economist Gene] Callahan [from whose book “Economics for Real People this week’s reading was taken] choose the title, “Make a New Plan, Stan”?

Much of the chapter is about the relationship between capital goods and planning. Specifically, whether or not a given item even counts as a capital good hinges on the role it plays in someone’s plan.

4 Give an example of a first-order good and a corresponding higher-order good.

Beets are a first-order good meant to be consumed directly. Everything in the production process upstream of beets — whatever machinery is used to till the soil, plant beet seed, fertilize and water the beets, harvest them, process them, package them, transport them, would be higher-order goods.

5 Why are market prices necessary to compute a firm’s total capital?

Market prices are required to estimate the value of the capital goods on hand. Whatever another farm would pay for your beet-harvesting equipment is its approximate value. It is worth pointing out, however, that this is not always a clear indication of value; if the world of beet farming is undergoing a quiet revolution that is soon to make all of your current capital stock obsolete, then merely adding up that capital’s current selling price on the market is not going to tell you what it’s truly worth.

6 Is there a such thing as “social capital”?

The textbook author says no, but he’s using the term to mean “the physical capital of society as a whole”. The only way in which I personally have heard the phrase “social capital” used is in referencing the social assets of a firm. Clearly the analogy between social and physical capital isn’t perfect, but I don’t think conceptualizing things like brand recognition and product popularity as a kind of capital is nonsensical or foolish. As long as one doesn’t take one’s own analogy too literally it can function as a useful shorthand in conversations and thinking.

7 What is meant by the term, “structure of production”?

The structure of production is the sum total of all the interlocking plans to create goods, together with the capital required to see these plans through.

8 How do Austrians differ from mainstream economists in their views on capital?

The neoclassical and Keynesian economists tend to view capital as a big, undifferentiated lump which can be summed up in a few numbers that are then plowed into mathematical equations. One of the key differences between the Austrian school and competing outlooks is that the former recognize the profound heterogeneity of the capital structure. Indeed, this insight is one of the pillars of the Austrian critique of the interventionist remedies proposed by Keynesians.

9 How do people benefit from the capital structure?

The capital structure is part of what makes dollars go so far. Capital goods make labor more productive, make resources cheaper, make distribution easier, etc. This savings is passed on to individuals who are able to get everything from toothpaste to transmission fluid much more cheaply than they could if they were making it themselves.

10 What is consumer sovereignty?

Consumer sovereignty refers to the fact that the ultimate configuration of capital is driven by consumer demand. When people began to demand cars over horses, truly titanic reconfigurations of the capital structure took place as hay production decreased in favor of oil refining, blacksmiths lost work and assembly line personnel gained it, and money accrued to those who had correctly predicted the future.

11 What was Alfred Marshall’s objection to Menger’s order of production?

Marshall asserted that Menger’s conception of goods as belonging to various ‘orders’ in a hierarchy was unhelpful because any good could belong to several different orders simultaneously, depending upon who’s vantage point was taken.

A car can be a consumer good to me, a second-order good to a traveling salesman, and a much higher-order good if used to drive to meetings at which the construction of a new beet processing plant is discussed.

12 How does Callahan answer this objection?

By asking: who gives a damn? The position of a good in the structure of production depends upon the plan of the person utilizing it. So yes, a good can be a first-, second-, third-, on n-ordered good, depending upon the use to which it is being put. This isn’t an issue, it’s a straightforward consequence of founding our economic analysis on subjective valuations.

13 Why did Böhm-Bawerk claim that “roundabout” processes were more productive?

The most straightforward way of planting beet seed is to walk out the front door and plant them in the ground by hand. A more roundabout way is to first spend three days building a tool to till the soil, then another two days building a little machine that plants and buries the seeds all at once.

This circuitous method is slower at first but will increase productivity in the long run by saving you a good deal of manual labor.

Most of the modern economy works in this way. Instead of machining a car’s parts at one location a good deal of the work is outsourced, sometimes to a firm all the way across the world.

Complex supply lines, specialized production processes, and intricate structures of capital goods all contribute greatly to an increased standard of living despite being less direct than they otherwise could be.

WorldSys: Austrian Home Study Course, Week 7

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course”. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.


This was an unusually difficult set of questions. It’s entirely likely that I have gotten some of this wrong, and I will update it in the future if I remember to revisit this post.

