Category Archives: Smackdown

Night and Day

A great post by John Cochrane,

But the Fed has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed’s independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.

Tyler Cowen publishes an email sent to him,

Fwiw, my take is that yes, the 2009 Chinese stimulus was a great test of large-scale govt stimulus and that we are seeing the results of what this looks like *in practice* rather than *in theory*. In practice, large-scale government stimulus is an invitation for corruption and a diversion of resources that builds up knowledge and capital in unproductive areas. As Obama said after the US stimulus package: there’s “no such thing as shovel ready projects.” Even in China.

I think there’s some merit in what’s quoted in that excerpt — and, I’m not forgetting what I wrote in my own piece on government spending —, but it seems completely unfair to compare U.S. political institutions with Chinese institutions.

Oh no, oh no, oh yeaa…

Robert Wenzel pours the kool-aid in a recent post on Milton Friedman.

  1. Even if you disagree with some high percentage of Keynes’ contributions to economics, you can’t deny he was a great economist;
  2. Of course, Wenzel doesn’t catch the significance of Friedman’s claim that A Tract on Monetary Reform was Keynes’ better work — better, in fact, than the The General Theory;
  3. Wenzel sums up Friedman’s differences with Keynes as “hav[ing] a somewhat different tack on monetary theory” (further claiming that, despite this, Friedman was “quite Keynesian” on the topic — what does that even mean?). Clearly, Wenzel is not familiar with either Friedman’s or Keynes’ work;
  4. The icing on the cake is quoting Paul Krugman on Friedman and Keynes.  These are two men (Krugman and Wenzel) with little knowledge on the relevant history (e.g. the split between post Keynesians and the Neoclassical–Keynesian synthesis; pre-Keynesian literature…).

The comments section is just as scary as the post (and, by the way, I say all of this as someone who is definitely not “enamored” with any of the two economists), too.

Check out this one,

I like Boudreaux. Smart guy, good thinker. Not Rothbardian, true — but no one is perfect. He’s certainly  far and away  the best among his GMU counterparts.

I wonder if he could name who Boudreaux’s “GMU counteparts” are.  And, well, I guess we’re all entitled to our own vision of what perfection is.

Another Attempted Rescue of Praxeology

Although I feel Jonathan did an admirable job defending the Misesian methodology, he has asked me to buttress his own writings with some philosophical thoughts of my own to which I of course will oblige. Jonathan links us to a critique of the practice of praxeology by Eric Perkerson at The Social Rationalist. After some interesting thoughts on the value of knowledge for its own sake and knowledge for the sake of its application, we find Eric’s thesis put bluntly:

The process of pure deduction, as a methodology, should not be valued in this regard. As we will show, it cannot be applied because it cannot yield appropriate knowledge-as-means.

This thesis is demonstrably untrue. First, I will deal with the body of his work – which deals with this specific thesis – and I will then comment on a few other erroneous, auxiliary points Eric tries to make against praxeology. Eric begins the meat of his post with an unqualified and wrong assertion:

Pure deduction can only yield conditional knowledge. Only with foundational assumptions, or with things that are “given,” can logical deduction yield any results at all. Logic in a vacuum yields nothing. Nothing in, nothing out.

Pure deduction, as a matter of fact, can yield quite a bit of certain knowledge. The understanding of mathematics and geometry are based on pure deduction from an incontestable axiom: the law of identity. A=A is not an empirical hypothesis, nor is it an abstract illustration of philosophical confusion (see: Hegel’s “self-differentiating unity” for an example). It is an incontestable truth that we cannot conceive of as erroneous. That A=A is correct does not require continual testing or experimentation; it can and must be understood a priori. Likewise, the law of non-contradiction – that something cannot both be A and not-A at the same time – is an example of pure deduction. Contrary to Eric’s assertions, these laws do not represent condition knowledge, but the opposite: unconditional knowledge. We can know with absolute objective certainty that a thing is equal to itself, and we know this by the very definition of what we are proposing. A=A is a tautology, just as all deduction is. Whether Eric thinks logical tautology can give us usable or meaningful knowledge is another thing, but certain knowledge it definitely can. For a more obvious example of the results of pure deduction to give us a bedrock of certain knowledge, see Descartes’ cogito.Furthermore, contrary to Eric’s ex cathedra pronouncement, the law of identity is not an assumption. It is a requisite for all deduction. There is no conceivable world where A=A cannot be true, and this elevates it to the status of an incontestable axiom – a product of deduction.

