WorldSys: Austrian Home Study Course, Week 18

READINGS: Sections two and three of Murray Rothbard’s What Has Government Done to Our Money?, Chapters five and nine of Gene Callahan’s Economics for Real People.

1 What are the disadvantages of barter?

The two biggest are ‘indivisibility’ and ‘lack of coincidence of wants’. If my most valuable possession is a plow and I want to exchange it for several different things I can’t break it into pieces to facilitate the exchanges. I can’t give one handle to a farmer for some eggs, the blade to a tailor for a shirt. The plow is only value in whole, and either I find someone who wants to trade one plow for the five or six things I want, or I go without.

Which leads to the next problem. What if no one wants what I currently have? If I possess more eggs than I need and want to barter some away for oranges, shoes, etc., I have to find someone who has those things and wants eggs. If no such person exists, I am out of luck.

2 What is the definition of money?

A medium of exchange chosen for its marketability. In a direct-exchange economy people will eventually find something which is valuable not just for its actual use but because most everyone will accept it in exchange.

3 Is it possible that a wise king invented money?

No, money as such can only develop out of the free market because the ‘price’ of money (i.e. the demand for some commodity as a medium of exchange) must grow out of people’s attempts to engage in ever-more-complex economic activity. It won’t work to simply have a king suddenly declare something money, unless it already had value as a medium of exchange on the open market.

4 What are some qualities that characterize a good money?

First, it gets rid of two big issues of indivisibility and lack of coincidence of wants discussed above. This allows for a far more complicated structure of specialization and production to emerge, which has wide-ranging benefits.

Perhaps greater still, the presence of objective, (relatively) stable, and widely-agreed-upon prices allows businesspeople to perform economic calculations, which enables all sorts of profitable speculation and entrepreneurship.

The coins themselves are durable, portable, fungible, etc.

5 Do money prices measure subjective value?

No, values are expressed in money prices, not measured by it.

6 Can increases in the supply of money make everyone richer?

Of course not. If we gave everyone on Earth $100, then consequently $100 would not go as far and everyone would be in about the same situation.

7 Can increases in the supply of money be completely neutral?

It’s conceivable — if everyone’s holdings increase by the exact same amount and no-one begins hoarding or panic-selling or anything similar.

8 What is the optimum quantity of money?

Whatever is determined by the typical market forces of supply and demand. There is no static ‘optimum’ that an economist can discover at his computer.

9 Why do people give up valuable goods and services for money?

Because everyone else values money as a medium of exchange, which means that money comes in handy no matter what you want to accomplish.

10 In a free society how would money be measured?

I take this question to mean, ‘how would we know how much money there is in a free society?’. Such a society would be on something like a gold standard, and its total volume of money would be equal to the sum of all its cash balances. That is: the amount of money can be learned by adding up the amount that everyone has available to them.

If I’m purchasing apples then we imagine subtracting $3 from my cash balances and adding it to the cash balances of someone else. This quantity would increase slowly because printing physical coins is a good deal more difficult than printing paper dollars.

11 What is counterfeiting?

Manufacturing something that looks enough like money to be mistaken for it.

12 What is inflation? Why is it harmful?

Inflation is an artificial increase in the supply of money, undertaken for example when a government prints money to stimulate demand and end a recession. It is harmful because it dilutes the purchasing power of each dollar.

13 Should government try to stabilize the price level?

No. It’s true that the purchasing power of money would change as demand for it increased or decreased, but this does not mean that governments should have a hand in stabilizing it. To begin with this sort of meddling reliably has unfavorable consequences, and in the system of fiat money under which we currently live we can see that ‘quantitative easing’ and ‘stimulus packages’, if anything, de-stabilize the money supply more than the free market alternatives.

Moreover the fall of prices is a natural consequence of productivity-boosting investments in capital goods. If the government doesn’t let those prices fall then the benefits of such investment cannot accrue to society at large.

14 Would an ideal money have a constant purchasing power?

No, on a free market the price of money would fluctuate freely in response to demand for it.

15 What is Gresham’s Law?

That ‘bad’ (i.e. artificially over-valued) money drives out ‘good’ (artificially under-value) money. Rothbard illustrates this principle with the following example:

Imagine a set of 1-ounce coins is minted and used for several years, resulting in a bit of wear and tear that means they are only .9 ounces now. Everyone recognizes this and trades them at .9 ounces until the government decrees that all coins trade at 1 ounce.

Seeing this state of affairs people realize that it makes sense to use the .9-ounce coins as full 1-ounce coins because they are essentially getting a .1-ounce bonus, and they simultaneously hoard the full coins to be used later.

The result is that the bad money has chased the good money out of circulation.

WorldSys: Austrian Home Study Course, Week 17

READINGS: Chapters 7, 8, 19, 20, 21 of Henry Hazlitt’s Economics in One Lesson, Chapter 7 of Gene Callahan’s Economics for Real People.

1 What is the definition of a laborer?

A person selling his labor on the open market to achieve some end. Put another way: anyone who is not entirely supported by other people is a laborer.

2 What is the difference between rents and wages?

Rent is a typically-fixed amount paid to the owner of a property or a good for its use. Wages are just the price paid to people for their labor.