1 What is time preference?

The willingness to defer present consumption for future rewards; or, the willingness to save money.

2 For Mises, is the existence of time preference merely a psychological regularity?

I believe he said it was a ‘praxeological regularity’ — not just something people do sometimes but something that it is within their nature to do.

As of now I’m not sure how I feel about this claim.

3 If I would rather “consume” a package of fireworks next July instead of today, is that a violation of time preference?

No, it is a kind of time preference. Time preference denotes a willingness or lack of willingness to defer consumption. A desire to use fireworks now would denote a high time preference, or in other words a strong tendency towards satisfaction in the present. But a desire to put off using the fireworks until next year would be an indication of low time preference, meaning you’re content to wait until next year to enjoy them.

4 What is the difference between rent and interest?

Rent is a price paid for temporary use of a good. Interest is a broader phenomenon, and can basically be thought of as an exchange rate between present and future goods. A high rate of interest privileges present goods over future ones by making it more expensive to invest in long-term projects, and a low rate of interest makes such projects more appealing by lowering the cost of undertaking them.

5 Can an investor earn interest just in the loan market?

An investor can earn interest in the loan market, yes.

6 What is Fetter’s theory capitalization theory?

The section of “The Great Austrian Economists” dealing with Fetter’s theory of capitalization was extremely condensed and high-level, so I can’t claim to fully understand it. But I will do my best to answer this question.

Fetter defined capitalization as “discounting the future rents in goods”, which I read as “paying a single sum today equivalent to expected value and discounted because that value lies in the future.” Remember that, all things being equal, people tend to prefer present use to future use.

The price of capital goods arises the same way all prices arise: as a result of individuals bidding on them because of the subjective ranking they assign to the goods. An entrepreneur investing in capital goods makes a profit because when the future “arrives” they can make more from those goods than the discounted rate they paid for them.

These inter-temporal comparisons between present and future uses, present and future goods, and present and future preferences are what give rise to interest rates, not the cost of producing a capital good.

The puzzle of interest rates was a significant one, and Rothbard claimed that Fetter was the first economist to derive an explanation of interest rates from a theory of time-preference.

7 Why don’t Austrians think the productivity of capital goods explains interest?

Because interest rates are a result of time-preference, not the productivity of capital goods. Further evidence for this claim comes from the fact that interest rates don’t only arise in connection with capital goods; basically every type of loan has an interest rate associated with it, for example.

8 Is it accurate to describe the interest rate as “the price of money?”

I’m not sure; I don’t think so. It would be more accurate to describe interest as a kind of exchange rate between present and future goods.

9 Mises adopts a “pure” time-preference theory of interest. But isn’t the rate of interest determined by the supply and demand for loanable funds?

This looks to me like the opposite of the mistake made in assuming that interest is explained by the productivity of capital goods (SEE: question 7), and our answer reflects this fact. We believe that interest rates are a result of time-preference because they occur pretty much everywhere that future consumption is evaluated against present consumption. This includes loanable funds markets, but is not limited to just these markets.

10 Do rich people always save more than poor people?

Let me explain why this question is being asked: if we possessed but a shallow understanding of subjective value theory and time preference theory we might assume that rich people, as a rule, always save more than poor people because they have enough excess wealth to handle any pressing needs such as food, water, and shelter. They might then be said to have the luxury of a very low time preference because they have plenty of money left over to be saved.

This is not the case. We have all heard stories of people working their whole lives on meager funds only to give a vast, saved fortune as an endowment to a university. And of course stories of the profligate rich squandering mommy and daddy’s millions are all too common.

WorldSys: Austrian Home Study Course, Week 6

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course”. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 What is the division of labor?

It’s exactly what it sounds like — dividing labor up. People could subsist atomistically, each person growing their own food, making their own shelter, and producing their own clothing. Or each person could specialize in a trade like agriculture or architecture, produce more than they need, trade the surplus, and use the proceeds to buy whatever they want.

This latter option is the division of labor, and for a variety of reasons it is vastly superior to everyone trying alone to provide everything their survival requires. People in different parts of the world are better positioned to provide certain goods. Individuals also bring different talents and aptitudes to the labor market. And by focusing on one skill or a small number of skills people can get really, really good at making whatever they’re specializing in.

