Irony; One Last Time

Blogger “Lord Keynes” attacks me, saying that my accusation that many economists don’t get the Austrian understanding of economic calculation is a “red herring” and concludes that the emphasis of price distortion is “feeble minded.”  In the process, he shows that he still doesn’t really understand the Austrian idea of economic calculation.

I intend for this post to be short.  Let me quickly respond to just an excerpt of LK’s post,

But the market system doesn’t require “right” prices in the standard economic sense of equilibrium prices to be successful and dynamic.

This particularly encapsulates LK’s entire post and shows that he isn’t “getting it” — which is strange, given that the one source he includes in the bibliography is Lachmann’s 1986 book.  Lachmann, of course, is big on one of the most important features of the pricing process, a process which LK doesn’t mention in the post.

Some Austrians like to talk about the “ex ante” and “ex post” role of prices, but the key one is the latter.  The “ex post” role is what economists like Ludwig Lachmann and Ludwig von Mises (Lachmann, of course, getting it from Mises) profit and loss.  Within the context of the business cycle, Freidrich Hayek also makes a big deal about profit and loss.  Hayek, though, refers to it “indirectly,” or under different terms; profit and loss is what Hayek talks about when discussing changes in the rate of profit.  Actual market prices can be far from the “equilibrium price,” but what guides the distribution of resources in the market is profit and loss.

What leads to malinvestment?  Changes in the rate of profit.  What causes changes in the rate of profit?  Changes in nominal valuation of goods — i.e. prices.  What reveals malinvestment?  Changes in nominal valuation of goods (n.b. Hayek’s term “forced consumption” refers to this).

11 thoughts on “Irony; One Last Time

  1. Lord Keynes

    “Blogger “Lord Keynes” attacks me, saying that my accusation that many economists don’t get the Austrian understanding of economic calculation is a “red herring” “

    That comment is not directed at you, but at Roddis.

    “But the market system doesn’t require “right” prices in the standard economic sense of equilibrium prices to be successful and dynamic.”

    I take it you’re not even disputing the truth of that statement.

    “Actual market prices can be far from the “equilibrium price,” but what guides the distribution of resources in the market is profit and loss.

    What leads to malinvestment? Changes in the rate of profit. What cases changes in the rate of profit?”

    This implies just a retreat to the ABCT, the theory which is simply not true.

    And, as for profit and loss, the existence of significant price setting in many markets by private businesses does not mean the economy is subject to some unsustainable and devastating “economic calculation” problems. Why? Because profits are, thereby, also made stable.

    It is quote obvious that that a consequence of price setting is a kind of profit “setting”: profits for the firm are made stable by price setting activities.

    Far from being a cause of intractable “economic calculation” problems, this profit stability is a strong stabilising factor for modern businesses: for stable profits allow stable margins for internal financing of investment.

    Reply
    1. Jonathan Finegold Post author

      I take it you’re not even disputing the truth of that statement.

      It was never in dispute — like, by any Austrian.

      This implies just a retreat to the ABCT, the theory which is simply not true.

      This is plain silly; please, read or re-read Hayek and Mises.

      As for the rest of your response, I’m having a little trouble understanding it. How does the fact that there is profits make the market stable? The entire Mises–Hayek theory is based on what the latter economist called “phantom profits.”

      Reply
  2. Lord Keynes

    And what’s more if you seriously think that, say, price setting activities by businesses are swelling profits and causing severe economic calculation problems, it is private sector itself that is cause of such distortions, not government.

    Reply
    1. Jonathan Finegold Post author

      No, the distortions are caused by an increase in credit beyond the quantity of “real savings;” i.e. an increase in nominal demand for certain capital goods that wouldn’t have otherwise existed without the increase in credit.

      Reply
  3. Lord Keynes

    And, assuming the factor inputs or capital goods in question really are scarce, this does not even require government at all, but a normal endogenous money banking system is sufficient to do it.

    At that point, you’re left with a view of the market as being inherently unstable.

    Reply
    1. Jonathan Finegold Post author

      We’ve been over this; in 1931, Hayek explicitly argues that these cycles can occur endogenously. Mises did not, because Mises had a much better banking theory than Hayek (who didn’t have one). These types of business cycles are not inherit to a constrained banking system of the Selgin/White kind.

      Reply
      1. Silvano

        Yes, but the problem with Mises is that for him money is the phantom of gold as Hicks pointed out.

        Basically in ch.XVII of Human Action he describes a “gaussian” free banking system where excesses are brought toward the mean through net settlements in money market.
        But his convinction that bankers are prone to carry out credit expansions just because of bad ideas is untenable.

        Anyhow, even if we have business cycles L.K., so what?

        This is a necessary condition but not sufficent to argument the goodness and the feasibility of what you invoke.

        Reply
        1. Jonathan Finegold Post author

          Basically in ch.XVII of Human Action he describes a “gaussian” free banking system where excesses are brought toward the mean through net settlements in money market.

          Yes, this is how excess money returns to banks; it circulates until it return to the issuing bank, which then has to make good of its value — bank notes are liabilities to the issuing bank. This is more or less how it works in the Selgin/White model, as well.

          But his convinction that bankers are prone to carry out credit expansions just because of bad ideas is untenable.

          I’ve never read Mises ever write something like this, but I haven’t read everything by Mises. And, in any case, this doesn’t make his banking theory bad or incorrect.

          Reply
  4. Silvano

    It seems to me in some footnotes of HA, but also in other writings I read in the collection “The Causes of the Economic Crisis”. Basically while he understand clearly why politicians, populists, etc. ask for credit expansions, he isn’t unable to figure out in a convincing way why bankers never learn from past lessons. For Mises this is a little “condrum” which bring with himself since his early writings and he tries to resort to some kind of “idealistic” explanation (like bad economic theoris, etc.).
    Anyhow that’s not so important. What I find difficult to agree completely is Mises’ belief that in a free banking system the creation of inside money (unbacked fiduciary media) would be extremely limited.
    Broadly speaking, at least from a historical perspective, financial innovation nearly always found a way to circumvent limitations (both physically and regulatory) imposed upon the creation and circulation of credit.

    Reply
    1. Jonathan Finegold Post author

      The “limitation,” in this case, is profit and loss. Read George Selgin’s The Theory of Free Banking.

      Reply

Leave a Reply