3 Won’t workers be paid starvation wages without government regulation?

No. If there were some force inexorably pushing wages down then why isn’t everyone paid the minimum wage now? As it happens a relatively small fraction of people are paid the legal minimum, which suggests that things like investment in capital, rises in productivity, and more options in other sectors consistently pushes wages up without government interference.

If this is true then there is no reason to suspect that workers would be paid starvation wages in an unfettered market.

4 What is marginal productivity?

The additional unit of production gained by hiring one more worker (or the unit lost by firing one worker).

5 How can a worker increase his or her marginal productivity?

Learning new skills, earning new accreditations, exploring and mastering the responsibilities of the position to which she aspires?

6 What are the effects of capital accumulation on wages?

Wages will rise, on average and over time. Capital accumulation means that someone (probably an investor-capitalist) is investing in more and better machines, equipment, etc. — this is what is usually meant by ‘capital goods’. It is exactly this kind of investment that leads to increases in productivity, which leads to rising wages. Giving a worker a better machine which allows him or her to work at 120% their previous rate makes paying them more economically justifiable.

7 Do workers benefit from high prices?

It depends. If the product they’re making increases in price it probably means more profits for their firm, more investment in capital goods, more marginal productivity on their part, and eventually higher wages. Of course other workers paying higher prices for the product in question may or may not benefit, depending on their relative situations.

8 Why do professional athletes earn higher salaries than teachers or nurses?

There is vastly more demand for the athlete’s services. There is only one Lebron James, but even so he would have to be a welder if no one were willing to buy tickets to see him play. Sports franchises are willing to pay so much money to have him play because he wins games, which draws crowds, which makes the team money, which makes paying him millions of dollars possible.

9 Do “labor-saving” inventions destroy jobs?

No, more often than not they result in the expansion of an industry which then employs more people or they temporarily free up workers who move to other industries.

10 What is the cause of unemployment?

There are myriad causes of unemployment, but in Hazlitt’s book voluntary unemployment results from machinery increasing production so much that people can afford to work less.

11 Is the value of a good proportional to the amount of labor required to make it?

Of course not; this is the good ‘ol labor theory of value, refuted in an earlier set of answers.

12 Without unions, how would workers bargain with employers?

They could bargain individually, of course, but we must also ask ‘what is meant by a union?’ In the present conversation I think it’s fair to say that a union is considered to be a collective bargaining entity with a spate of legislation behind it giving it privileges it wouldn’t otherwise have. I don’t get the sense that Hazlitt has an issue with the first part of the definition, only the second part. A libertarian would see nothing wrong with employees forming associations to collectively bargain as long as they don’t, say, physically assault employees who abstain from the union and continue to work.

13 Can unions raise wages for union members?

Perhaps, artificially and through political means. But this will not be a “real”, “organic” increase in wages. Wages are a price for labor, and they increase on their own when labor becomes more productive. The way to achieve this is to investment in management, equipment, and training and make each worker more productive. This approach is what made wages among American workers much higher than those paid out to English and German workers during the period in which the strength of labor movements was waxing in those countries.

14 Can unions raise wages for all workers in society?

No. Hazlitt walks us through a fictional example in which six groups of workers form unions and attempt to achieve wage raises. There is no way an economy can sustain the simultaneous increase in hourly earnings for every single group, and in any case it is exceedingly unlikely that all six unions will end up in exactly the same strategic position. So this means that some unions will get wage hikes and others will stay where there are.

Because wages are a price for labor an increase in wages has to be result in an increase somewhere else, probably in the cost of living. Let us imagine that the unions manage to get a raise of 25% on average. Some raises are higher, some are lower, and this is what it works out to on average.

Well, any member of a union that didn’t get a wage raise of this amount or higher now must get by in a more expensive world.

And this isn’t factoring in various secondary effects. Increases in unemployment almost always accompany increase in wage rates, often in the industries that gain the most. This is because workers on the margin — those just barely able to produce $12/hr of value — simply aren’t worth employing any more. Perhaps we could ameliorate this effect somewhat by setting up government relief plans. But where do you suppose the money for that comes from? From the wages of those still employed in the industries that fought so hard for a wage raise. If members of the unsuccessful unions are taxed at a higher rate, they’re now in pretty bad shape, and if members of the successful unions are taxed at a higher rate their wages are reduced, so it’s not clear what all the striking and picketing was for.

Nor can we blithely assume that it will merely be employers and investors who are getting screwed. If a capitalist realizes that the rate of return on her investments is shrinking rapidly and permanently it won’t take long to conclude that her money is best invested elsewhere, or not at all.

15 In a recession, should we raise wages so that consumers can have more money to spend?

There isn’t any way to do this that wouldn’t also raise production costs and eventually raise prices. If we pay toothpaste manufacturers 30% more then it is only a matter of time before toothpaste costs more, ultimately helping no one.

WorldSys: Austrian Home Study Course, Week 16

1 Why does [Peter] Klein characterize the traditional theory of the firm as “a calculus problem”?

Standard economics treats firms as single-agent black boxes obeying the outputs of a ‘production function’, an approach which is appealing because it can be analyzed with the tools of calculus.