For conditional knowledge to be elevated to the status of proper knowledge, we have to somehow verify that the conditions or assumptions on which the conditional knowledge is contingent actually hold true in some respect out in the external world. The conditional knowledge of the pythagorean theorem is based on the condition that one has a right triangle. Actual knowledge based on the pythagorean theorem has to come from knowledge that one is dealing with something which satisfies the definition of a right triangle. Conditional knowledge becomes proper knowledge when the conditions it is based on are known to be satisfied. How this knowledge comes to be known is a problem that is outside of the realm of pure deduction: it is necessarily empirical. This is the interesting epistemological problem.

This paragraph is untrue in all of its parts. Not only does Eric not give us a definition of “proper” knowledge (versus improper knowledge?), but he is wrong when he asserts the need to empirically demonstrate the necessary conditions for the Pythagorean Theorem. The theorem, as we all should know, says that the two sides of a right triangle, when squared and added, will equal the hypotenuse when squared. It must be remembered, that in order for this to be true, we do not need to posit the existence of any right triangles. In order for it to be true that the circumference of a circle is equal to its diameter multipled by Pi, we do not need a circle. These polygons illustrate the logical theorems, but are themselves not exactly necessary. The Pythageoream theorem and the mathematical properties of a circle are not dependent on witnessing or “having” such shapes. They are true by virtue of their tautological status. The relationship of Pi to a circle is such that the concept of “circle” – a round plane figure whose boundary (the circumference) consists of points equidistant from a fixed center – already implies the necessary mathematical unit of Pi. What empirical testing and experimentation can do is to verify whether certain theorems fit into a specific case, not whether certain theorems are true or false. Eric seems to adopt a certain mathematico-positivism, whereby the truth value of all logical claims are held conditional to some external reality. How and why Eric believes the observable world can guarantee him something other than “conditional” knowledge, I do not know. The observable world is far more unreliable than logical tautologies as far as delivering the verdict on the truth value of scientific claims, and for this reason we should be skeptical of trying to prove logic using reality. The really interesting epistemological problem, again contrary to Eric’s argument, is not a boring empirical argument, but a much deeper issue in metaphysics and philosophy of mind. How our knowledge squares with reality is not satisfied by a  “go and see for yourself” attitude. It is satisfied by a rigorous metaphysical formulation that explains the essence of reality and ties in true epistemic claims about that reality. Whether reality is composed of many substances or just one, whether reality is deterministic or indeterministic, whether reality is simply “our universe” or if it consists of multiple universes; these are metaphysical and epistemological arguments that are the heart of philosophy and will not be solved by a microscope. Left unmentioned is exactly why Eric believes “reality” and the a posteriori can grant us unconditional knowledge when it is a priori knowledge that is based on necessary and universal truisms, not happenstance observations.

Conditional knowledge, without knowledge about whether or not the foundational assumptions hold, cannot be knowledge-as-means because there is then no way of connecting the real world with the abstract world in which the assumptions we have based our conditional knowledge on hold. We have shown that the process of deduction by itself, as a methodology, is useless in attaining knowledge-as-means, because it gives no way of solving this problem.

I have already illustrated that these foundational “assumptions” are not assumptions at all but necessary truisms. The laws of identity and non-contradiction are a priori true because they cannot coherently be denied. The question of how our logical knowledge connects with reality is an old philosophical question, and one that Kant has helped us understand a great deal. The Kantian framework of synthetic and analytic propositions, along with the a priori and a posteriori methods, have given us a great deal of headway into answering this question. I relate Kant to Mises here.

But while we have good reasons for believing this [action axiom] to be true, it is by no means true on the basis of pure deduction alone. Fundamentally, this is an empirical claim. We can certainly conceive of a world where humans are nothing more than mere animals, reacting on the basis of instinct alone. We also know that there are human beings in our world who do not act, who have fallen into persistent vegetative states. But if one tries to solve this problem by appealing to definition, by claiming that human beings aredefined by their ability to act, then one is at once at a loss to explain how they can know that the beings around them who look similar and with whom they seem to communicate are in fact human beings in the sense that they act.

