A Critique of Mises's Praxeology (Part 1?)

Economics Economics Questions
61

I’m curious as to what you think Mises means when he says profit isn’t a zero-sum game in a progressing economy. I showed in my previous post that, in the Misesian framework, this must either be because the workers are failed entrepreneurs or because they have a higher time preference. Which one do you think it is?

Or because their risk appetite isn’t consistent with the risks entrepreneurs must bear in suffering losses if their predictions don’t pan out. Who knows? It could be any combination of factors. I’d say it is a mixture of high TP. lack of understanding of even basic finance let alone markets (thank you, government education) and risk aversion.

He conceded that marginal utility could not be formulated without assuming a preexisting supply.

In which case it is a special case of a yet more general theory.

However, his formulation included only supply as magnitude and not as multitude. Marginal utility needs to be formulated with reference to multitude (i.e. there needs to be more than one of a particular type that can be ranked).

It suffices that a good serves a particular end. Its utility is its serviceability towards reaching that end. As it begins fulfilling increasingly subordinate ranks on a preference schedule, its utility continues to fall. If you mean that the theory of marginal utility requires a prior theory of valuation to get off the ground because it is concerned with discrepancies in values between goods (which are by definition homogeneous from the valuer’s perspective), then possibly it does - the subjective theory of value.

So if I take away one unit of Depends from its manufacturer, which use will give way first?

The one upon which they place the least value, which is something only they can determine.

Why would it necessarily? If I were building a house and already had 10 bricks, why would I be willing to pay less for an additional brick than if I had none at all?

That would only make sense if you were indifferent to which end you were fulfilling, i.e. any particular end would be as good as any other end being fulfilled and there was no mutual exclusivity of one end depriving another end’s fulfilment, i.e. the good is in abundance.

I mean sure if you took one brick away from me, the hole in my wall would be in the place of lowest rank. But why does this mean that I value that brick less than the others? Doesn’t it just mean that I value a brick in that hole less than one in the other potential holes?

Indeed, or however else the consumer chooses to regard the good. The good in question isn’t the brick but the brick fulfilling whatever capacity the consumer desires of it.

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Fool on the Hill wrote:

Personally, I can’t see myself using a modified Austrian framework in the future. I’d more likely use the language of other economic paradigms. But if you want to reformulate Austrian economics in light of my criticisms, I would be interested to see what you come up with. I understand that there are some Austrians who are probably closer to my viewpoints, Ludwig Lachmann for example. The same conclusions can often be reached from within different traditions.

But that is not my conception of the notion of “valuing X,” nor is it the conception of Mises. Probably, relatively few, if any, Austrians would consider value to be measurable or quantifiable. Thus, a significant portion of your critique, as I previously mentioned, is based on your insistence on interpreting conceptions that are intended in their universal sense, in their concrete or physical sense.

But right after you say that value is identical to striving, you say:

Thus, when A strives for X, this is identical to both the not having of a wanted X (the “low”supply), and a valuing of X (the “increase” in value).

I had assumed that the words “supply” and “increase” referred to quantity. To say that something has increased or is greater than something else is itself a form of measurement. Wikipedia says this about quantity: “Quantity is a property that can exist as a magnitude or multitude. Quantities can be compared in terms of “more”, “less” or “equal”, or by assigning a numerical value in terms of a unit of measurement.”

Thus, if one wanted to construct a universal, non-particular (in your terms, non-empirical) conception of marginal utility—a theory that asserts a necessary relationship between “supply” and “value,”—one could approach it in this way.

But I don’t see where the “marginal” aspect comes in. Where are the units for which one can be marginal for another? Once you include these units, these units are by definition particulars. So there is no way to formulate marginal utility without reference to particulars.

Fool on the Hill:

I wouldn’t reformulate Austrian Economics in light of your criticisms since your criticisms are saying something I already knew: that Mises’s theory is not perfect, and that the entirety of Human Action does not constitute a monolithic “praxeology.” If I were interested in economics (market study) particularly, I would reformulate Austrian Economics in terms of the categories of action. Your critique would be of little use for this since the categories of action are not clearly expounded or clearly discernible in your critique.

“Low supply” and “increase in value” are placed in quotations and parentheses to separate the formal aspect of the proposition from the application of the formal proposition to “empirical” or “complex” experience. In other words, the formal law (the part outside the parentheses) explains why, in complex experience, we intuit a relationship between a low supply and an increase in value (the part inside the parentheses). This is consistent with Mengerian and Misesian formal/exact science which holds that complex experience does not present itself to us as exact, but it is “in respect to the approaches to cognition by which we attain to them simply bear within themselves the guarantee of absoluteness.” In the above formulation, the formal law is the part outside the parentheses; our experience of complex, “empirical reality” is the part inside the parentheses. Thus, your critique doesn’t apply.