2 In neoclassical theory, what is a production function?

It’s simply an equation capturing a relationship between physical output and factors of production (such as capital goods and labor). The production function be used to do things like establish an upper bound on productive capacity given constrains on some input.

3 Mainstream economists have grown dissatisfied with certain aspects of the orthodox approach, but (according to [Peter] Klein) what is the “more serious problem” that they generally overlook?

The more serious issue is that the story of business firms is almost always told from the manager’s viewpoint, even when the manager isn’t the owner. But in cases in which someone owns the business and puts up investment capital they must decide how much authority to delegate to the manager. In an important way, therefore, the owner is the one calling the shots, even if they aren’t much involved in the day-to-day running of the business.

The fact that the mainstream approach completely overlooks the role and function of the owner is a serious problem.

4 What are the “two alternative perspectives” on the firm?

The entrepreneur-promoter perspective sees the firm as an entrepreneur in the Misesian sense; that is, as an entity that purchases factors of production at today’s prices for the promise of an unknown and uncertain reward in the future.

The capitalist perspective sees the owner as a kind of ‘decision-making capital’ and ‘residual claimant’ with the firm’s objective as the maximization of the owner’s profit.

5 What is the Coasian explanation for the sizes of different firms?

Coase realized that the boundaries of a firm were determined in large part by transaction costs. A firm operating in the open market can choose to outsource the production of a certain good, or hire a marketing team, or hire people to do market research, or it can choose to do these (and other) things internally. The are obvious costs associated with taking the former route, but it’s important to not overlook the costs of taking the latter route: people must be hired and fired, performance must be monitored and critiqued, etc.

So, the process of determining at the margin whether a given task is worth doing externally or internally is a decisive driver of firm size.

6 Beginning with the Coasian framework, what two elements does Klein add for an Austrian theory of the firm?

The idea that firms have an entrepreneurial function insofar as they bear uncertainty, and they utilize economic calculation to evaluate the decisions they make. The owners and managers of a business firm fit the Misesian definition of an entrepreneur as an uncertainty-bearing entity that takes risks by acting on a vision which could end in total failure.

7 According to Rothbard, what provides an upper limit to the size of a firm?

To contextualize this question we first note that there is a blind spot in the economics literature around the costs of internally governing a firm. Much effort has been put into analyzing inter-firm transaction costs but much less into analyzing intra-firm transaction costs.

Put another way: why does a given entrepreneur not take one less or one more action in the governance of his enterprise? What marginal calculations are driving firms towards being a certain size?

Rothbard believed that it was the socialist calculation problem rearing its head. We all know that any centralized authority attempting to plan an economy faces a hopeless computational thicket. There just is no way to organize and act upon the information distributed throughout a market without so badly distorting price signals as to make them meaningless. From that point it becomes impossible to make even basic economic decisions.

At a certain size similar issues begin to plague large firms. Rationally allocating resources to different divisions within a company requires an external market generating prices so that meaningful counterfactual comparisons can be made. The size of the firm, therefore, is constrained by the need for external markets for all its goods, allowing for sensible prices between its subdivisions and efficient use of resources.

8 What is the “principal-agent problem”?

The problem of analyzing the relationship between the owner of an enterprise and its manager, roles often occupied by different people. How is it that owners decide on the correct amount of authority to delegate to the manager, how do they monitor managerial performance, etc.

9 How do capital markets, and in particular takeovers, allow shareholders to rein in management?

Incentivizing managers can be a tricky issue because they often wield enormous discretionary power while monitoring and   be tricky. As with other things one of the best ways to ensure managerial discipline is to have an external market for corporate control. That is, allow mergers and takeovers. If a manager underperforms badly enough often enough, eventually someone will buy his enterprise and replace him.

10 What are the four areas that Klein believes an Austrian theory of corporate governance should address?

Looking at the ways in which firms constitute an investment, examining how internal and external capital markets are related, comparing various corporate governance strategies, expanding upon the notion that financiers are entrepreneurs.

WorldSys: Austrian Home Study Course, Week 15

1 In mainstream theory, what is a “perfectly competitive” market?

A purely competitive market is one in which all the sellers of a good are so small that they individually cannot move prices, distribution, or any other feature of the market around. This becomes a perfectly competitive market when perfect information is introduced.

2 In mainstream theory, what is the definition of a monopoly?

An intolerable situation in which there is either one seller of a good or several sellers collude to act as a single agent. Such an entity, it is assumed, has quite a lot of power in the marketplace.

3 What is allocative inefficiency?

Allocative inefficiency is one consequence of allowing monopolies to exist: namely, that any firm in a monopoly position can boost profits by restricting supply. If you are a soap-manufacturing monopoly and people simply must get their soap from you you can maximize profits by producing just so much soap, which prevents the per-unit price from dropping.

4 What is technical inefficiency?

Technical inefficiency is the other dire consequence of allowing monopolies to exist: because the firm has no competition from direct sellers and is thus not incentivized to be as efficient as possible. Over time all sorts of suboptimal configurations creep into the production, distribution, and marketing processes because there is no reason to control costs.

