WorldSys: Austrian Home Study Course, Week 31

READINGS: “Economic Calculation in the Socialist Commonwealth”, Ludwig Von Mises; Chapter 10 of “Economics for Real People”, by Gene Callahan; Chapters 2 and 3 of Thomas Taylor’s “An Introduction to Austrian Economics”.

1) For Mises, what is the defining characteristic of socialism?

Community ownership of the means of production, that is: factories, capital goods, etc. Of course some special body will have to be set up to exercise the will of the people.

2) Is it possible to have money in a socialist commonwealth?

Yes — even if consumer goods are allotted by awarding individual comrades with coupons those goods will likely be exchanged (a teetotaler could trade his alcohol allotment for tickets to the movies, and so on). To the extent that this is possible money can evolve and play the same role it does anywhere else. But where public ownership prevails this cannot be the case.

3) Does the “calculation problem” involve the difficulty of discovering technological recipes for production?

No. Mises illustrates the difference between ‘recipe for production’ calculations and economic calculations with an example of a bridge. Successfully performing all the calculations required for building a bridge won’t tell us whether, all things considered, the bridge should be built. This latter kind of calculation is the kind that becomes impossible with public ownership of the means of production.

4) Does the calculation problem involve the possibility that the central planners might be selfish and ignore the desires of their subjects?

That is always a possibility, but it’s orthogonal to the calculation problem itself. Even if central planners were every bit as wise, intelligent, and benevolent as they believe themselves to be it wouldn’t blunt the force of the calculation argument; communal ownership of the means of production would still make rational economic calculation impossible.

5) Why doesn’t the capitalist society suffer from the calculation problem?

Because the free market is able to utilize many individuals who are independently doing economic calculations with information which may not be written down anywhere. Prices on capital and consumer goods can respond to these people making value judgements, bidding for resources, taking action in the face of uncertainty, and succeeding or failing. Ultimately this means prices are able to better perform their information-theoretic function, making all calculation efforts more effective.

6) Would Robinson Crusoe be able to “centrally plan” his “economy”?

Crusoe would be able to plan his own behavior and undertake ever more complicated actions to satisfy ever more complicated desires. But, crucially, he wouldn’t be able to foresee all possible production choices in advance. Even when alone Crusoe is still engaged in a kind of exchange, insofar as he trades finite time for this or that good. There is no way he can imagine all that he will desire in the future, nor all the ways in which those desires can be fulfilled, nor the ways in which his preferences will evolve, nor the plenitude of ways in which higher-order goods are to be evaluated one against the other in the service of satisfying his wants.

7) Can’t central planners rely on mainstream economic theory (such as the rule that price should equal marginal cost) to guide them?

No. Quite a lot of mainstream theory relies on assumptions which render their models totally unrealistic. The concept of perfect competition, for example, imagines that all market participants possess perfect knowledge — of the relevant economic data, of each other’s motives, etc. But this sidesteps what Hayek and others considered to be the central problem of economics: resource allocation in the context of imperfect knowledge. Hayek’s great contribution to the Austrian tradition was puzzling out the implications of this fact for the market order. Stipulating perfect knowledge, therefore, begs the question and renders us unable to provide anything like a realistic treatment of actual people’s actual behaviors in actual markets. Centrally planning an economy is therefore even more difficult.

8) Perhaps Mises’s essay contained relevant points when it was first penned, but don’t modern computers offer a way to solve the calculation problem?

The calculation problem remains a problem even with the power of computers, supercomputers, and quantum computers. There is no way to outcompete the market in the absence of prices for capital goods, and no way to establish such prices without a market.

I will say that I have a hard time putting limits on what an artificial superintelligence can do; can I really be certain that the kind of minds existing on a computer the size of Jupiter couldn’t plan a simple economy, even in principle? Perhaps not, but I am comfortable saying that no human, group of humans, or group of humans aided by foreseeable technology will be able to do so.

9) What is “market socialism”?

There doesn’t seem to be much consensus on what exactly market socialism entails, but it appears to be cooperative ownership of the means of production embedded in a framework which still uses a market in capital goods. How exactly this is supposed to work varies enormously from one model to the next.

10) How might the Soviet Union have benefited from world prices established in foreign, capitalist countries?

The heart of the calculation argument is that common ownership of the means of production either distorts or destroys prices altogether, making any semblance of economic calculation in capital goods markets impossible. But a country surrounded by market economies on all sides can still undertake to perform a blunted, ham-handed version of calculation by examining prices in those countries. In the months before starvation a Soviet farmer might’ve been able to approximate the cost of a new piece of equipment by looking at what similar equipment costs in Hungary.