Eric is clearly confused. In the first place, it is true that Mises writes “Man acts,” and we are tempted to run out into the world and see if this is true. But it would be more accurate for Mises to have written “Agents act.” Despite some sloppy terminology from the early 20th century, we can still recover much of Mises’ formulation. For instance, it is an incontestable truth that agents act – this is in fact a prerequisite for all other definitions of agency (argumentation, reflective thinking, the pursuit of virtue, etc.). Action is necessary to the concept of agency and cannot be done without. Secondly, to tie in to my earlier point, we do not need to posit the existence of any agents to arrive at a theoretically true economic science. All we need to say is that if agents exist, then they must act. If they act, they must choose. If they choose, they must exhibit preferences. And also, if they choose, they must forgo any competing alternatives. This illustrates the theoretical principle of opportunity cost – that the cost of any action is the value of one’s next most favorable alternative. This logic is sound irrespective of if there are any agents in which it could be manifest. Praxeology does not give us knowledge about what humans or non-humans will or can do, but about categories of action that manifest themselves in the economic sphere of agents. If there are creatures who act, the whole body of praxeology applies to them in all its parts.

 Far from being the end of the matter, the action axiom is but the first of many assumptions needed to fuel the engine of deduction that produces the claims embodying Austrian economics.

The action axiom is not an assumption, but an incontestable truth. Nobody can deny that man (or agents) act because a denial is itself an action and the opponent would be caught in a performative contradiction. The action axiom is thus immediately and obviously true. Mises makes a few auxiliary empirical claims (such that labor constitutes a disutility and that we live in a world of scarcity, among others), but these are not exactly necessary to erect the body of praxeological truth. There are no assumptions in Austrian economics. There are premises and there are deductions.

Very little, and possibly nothing which could be classified as “useful” economic knowledge-as-means can be derived from simply the action axiom alone.

An obvious counterexample is the principle of diminishing marginal utility, which is proved on praxeological grounds. Hoppe writes:

[T]he law of marginal utility follows from our indisputable knowledge of the fact that every actor always prefers what satisfies him more over what satisfies him less, plus the assumption that he is faced with an increase in the supply of a good (a scarce mean) whose units he regards as of equal serviceability by one additional unit. From this it follows with logical necessity that this additional unit can only be employed as a means for the removal of an uneasiness that is deemed less urgent than the least valuable goal previously satisfied by a unit of such a good. Provided there is no flaw in the process of deduction, the conclusions which economic theorizing yields must be valid a priori. — Hans-Hermann Hoppe, The Economics and Ethics of Private Property (Auburn: Ludwig von Mises Institute, 2006), p. 278

To put it in terms for non-economists, Hoppe says that every actor prefers that which satisfies him more over that which satisfies him less. When you add an additional unit of a good to an already existing stock of the same good, this additional good must be put to a use less valuable than the previous units of the stock. Thus, the first sack of grain to a pioneer farmer will be put to a more productive use in satisfying his desires than his second sack of grain, which will still be more productively utilized than his third sack of grain, etc. This all follows from the praxeological fact that we prefer things which satisfy our desires over things that satisfy them less. This proof does not require empirical testing, experimentation, or falsification – but logic.

“Useful” knowledge, for people acting in the real world, must be knowledge about the real world.

This is the great value in Kant’s synthetic a priori. It is synthetic – in that the concrete matter of inquiry is a real world phenomenon – and yet it is learned a priori – by logic. We can learn “useful” knowledge about the real world without acquiescing to microscopes and hypotheses. Economics is a subject dealing with real-life content: value, choice, cost, profit, and loss. These are the categories of action that we can understand, as I illustrated above, using a purely deductive methodology.

The remainder of the critique is focused on the difference between methodologies. Our author makes us aware that the methodology of physics is different than the methodology of history. Surprisingly, he draws no conclusions from this on the question of what methodology can give us knowledge in economics and proceeds to throw up his arms on the debate, flatly declaring that:

“In the final analysis, the methodology of Austrian-economics-as-practiced, as opposed to the stated methodology of Austrian economics, is a synthesis of casual empiricism, in that the assumptions necessary for the reasoning are simply taken for granted, and logical deduction.”