5 Why does uncertainty upset the orthodox benchmark of competitive equilibrium?

Because none of the assumptions we make in attempting to understand competitive equilibrium hold at all. The competitive equilibrium model assumes homogeneous consumer preference and perfect information, when in real markets consumer tastes change moment-by-moment and no one has a crystal ball. It’s hard to see why a model with assumptions this fantastic should be taken seriously at all.

6 What is the Austrian approach to competition?

Austrianism makes no assumptions about perfect information or intransigent consumer tastes. It takes dynamism, change, and limited information as its starting points, and never runs into the absurdities of the textbook model of pure/perfect competition.

7 Name some problems with orthodox monopoly theory.

It draws dubious conclusions from specious comparisons to a model of competitive equilibrium that bears no relationship to the real world. Orthodox monopoly theory does little to justify anti-trust regulation because it gives us no reason to suspect that collusion among firms will be stable or that a single firm could capture monopoly profits by engaging in monopoly prices indefinitely.

8 Couldn’t a monopolist cut prices to discourage rival entrants into his industry?

Sure, but this practice would either be economically unsustainable or the result of a profound increase in productive efficiency. If it’s the former then eventually prices will rise and other firms will enter the market, if it’s the latter then the entire marketplace is getting a good deal and therefore should lighten up a little bit.

9 What is the relevance of economies of scale to mergers among firms?

Mergers needn’t signal anything nefarious, there are perfectly wholesome reasons for multiple firms wanting to integrate. One of these is ‘economies of scale’. An economy of scale is any situation in which a given process becomes easier as productive output increases. Beyond a certain point it might make economic sense to expand into a bigger factor, invest in better equipment, and acquire automation. All of this means savings can be passed on to consumers.

What might not be feasible for one firm might be feasible for three, if they merged.

10 What is the conventional account of the Standard Oil case?

That Standard ruthlessly expanded its business holdings with ethically dubious maneuvering before finally being smashed by the almighty hammer of the State at the height of its monopolistic tyranny.

11 What were the managerial innovations of Standard Oil?

Quoting from Dominick T. Armentano: “[The success of Standard] was the result of shrewd bargaining for crude oil, intelligent investments in research and development, rebates from railroads, strict financial accounting, vertical and horizontal integration to realize specific efficiencies, investments in tank cars and pipelines to more effectively control the transportation of crude oil and refined product…”

12 How did the price of kerosene move following Standard Oil’s rise to dominance?

The prices fell from 30 cents/gallon to a little under 6 cents/gallon over the course of three decades.

13 How many competitors did Standard Oil have in 1911?

At least 147.

14 Why do some empirical studies use profit as a measure of “monopoly power”?

Mainstream theory is that extremely high profits are evidence of restricted competition and monopoly practices.

15 What are some problems with these studies?

They conflate ‘accounting profit’ with ‘economic profit’ (I do not understand the distinction at present and it is not elaborated in the book), the presence oft tariffs, occupational licensing, and other barriers to entry might force a connection between legal and market monopolies that needn’t necessarily hold, and most of these studies are comparing existing profits against a ‘competitive equilibrium’ benchmark which, as we’ve seen, is problematic.

WorldSys: Austrian Home Study Course, Week 14

1 What is the problem with all government efforts to improve on the market?

The only thing which permits a rational analysis of the costs and benefits of a given program or piece of legislation is a market price. Any public institution which wants to intervene in the market must necessarily use made-up numbers in their diagnostics. The longer the government intervenes the less accurate its numbers will become, and the more distorted that segment of the economy will be.

2 How does a mainstream economist use “efficiency” as a  criterion for settling disputes?

In short: if we think of dollars as votes then we declare an ‘efficient’ solution to have been reached when the people who are willing to pay more for one outcome than another actually achieve that outcome.

If I’m willing to pay $100 to set your house on fire and you are only willing to pay $80 to stop me, then the efficient solution is to put your home to the torch.

3 What is the efficiency objection to the free market?

That under a variety of circumstances the market doesn’t lead to efficient outcomes and the state is required to step in with interventions that provide corrections.

4 Why are secure property rights important to society?

For myriad reasons, but within the context of mainstream efficiency analysis we must note that there is a penalty for not vigorously defending property rights. If I know that the only thing stopping my neighbors from burning down my house is my having more funds immediately available than they do, all sorts of otherwise inefficient behaviors become sensible.

I might horde huge amounts of cash instead of keeping it in a savings account (where it can accrue interest) or investing it in a business (where it can move the economy forward), for example. Or I might react to a neighbor’s house party with consternation — is he plotting to have all of his guests donate money to the cause of burning down my house? The more popular he is and the more friends he has over, the more likely it is that he’ll finally have enough to outbid me!

5 What is the relevance of [Gene] Callahan’s example of swimmers reaching the Olympics?

That it is easy to say something has a lot of value to us, but we won’t know until we have to actually pay for it. A lot of children may claim to want to make it to the Olympics, but no one, including them, can know if they’re serious until they consistently make the sacrifices required.

This is yet another problem with ‘efficiency analysis’, because people can claim that something is worth an arbitrarily large amount of money to them, but this doesn’t mean much until they have the option to buy it at that price on the open market and then do.