WorldSys: Austrian Home Study Course, Week 30

READINGS: “The Austrian Theory of the Trade Cycle and Other Essays” by Mises et al., Chapter 8 of Thomas Taylor’s “Introduction to Austrian Economics”, Chapter 13 of Gene Callahan’s “Economics For Real People”

1 Is the business cycle a natural feature of the market economy?

No, it is a result of credit expansions from financial institutions. There would be swings and retractions in a regular economy, of course, but not ones of such intensity and duration as are present in a mixed or socialist economy.

2 What is the natural rate of interest?

The rate of interest set by the market, in the absence of meddling by the central bank. Put another way (and quoting Roger Garrison) “[t]he natural rate of interest is the rate that equates saving and investment.”

3 What is the connection between central banking and the business cycle?

The Austrian Theory of the Business Cycle stipulates that it is just the central bank’s expansion of credit which drives the business cycle in the first place. Holding down interest rates and increasing the money supply encourages people to open businesses which are only profitable on paper — with easy credit and prices set to rising by an ever-inflating money supply.

4 How does the Federal Reserve lower market interest rates?

Flooding the market with new cash, which makes more money available for loans and thereby lowers the per-loan interest rate.

5 Why are low interest rates politically popular?

They’re an immensely easy sell — all you have to do is make it sound like you’re giving more businesses the power to expand and create jobs and the working-class members of your constituency will love you for it.

6 How does an artificially lowered interest rate affect the structure of production?

Investments, expansions, projects, and enterprises which are not actually feasible suddenly look more feasible because it is easy to get credit (a loan) to undertake them. Over time this means that more and more unsustainable businesses are funded, gradually bringing the structure of production into a more fragile and unworkable configuration.

7 What is the boom period?

The exuberant period in which easy credit and an expanding money supply cause people to spend more than they would opening businesses and starting new ventures. Everyone is feeling optimistic.

8 Can the boom be maintained indefinitely?

No. All that is occurring is that an expansion of credit is leading people to attempt ventures which would not look profitable or even possible under stable, sound economic conditions. Since the boom period is giving rise to a structure of production and a series of entrepreneurial bets which cannot all physically be realized it is unsustainable by definition.

9 In what sense is the “bust” good for the economy?

It liquidates bad investments and unsustainable ventures, freeing up those resources for better uses elsewhere.

During the boom period people are incentivized to open businesses they normally wouldn’t because interest rates are artificially low, and to remain in business when they aren’t profitable because an artificial rise in prices makes them look more successful than they actually are.

When it becomes clear that this isn’t going to end well the bust is the equivalent of a brush fire, clearing out the thickets, fertilizing the soil, and making space for new, healthier growth.

This is painful, of course, and we shouldn’t make light of people’s failures. But this self-corrective mechanism is a necessary component of a functioning economy.

While all this is happening people start cutting back, eventually building new capital stores to be invested in enterprises that better conform to the consumer’s pattern of wants.

10 Should the government use the printing press to stimulate the economy if there is widespread unemployment?

Using the printing press to spur anything — unemployment, investment, what have you — reliably leads to mal-investments and distortions in the capital structure as business people work off faulty market signals and fund ventures which only look profitable in the light of low interest rates and rising prices.

So if the Federal Reserve curbs unemployment by inflating credit and allowing a whole bunch of new businesses to open up which shall only last as long as new money is being printed, what’s going to happen when the chickens come home to roost and the contraction begins?

11 What is capital consumption?

The use of capital without replacing it during the boom period.

12 Why do entrepreneurs make bad investments during the boom period? Doesn’t the market weed out those who make poor forecasts?

It does when it’s allowed to function properly, but this can take time. If inflationary practices have systematically distorted almost the entire economy then making sensible economic forecasts becomes extremely difficult, no matter how smart and careful an entrepreneur is.

WorldSys: Austrian Home Study, Week 29

READINGS: Selections from Henry Hazlitt’s Economics in One Lesson; Chapter 12 of Gene Callahan’s Economics for Real People

1 What is a price control?

Some kind of government-mandate change made to a market price. The State may establish a price floor below which a price may not be allowed to fall, a price ceiling above which a price may not climb, or a fixed price at which a price must remain.

2 What is a shortage?

An amount of a good less than what is demanded at a given price.

3 What is a surplus?

An amount of a good greater than what is demanded at a given price.

4 Is a shortage the same thing as scarcity?

Not quite; all economized goods are scarce more or less by definition. But there being a shortage of something means there’s an additional amount of scarcity over and above the normal amount. Automobiles are scarce because there are not an infinite number of them, but there is only a shortage if the president erects enormous tariffs on imported cars, or if a meteor hits a Detroit and America’s ability to produce cars is permanently hindered.