But I don’t see where the “marginal” aspect comes in. Where are the units for which one can be marginal for another? Once you include these units, these units are by definition particulars. So there is no way to formulate marginal utility without reference to particulars.

People mistakenly believe that what is essential about the law of marginal utility is the concept of marginality, which requires, or seems to require, at least one of the following: 1) that the actor possess a number of identical items, 2) an intertemporal comparison of value.

The key is the recognition that the essence of the law of marginal utility is the statement of an exact or formal or praxeological relationship between supply and value in individual action. Marginalism or marginality can then be seen as the application of this purely formal relationship between supply and value (as suggested above) to our complex experience consisting of several actions. Historical formulations of the law of marginal utility, I will contend, are based partly on objective conceptions that are incompatible with praxeology (the formal analysis of the categories of human action).

When/if the law of marginal utility is re-conceived as suggested above, there is no “marginalism” in this new formulation. Marginalism is then moved over to the empirical or objective or thymological side of the treatment.

Just to be clear, the re-conceptions of scarcity (2006)and marginal utility (2008) in terms of the universal categories of action predates your present critique. What necessitates their reconception is the desire to render praxeology as accurate and consistent as possible. Your critique, though a confirmation of the need to improve praxeological conceptions, is not the cause or reason for improving them.

Fool on the Hill wrote:

Just like how he does for the concept of exchange, Mises also purports to derive the concept of profit from the category of human action:

Profit, in a broader sense, is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it, in other words, yield minus costs. To make profit is invariably the aim sought by any action. If an action fails to attain the ends sought, yield either does not exceed costs or lags behind costs. In the latter case the outcome means a loss, a decrease in satisfaction.

Here is how one can read this passage from Mises on the assumption that one agrees that there are universal categories of action:

Profit = the gain derived from action = the increase in satisfaction = the decrease in uneasiness = the difference between higher value and lower value = yield minus costs.

In other words, if we want, we can read Mises as, to a large extent, elaborating a chain of “tautological transformations.”

The concept of profit is derived from the category of action because “satisfaction” (happiness, pleasure, etc.----each meant formally, not contentually) is a category of action, and profit is either: another word for this category, or, a concrete instance of it, in which case it becomes a thymological notion.

Mises is reasonable and understandable in speaking of “deriving the concept of profit from the category of action.”

If one wants to argue that Mises made mistakes or missteps in his theoretical application of the categories of action to a market setting (the interaction of a number of people), then one agrees with Hayek in 1937:

“…my 1937 article on the economics of knowledge [was] my attempt to persuade Mises himself that when he asserted that the market theory was a priori, he was wrong; that what was a priori was only the logic of individual action, but the moment that you passed from this to the interaction of many people, you entered into the empirical field.” (Hayek on Hayek, p. 72)

Fool on the Hill wrote:

“Thus, no proof of the beneficial function of the entrepreneur can be derived praxeologically. If a case is to be made for the entrepreneur, it has to be made on “empirical” or “historical” grounds.”

This is largely correct. But it requires neither a lengthy explanation nor an opponent of praxeology to see why.

If the notion of the entrepreneur is conceived to consist only of the categories of action, then the entrepreneur is a universal actor just like any actor, and there is no separating him theoretically from any other actor.

If the notion of the entrepreneur contains concrete characteristics that differentiate him from the universal actor, precisely those concrete characteristics will prevent or destroy formal exactness in the affected propositions relating phenomenon A with phenomenon B.

In short, to the extent the entrepreneur is an ideal type, as opposed to an actor consisting of only the universal categories of action, concrete differentia replace universal categories, and formal exactness becomes unattainable.

This may help explain why those Austrians who make the concept of the entrepreneur the centerpiece of their theory tend not to emphasize the notions of a priori propositions, necessary truths, or exact laws. The notion of the entrepreneur is likely a thymological construct.

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David, thanks for your thoughtful post. I’m not sure what I should respond to. I think I agree with a lot of what you say, and where I don’t, you probably know where I stand. I admire your desire to develop praxeology in new directions, such as conflict theory. I hope you can make some contributions in this area. It should expand your understanding if nothing else.