6 What is a problem with the Pareto criterion?

The Pareto criterion is that a policy should be adopted if it makes at least one person better off while making no one worse off. There are several problems with this. First: in actual society it is virtually never the case that no one is made worse off by a policy. Second, it still isn’t possible to determine how much something is worth to a person unless they have to pay for it. We can’t determine the Pareto-optimum policy simply by asking people what they’d like, because people may not understand how costly a policy will be until they feel it’s effects. But it is precisely this process of paying for what you want at a fair price that is distorted by the government’s interventions into the market.

7 If there were at least one person in society who despised all government interventions, could the State ever effect a Pareto improvement?

Not if the person were serious enough to pay some amount to stop the interventions from being enacted.

8 If at least one person will always object to any change from the status quo, is society always or never at a Pareto optimum?

You could never achieve a Pareto optimum because any move away would make this one person worse off.

WorldSys – Austrian Home Study Course, Week 13

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 15 of Gene Callahan’s Economics for Real People

1 What is welfare economics?

Welfare economics attempts to study the impact of various policies on total, aggregate social welfare.

As you can imagine, Austrians consider this approach to be problematic.

2 What is a positive (negative) externality? Give an example of each.

When a person does something that has an effect on other people we call this effect an externality. If I burn tires in my backyard the smoke and the acrid stench will waft onto my neighbor’s property, creating a negative externality. If, feeling remorseful, I design and build a bleeding-edge air purify which scrubs the atmosphere of the entire neighborhood free of allergens and irritants, that is a positive externality.

From an economics standpoint a problem arises if these positive/negative externalities aren’t baked into the prices of the relevant goods and services. If my shirt factory is polluting a river and I don’t suffer a penalty then I’m producing more than the ‘correct’ amount of shirts. The price of making each shirt is a little bit of pollution, but if I bear no pecuniary responsibility for this pollution than I will make more shirts than is warranted, just as I would if I got the fabric for free.

An inverse problem occurs with positive externalities. If I put up the funds to clean the polluted river then there likely isn’t a good way for me to ‘charge’ people for this service. They receive the benefits of a cleaner river without having to pay for them. What this means is that services of this kind, where costs are centralized and benefits are diffuse, are less likely to be provided because it is so difficult to capture the value created.

3 What was Pigou’s policy recommendation in the case of a positive externality?

A state mandate or subsidy.

4 What was Pigous policy recommendation in the case of a negative externality?

Regulations or taxes.

5 Explain Lionel Robbins’s critique of the Pigovian analysis.

Robbins noted that we cannot simply compare utility between people, as Pigou’s analysis requires. There’s no way for me to determine the correct tax rate for a negative externality by saying ‘everyone everywhere suffers -5 utility from +1% air pollution, so we must tax the local factory at .08%’.

6 What is the Pareto criterion of an improvement in social welfare?

Instead, Robbins advocated for using ‘Pareto improvement’ as a criterion for welfare economics. A given policy is a Pareto improvement if it makes at least one person better off while making no one worse off.

7 According to Rothbard, how can the observer draw conclusions about another’s preferences?

In his 1956 paper “Toward a Reconstruction of Utility and Welfare Economics” Rothbard argue that the only way to deduce another’s preferences is by watching him in action. We cannot do it from our armchairs or with fancy mathematical tools, which means the project of determining the correct tax/subsidy for a negative/positive externality is doomed.

8 What is Ronald Coase’s famous treatment of this issue?

Case noted that externalities can be internalized when transaction costs are low and property rights are clearly defined. In the case of river pollution, if the people living along the river have some sort of property right pertaining to it, then the factory doing the polluting will have to compensate them for their suffering, purchase the right to dump pollutants into the river, shut down, pay people to move, or something else.

Coase demonstrated that developing market solutions to externalities problems isn’t a hopeless, intractable problem.

9 If transaction costs are high, is government intervention justified?

No, the solution is still to have the most crisp notion of property rights possible. It might be hard to negotiate settlements for air pollution, given how diffuse the externality is, but if we have worked out exactly what rights people have to the air on their property we can almost certainly have a third party arbitrate the issue and arrive at a fair payout.

10 What is a (so-called) “public good”? Give some examples.

In the standard analysis a public good is a good whose positive externalities are such that there is no way for the free market to provide them, and instead public action through the intermediary of the state is required to furnish them.

Examples include postal delivery, parts, garbage pickup, museums, airports, roads.

11 What is a free rider? How does it relate to public goods?

A free rider is anyone who enjoys the use of a good while letting other people pay for it. Many believe that free riders are the root cause of the impossibility of provisioning public goods by any means except the state. If I build an enormous air purifier I can’t force people to reimburse me for its use; I can’t cut off the oxygen supply if they refuse to pay me. The State, on the other hand, can simply levy a tax and be assured in advance that they’ll be paid for the equipment.

12 What are some problems with these objections to free markets?

To begin with these objections show an astonishing lack of imagination. On more than one occasion economists who have troubled to look they have found that markets develop robust mechanisms for incorporating externalities into their transactions. Once upon a time a standard example of market failures was the fact that beekeepers and fruit tree growers didn’t have a way to avail of each other’s valuable services. Peach trees could be pollinated and bees could eat if only the State intervened to coordinate things. Of course when Steven Cheung actually examined the relevant markets he discovered that these groups had done perfectly well on their own; in fact, by simply looking in the Yellow Pages one can find multiple ‘pollination services’ provided by beekeepers.

