You Can’t Have Your Cake and Eat It Too

In todays Mises Daily article, David Howden talks how banks should be regulated “the Austrian way.” Its basically making quick jabs at fractional reserve banking, bringing up that all too common full reservist objection of how banks could lend out a fraction of your deposits, when it should just be kept in their vaults in full because its your money! This objection just shows that full reservists aren’t interested in continuing an intellectual debate because this objection has been answered so many times that most serious scholars on banks basically laugh at this objection now.

Though, the real point of the post isn’t meant to critique this full reservist position. The point of this post has to do with these two statements by Howden:

The first group correctly notes that there are two specific drawbacks of increasing regulation. On the one hand, “one size fits all” regulatory policies (such as is commonly the case on the Federal level) are rarely capable of handling the intricacies and dynamics of business.


By ending this legal privilege, we eliminate the ability for banks to grow to such inordinate sizes. By abiding by the same legal principles (or “regulations,” if you will) as any other deposit-taking firm, banks are not unduly advantaged.

These two statements are in a sense contradictory, I think anyway. Howden in the first statement makes the claim that regulatory policies (like those at the Federal level) create this “one size fits all” spectrum for which makes these policies “rarely capable of handling the intricacies ad dynamics of business.”

Then in the second statement, he calls for a direct “one size fits all” policy so that banks could be “abiding by the same legal principles” or regulations as other deposit-taking firms.

Doesn’t Howden even consider that this “one size fits all” policy on banks leaves aside the  intricacies and dynamics of how modern banking works? Well maybe he doesn’t, for he doesn’t even grasp why his earlier objection on fractional reserves is just plain faulty and misunderstands fractional reserve banking at its very elementary level. Gotta love those Rothbardians…

Oh I Hate The Game, If The Game is Public Choice

There is a piece at Free Exchange entitled ‘Don’t Hate the Player, Hate The Game’ that talks about the contributions of James Buchanan, who died recently. Now, Buchanan was a very influential person to a couple of people who I myself find influential, namely Jack Wiseman and Karen Vaughn. From what I read, Wiseman was a close friend and colleague of Buchanan who often cited Buchanan and Vaughn cites Buchanan often, especially when talking about subjectivist economics. Nevertheless, I do not share the same appreciation as they do. I think Public Choice is one of the worst things Austrians could endorse, and this is certainly the case in the GMU program. For a critique that I find valid of Public Choice from an Austrian perspective go here .

The main core of the argument is stated here:

Implicit in the assertion that “politics without romance is impossible” is the assumption of public ignorance. The public does not understand the niceties of politics. This is all the more amazing upon observing how emotionally involved people become in something (presidential elections) while remaining so woefully ignorant of it — and even ignorant of their own ignorance! Voters actually think that they are making the right choice; in most cases they are convinced of it. But the truth is that voters typically do not know what is going on. (They know the color of Mrs. Obama’s dress, but are ignorant of the minute details of Mr. Obama’s policy proposals.) And it is funny to hear commenators on the news repeatedly lament that other commentators are not sticking to the issues, issues that people want to hear! I would be willing to bet that if popular news outlets began discussing the “issues” in great detail, the people’s interest in politics, and their participation in it, would quickly end.
But what makes Austrians think that this ignorance stops with voters? This ignorance cuts both ways. Politicians cannot know the effects of any political exchange (vote trading). Public Choice Theory relies on the principle of omniscience for its validity… Austrians are doing great injustice to Hayek and Mises in believing that politicians can accomplish whatever they want by acting in their own self-interest. The effects of any action in politics are terribly complicated, and its unintended consequences too numerous to assess and evaluate intelligently.