If one looks at it in this way, we see that in fact, the bear example fits praxeological abstract concept of action perfectly. I don’t curl up in a ball, and think that the attack by the bear makes me happier than I was before the bear attacked me. I curl up in a ball, because I expect to prefer the experience of a bear attack while I’m in a ball, to my experience of a bear attack when I’m not in a ball. Both realities that impel any action, the one which a man’s action seeks to avoid and the one man’s action seeks to attain, are the sources of uneasiness/happiness that impels action. Meaning man’s actions are always into an unrealized future.

Yes, this is what I was trying to say.

So, in asking these questions as you have about Mises you may disconnect from his ideas if you so choose. But do so because they actually ARE wrong when applied to reality. Historically, the attacks on Praxeology have not been on the internal logic of the system. Or on the applicability of the system to reality. The only way it’s been attacked has been to attack logic itself as flawed and biased.

No, I am not trying to attack logic itself. That would indeed be silly. I am trying to critique Mises’s praxeology in the same why a math teacher might critique my math paper. I think he lays out some good concepts but doesn’t hold to them consistently. I hope to lay out a labor theory of value at some point that will make sense from a praxeological perspective. One might call it an action theory of value.

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Before I forget, I had a collection of Mises quotes on the relationship of action to time that I wanted to post. The first set of quotes I more or less agree with. I think these quotes express the correct view of action as a selection of possible states over the same period of time (intratemporal).

Action is always directed toward the future; it is essentially and necessarily always a planning and acting for a better future. Its aim is always to render future conditions more satisfactory than they would be without the interference of action. The uneasiness that impels a man to act is caused by a dissatisfaction with expected future conditions as they would probably develop if nothing were done to alter them.

Action does not measure utility or value; it chooses between alternatives.

What counts for praxeology is only the fact that acting man chooses between alternatives.

As has been pointed out, every action aims at the attainment of a state of affairs that suits the actor better than the state that would prevail in the absence of this action.

The second set of quotes highlight what I think is Mises mistake–that action is about the improving of one period of time over the previous period of time (intertemporal). This is the mistake of seeing action as profit. I see these statements as contradicting the first set:

Man becomes conscious of time when he plans to convert a less satisfactory present state into a more satisfactory future state.

The urge toward action, i.e., improvement of the conditions of life, is inborn in man.

What a man does is always [!] aimed at an improvement of his own state of satisfaction.

Action is change, and change is in the temporal sequence. But in the evenly rotating economy change and succession of events are eliminated.

[In addition to the confusing statement that action is change, it’s not clear to me why there wouldn’t be a succession of events in the evenly rotating economy. Doesn’t rotation imply a succession of events?]

In addition, I thought this quote from John Dewey on the relationship of profit to human action might be relavent:

We now return to a consideration of the utilitarian theory according to which deliberation consists in calculation of courses of action on the basis of the profit and loss to which they lead. The contrast of this notion with fact is obvious. The office of deliberation is not to supply an inducement to act by figuring out where the most advantage is to be procured. It is to resolve entanglements in existing activity, restore continuity, recover harmony, utilize loose impulse and redirect habit. To this end observation of present conditions, recollection of previous situations are devoted. Deliberation has its beginning in troubled activity and its conclusion in choice of a course of action which straightens it out. It no more resembles the casting-up of accounts of profit and loss, pleasures and pains, than an actor engaged in drama resembles a clerk recording debit and credit items in his ledger. (Human Nature and Conduct, 199)

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Fool on the Hill wrote:

The second set of quotes highlight what I think is Mises mistake–that action is about the improving of one period of time over the previous period of time (intertemporal). This is the mistake of seeing action as profit. I see these statements as contradicting the first set:

Man becomes conscious of time when he plans to convert a less satisfactory present state into a more satisfactory future state.

The urge toward action, i.e., improvement of the conditions of life, is inborn in man.

What a man does is always [!] aimed at an improvement of his own state of satisfaction.

Action is change, and change is in the temporal sequence. But in the evenly rotating economy change and succession of events are eliminated.

[In addition to the confusing statement that action is change, it’s not clear to me why there wouldn’t be a succession of events in the evenly rotating economy. Doesn’t rotation imply a succession of events?]

