WorldSys: Austrian Home Study Course, Week 23

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.

As with week 7 I found these questions especially difficult and beg more than the usual amount of pardon for any inaccuracies and errors. Perhaps some day I’ll return with a fuller understanding and amend what’s written here.

READINGS: “On Certainty and Uncertainty, Or: How Rational Can Our Expectations Be?”, Hans-Herman Hoppe.

1 Would people act if they had perfect certainty?

Probably not, for what would be the point?

2 Why is the notion of perfect uncertainty a contradiction?

Because we must be certain of total uncertainty, which can’t be the case.

3 Why is our knowledge of the physical world ultimately uncertain?

While we can say certain highly abstract things are true — such as that there are objects with properties — learning any of the specifics requires experience, which must necessarily always be imperfect, open to amendment or abandonment.

4 What is the difference between class and case probability?

When an airplane crashes, a glass shatters, or an earthquake destroys a house we may be shocked by the specific case, but as a class of phenomena these events are governed by an often thoroughly-studied probability. So we cannot say “this airplane will crash today”, but we can say that taken as a class a given percentage of airplanes crash every year, and so taken as a case this particular vessel has a given percent chance of crashing.

5 In developing these concepts, Ludwig Von Mises relied upon which mathematician?

Frank Knight and his brother, Richard Von Mises.

6 Under which conditions is insurance feasible?

It must be that the insurer is dealing with a class of physical phenomena which are predictable in the aggregate and over the long term, and it must be the case that there are enough insured to allow the insurer to make money — for there will surely be people who file claims long before their premiums have amounted to the payout for their policy, and this must be offset by people who pay premiums in excess of the payout for their policy.

7 Describe some practical difficulties in implementing this theory of insurance.

There are situations in which disasters occur which are so enormous insurance claims pour in all at once and threaten to bankrupt the insurance company.

We can also turn to the controversy surrounding ‘pre-existing conditions’ to see more examples of the thorny quality of insurance markets. People who suspect they might have some genetic malady which is detectable through testing are likely to be strongly dis-incentivized from taking the test for fear that it will cause their insurance premiums to go up, even though this is information almost anyone would want to have.

8 Can human actions be considered insurable risks?

No, only physical events like tornados or water heater explosions can be subjected to the kind of statistical analysis that makes insurance feasible.

Although I suppose it’s possible to insure against human actions like ‘burglary’, so I’m not sure what to make of this claim.

9 How does rational expectations theory differ from orthodox general equilibrium theory?

The operative model of a human being is that of a machine with perfect knowledge of the probabilities of future classes of action and which periodically breaks down by committing random errors.

10 List three flaws with the rational expectations approach?

It cannot account for the fact that humans learn and thus that their behavior changes; it assumes we can list out all possible actions we might take in the same way that we can list out all possible poker hands, then generating a relative frequency table; in order for the approach to make sense we must assume everyone has the same knowledge, because otherwise someone’s predictions could be better than another’s (but if this were true there’d be no need to point it out because everyone would already know).

11 Why can’t the positivist method be applied to predicting one’s own future actions?

On the Austrian view positivism is shot through with logical contradictions, so of course it wouldn’t be useful in predicting one’s own future actions.

12 Why does Hoppe compare Lachmann to the German historicists?

Hoppe claims that Lachmann is making a similar kind of argument with similar sorts of flaws. In essence Lachmann is saying that because human beings learn from their experience there is no way for us to make sensible statements about the future, because every episode — every bank failure, every episode of hyperinflation, every bad investment — teaches us something such that we don’t behave the same way afterwards.

13 Why are the propositions of praxeology counterexamples to Lachmann’s views?

Hoppe responds with a litany of praxeological propositions which refute this view. Because humans learn can we really not say that voluntary transactions are beneficial for all parties involved, that an overnight doubling of the money supply would lead to spectacular decreases in purchasing power, or that a minimum wage of $1,000 per hour without a concomitant increase in the money supply would engender massive unemployment?

14 Do a priori propositions provide us knowledge of the “real” world?

Sure. If we take a priorism seriously and arrive at a deductively valid claim about money (see the examples in the previous question) then, because every economy on Earth uses some form of currency we have come to understand something about the “real” world.

15 What is Mises’s approach to the singular events of human history?

To treat them as subject to case (not class) probabilities for which we understand some of the factors involved. Each event, being singular, can usefully be distinguished from similar events

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