2 What is the law of association?

The law of association is the name given by Mises to what is usually known as the law of comparative advantage. The idea is that even if one person is strictly better at everything than another person, both are better off if they still specialize and trade. If the owner of a store is better at sales, running the cash register, and sweeping the floors than an assistant it does not follow that the store owner should try to do everything on her own. She should choose the handful of tasks at which she is most best at and do those.

3 Which party benefits from a voluntary trade?

If a trade is voluntary it’s exceedingly likely that both parties benefit. It’s of course possible that a person might regret a voluntary transaction because they do not derive as much joy as they thought they would from an item, but there is nothing inherent in voluntary transactions that means one party is exploiting another.

4 Should someone trade with a man who has a lower productivity in every good?

Yes, see the answer to question 2.

5 Give an example of a price formed in a barter economy.

One pound of butter = two loaves of bread.

6 For Austrians, what is the ultimate cause of market prices?

The subject valuations of marginal goods made by individuals. If I am making shirts to trade, I will continue to make shirts until I’ve arrived at a point at which no one can offer me anything I’d like more than I’d to possess a shirt. Every one else in the economy is also making subjective valuations of a similar kind, and the sum of these valuations determines the price of a good.

7 Do prices measure value?

Not directly. Value is a phenomenon occurring at the level of the individual — an individual values a car or a book. When multiple individuals in an economy value a good and begin to compete for it, a price is established from all their demand curves.

8 If someone thinks a TV is worth more than its purchase price (say $100), why doesn’t he keep buying TVs until he runs out of money?

Because he doesn’t value each new TV equivalently. The first TV might be worth greater than $100, but the second might only be worth $50, the third $15, and the fourth might actually be of negative utility because he has no way to transport or store it.

9 If value is subjective, does that mean market prices are subjective too?

Not if ‘subjective’ means ‘arbitrary’. ‘Subjective’ means ‘occurring in the mind of a human being acting purposefully’. There can be objective facts about subjective states — if you are hungry, for example, that is a true fact about your conscious experience. Likewise, if more people subjectively value oranges than apples, the market price will be an objective manifestation of that fact.

10 What is an equilibrium price?

The price at which supply and demand are equal. The equilibrium price for tires is whatever price allows everyone who wants tires, and can afford them, to have them.

11 What is the source or cause of prices for factors of production?

It is the same source of prices in consumer goods: subjective valuations. Each producer must weigh the cost of an additional piece of machinery against what could be done with the money. And each unit of the factor of production will be subject to the same diminishing marginal utility as a loaf of bread purchased at the super market.

12 In economics, what is the difference between desiring and demanding a good?

Demanding a good is more forceful. We all desire things we aren’t willing to pay for — like being in absurdly good shape. If you could snap your fingers and be 5% body fat with a 40” vertical and a deadlift of 500 pounds I’m sure you would. But if you’re not willing to spend a decade pursuing these goals, then you don’t demand them in an economic sense.

13 Why are demand curves downward sloping?

Because, as described with the law of diminishing marginal utility, each successive unit of a good does less to satisfy your desires. The demand curve for cheese slopes downward because you might really enjoy the first piece of cheese, somewhat enjoy the second piece of cheese, only mildly enjoy the third piece of cheese, and be nauseous at the thought of eating cheese after that.

14 Are supply decisions purely objective, or do they involve value judgements?

They involve value judgments. A factory owner can invest in more machinery to expand production, but that might not be worth the extra expenditure and effort.

15 Would we expect different prices for the same good to persist on the market?

In an idealized model, perhaps not. But consumers might favor one brand of toothpaste over another because, rightly or wrongly, they believe one brand to be more reliable than the other, even if both brands are chemically indistinguishable. In reality there are innumerable little factors such as this which can lead to long-term price differences for goods that are, for all intents and purposes, identical.

WorldSys: Austrian Home Study Course, Week 5

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 What is the difference between a valid argument and an argument with a true conclusion?

A valid argument is one with a conclusion that bears a certain kind of relationship to it’s premises, specifically: if the premises are true then the conclusion must follow. The classic textbook example is:

  • All men are mortal;
  • Socrates is a man;
  • Therefore, Socrates is mortal.

If it is true that all men are mortal and it is true that Socrates is a man then in must necessarily follow that Socrates is mortal.

But there are an infinite number of arguments which have true conclusions but which aren’t valid because they don’t follow from their premises:

  • I am the king of England;
  • The moon is made of cheese;
  • Therefore, 2 + 2 = 4.