In addition, I thought this quote from John Dewey on the relationship of profit to human action might be relavent:

We now return to a consideration of the utilitarian theory according to which deliberation consists in calculation of courses of action on the basis of the profit and loss to which they lead. The contrast of this notion with fact is obvious. The office of deliberation is not to supply an inducement to act by figuring out where the most advantage is to be procured. It is to resolve entanglements in existing activity, restore continuity, recover harmony, utilize loose impulse and redirect habit. To this end observation of present conditions, recollection of previous situations are devoted. Deliberation has its beginning in troubled activity and its conclusion in choice of a course of action which straightens it out. It no more resembles the casting-up of accounts of profit and loss, pleasures and pains, than an actor engaged in drama resembles a clerk recording debit and credit items in his ledger. (Human Nature and Conduct, 199).

“Man becomes conscious of time when he plans to convert a less satisfactory present state into a more satisfactory future state.”

In other words, we may derive a praxeological, as opposed to a natural-scientific, conception of time from the concept of action. The attempt to substitute one state of affairs with another (the initial premise or supposition of praxeology) implies the notion of time.

“The urge toward action, i.e., improvement of the conditions of life, is inborn in man.”

Ontological or biological propositions are problematic in the context of praxeology. But they are not necessary for praxeology.

“What a man does is always [!] aimed at an improvement of his own state of satisfaction.”

Here, we’ll take the easy explanation. “Doing” (derivation of “does”) refers to an action. The statement is true by defintion.

“Action is change, and change is in the temporal sequence. But in the evenly rotating economy change and succession of events are eliminated.”

Agreed. Confusing. Let’s substitute: “Action aims at change.”

“We now return to a consideration of the utilitarian theory according to which deliberation consists in calculation of courses of action on the basis of the profit and loss to which they lead.”

I thought there was previous agreement that deliberation was itself an action. What Dewey is referring to then, is the content of a particular action, and so it is not praxeology.

If there was not previous agreement that deliberation is itself an action, let’s reiterate that deliberation (the attempt to reach a conclusion (end) by means of thinking, reasoning, etc.) is itself an action.

Also, compare Dewey:

“Deliberation has its beginning in troubled activity…”

With Mises:

“The incentive that impels a man to act is always some uneasiness.”

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Jon: In which case it is a special case of a yet more general theory.

But I wasn’t contesting the more general theory.

It suffices that a good serves a particular end. Its utility is its serviceability towards reaching that end. As it begins fulfilling increasingly subordinate ranks on a preference schedule, its utility continues to fall. If you mean that the theory of marginal utility requires a prior theory of valuation to get off the ground because it is concerned with discrepancies in values between goods (which are by definition homogeneous from the valuer’s perspective), then possibly it does - the subjective theory of value.

The one upon which they place the least value, which is something only they can determine.

But how does it have value for them? Are you saying that they would use all of the Depends if they didn’t sell them?

That would only make sense if you were indifferent to which end you were fulfilling, i.e. any particular end would be as good as any other end being fulfilled and there was no mutual exclusivity of one end depriving another end’s fulfilment, i.e. the good is in abundance.

I’m not sure what you’re saying here. Are you saying that I would be less willing to pay as much for the final brick or not? I don’t see how we get from the fact that I prefer one of two uses when I have a single unit of a good to that unit being more valuable than a second unit of the same good. That seems like a logical leap to me.

Let’s say that there is one concert on Friday night and another on Saturday night, and I really want to go to both. If I only have enough money for one ticket, I’ll go on Friday. Why do I prefer Friday? Because a friend of mine invited me to a party on Saturday. So I figure, if I can’t go both days, I’ll go on the day that allows me to have the most fun on the other day. But if I have enough money for both, I’ll go both days. Given this, how can we conclude that the Saturday concert is less valuable than the Friday concert? We can assume that I enjoy both concerts equally while also allowing me a clear reason to prefer one over the other. Indeed, it’s quite possible that I would prefer the lineup at the concert on Saturday to the one on Friday, yet still choose to go to the concert on Friday because I don’t want to spend one of the nights alone. Thus, this choice tells us nothing about the relative utilities of the two units. You should be able to see how this fits in with my overall line of critique against Mises. It’s just another example of his view that action demonstrates some sort of intertemporal selection.

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Adam: People mistakenly believe that what is essential about the law of marginal utility is the concept of marginality, which requires, or seems to require, at least one of the following: 1) that the actor possess a number of identical items, 2) an intertemporal comparison of value.

The key is the recognition that the essence of the law of marginal utility is the statement of an exact or formal or praxeological relationship between supply and value in individual action. Marginalism or marginality can then be seen as the application of this purely formal relationship between supply and value (as suggested above) to our complex experience consisting of several actions. Historical formulations of the law of marginal utility, I will contend, are based partly on objective conceptions that are incompatible with praxeology (the formal analysis of the categories of human action).