Clearly Ludwig von Mises’ thousand-page treatise on economic theory and methodology skipped right over our author’s head when considering source material to verify that the “Austrian-economics-is-empiricism” story is true. The ideas that differentiate the Austrian school from others – from a time-preference theory of interest, to the catallactic function of profit and loss, to the Mises-Hayek business cycle theory, to name a few – are not products of casual empiricism, but rigorous deduction. While not all Austrians are Misesian purists, the Austrian school by and large holds and practices a substantially different mode of science. We are not empiricists with some mathematics pasted for a backbone. This critique would hold fine for the Neoclassicals – who do not attempt to justify their assumptions on cardinality, indifference, continuous functions, among other aberrations – but it looks absolutely ridiculous when charged against the Austrians who make economic methodology a prime concern of their study.

From One to Ten…

On a ‘quality of debate’ ranking, from 1 (worse) to 10 (best), I would rate the Selgin–Full Reservists debate a -1.  Given the ranking you might deem this impossible, but the discussion has really pushed the barriers south.  What’s worse is that the protagonists are economists that I have a lot of respect for (I consider both important and high-quality monetary theorists, and both have taught me a lot through their writing).

Prominent free banker George Selgin (1988, 1996) has what comes off as a knee-jerk reaction to a Ron Paul article published on the latter’s congressional website, which explicitly states a preference for full reserves over fractional reserves.  In part, Selgin’s response is the product of a misunderstanding: he believed that Paul’s website’s administrators were deleting dissenting comments (including his).  But, on the other hand, Selgin is somewhat tired of having to debate the same ol’ points over and over again (although, this is a pretty usual process in academic economics, as far as I can tell).  Unfortunately, this leads him to accuse full reservists of being part of a “moronic cult” supporting “clownish” ideas.

The insults leads to two posts on the Mises Institute’s blog: one by Daniel Sanchez and the other by Joseph Salerno.  Sanchez makes a valid point, that I agree with: ridiculing your opponents is not a proper debate tactic (although, Selgin admits [here also] that he is beyond debate).  Salerno’s post, on the other hand, is more difficult to agree with, and worse of all embodies something that Selgin has (and I have) claimed: the opposition doesn’t understand the theory very well (although, Salerno, admittedly, better than others).  To me, Salerno’s post is difficult to reconcile with his intellectual position, since he is usually someone with a strong affinity for the minutiae (see Salerno [2010]).  This is more surprising, because I consider myself a “centrist” — I reject monetary equilibrium theory (also, parts of Bagus and Howden [2011] offer essentially the same argument), accept the general model of Selgin’s and Larry White’s theory of free banking (ending up somewhere in between the Selgin/White model and Mises’, as described in Human Action [pp. 431–445]).

I’d like to think I am a sensible, open, and objective person (although not someone with an important opinion), with good intentions.  I hope the following comments on Salerno’s post are well taken.

I’m not sure if it’s out of genuine belief or to give a negative impression (given the environment) — I’d lean towards the former —, but throughout Salerno drives home the idea that Selgin’s “free banking” is delivered in a fundamentally Keynesian package.  This is, simply said, completely untrue.  Part of what Salerno is referring to is called “monetary (dis)equilibrium theory” (MET), which operates how he describes it: unmet changes in society’s demand (to hold) money can cause macroeconomic shocks.  I think it’s bullocks, because it implies that any change in the pattern of spending can cause shocks in output production, since entrepreneurs are apparently unable to cope with decreases in nominal (monetary) demand for their products.  However wrong it is, though, MET is not Keynesian (or New Keynesian, and the two schools are not the same).