Further, the distinction between public and private goods is rather fraught because most goods have some externality. As Walter Block has argued, we are all spared great discomfort when everyone wears socks. So should we subsidize or mandate socks?

13 How could a free market provide public goods? Give an example from the real world.

Because the public roadways in Britain at the beginning of the 18th century could not handle the increased traffic of the Industrial Revolution the National Turnpike Company undertook to build a private roadway financed by tolls. It didn’t take long for factory owners and other sorts to see that their interests were served by linking into this network, and soon a private transportation system sprung up that was the envy of the world.

14 Does mainstream welfare economics smuggle value judgments into (what should be) value-free economic science?

It does. The idea of subsidizing clean energy, for example, is not based on sound economics but on the value judgment that the world should be moving away from fossil fuels and toward solar, wind, etc.

15 Even if the market provided too little of a particular public good, should we expect government to know better?

No. First, the government faces no real incentive to contain costs and stay on schedule. Second, even if they did want to do these things the mere presence of interventionism begins to distort market prices, making economic calculation harder and harder to undertake.

WorldSys – Austrian Home Study Course, Week 12

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: “Liberty and Property” in Two Essays by Ludwig Von Mises

1 What was liberty in the eyes of ancient Greek and Roman writers?

A privilege granted to an elite few who would rule as an oligarchy.

2 What was a second notion of liberty, held by European princes?

Similarly, the liberty conceived of by European princes was an oligarchic freedom granted solely to a landed aristocracy.

3 What does Mises consider the “characteristic feature of capitalism that distinguishes it from pre-capitalistic methods of production?

Under capitalism it is not enough simply to make products, you must make products with an eye toward satisfying needs. You become wealthy by better serving your fellow human beings. Under most other regimes, including feudalism, monarchy, etc., the road to power is conquest, not production.

Importantly, a capitalist could make a fortune catering to the impoverished masses, whereas most artisans and craftsmen in pre-capitalist eras focused on high-class or aristocratic clientele.

4 In what sense are capitalists, entrepreneurs, and landowners ‘mandataries’ of the consumers?

If you refuse to make things people want they will vote with their dollars to go elsewhere and you will likely go out of business. The factors of production are allocated according to the mandate of the consumer, not a mandate from gods or kings. To continue to be successful you must continue to anticipate, understand, and satisfy consumer needs; it is not enough to have once saved money and invested it.

5 Mises says that representative government may be viewed as an attempt to model political affairs after the market, but that this design can never be fully achieved. Why not?

First, because the market often does cater to ‘minority’ clientele — think of ‘big and wide’ men’s clothing stores that exclusively serve larger men. Second, in the public sphere there is no vehicle by which an individual can defy the will of the majority (except perhaps to simply break laws). In the market anyone who thinks the consensus is wrong is free to open a business and test his presumption.

6 What is the connection between “heretics” such as Kafka, Whitman, and Schopenhauer to private property?

A robust institution of private property made such people possible. If the government owns everything depriving heretics of the means of their survival would’ve been straightforward. As you can imagine, such an arrangement discourages non-conformity.

7 Why are terms such as “chocolate king” inappropriate?

It is literally a non sequitur. A person can only be a ‘chocolate king’ so long as he gives the buying public exactly what they want. He must work tirelessly to improve his production methods, to lower his costs, to expand his offerings, to conduct experiments to see if he can anticipate future demand. he must think about every aspect of his enterprise, from the soil in which coco trees grow, to the color of the wrappers for his confections.

How many kings lay awake at night thinking “would the peasantry prefer I wear a smaller crown? What kind of roads do they want? Have I truly thought of all the possible ways of reducing taxes?”

The answer might not be ‘zero’, but I’d be willing to bet it isn’t many.

8 Why does Mises think the socialist chiefs should have tried to earn a living selling hot dogs?

This alone might be enough to flatly refute their doctrines. Many socialist theorists speak of ‘exploitation’, as though the people in charge are the capitalists, the entrepreneurs, or the businessmen. A few weeks trying to dictate to people what they will buy should be enough to dispel this illusion.

I am inclined to agree with this point. I have met very few working-class socialists who take socialism seriously.

9 Why does Mises think the “one-party principle” is a misnomer?

There is no freedom in being able to choose one single thing. You don’t get a chance in whether or not to fall when you step off of a cliff, and you don’t get a chance to truly vote when there is only one party making every decision (especially when the party makes a habit of liquidating dissenters)

10 How does Mises evaluate the bargain by which Russians gave away their liberty in order to achieve prosperity?

In the communist revolution Russians bargained away liberty in the hope of getting prosperity because communist theory is blind to the connection between the two. In so doing the Russians ensured that they would have neither, as their standard of living under communism was far worse than it was under the freer countries of the west.

11 Why does Mises write, “Government is essentially the negation of liberty?”

Consider a contrast between the ‘chocolate king’ of question #7 and an actual king. The chocolate king, operating in a free market with no barriers to entry, must relentlessly anticipate and serve the needs of his costumers in order to maintain his success as a purveyor of confection. The same is almost never the case with a monarch, whose word is law and whose diktat’s must be obeyed on pain of death.