You mean marginal utility doesn’t have anything to do with…marginal utility? How exactly do you apply this pure formal relationship to actual phenomena? This is like saying the essence of astrology is a purely formal relationship between stars and individual action. Sure you can formulate such a conception in your mind. Can you use it as a science to explain and predict reality? No. The same with marginal utility. It’s just a pseudo science.

The concept of profit is derived from the category of action because “satisfaction” (happiness, pleasure, etc.----each meant formally, not contentually) is a category of action, and profit is either: another word for this category, or, a concrete instance of it, in which case it becomes a thymological notion.

It is certainly not derived from action in anyway that preserves its normal meaning (which is what Mises switches to when he talks about economics).

In other words, we may derive a praxeological, as opposed to a natural-scientific, conception of time from the concept of action. The attempt to substitute one state of affairs with another (the initial premise or supposition of praxeology) implies the notion of time.

Are there any words that praxeologists don’t redefine? Why not invent new words so people don’t mistakenly think that you’re talking about reality?

Here, we’ll take the easy explanation. “Doing” (derivation of “does”) refers to an action. The statement is true by defintion.

No it’s not, because improvement means to get better from one period of time to the next.

I thought there was previous agreement that deliberation was itself an action. What Dewey is referring to then, is the content of a particular action, and so it is not praxeology.

Profit, in the normal sense, usually does refer to the content of action. Certainly it does in the economic sense, even Mises’s entrepreneurial profit.

“Deliberation has its beginning in troubled activity…”

With Mises:

“The incentive that impels a man to act is always some uneasiness.”

But deliberation is only one form of action. Dewey already assumes that action is taking place before deliberation occurs. Uneasiness merely transforms the previous form of action into deliberation. The Mises quote on the other hand seems to suggest that there is a point when man does not act, and that uneasiness is what causes man to act in the first place.

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Whoa… “Can you use it as a science to explain and predict reality?” You can’t say no, unless you know whether or not there is predictive value. Any theory is not simply junk, if it successfully predicts and explains real phenomena. The only question to be resolved is do we have a better explanation that opens up more phenomena to understanding. Let’s get silly here so I can point out the breadth of this comment.

If someone tells me that the sun in the sky, is the chariot of Apollo being pulled by 2 flaming (on fire, not gay) horses, and that at night he runs through the underworld, then I look at the phenomena and attempt to validate that it successfully matches the phenomena. Whups, it does. The only problem with that theory is that it doesn’t add to my understanding. Meaning, that the only things it explains are phenomena that I already knew. It doesn’t explain anything I didn’t know.

If we look at the sun as we understand it today, we get lots of knew understanding that we did not have previously. For example, the aurora borealis. Add in gravitational pull, and suddenly you understand orbits, and planets, etc. You can understand things you did not previously.

So, come back to marginal utility as described by Mises. Are you sure, that it’s not applicable and doesn’t in fact explain phenomena that were previously unexplained. My problem with the attacks on marginal utility is that they’re motivated by seeing profit as exploitation, instead of leaving any normative evaluation of the phenomena out of the analysis, and simply asking why it happens. We know it’s because he can, but explain how the “can” part of profit arises out of the nature of man. Praxeology does that with value-free analysis.

One can ask whether or not it “should” be that way all you want, but accurately analyze the consequences of attempting to remove it. The result must necessarily be a reduction in the accumulation of capital, and therefore a necessary reduction of production, and wealth, and the living standard for mankind, etc., etc. Now, if removing the instances of what Marx deems as exploitation from the world is the ultimate goal, forsaking wealth, living standards, etc. Then so be it, but embrace the other consequences too, and simply forsake wealth and higher living standards, longer lives, etc.

My point is two-fold, don’t throw out a thoery simply because it seems silly. Check it’s accuracy first. Secondly, leave your normative evaluation out. Bring it back afterwards when examining the consequences of the valid theory. Discard the theory simply based on it’s inaccuracy.

Marginal Utility theory does explain profit. The problem from the Marxist point of view is that they don’t like the implications of that truth.

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Lost all formatting in that one, wtf…

70

But how does it have value for them? Are you saying that they would use all of the Depends if they didn’t sell them?

It has value insofar as it is a means to serve whatever ends they might have. That’s it. There’s nothing more to it. If you want to go and brain scan people to find out why they prefer things, go ahead.

Are you saying that I would be less willing to pay as much for the final brick or not?