Price rigidities and the theory of nominal monetary shocks predate both the New Keynesian school and John Maynard Keynes (and, let me emphasize, the New Keynesian school is not necessarily the successor of Keynes’ economics — MET plays no role in Keynes’ mature theory of industrial fluctuations).  This misunderstanding should have been put to rest by Yeager (1971) (re-published in Yeager [1997] and [2007]), but amazingly has not.  For a specialized contribution to the literature on the history of MET, I also refer the reader to Clark Warburton (1981) — note that Warburton actually suggests that a major death knell to MET is delivered by J.M. Keynes’ The General Theory (p. 294).  Any claim that Selgin is offering a fundamentally Keynesian monetary theory is pure poppycock — poor history of thought.

Next, Salerno takes Selgin to task for using the term that “Keynesians” (and just about everyone else, by the way) call aggregate demand.  It’s worth taking a step back and considering just what Selgin means when referring to terms like aggregate demand, which here is an aggregate nominal value.  I actually think the implied definition is fairly close to something that full reservists are in more-or-less agreement: a stable supply of money.  This isn’t necessarily the same thing as a stable price level — and, as Salerno points out, Selgin actually advocates in favor of a declining (secular) price level —, and definitely not an advocacy of price stability in the sense of individual prices (although, unfortunately, this is implied in MET, which Selgin is an advocate of).  Simply put, when Selgin writes things like maintaining ‘aggregate demand’ or ‘total income,’ what he is actually supporting is something in line with Misesian or Rothbardian monetary theory.

One can deduce from this discussion that Salerno’s claim that Selgin’s preferred banking system “would thus involve a massive expansion of the money supply” is equally as wrong as his history of economic thought.  Specifically, Salerno rightly describes the evolutionary process of the latter’s banking model as involving the reduction of gold reserves as monetary demand for gold drops (in favor of using money substitute).  The conclusion — inflation — doesn’t follow from this premise, though.  Imagine that 1oz. of gold is represented by a proxy money substitute (we’ll call it 1 Selgin dollar [GSD]), and the market originally contains 1,000oz.  The total stock of gold is gradually substituted with “inside money,” or bank notes, such that what circulates is 1,000 GSD equal in value to 1,000oz. of gold.  With demand for gold as money falling, banks find it profitable to export their reserves, keeping just enough to meet inter-bank clearings and demand for redemption by part of their clients.  Does this entail an increase in the quantity of money?  Clearly not, as the supply of circulating media remains exactly the same: 1,000 GSD (serving as a proxy for 1,000 oz. of gold).

Changes in the total stock of money substitute (much of which is not fiduciary media) occur through a totally separate process.  These bank notes represent liabilities (since the bank essentially owes the holder a defined quantity of outside money, which are assets), and banks will find it profitable (or pertinent, to avoid losses) to fluctuate the quantity of outstanding notes in accordance with the volume of returning liabilities (for redemption or inter-bank clearings).  This is the more controversial process, I think, since it actually involves changes in the stock of money.  I think that these changes would be minimal, especially since there is a degree of inflexibility of juggling liabilities against assets.  But, Selgin, et. al., hold that the consequences of these changes are not inflationary — they have no net impact on the general price level —, because the decision to hold money implies a period during which that quantity of money will no longer be circulated (in turn, suggesting that if it’s unmet the general price level would fall).  More controversially, this is seen as a temporary change in the rate of savings (withholding present consumption for future consumption).

I’m not here to defend the Selgin/White model of free banking.  I am an advocate of it, but let’s not derail the real purpose of this comment on the debate: unveiling important errors in the depiction of the theory.

One final substantive comment takes us to points 3–5.  Calling Selgin a “garden variety Keynesian,” Salerno goes on to attack the free banker for advocating monetary interventionism as a response to industrial downturns.  He erroneously suggests that Selgin supported QE1 (“and maybe QE2”).  As explained by Steven Horwitz (2011), QE1 does not entirelly fulfill the actual prescription: “the Fed did precisely the opposite of that by lending to distressed banks and then compounded the problem with the strategies of QE1 and QE2.”  Of course, after deriding Selgin, Salerno admits that to the former Fed intervention is a “second-best” solution.  Then why the irrelevant attack?  Although, note, Salerno finds nothing heterodox in the fact — that he correctly documents — that the free bankers’ support a zero-growth target, compared to a positive-growth target by Market Monetarists and Keynesians.