Damn, maybe it is true that libertarians are just lazy Marxists. It is a shame to see that Austrians are so quick to accept arguments about those damn bureaucrats in government ruining the lives of many because they only look after their own self interests. This gives the Austrian school the incentive of arguing that a market process is purely a ‘private’ activity with the interventions of government ruining the end result of these private actions, or that capitalism without the help of the state is somehow consistent, and is something that the public can benefit from. Underlining all this is the belief that neoclassical economics is essentially right but all it needs is a bit of Austrian tweaking, a view that Karen Vaughn tried to get us to stop using in exchange for a more Lachmannian view of trying to make Austrian economics a true school of the heterodoxy.( And Austrians wonder why others call them neoclassicals).

I used to believe in these type of arguments, but now I laugh at myself for ever thinking such a thing. Don’t get me wrong, there may be reasons for a smaller government than what others envision (and this can be something worth defending with the opposition happy to debate), but this is certainly not the way to justify so called free market economics

Carl Menger, Founder of the Austrian School, A Socialist!

At least according to this person after I ask if Menger advocating specific regulation makes him socialist:

Also, I will say that such policies are certainly socialist. So, if Menger did indeed make such statements, then he certainly was recommending socialist policies in such an instance. However, that would be a separate issue from Menger’s work on theory and methodology.

Seriously?! This is simply clear ignorance of an Internet Austrian. Sure the policies advocated are separate from theory, but it is clear that Menger’s theory is one that doesn’t see markets as pure spontaneous order, indeed he notes several times that as great as the automatic system is (spontaneous order), there are indeed limits, and development must be expanded via government. Most Austrians only see the spontaneous order part of Menger and completely forget to flip the other side of the coin, for it is a picture they refuse to accept. The same commenter questions a source in which provides a lot of Menger’s views on policy:

In any case, the source in question is the notes of Crown Prince Rudolf from when Menger was one of his tutors. This is pretty shoddy, because we don’t know if these are the words of Menger, or of Rudolf, nor do we know that these aren’t the words of another of Rudolf’s tutors. In fact, the entire collection is from a classical perspective, and is in fact very Smithian. Further, there is no mention of Menger’s subjectivity, monetary theory, or any of his methodological work at all. That seems a bit strange, doesn’t it? Menger could very well have been instructed to teach Rudolf from a particular perspective. Or, none of those words could be Menger’s. It could be Rudolf’s ode to Smith.

This is really a bad critique on Rudolf’s notes. As noted in these series of lectures, while Rudolf did write the majority of these lectures by memory, Menger revised and corrected the lectures, in other words, these are the final revised lectures. So misrepresentation of Menger’s views is of (very) low possibility. Actually as Oscar Jaszi notes in his The Dissolution of the Habsburg Monarchy (published in 1929 btw) , the lectures by Menger and his student were used to some extent to dismantle the aristocracy in Austria (p 152).

Thus, Menger’s appreciation for Smith, advocacy of forest regulations (p 131-3), government to improve workers’ conditions (p 127), and government to build roads, schools, railroads, canals (p 121) were Menger’s views, this is not a “shoddy” claim, unless one is going to take the position that Menger sucks at revising and correcting his student’s notes on lectures by Menger himself.

This isn’t the only source of Menger’s policy views. In his article “Geld” (the latest edition is the one of 1909), Menger makes it clear that he supports government monopoly of coinage.

In Transcript of Finanz-Wissenschaft von Prof. Carl Menger translated by Mizobata, Menger claims to advocate progressive income tax (p 52).

Why didn’t the lectures have Mengerian issues like subjectivism, I don’t know and I am not going to speculate a reason. The point though is that there is evidence to show Menger’s views and the validity of the lectures. Menger truly was an ideal figure for classical liberalism, his lectures show the importance to stress the limitations of government, while still demonstrating a role for the state, one that goes beyond providing security, courts, and laws. If others want to interpret this as socialistic, go ahead, I am not going to get myself involved into a semantics debate too heavily. I just don’t get why one advocating for an active role of government makes one a socialist, maybe I will never get it, given that I have probably been brainwashed by the socialistic public school system!