We can see that, while the conclusion is incontrovertibly true, it is a total non sequitur with respect to its premises. What on Earth do my heavenly mandate or the constitution of heavenly bodies have to do with truisms of basic arithmetic?

Absolutely nothing.

2 For [Hans-Herman] Hoppe what is the subject matter of economics?

Hoppe defends the view that economics is a pure science dealing with human action. It studies the consequences of the inescapable fact that human beings engage in purposeful, goal-directed behavior.

3 Do other free market schools share the Austrian methodology?

No. The Austrian methodology focuses on a priori knowledge deduced from self-evident axioms. The Chicago School, in contrast, is far more focused on empirical research.

There are plenty of non-Austrians who do utilize Austrian insights, however.

4 What does praxeology mean?

‘Praxis’ means ‘practice’ or ‘action’, and ‘praxeology’ is therefore the study of human action. It is not synonymous with economics, for economics is but one branch of the broader praxeological framework.

5 What is the ultimate starting point of praxeology?

Praxeology begins with what is called ‘the action axiom’, which states that man acts. From this deceptively simple starting point further economic principles such as the law of marginal utility and the law of supply and demand are deduced.

6 If economic theorems are tautologies, do they teach us anything new about the world?

They can. A tautology like “p or not p” does not really get us anywhere, but a tautology like “a person chooses their highest ranked preference first because otherwise they would’ve chosen differently” does get us somewhere. In particular, it allows us to begin understanding the Austrian notion of ordinal, subjective value rankings, which is crucial to an understanding of the whole marginalist philosophy of economics.

7 When Mises first wrote on methodological matters, did he think he was offering a critique of orthodox economics?

No. When Mises began writing it was common to reason about and explain economics with the same reliance on truths deduced from axioms which characterizes Austrianism. Mises believed that he was taking economics as it was practiced and giving it firmer foundations, not building an entirely new structure.

8 Were any of the classical economists praxeologists?

No, praxeology grew out of 19th and 20th century attempts to reform the errors of classical economists. William Harold Hutt wrote many Austrian-themed works while considering himself squarely in the classical tradition, but he is the only exception of which I’m aware.

9 Give an example of a praxeological theorem.

If a transaction between two people is non-voluntary then one person profited at the expense of another.

10 Since economic theorems are always valid, does that mean their conclusions apply to every situation?

No. An economic theorem’s validity derives from the fact that it must follow from its premises, but if the premises don’t hold then the conclusion may or may not follow. The world is complicated and for any given situation there are innumerable mitigating factors which could make economic analysis less straightforward.

A well-known economic truism is that an increase in the supply of a good will decrease demand for that good. So if a dress shop doubles their supply of a certain dress and demand goes up have we refuted the laws of supply and demand? No: perhaps Kim Kardashian was seen wearing the dress and now her fans are clamoring to get their hands on one.

11 To be scientific, shouldn’t we test economic laws?

I have a confession to make: I’m a huge fan of empiricism. This means the Austrians are unlikely to invite me to their philosophy parties.

But it is crucially important that we never lose sight of the fact that what we’re trying to understand is reality, and that our deductive principles and our models might have to be changed on the basis of new discoveries.

But having studied Austrianism I’ve become more aware of the fact that there are certain kinds of claims for which observational evidence is not required or even relevant.

Consider the claim that a ball cannot be blue all over and green all over at the same time. I suppose one could try to test this with a ball and some cans of spray paint; but if we saw someone undertaking experiments of this sort, or founding an Institute for Research Into Non-Contradiction, we’d be feel that they simply didn’t understand what ‘all over’ or ‘at the same time’ means.

Likewise, in high school we all learned that on a plane the interior angles of a triangle sum up to 180°. Empirical confirmation of this fact isn’t necessary if one understands the proof. Moreover, if someone did draw a triangle whose interior angles summed to 179° we would all assume they’d made a small error in their measurement, not that all of geometry was now in question.

Or how about this one: the Austrians claim that the Great Depression was the result of government policies and that a hands-off approach would’ve made the recovery much, much quicker. Keynesians, on the other hand, think that not only is the market to blame for the downturn but that without extensive interventions the recovery would’ve taken much, much longer.

As we are dealing with a matter of history there isn’t any way to turn back the clock, try something different, and then compare the results. Instead we must evaluate these claims on the basis of sound theory, for there is no other way.