While perhaps it’s more subtle to accuse your opponent of being a Keynesian (and, if he were, so what? — it’s certainly a sign of dogma when a mere title is sufficient to discredit someone) than to call him or her a member of a cult, it’s no less inaccurate.  Neither does Selgin, or any free banker for that matter, consider “banker–entrepreneurs” “automatons” or “‘efficient’ in the neoclassical sense.’  In short, while Selgin may have been out of line in his insults, Salerno nevertheless proves him right in one thing: full reservists have a penchant for muddling the facts.

It Doesn’t Get Much Worse

[Josh] Barro claims his bookshelf is full of copies of libertarian (and I assume “Austrian” economic, because economics is not the same as political philosophy) literature, but his quick hit piece on Austrian economics doesn’t seem to show any deep reading of it.  On Twitter, he actually admits that he couldn’t get through Human Action, because “it actually makes no sense” — what I suspect really happened is that he couldn’t open his mind just enough to understand Mises’ rationalization, and instead opted to put the book down and pretend there was no rationalization (because, the book does make sense to me and a large multitude of other readers, even if some of them disagreed with the book).  He then goes on to claim that “most of [Hayek’s] stuff is normative,” ignoring Hayek’s work on capital and business cycle theory between the mid-1920s through to the mid-1940s and his work on monetary theory and policy of the 1970s (Barro does talk about Hayek’s work on “knowledge on society,” but I’d be genuinely surprised if he actually understood Hayek’s point).

In this recent opinion piece he makes some strong claims about Austrian economics that don’t really stand up to the literature.  What’s worse is that he repeats some old misunderstandings that non-Austrians like to use to ridicule what they haven’t really taken the time to understand.

For example, writes Barro,

One is that Austrian economists reject empirical analysis, and instead believe that you can reach conclusions about correct economic policies from a priori principles.

It would be more reasonable to claim that many (although, not all) Austrian economists approach economic science through an a priori methodology.  That is to the say, Mises and some modern followers of the school believe that economic theory must be arrived at deductively, and that we can make an internally consistent body of theory by starting from an (empirically) valid axiom.  Not all Austrian economists were as “axiomatic” as Mises, but I think it’s true that most Austrians approach the science deductively — contra Barro, on Twitter, this includes Hayek.

Does this imply a rejection of empiricism?  If you read Mises’ Human Action and Theory and History, the obvious answer is ‘no.’  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.  And, in fact, Austrian literature is full of historical case studies, applying Austrian economic theory to the real world data.  So, claiming that Austrians ignore empirical evidence is absolutely erroneous.

What’s worse is that Barro doesn’t even seem to be talking about this.  Instead, he is talking about policy conclusions!  How can one make a policy conclusion without knowing what the policy is supposed to address?  It is true that perhaps Mises, et. al., might have given policy conclusions for specific events, but to know whether some policy is relevant or not you need to know the real world data.  Mises, nor any other serious Austrian economists, would deny this — again, read the literature (not amateur internet Austrians who are just starting to read the original sources).

This isn’t a “we’re right, you’re wrong” type of post.  You don’t have to accept Mises’ view on things, but if you want to criticize ideas then you have to understand them.  The irony is that the “empirical evidence” is seemingly lost on Barro, since it is he who is unable to cope with the “data.”  That is, despite what Mises actually wrote, Barro continue to peddle misunderstandings and dishonest readings.  What made my day was Noah Smith’s decision to ask Barro on Mises over Twitter, when the latter admitted he couldn’t get through Mises’ work.  The blind leading the blind.


How does anybody take stuff like this seriously?

Hayek bought into the statist methodology analysis from the beginning.

— Gary North, “Let the Euro Die… Soon.”

The entire article is a work of art, but of the abstract kind, where while no amount of effort will help you make sense of it (and how North manages to mangle Huerta de Soto’s argument) you have to commend the creativity.