Evidence and Data and Economics

Mises believed that theory is useful for interpreting data. The only rejection is that of using the data to derive theory. But, if theory is used to understand real world events, then analyzing these real world events are obviously a fundamental part of economic science.

The above passage is from Jon Catalan: found here. In this post he defends the Austrian School, and specifically Mises, on the straw man that Austrians hate empirical analysis and thus find it irrelevant to economic science. Though, I can understand, for example, the critics questioning minimum wage conclusions when Austrians make claims that “it is just common sense that if you raise minimum wage, you increase unemployment,” thus they may be selective on what they choose to look at as empirical analysis, but to generally say that empirical analysis is useless in Austrian economics is a straw man. As Catalan pointed out, the simple fact that humans act is an empirical claim, or better yet, it can be supported by empirical analysis.

I also have distaste of this horrible attack on Austrian economics, there are elements which to need to be improved in this school but we sure wouldn’t know if this was how critics respond. I have distaste for it on two main reasons 1) it is somehow claimed that republicans are now Austrians and 2) it just so fixed into thinking of Austrian economics as a philosophy than as an actual economics school that can actually teach the mainstream something.

1) I do not get where people get this information that republicans are now influenced by Austrian economics (maybe it is this author that lacks viewing empirical evidence as important). Most republicans, and especially those who are politicians or have a big name in the right wing, are influenced by mainstream economics, namely by conservative New Keynesians and New Classicals. Even if we assume Austrian economics as a school that has similar views of that of Ron Paul, a good majority of republicans think of him as a crazy man.
And somewhat relevant, I also doubt that Bachmann reads Mises, even more so, on the beach.

2) More important than the first point, Austrian economics does indeed offer many things to the economics profession. I’ll present one thing, briefly but important, that the mainstream needs to learn (using economic reasoning and not a philosophical reasoning or ideological one etc). Data analysis itself is not sufficient to say anything about the economy. People from the Austrian school to the Shacklian Keynesians know that due to a transmutable reality, we must be skeptical of data to say anything about future states. The future is determined only by action done in the present, and in turn leaves us with the conclusion that the future always remains to be written. A common question may arise from this: if we are to be skeptical of data then how are we to say anything about macro concerns?

Maybe to an Austrian, this may sound ‘weird’. It is widely believed in the Austrian school that a divide of macro and micro is unnecessary. “Economics is just economics, what is this macro or micro economics that you speak of,” I heard said by a peer while I was at the Mises Institute last year. This is to mean that Austrians generally like to use similar, if not the same, tools to analyze ‘macro’ effects and ‘micro’, and thus when explaining macro, we try to incorporate as much of micro foundation as we can. In Ludwig Lachmann’s essay Macro Economic Thinking and The Market Economy, he gives a justification for using micro foundations to macro:

The more firmly a macro-economic argument is linked to its micro-foundation in choice and decision, the less it lends itself to statistical verification. Since the range of choice present to the minds of decision-makers defies statistical measurement, no theory linking observable events, like output quantities or prices, to choice and decision is, in this sense, ‘testable’. The circumstances influencing decisions find their mental reflection in plans. All economic action is, in the first place, the making and carrying out of economic plans. So long as there are no statistics of plans there is nothing to which the econometricians can correlate their measurements

Keep in mind, as also mentioned by Lachmann in this essay, that Joan Robinson said the same thing. The difference in her statement is that Robinson only reserves what she says to the neoclassical production function, while Lachmann extends this to explain economics as a whole. Here is Robinson:

Statisticians can find out in a rough general way, for a particular situation, the capital-output ratio in dollar values and the share of profit in the dollar value of net output, so that they can estimate the overall ex post rate of profit on capital. They cannot describe what was in the minds of directors of firms or on the drawing boards of engineers when the choices were made which led to the creation of the existing stock of capital equipment. Still less can they say what choices would have been made if the rate of profit had been different from what it is.