12 What does synthetic a priori mean?

It means a statement the veracity of which cannot be established by formal logic and for which experimental observation is also not required. A true synthetic a priori statement follows from axioms which cannot be denied without implicitly relying on them — e.g. one cannot deny that existence exists without confirming existence. With such axioms in hand we can derive synthetic a priori truths by reflecting on how things must necessarily be. Kant, who developed this framework, gave geometry as an example of a body of true synthetic a priori statements. Geometry begins with axioms like the definition of a line and derives further statements which could be tested (like: ‘the interior angles of a right triangle sum to 180°’) but which usually aren’t tested.

13 Does praxeology assume that all people are perfect calculators?

No, it assumes that they engage in purposeful behavior and have a hierarchy of wants.

14 Does praxeology assume all people are basically selfish?


Entrepreneurship is Bigger Than You Think

In “Economics For Real People” Gene Callahan notes that “All human actions have an entrepreneurial aspect to them, not just those of the people who run businesses.”

I thought this was pretty interesting. Most people think of someone like Elon Musk or Jeff Bezos when they hear the word “entrepreneur”, but the great economist Ludwig von Mises noted that as a kind of activity entrepreneurship really just means acting in the face of a future made uncertain by shifting market conditions.

Since none of us possesses a crystal ball by which to divine what’s coming, we are all entrepreneurs when and to the extent that we have to use our best judgment to make predictions.

WorldSys: Austrian Home Study Course, Week 4

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 Why did Hayek receive the Nobel Prize in economics?

For his work on the Austrian theory of the business cycle.

2 Under which Austrian did Hayek actually study?

Friedrich von Wieser, and he also attended Mises’s legendary economics Privatseminar in Vienna.

3 What caused Hayek to abandon his socialist views?

Hayek’s interest in both economics and socialism stemmed from his desire to ameliorate the suffering of the poor. When Mises published Socialism, wherein the great man compellingly made the case that socialist ownership of the means of production would make economic calculation flatly impossible, Hayek was converted to Austrianism.

4 How did Hayek spread the Misesian cycle theory to the English world?

Hayek built on Mises to derive a theory of economic fluctuation based on credit expansions from financial institutions, and this was compelling enough to land him an invitation to lecture at the London School of Economics. There he met such future luminaries as Lionel Robbins, J.R. Hicks, Arnold Plant, George Shackle, and many others. Hayek was able to make the case for the Austrian theory of the business cycle to these people, many of whom gradually accepted his ideas. Through them the core ideas of Austrianism spread throughout the English-speaking world.

5 Name some reasons why Hayek may not have offered a full-scale refutation of Keynes’s General Theory.

Though Keynes and Hayek clashed on a number of occasions in the 1930’s, Hayek was in general reluctant to engage in direct confrontations with his colleagues in economics. And Hayek later claimed that Keynes changed his mind so often there was no real point in working out a detailed critique of General Theory if it was just going to be obsolete in a few years.

6 Which major economists attacked Austrian capital theory?

Two of the most prominent were the Italian Piero Sraffa and the American Frank Knight. For a variety of reasons, however, Austrianism had begun to fade from public view.

7 After leaving the LSE (London School of Economics), where did Hayek teach, and in what capacity?

At the University of Chicago as part of the Committee on Social Thought.

8 How did Mises and Hayek differ in their views on society?

The two men approached the defense of capitalism from very different angles. Mises was a rationalist fond of deductive arguments, while Hayek argued that the market order was better at incorporating diffuse knowledge into price signals and encouraging trial-and-error learning. Mises used reason to arrive at capitalism while Hayek repeatedly stressed the disastrous effects of an inappropriate faith in the power of reason.

9 What is a “Hayekian triangle”?

The Hayekian triangle is a diagrammatical representation of the fact that production is a temporal process requiring a vast amount of coordination between present and future goods and present and future demand.

Investments in capital goods like harvesters, mining equipment, or robots for assembling cars must be made in the present on the premise that people will want whatever those goods can make in the future. Investment in capital goods does not happen all at once, of course, but occurs in various stages; the production of a watch must first begin with pulling the required metals out of the ground, then proceeds to refining those metals somewhere, then moves on manufacturing the precision components which go into a watch, and eventually it must all be assembled (probably in a factory).