The chocolate king has no recourse if you choose to disregard him or take up with a competitor. An actual king can throw you in jail or have you killed. The chocolate king faces the ceaseless possibility of a superior competitor arising and better satisfying the market’s needs. Real kings are deposed, of course, but the crown then goes to whoever is better at violence or intrigue, not whoever is better at serving customers.

Government, then, imposes rules through force, and is the negation of liberty. If it subsidizes a school, pays a police officer, or builds a road, it does so with funds taken from someone involuntarily.

12 Does Mises think government is a necessary evil?

No, it is an institution required to prevent warlords or foreign powers from interfering with society. By arrogating the right to use force in a geographic area governments facilitate the smooth functioning of society.

13 Why can’t there be any freedom under a socialist system?

While Mises does not view the government as inherently evil he does see it as inherently an institution that limits freedom. People are free insofar as no one is coercing their decisions, and they are unfree to the extent that another person’s will is dictating their future. Private individuals do sometimes coerce one another, but only government is an institution designed to coerce.

Socialism, therefore, takes the entire sphere of free human choice and subsumes it under the will of the state. It literally permits no freedom at all.

14 Why does Mises say that private property in the material factors of production “is not a restriction of the freedom of all other people to choose what suits them best?”

Those people have a choice in how they use their own time, money, and property. Under a sensible definition of ‘freedom’ the fact that I own a factory or a piece of land does not infringe upon anyone else’s liberty. And if I use these resources to produce a new good or service, everyone else similarly has the right to avail themselves of the fruit of my efforts, or not.

What this means is that it is ultimately the consumer, not the producer, who has final say. An enterprise grows successful by virtue of better meeting a need.

15 What is the “distinctive principle of Western social philosophy,” and what is its connection to liberty and property?

Western social philosophy has had a greater emphasis on individualism than can be found anywhere else. A necessary corollary of endorsing spheres in which individuals are free to make their own choices is the idea of private property — after all, a freedom to speak one’s mind in a society that seizes the property of dissenters is a hollow freedom indeed.

This division of labor and reinvestment of profits in capital goods is what has given rise to the splendor and comfort of the modern world. Individualism and capitalism also gives everyone the greatest chance they have to rise in the world. It is true that some people are born to vastly more favorable circumstances than others, but by and large you’re best bet of making a fortune from scratch is to be born in the freest possible society.

A Taxonomy Of AI Systems

(NOTE: the following is all highly speculative and not researched very well.)

In a blog post on domain-specific programming languages author Eric Raymond made a distinction between the kinds of problems best solved through raw automation and the kinds of problems best solved by making a human perform better.

This gave me an idea for a 4-quadrant graph that could serve as a taxonomy of various current and future AI systems. Here’s the setup: the horizontal axis runs Expert <–> Crowd and the vertical axis runs Judgment Enhancement <–> Automation.

Quadrant one (Q1) would contain quintessential human judgment amplifiers, like the kinds of programs talked about by Shyam Sankar in his TED talk or the fascinating-but-unproven-as-far-as-I-know “Chernoff faces”.

In Q2 we have mechanisms for improving the judgments of crowds. The only example I could really think of were prediction markets, though I bet you could make a case for market prices working as exactly this sort of mechanism.

In Q3 we have automated experts, the obvious example of which would be an expert system or possibly a strong artificial general intelligence.

And in Q4 we have something like a swarm of genetic algorithms evolved by making random or pseudo-random changes to a seed code and then judging the results against some fitness function.

Now, how should we match these systems with different problem domains?

It seems to me like Q1 systems would be better at solving problems that either a) have finite amounts of information that can be gathered by a single computer-aided human or b) are problems for which humans are uniquely suited to solve, like intuiting and interpreting the emotional states of other humans.

Chernoff faces, if we ever get them working right, are an especially interesting Q1 system because what they are supposed to do is take statistical information, which humans are notoriously dreadful at working with, and transform it into a “facial” format, which humans have enormously powerful built-in software for working with.

Q2 systems should be used to solve problems that require more information than a human can work with. Prediction markets are meant to use a profit motive to incentivize human experts to incorporate as much information as they can in as honest a way as they can, and over a span of time there are enough rounds of updates that the system as a whole produces a price which contains the aggregate wisdom of the individuals making the system up (At least I think that’s how they work).

Why can’t we have a prediction market that performs heart surgery? Because huge amounts of the relevant information is “organic”, i.e. muscle memory built up over dozens and eventually hundreds of similar procedures. This information isn’t written down anywhere and thus can’t be aggregated and incorporated into a “bet” by a human non-surgeon.

Based on some cursory research, my example of a Q3 system, i.e. expert systems, appear to be subdivided into knowledge bases and inference engines. I’d venture to guess that they are suitable wherever knowledge can be gathered and encoded in a way that allows computers to perform inferences and logical calculations on it. Wikipedia’s articlecontains a chart detailing some areas where expert systems have been used, and also points out that one drawback to expert systems is that they are unable to acquire new knowledge.

That’s a pretty serious handicap, and places further limits on what types of problem a Q3 system could solve.