In macro, there needs to be a stronger basis for this kind of analysis but, at best, this will hardly be achieved any time soon, for the economics profession (macro and micro levels) is still lacking micro foundations based on subjectivism (based on decision and choice).

Jack Wiseman asked a very haunting question, given micro foundation considerations, to the mainstream:

… what becomes of positive economics once it is recognized that the basic econometric data (recorded prices etc) is, and always going to be, the outcome of mistaken predictions?

At best (I think), we can use Lachmann’s advice:

[it is]… impossible to discuss meaningfully policy measures designed to affect the magnitude of such aggregates without also discussing those changes in their composition which must accompany them.

And why is this?

Since these micro-economic actions are not necessarily repeated from day to day, even less from year to year, we have no reason at all to believe in the aggregative constancy of the macro-variables over time.

A Forgotten Austrian: Jack Wiseman

Jack Wiseman is a great writer. He was often thought of by many as a radical right wing person and thus, many dismissed what he had to say. Though I would question his ‘radical right wing’ label because relative to other Austrians, especially the anarchists, he was not that radical.

Wiseman’s way of thinking is almost from a radical subjectivist perspective, and he talks more about policy than economic theory (as opposed to Lachmann or Shackle who preferred to talk about theory). He might of also been thought of radical because of his distaste for neoclassical economics and he extends his criticism towards neoclassical economics to policy making. What he states insightful passages and why he isn’t recognized by other economist, especially Austrians, is unknown to me. On a side note, some Austrians that do know who he is would just call him a fellow traveller, but I do think that is highly debatable.


(the article I quote from Wiseman’s on uncertainty is one called Costs and Decisions though there are plenty of articles by Wiseman to chose from. This is simply my favorite on uncertainty )

My favorite contribution has to be what he writes in concerns about uncertainty. He seems to come very close to my overall interpretation of what uncertainty implies, though not quite. He also notes that his idea of uncertainty comes in part from Shackle, even though for most of his career he was always participating in Austrian circles.

Uncertainty is here because people do not know the future. But this idea of uncertainty is applied to everything, thus we can have the same analysis when looking at markets and policies.

At the time, the equilibrium theorists during his time (search theorists, temporary equilibrium theorists, the ‘new’ new welfare economics theorists based on information theory) were theorists who went beyond the ‘Walrasian god’ of conditions of general equilibrium, but nevertheless were still ignorant of the unknown future. The future may not be predetermined in the same sense as earlier theories, but it is still known. These theories incorporate probabilities and risk attitudes, or equilibrium is a condition were individual ‘theories’ and policies with emerging outcomes are conformed.

Decision makers are ‘clockwork Bayesians’ programmed to respond to changes in conditions but in preordained ways and within a defined system. This of course ignores or puts aside the fact that decision makers may experience surprise or experience new opportunities not anticipated as possibilities in the model, they can ‘learn’ but only in a restricted sense. In other words, this is a nice stable system choosing to assume away reality because of instability. He went on to consider this vision of uncertainty as the “new uncertainty school”, which he would of course categorize Shackle as one of his members and presumably, Lachmann.

But of course it was his view of uncertainty which was the main bait for critics. If I was to summarize the main argument against Wiseman, it would be, “Well, can you do better?” Wiseman’s answer is along the lines of, “Well to say this is to imply that you reject the evolutionary aspect of economics. There is no argument of principle against such an evolution.” The italicized part are his words, quite wonderfully said. What of arguments that reject this notion of uncertainty and fail to apply its implications but yet argue “current theory is the best we got”?

One of my favorite passages by Wiseman is when he draws two points about uncertainty and economics:

I shall content myself with two [inferences] by way of illustration, one positive, one negative. The positive one is that ‘higgledy-piggledy growth’ is a natural consequence. The past (recorded) performance of decision makers does not provide a simple guide to their likely future performance, and… ‘learning’ can never provide a more sophisticated fully trustworthy ‘investment rule’. The negative proposition is perhaps more disturbing: what becomes of positive economics once it is recognized that the basic econometric data (recorded prices etc) is, and always going to be, the outcome of mistaken predictions?