5 What are some of the effects of rent control?

As rent controls are just a form of price controls most of the consequences are the same. Such controls unfairly privilege those already living in apartments at the expense of those who don’t because not everyone has an equal chance to bid for space. There is no incentive to conserve space, so tenants who might be willing to suffer a roommate to split rising rents will have no reason to do so. Rent controls also strongly and increasingly dis-incentivize building new housing because construction costs are rising while potential profit (from rents) is legally frozen in place. Sometimes the State will understand this and only place rent controls on existing buildings, not ones built in the future. If this is the case, people will refuse to move because it will be so much more expensive to live anywhere else.

6 What are the effects of minimum wage laws?

Minimum wage laws price marginally-productive workers out of the market. So if the minimum wage was $10/hr and is being raised to $15/hr, anyone who was just barely worth the old wage will now incur a loss for his employer at the new one.

He will, therefore, most likely be fired. To paraphrase Hazlitt, “you cannot make a man worth a certain amount of money by making it illegal to pay him less”.

The more this happens the more economic sense it makes to begin investing in alternative like automation. There are quite a lot of jobs, like cleaning or taking orders at fast food restaurants which are increasingly falling to AI and robots because minimum wages laws make employing humans for these tasks prohibitively expensive.

So both rising unemployment and rising automation are hallmarks of a rising minimum wage.

7 What are the effects of “price supports” for agricultural products?

A typical price support scenario is artificially restricting the supply of a good like cotton or oranges to ensure that prices remain at a State-mandated level. This means that all growers of cotton and oranges produce below their capacity and prices remain above what the market “wants” them to be.

Now contrast this with an organic price decrease. If demand for agricultural goods drops, prices drop, and only the least-effective farmers go out of business: those that were working bad soil, or using old equipment, or being less efficient than they possibly could be, etc.

The resources being used by these marginal farmers are now freed up, and the most effective farmers might conceivably be able to expand their output, more effectively utilizing the newly available land and equipment.

Now, anyone who buys cotton or oranges gets their goods for less than they did before, the price having dropped and all. That extra money is then made available for saving, investing, or purchasing other goods. Those farmers that were knocked out of business by a drop in the prices of oranges and cotton might well find themselves employed in some adjacent industry, supplying the demand engendered by this surge in economic activity — in fact, it isn’t uncommon for a superior company to buy out a competitor and keep nearly the entire staff in place.

To be sure the picture isn’t always so rosy, but note that neither this scenario nor anything like it is possible with the State blindly whacking about with prices and production like a six year old at a piñata.

8 Shouldn’t the government outlaw “price gouging” after a natural disaster, at least for essential items such as canned food and bottled water?

Such laws dis-incentivize provisioning these goods. Higher prices for water, gasoline, and food reflect their scarcity. When water goes for $10/bottle people two or three states away will lead their trailers full of bottled water and drive to the disaster site. If we let our good intentions compel us to legally outlaw such behavior the far more likely result is that there will simply be no water at all.

Maybe we’d like to say “well, people should just drive to the disaster site with water anyway, out of the goodness of their hearts”, and maybe that’s true, but our sentiments do not change the reality at all.

9 What function do market prices serve?

Market prices condense and represent information about preferences, the availability of resources, production costs, supply and demand, and so forth which is otherwise spread throughout the economy in an unusable state. With the prices of final goods, the prices of the factors of production, prices for distribution, an entrepreneur is able to make sensible economic calculations. When people want more of a good or service they begin buying whatever quantity of it exists, which makes providing the good or service more profitable, which serves as a signal to entrepreneurs to enter this segment of the market. The reverse process serves as a signal to entrepreneurs to leave this segment of the market.

Thousands, or perhaps millions, of people are able to act as if they are a working together to accomplish all of this, but in fact it’s just individuals making economic decisions moment-to-moment or day-by-day.

The central mechanism making all of this possible is the price system.

10 Shouldn’t the government try to raise the prices of stock shares, in order to promote investment and growth?

No. Doing this won’t help the people who’s stock was trading below the new price, they will simply be booted out of the market. Even if this somehow weren’t the case (because people were mandated to own a certain amount of stock or whatever) the company’s boosted purchasing power would come from stock purchasers who have had their own purchasing power reduced by the same amount.

It’s unlikely that many will be buying the stocks at the new price, which means that for the most part people are just buying those stocks they would’ve bought anyway, only without the option of buying stocks that had been trading at the less-than-mandated price.

11 How do corporate “raiders” promote efficiency when they engage in leveraged buyouts?

They free up assets like labor and equipment which can be used by other firms. The “raider” essentially waits until such time as a company’s assets exceed its share price on a stock exchange, leverage their buying power to raise enough money to purchase the firm, and then auction the company off piecemeal.

This allows the mis-used resources tied up in the company to be better utilized elsewhere. Other firms might bid on the computers, office equipment, etc. of the original firm.