Finally, Q4 systems are probably the strangest entities we’ve discussed so far, and the only examples I’m familiar with are from the field of evolvable hardware. IIRC using evolutionary algorithms to evolve circuits yields workable results which no human engineer would’ve thought of. That has to be useful somewhere, if only when trying to solve an exotic problem that’s stymied every attempt at a solution, right?

WorldSys: Austrian Home Study Course, Week 11

READINGS: Selections from Lew Rockwell’s The Economics of Liberty

1 How does common property lead to a free rider problem?

Common ownership of property disincentives hard work because the fruits of one’s labors are added to a common pool for general consumption. While it may be the case that sufficiently motivated people will expend a certain amount of effort for the “common good”, there simply isn’t any reason to put in extra hours for weeks on end if there is no guarantee that at least some of whatever is produced can be claimed as recompense. And under most circumstances some fraction of the community will eventually realize they don’t actually have to produce anything in order to consume.

They become free riders.

2 Is this the same “free rider” problem of mainstream economics?

No; in economics textbooks free rider problems are almost always discussed in the context of market failures, rarely in the context of communal failures.

3 What was Gorbachev’s diagnosis of the Soviet Union’s economic woes?

The Associated Press quoted him as saying that “[m]any people have forgotten how to work. They got used to being paid…just for coming to work.” In other words, free riders eventually poisoned the Soviet system.

4 Why are externalities not merely a problem for markets?

As has been pointed out by e.g. Walter Block, there are very few actions anyone can take which don’t have some positive or negative externality involved. If you wear deodorant I get the positive externality of not having to smell you; if you don’t wear deodorant I suffer the negative externality of having to smell you.

It’s true that externalities are a problem for markets, but they’re a problem for all economic arrangements, for it is precisely the positive externality of not needing to work to consume that generates such appalling free-rider scenarios wherever property is communally owned.

5 Why might common ownership lead to overhunting in forests?

Because the benefits are concentrated on the hunters who take more than the sustainable amount while the costs are born by the entire community. Any time this is the case it’s a safe bet something screwy is going to happen with the incentive structure involved.

6 What is the supply-side argument for cutting marginal tax rates?

It satisfies both those that want more money for government projects and those that want to keep more of their individual earnings. The readings don’t exactly go into detail on the mechanics of this is supposed to work.

7 What may have been a strategic error on the part of supply-siders?

They were attempting to twiddle the tax-rate knobs and get reductions at the margin, instead of denouncing the entire thing as theft.

8 What is the “income effect” that Paul Samuelson discussed in his textbook?

In a 1967 edition of his famous textbook on economics Samuelson claimed that higher taxes can sometimes incentive people to work harder for their fortunes. He evidently never justified this claim.

9 What does Bethel think is even more important than tax rates in the explanation of Third World poverty?

First, it should be noted that the question is phrased this way because supply-side thinkers have put a lot of weight on the claim that Third World poverty is caused by high tax rates in Third World countries.

Bethel (the author of this week’s essay) thinks that the issue of taxes is but a special case of a more general phenomenon: property rights. He believes that there will be a strong correlation between the protection of property rights and economic prosperity. I have only given this matter a perfunctory examination, but I do think there have been studies demonstrating such a correlation.

10 How does the progressive tax code promote a class system?

There is a competitive advantage created by the way in which the tax system is set up. “Income property” (which I take to just mean ‘income’ — it isn’t defined) is subject to enormous confiscation through myriad taxes while “real property” — (which as far as I know is something like actual real estate) is harder to confiscate. So “old money” sorts able to buy real property when taxes are low are at an advantage compared to “new money” sorts who are constantly struggling to rise under a crushing tax burden.

Profundis: “Starfish”, by Peter Watts.

Closing in on Peter Watts’s “Starfish” and I have to say it exerts the exact same psychic gravity his other books do. Once I really dive into a Watts story I find myself picking it up almost involuntarily — putting off getting into the shower to finish a chapter; delaying work on the World Systems Project for what I tell myself is fifteen minutes only to look up an hour and a half later.
 
The plausible science, morbid characters, and terrifying philosophical implications he weaves have all the urgency of a hand shooting out of the dirt of a fresh grave. And through every line is a quiet voice saying …there aren’t any obvious flaws here; this could happen.
 
Yet even his monsters are portrayed with a depth and nuance that make them relatable (though not particularly likeable). If Ramsey Snow had been sent to the bottom of the ocean to live on an energy station straddling a thermal vent, we might have systems ecologist Michael Brander; if it had been Stranger Things’s Dr. Sam Owens, we would have Dr. Yves Scanlon. And though Patricia Rowan does much for which she could be condemned, still we can’t help but experience little shivers of sympathy for a woman forced by wretched luck to make decisions that will impact all life on Earth.
 
The book jacket of my edition compares it to Arthur C. Clarke’s “The Deep Range”, but Watt’s has penned the better sf. The first half of “The Deep Range” reads like a single book, with the rest feeling more like scattered vignettes giving Clarke an excuse to talk about plankton herding and sea monsters. I enjoyed “The Deep Range” quite a lot, but the mounting tension of “Starfish” carries you resolutely to the final pages.
 
Highly recommend.