It’s note mentioning that even by friend and early mentor at LSE, Lord Robbins,
states that he shouldn’t overestimate the influence of uncertainty upon the thinking of future compatriots.

One thing that I do find fault in Wiseman’s talks on uncertainty is changing of institutions may indeed reduce or eliminate uncertainty. Though he does only say this once and quite vaguely, I still am at awe of the fact that he says this and yet also questions the state of positive economics.

At least though, he acknowledges the idea that we may never find a formal analysis embodying the unexpected. We need to get out of the “this is the best we can do” mentality for this only seems to appeal to elegance not relevance.

I always keep in back of my mind that we may never satisfy a clear theory of Economics with uncertainty but I do not let that dominate my overall thoughts. Economics is an evolutionary science, and this leaves room for optimism, this is to say, a feeling that we may find a satisfying theory of economics and uncertainty.

Group Behavior and Action

Another major contribution has to do with his research on group behavior. While still having a view of methodological individualism, he acknowledge that groups may act too. But because groups are composed of individuals, and thus with different ends and means, groups are often not just perusing one goal and quite often, groups are constantly fighting in trying to ‘change the rules of the game’ for their favor. By this in mind, we should imply that treating firms with a tendency of an extension of the lone entrepreneur is faulty. The mainstream treatment of firms is dealing with things one thing at a time with assumed profit constraints and no quarreling. This also may question some government policies like subsidies. To Wiseman, having a vast amount of subsidies in various countries led him to believe that there is more to subsidy policies than just economic reasons. Of course when talking about things abstract to the mainstream, like various ends and different means for individuals, we can now see that there can be some policies simply to ‘favor’ a particular thing and allow the changing of the rules for individuals. See his article Some Reflections on the Economics of Group Behavior for more info.

I will conclude by quoting a passage of Wiseman’s in which he concluded one of his articles on uncertainty:

I hope that I have persuaded you that there is here something more than a straw man: those of us who are interested in the study of a truly uncertain world could do with some help.

Uncertainty…Round 2

Lets start this post with a Lachmann passage on Keynes and subjectivism:

We have emphasized the importance of expectations for the subjectivist view of action. It is well known that in the General Theory, Keynes’s main aim was to establish the possibility of unemployment equilibrium and that everything else he had to say was made to serve this purpose. The introduction of expectations was thus to him a means to an end. He brought them into his argument when it suited him and left them out when it did not. (emphasis mine)


Keynes_Follower states the following

I may have a possible response to this uncertainty problem. The market itself is uncertain, we both agree, but government does reduce uncertainty because it has intervening factors that we know and that said, it does not apply to the uncertain problem like that of the markets at least.

To refresh, click here on my post on uncertainty.

But to answer: In a world of ontological uncertainty, non ergodicity, and transmutability, how can we have Post Keynesians say for certain that government reduces uncertainty? Just because the market is instable, unpredictable, and uncertain does not follow that government policies in trying to reduce the consequences to these thing suit any better. And it does not follow that these same policies overcome uncertainty. Again to state that ‘Government reduces uncertainty’ is like saying ‘increase of knowledge reduces uncertainty’.

This problem is even more of a problem if one rejects the ‘state vs market’ mentality, which many Post Keynesians agree to reject this mentality. This is to say, one cannot say the uncertainty problem solely applies on markets and also reject the ‘state vs market’ mentality. But even setting aside this ‘state vs market’ mentality, policies still influence the market process, and thus it still follows that the market still deals with the exact same problem than without the policies, it still deals with ontological uncertainty, non ergodicity, and transmutability.

It seems like the followers of Keynes have fallen into that same problem as Keynes but in a somewhat different context. Post Keynesian literature and research on uncertainty, while really great stuff, is only a means to an end. They use it when it suits them and leave it out when it doesn’t… Or so it currently seems.