Some general points,

  • The reason why economists like Hayek and Huerta de Soto (and, according to the latter, Mises) prefer(red) a fixed exchange rate — what North calls a price control — is to limit a government’s ability to manipulate the supply of currency to essentially enact economy-wide price controls (which is, in a way, what price distortions are).  It is a “second best” reform in lieu of being able to enact what North wants: a free market flexible exchange rate monetary system;
  • North writes, “[Huerta d]e Soto sees the euro as the outworking of free market ideas.”  This is not true.  Huerta de Soto sees the positive properties of the Euro as an unintended consequence of the politics which led to the creation of the European monetary union;
  • Throughout the entire essay, North is incapable of accepting what Huerta de Soto seeks to do.  The latter is not attempting to set the Euro up as an absolutely preferred currency system.  Rather, he is showcasing its advantages over a flexible exchange rate system, which is susceptible to all the government manipulations that North so ably highlights.  Huerta de Soto’s essay is not one about political theory, but about the advantages of the Euro within a given political system
  • North fails to mention two crucial facts: (a) the currency is partially constrained by the competing interests of the various member nations and (b) leaving the Euro would lead to a long period of monetary chaos, restraining margin countries in their ability to simply reorganize their currency;
  • Nevertheless, I agree with a much more general argument: any economic-political system that allows government to intervene in the monetary system is susceptible to distortion.  But, this alone does not necessarily bring down Huerta de Soto’s argument.

Gary North charges $15 for subscriptions to his writing.  Hopefully that makes it unaffordable to most young minds.


Spanish economist Ángel Martín draws our attention to a blog post on  LRC Christopher Manion writes,

This morning our pastor, a frequent pilgrim to the Holy Land, recounted how hard it is to be a Christian there these days. Where the population of the Holy Land was 37% Christian just fifteen years ago, today it has fallen to one percent, he said.

Unlike Iraq, where hundreds of thousands of Christians have been driven out (and tens of thousands more killed), thanks to George W. Bush’s triumphant installation of Democracy there, the Christians in the Holy Land have been driven out primarily by their Jewish neighbors — with the support of their government, of course.

Ángel, skeptical of such a wild claim, shows us the evidence:

Unlike Ángel, who writes that he still reads LRC, I was never that impressed with most  of what is published on that website, and whatever faith I have had in it has been steadily falling with every passing day.

Edit:  Check the statistics yourself.  In fact, it seems as if the Christian population in Israel has been increasing, with a few years of decline and recuperation, since 1949 (no statistics for earlier dates, since Israel was founded in 1948).

Words in His Mouth

The Wall Street Journal publishes a short op-ed signed by sixteen scientists who oppose public policy directed towards curtailing the human cause for “global warming” (AGW). Although when it comes to publicly stating my opinion on AGW I try not to pass judgment, since I am not a scientist and I am not well read on the facts, I nevertheless file myself as an “AGW skeptic.”  AGW skeptics tend to love these letters, because they reaffirm what they already believe in.  Some parts of this particular letter, though, seem particularly bad.

The op-ed states,

In September, Nobel Prize-winning physicist Ivar Giaever, a supporter of President Obama in the last election, publicly resigned from the American Physical Society (APS) with a letter that begins: “I did not renew [my membership] because I cannot live with the [APS policy] statement: ‘The evidence is incontrovertible: Global warming is occurring. If no mitigating actions are taken, significant disruptions in the Earth’s physical and ecological systems, social systems, security and human health are likely to occur. We must reduce emissions of greenhouse gases beginning now.’ In the APS it is OK to discuss whether the mass of the proton changes over time and how a multi-universe behaves, but the evidence of global warming is incontrovertible?”

This is my interpretation: we can debate topics as esoteric as the mass of a proton, but not one as practical and important as AGW?

This is how those sixteen scientists interpreted Giaever,

In spite of a multidecade international campaign to enforce the message that increasing amounts of the “pollutant” carbon dioxide will destroy civilization, large numbers of scientists, many very prominent, share the opinions of Dr. Giaever. And the number of scientific “heretics” is growing with each passing year.

On a second reading, I realize that I may be jumping the gun, which is why I included the second sentence.  My interpretation of the above is to claim that Giaever is a “heretic” (the use of the word “and” makes it seem as if the second sentence feeds off the first, and therefore the first is directly related to the second). That is, Giaever is opposed to “the message” of AGW.

It may, indeed, be true that Giaever does not agree with AGW.  But, that is not what his letter of resignation to the APS reads (at least, the excerpted part).  Giaever is opposed to the lack of debate, not to the argument in favor of AGW.