Getting all of this lined up so that people ultimately have the goods they want is one of the central problems of a complex economy, and the Hayekian triangle helps to illustrate the issue.

10 Describe some of Hayek’s insights on knowledge.

Hayek was a complexity theorist of some renown who believed that the task of economics was not to understand how an economy allocated scarce resources for diverse ends but how an economy utilized knowledge which was scattered among many different minds and not known to anyone in its totality. Much of the knowledge required to make an economy work is not only not centralized anywhere, and is not only not the kind of thing that is easy to articulate, but may not even be consciously known by the people who possess the knowledge! It is, in other words, tacit knowledge.

Such information is not available to central planners and cannot be made available to them, even in principle. An evolving market, therefore, is the best way to use this information to everyone’s benefit.

On this basis Hayek made a distinction between unplanned order (cosmos) and planned order (taxis). A taxis, like a business enterprise or a bureau, can only deal with problems of extremely limited complexity. A cosmos on the other hand is able to evolve solutions to much more complicated problems — but must be left alone if it is to succeed in doing so.

11 Why did Hayek describe competition as a “discovery procedure”?

Because he saw that markets make use of distributed, tacit knowledge by continuously discovering it. Tacit knowledge is found and utilized when firms hire workers to grow oranges, build houses, or manage teams of people. Moreover, individual people pursuing their own ends cause knowledge to percolate through the economy, showing up in the prices of goods and services.

12 What is a ‘spontaneous order’?

An order that is not planned by a central authority but instead emerges out of many smaller parts as they compete and coordinate. Nobody plans a modern capitalist economy, but one falls out of millions of individuals working, innovating, improvising, and consuming.

13 Describe some of the controversies in interpreting Hayek’s thought.

While Hayek was a preeminent economist squarely in the Austrian tradition he was not simply a follower of Mises. He differed from Mises in his interpretation of the socialist calculation debate: while Mises believed that collective ownership of the means of production made an effective socialist economy impossible, Hayek is thought to have believed it merely made an effective socialist economy really, really unlikely.

Hayek pointed out that there are two kinds of ‘liberalism’: a rationalist variety that derives laissez-faire deductively from first principles, and an English common-law variety that is wary of the over-application of an engineering mindset to economics problems while stressing the organic complexity of social orders. Hayek was mostly a champion of the latter liberalism.

There are those who go further and postulate a similar split in Austrianism itself, with the Hayekian faction emphasizing the diffusion of knowledge and the communicative powers of the pricing system and the Misesian faction emphasizing the effects of government intervention on monetary calculation.

Because Hayek was prolific and characterized his own writings as more exploratory than authoritative there are several different Hayeks one can read from his work. In any case, his was one of the 20th centuries most probing minds and all possible Hayeks are worthy of study.

WorldSys: Austrian Home Study Course, Week 3

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along. 

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 Did Mises always intend to be an economist?

No, he began more interested in history.

2 What book formed Mises’s initial views on economics?

Carl Menger’s magisterial Principles of Economics. Mises had formed certain free-market convictions as a result of his empirical observations, but this book opened his eyes to a universe of positive economic theory which could enrich and extend what he’d learned on his own.

3 What was Mises’s major post from 1909 until he left Austria?

He was an economist at Vienna’s Chamber of Commerce, where he was able to win a number of important battles for sound money and sound economics.

4 In monetary theory, what was the “problem of the Austrian circle”?

While the Austrians had done spectacular work in what today would be called microeconomics there didn’t seem to be a way to apply their analysis to money. People subjectively value goods, and all the competing/intersecting subjective valuations together constitute market demand. But money appears to be a different thing because no one wants money for its own sake, they want money because of what it can buy.

This would seem to trap us in a circular argument: demand precedes and determines price for all goods except money, which people want because it already has purchasing power attained because people want it.

5 In The Theory of Money and Credit, how did Mises solve this problem?

By successfully developing a theory of money grounded in individual choice and consistent with Austrian views on price while simultaneously deploying one of his greatest contributions to economics: the regression theorem.

Mises noticed that the ‘price of money’ regresses backward until the development of money as a unit of exchange in predominantly barter economies. People value a dollar based on what they know a dollar could buy them yesterday; they valued a dollar yesterday because of what a dollar could buy them the day before that.

Keep subtracting days until you arrive at the point that gold or silver became a medium of exchange. At that point these were actual commodities bartered against other commodities and evolving into ‘money’ because they are easier to carry around and divide into smaller units.