And on a side note, this is not a critique specifically towards Post Keynesians, though I am ‘picking’ on the Post Keynesians (if you will) because of the great literature on uncertainty they have on markets. This critique really applies to all economic theories. If we want to have more realistic explanations about the economy and economics then we must be willing to take uncertainty to the next level and apply it to everything that is involved in the market process. Again, my conclusion that I drew up from my original post on uncertainty was as follows:

By applying all that has been said to economic theories and policies are key if we wish for economics, as a subject, to progress. Davidson is really spot on, on what he has to say about uncertainty and he does a very good job at explaining uncertainty in depth. Nevertheless, this puts in question all theory that asks for both positive and negative regulation.

What Austrians can Learn from Post Keynesians

First off, as a person influenced by Ludwig Lachmann and George Shackle, I do not necessarily see a difference in how Austrians (Radical Subjectivists specifically) and Keynesians (Post-Keynesians specifically) begin to view economics. Shackle is quite known as an economist that uses Austrian premises and Keynesian conclusions and that is how I generally view Post Keynesians. Austrians need to get that there is a ‘middle ground’ that unites the two schools, as paradoxical as it might seem. But while we might agree with stuff like general equilibrium flaws, perfect competition flaws, rational expectations flaws, uncertainty, subjectivism, etc etc, Post Keynesians have been more consistent in showing how these things apply (or don’t apply) to economics.  Thus, I believe it would be beneficial to Austrians to at least give Post Keynesians a try. I am not saying that we should automatically advocate the amount of government they like, for example, but we should be willing to learn for its theory. Here are some quick things I think that Austrians can learn, and I hope they do, from Post Keynesians:

1) Uncertainty

I put this as number one because Austrians claim that there has been a great deal of Austrian literature to explain and further the idea of uncertainty. But I think it is quite the contrary. What is funny is that Austrians, as well as Post Keynesians, have a Knightian way of looking at uncertainty. This is to say that we make plans but we do not know they will be successful in the future. But yet, I think the Austrians, while claiming to have, or claiming that it is similar to, a Knightian sense of uncertainty, they fail to show it in theory, whether it is by Roger Garrison accepting general equilibrium when it comes to modeling the business cycle or accepting an ergodic view of the world.

2) Knowledge

The view of knowledge to most Austrians is a bit flawed, it is because they fail to grasp the concept of uncertainty. Most Austrians claim that uncertainty exists because the world is complex. The more knowledge  we can obtain in this complex world, the more certain we become. But this view of uncertainty and knowledge only holds if we assume that there is no further change in data. Austrians need to accept the fact that uncertainty exists because of human action and expectations. The world is spontaneous and data is constantly changing. Thus, it is useless to view obtaining knowledge as reducing uncertainty.

3) Expectations and 4) market instability

If we accept subjective expectations, then by default we accept the notion of market instability. While Post Keynesians have great literature on this, most Austrians reject market instability. A big part of instabilty is due to the fact that people have high expectations in periods of perceived tranquility.

In conclusion

For the most part all of these points can be put in one category, which is that of uncertainty. Understanding the true implications of uncertainty does indeed implying accepting subjective expectations, market instability, and the ontological nature of knowledge. Also, these are not at all original ideas of Post Keynesians, Ludwig Lachmann claimed that in order for the Austrian school to further, they must take these implications to the next level. In ignoring what Lachmann had to say, it seems that the Post Keynesians have indeed beat Austrians at their own game. Ironically, I do not think that Austrian economics can advance without the help of the Post Keynesians.

I highly recommend reading Lord Keynes’ blog Social Democracy for the 21st Century and New Economic Perspectives. From what I read in Unlearning Economics, I would consider it a great Post Keynesian blog, but I just started following it a couple days ago. The first post ‘How to Unlearn Economics’ is a fantastic post in my opinion.

-Isaac Marmolejo