These types of tactics seem a tad bid dishonest; and if dishonesty was not intended (which very well may be the case), then the tactic is unintentionally dirty.

Boudreaux’s Knowledge Problem

Don Boudreaux quotes from Lucien Albert Hahn’s book Economics of Illusion.  On this topic, I reviewed Hahn’s book Common Sense Economics, which was, in a sense, a follow-up to Economics of Illusion.  I also provide a brief history of Hahn’s intellectual journey and his contributions to economic science.  Boudreaux repeats something that many people who know of Hahn’s economics like to write, and which Hahn also said of himself: Hahn’s original beliefs closely mirrored those of Keynes, and his original treatise  preempted Keynes’ The General Theory.  I think that Keynes’ economics are probably fundamentally different to those of Hahn (at least, Hahn’s original paradigm).  The complexities of Keynes’ theories are far more advanced and intricate than Hahn’s, or at least substantially different.  What many people do not realize is that Keynes did not just sell a set of policy prescriptions; he caused a revolutionary shift in framework.

I have actually, to-date unsuccessfully, tried to come upon an English translation of Hahn’s original treatise, Volkswirtschaftliche Theorie des Bankkredits.  I was interested in actually comparing the ideas of Hahn and Keynes.  I have become skeptical of comparisons to Keynes, because I have come to realize that most people took away only a very superficial understanding of what Keynes was trying to get across.  I am not saying that Keynes was right; I believe the exact opposite.  I am saying that few people have taken away from Keynes the unified body of theory he presented in The General Theory, correct or incorrect.

I have gone on a bit of a tangent on L. Albert Hahn and John Maynard Keynes, and I originally did not intend to do so.  Instead, I wanted to comment on a minor point Boudreaux makes in his post that I think is wrong.  Boudreaux writes as follows,

In contrast, microeconomic maladjustments across both space and time – what Arnold Kling might call unsustainable patterns of specialization and trade – are not seen by anyone (save by careful economic theorists).

I admit that I am critiquing a tangential point, and probably reading too much into what Boudreaux writes.  Nevertheless, I think this is a good time to bring up the fact that no economist can “see” “unsustainable patterns of specialization and trade”, or malinvestment.  We can make a generalized assumption that malinvestment exists, or that conditions are present for the formation of malinvestment, but you cannot point out which exact investments are malinvestment and which are not.  To illustrate my point: you cannot call the entire housing sector beyond some theoretical point “malinvestment.”

Malinvestment is a microeconomic concept.  It has nothing to do with “patterns of specialization and trade.”  Hayek’s ideas here, as elucidated in Prices and Production, are quite clear.  Malinvestment is caused by a dearth of capital goods, and who exactly will be affected the most by this scarcity is a question of the unfolding pattern of coordination.  Thus, you cannot pinpoint where exactly malinvestment is occurring or predict where it will occur.  Those who are forced to liquidate are those who feel that the changing conditions of investment no longer favor their entrepreneurial adventure.  That is why economic recessions are so widespread; they affect all capital goods industries.

The over-investment in the housing sector was not a consequence only of credit expansion.  There was an over-concentration of malinvestment in the housing sector for other reasons, which are outlined in Jeffrey Friedman’s and Wladimir Kraus’ Engineering the Financial Crisis (reviewed by me here).  Capital minima regulations imposed upon banks by the Recourse Rule channeled investment into highly rated (AAA) mortgage-backed bonds, favoring housing loans over business loans.

Those who claim they can see malinvestment will be handicapped by the same “knowledge problem” as the person who claims he knows what is best for the economy.  On this basis, I challenge Boudreaux’s assertion that the careful economist can see malinvestment.  I agree with his overarching point, which is that an economist trained in the proper tradition might be able to recognize the opportunity for malinvestment; but, this claim is very different from the much stronger one that Boudraeux, perhaps unintentionally, put in his post.

All this being said, I agree with the conclusion he draws.  Keynesians and Monetarists mistake the fall in demand as the cause of the recession, where a fall in demand is a secondary consequence (Monetarists, more specifically, mistake a fall in the supply of money as the cause, where it is a secondary effect of malinvestment).