In this way, Mises broke the circularity of the money argument and incorporated monetary theory into the edifice of Austrianism.

6 In what sense did Mises’s monetary theory integrate micro- and macroeconomics?

The Misesian monetary theory integrated micro- and macroeconomics because it was able to ground the most staunchly macro phenomenon — money, thought to be a radically different from other goods and resistant to similar ‘subjective value’ analysis — in the most staunchly micro phenomenon — individual choices.

7 In what sense did Mises differ from Menger and Böhm-Bawerk on the nature of utility?

Both of the earlier Austrians left indications that they believed utility to be measurable in some important way. That is, it was meaningful to speak of a good’s ‘total utility’ and attempting in some way to connect this with its marginal utility. Mises argued firmly for utility being ordinal; that is, that goods can be ranked in order from most to least preferred, but one can’t attach units to this valuation and say that one values apples ‘three utilons’ more than pears.

Moreover, the utility of a carton of eggs bears no fixed mathematical relationship to the utility of one egg. Instead, we are now dealing with the single utility of one larger unit (namely: a carton of eggs).

I confess that this is something I’ll have to engage with more down the road because it seems to me that there must surely be a sense in which utility can be thought of in the aggregate. Otherwise how can we say that a freer society is preferable to one of slavery and serfdom? Perhaps Mises would say that such judgments are perfectly valid but not with the purview of economics? I don’t know.

8 What were the three building blocks (formed by previous economists) that Mises used to construct his theory of business cycles?

They were: a boom-bust model of business cycles which already existed in the Currency School; the distinction between the ‘natural’ rate of interest and the ‘bank’ rate of interest developed by Swedish economist Knut Wicksell; the capital and interest theory of Böhm-Bawerk.

9 How did Mises contribute to the debate over socialism?

Immensely. There had been ample pushback against socialist intellectuals in the decades prior to Mises, but this had mostly centered on problems of incentivizing such distasteful chores as taking out the trash and the obvious fact that socialism would require quite a lot of coercion to be made workable.

In a series of breathtaking articles Mises argued forcefully that the collective ownership of the means of production could not succeed even on its own terms. The issue is that such a scheme would make prices completely inert. How could a central planner possibly calculate profit and loss if the state were in sole control of the means of production? Would a given unit of lumber be better used making additional apartment complexes, going toward a gymnasium, being used to build a concert hall? Now multiply this same question across everything the government uses to produce anything.

This ‘calculation argument’ sent the socialist intellectual world scrambling to formulate a reply. By the 1930s many were satisfied that communist theorists like Oskar Lange had succeeded in answering, but modern Austrians contend that the history of communism in the 20th century eloquently proved Mises and Hayek correct.

10 What is praxeology?

Praxeology is the science of human action, of which economics is but a part. It begins with the action axiom — ‘man acts’ — and the proceeds to deduce a variety of a priori truths that together constitute a framework required for any understanding of human beings.

Mises endorsed a variant of methodological dualism when he decided that separate techniques were required for studying men and molecules. Molecules might behave but they don’t act in the sense of taking purposive steps to achieve a goal. Therefore a science of human action must begin with different premises and use a different approach. Mises advocated for careful, rigorous deduction.

11 Name some economists influenced by Mises.

F.A. Hayek, Oskar Morgenstern, Gottfried von Haberler, Fritz Machlup.

12 What were the main themes of Omnipotent Government and Bureaucracy.

The former made the case that both leftwing and rightwing collectivism are undergirded by statist totalitarianism. The latter pointed out the many ways in which bureaucracies, both in governments and nonprofit organizations, are fundamentally different from profit-seeking enterprises by virtue of facing an entirely different set of incentives.

13 What was the German-language predecessor of Human Action?

It was called Nationalökonomie, and Human Action was a version so extensively revised and updated as to be a whole new book.

14 Did the American economics profession welcome Mises?

He had some allies and students, he found a teaching position at the New York University Graduate School of Business, and he found a publisher for Human Action, but by and large no, he was not welcomed by America’s economic intellectuals.

15 Was Mises a believer in logical positivism?

No. He penned a critique of it called The Ultimate Foundation of Economic Science: An Essay on Method, and was dismayed to see some of Hayek’s implicit endorsements of neo-positivism.