12 Why does Callahan write that “…there is no use crying over spilled milk?”

In the real economy failures happen. Entrepreneurs misjudge the markets, conditions change and old techniques are no longer viable, speculators and investors make bad calls, money is lost.

The free market corrects for this be liquidating the resources tied up in these unprofitable ventures, making them available for use elsewhere. This is a healthy and necessary part of a functioning economy, not a reason to cry and wring our hands and subsidize failing enterprises at the public’s expense.

There is nothing wrong with taking pity on people who have fallen on hard times, economically, but the correct approach is not bailouts, it’s to let the failures happen and new ventures to emerge.

WorldSys: Austrian Home Study Course, Week 28

READINGS: “Middle-of-the-road Policy Leads to Socialism” by Ludwig Von Mises, Chapters 11 and 12 of Gene Callahan’s “Economics for Real People”

1 What is interventionism?

A third-way system meant to stand equidistant between communism and capitalism, retaining the advantages and avoiding the pitfalls of each.

Interventionism essentially calls for having a market and a State, with the latter heavily involved in the operation of the former, issuing orders, controlling prices, wages, and interest rates, and otherwise meddling in the free economic choices made by individuals.

2 How does interventionism differ from full socialism?

Interventionism allows quite a lot of ostensively free economic activity, and lacks anything so nasty as socialism’s full public ownership of the means of production.

For a while, anyway.

3 Name some examples of typical interventions?

Price and wage controls, tariffs on imports to “support” domestic industries, taxes, establishment of governing bodies like the American Medical Association and the Food and Drug Administration, new “there oughta be a law” laws, subsidies…

4 Describe the “dynamics of intervention”.

Some enterprising bureaucrat spots an opportunity to garner public favor by offering to subsidize some industry or erect a tariff to make imports more costly. Then they pass their laws. But these laws have unintended consequences — not allowing inefficient firms in the subsidized industry to fail means higher prices, as do the tariffs. So now, to remedy this mess, more laws are passed fixing prices. Alas, this just moves the problem further afield, and now we must fix prices in more remote industries to forestall further increases in costs.

And this merry-go-round of nightmares continues to spin and spin, crushing everyone as goes.

5 Why does Mises think an initial price control will lead to more such interventions?

Because interventions generally always lead to more intervention to mitigate whatever unforeseen consequences the original intervention caused.

Mises illustrates with the example of a price control on milk. Say the government caps the price of milk at a certain level, the better to make it available to the poor so that their children can have decent nutrition.

The marginal producers of milk, those for whom the venture was just barely profitable, now take their cows, machines, and skills elsewhere and do something that makes more economic sense. This reduces the supply of milk, making it harder for anyone, including the poor who were to be the target of the State’s largesse, to get any.

To avoid this, the State now institutes further price controls on the various factors of milk production so that those marginal producers don’t face a prohibitively steep rise in their business costs.

But the result of this meddling is that the supply of the factors required to produce the factors required to produce milk drops. At this point does the State see the trend and usher in a program of sweeping free-market reforms, drastically cutting itself down to a size consilient with liberty?

Mayhap it would in a world like Narnia; not, in fact, in this one.

6 How might a government intervention lead to results that even its proponents consider worse than the initial state of affairs?

See the previous question. In this scenario, if price control schemes are allowed to metastasize eventually you end up with economy-wide shortages in all sorts of things. This is not what the original fixers of milk prices had in mind. In theory, if they had understood where their path would take them they would not embark upon it in the first place.

7 Isn’t it best to adopt a moderate position, which avoids the excesses of pure socialism and pure capitalism?

Mises contends that this cannot be done. Only the poles of socialism and capitalism are stable over the medium term, and only capitalism is stable over the long term (socialism eventually collapsing under the mis-signaling of distorted prices).

8 If interventions fail to achieve their official goals, why do politicians continue to propose them?

They are popular with the electorate, and can gain shallow, immediate results which increase the chances of being re-elected.

9 If interventions fail to achieve their official goals, why do voters continue to support them?

Most people simply don’t understand how the economic consequences play out.

10 What are the “two roads to socialism” described by Mises?

The first is by elevating the proletariat to the status of ruling class and then encroaching by steady degrees into the operation of the market; the second is to let capitalism reach full maturity, at which point it will ineluctably evolve into socialism.

So the first sees a need for the State to take an active role in the development of socialism, but the second takes the view that the natural forces of history will take us to socialism whether we will it or no.

11 Is interventionism a viable economic system?

No, either it is abandoned in favor of capitalism or it continues to expand into socialism.

12 Does the history of the U.S. validate Mises’s views on the trends of interventionism?

Most certainly. Our once stalwart allegiance to individualism and economic freedom has given way to gradually more and more statism, collectivism, and interventionism, as Mises said it would.