No, I am saying how much you are willing to pay for it will depend on how utile it is to you. For it to be of equal value to another brick, the end it fulfills would have to be of equal preferrability to you. The only situation in which that would obtain would be where you needed a definite quantity of goods to bring about a desired end, where any one of them being missing will fail to bring about the sought after end, and therefore where they only acquire value (to you, not in general) as a set.

We can assume that I enjoy both concerts equally

Marginal utility has little to do with “enjoyment” per se. It concerns fulfilment of more urgent preferences as against less urgent ones, in a purely formal, contentless manner. If you are constrained by a budget and opt for one fulfilment over another, you demonstrate preference for it. Since it isn’t concerned with la-la-land but action in time and space under conditions of scarcity, it examines how actors value means for the attainment of ends of varying urgencies, and therefore is only concerned with satisfaction in this sense, not in the sense of something being “most enjoyable”. It isn’t concerned with enjoyment in some abstract sense or indeed preference divorced from action i.e. mere wishing/dreaming.

Thus, this choice tells us nothing about the relative utilities of the two units.

In what sense does it not? You seem to be proceeding from a conflation of utiltiy with “enjoyment”. Why? Again, you are not talking about preferences but “enjoyment” in your example.

You should be able to see how this fits in with my overall line of critique against Mises. It’s just another example of his view that action demonstrates some sort of intertemporal selection.

Gee, what a nutty crank he is.

You mean marginal utility doesn’t have anything to do with…marginal utility? How exactly do you apply this pure formal relationship to actual phenomena? This is like saying the essence of astrology is a purely formal relationship between stars and individual action. Sure you can formulate such a conception in your mind. Can you use it as a science to explain and predict reality? No. The same with marginal utility. It’s just a pseudo science.

Calm down, this isn’t Marxism.

It can certainly explain reality as a conceptual analysis of valuation. As for “prediction”, why should this be its goal? Because “science” you will say is meant to “predict”? In what sense are statements regarding how individuals act to satisfy their ends with available scarce resources comparable to the stars, except insofar as the stars themselves can be harnessed as means towards ends? As actors we understand the concepts of striving to satisfy ends with means that are in scarce supply, so we understand both the end and that which can bring it about. Marginal utility theory explains how that relation - of means and an agent’s ends - obtains from the point of view of the subject, and does not purport to explain how movements in the heavens can influence individuals’ luck. Now Mises’s formulation of it may not be perfect yet I have not seen anything better to supplant it, and certainly not from you or Marx.

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David: So, come back to marginal utility as described by Mises. Are you sure, that it’s not applicable and doesn’t in fact explain phenomena that were previously unexplained. My problem with the attacks on marginal utility is that they’re motivated by seeing profit as exploitation, instead of leaving any normative evaluation of the phenomena out of the analysis, and simply asking why it happens. We know it’s because he can, but explain how the “can” part of profit arises out of the nature of man. Praxeology does that with value-free analysis.

I actually don’t think Marx uses the term “exploitation” as a moral condemnation but as a descriptive word. He also says that farmers “exploit” the land. I don’t think he wants to end farming. But personally, I think the term is loaded, and I don’t think I’ve ever used it on this site. As far as I can tell, my critique in this thread has been what you call a value-free analysis.

The result must necessarily be a reduction in the accumulation of capital, and therefore a necessary reduction of production, and wealth, and the living standard for mankind, etc., etc.

The reduction in the accumulation of capital does not necessarily mean a reduction of production and wealth. There are more ways to produce wealth than through capital. (Unless if by capital you mean means of production. In that case, the elimination of profits does not necessarily mean a reduction in capital accumulation.)

My point is two-fold, don’t throw out a thoery simply because it seems silly. Check it’s accuracy first. Secondly, leave your normative evaluation out. Bring it back afterwards when examining the consequences of the valid theory. Discard the theory simply based on it’s inaccuracy.

Where have I brought in a normative evaluation? Marginal utility simply does not make sense. The labor theory of value has better praxeological foundations.

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Jon: It has value insofar as it is a means to serve whatever ends they might have. That’s it. There’s nothing more to it. If you want to go and brain scan people to find out why they prefer things, go ahead.

So the manufacturer throwing away the Depends if they don’t sell constitutes a means of getting rid of them, and thus they have value? What doesn’t have value then? It is hard for me to believe that any subjective use-value that the Depends have for the manufacturer could somehow contribute to the formation of its price. In order for the assumptions of marginal utility to hold, the act of throwing away the Depends must have more utility than the act of giving them away.

No, I am saying how much you are willing to pay for it will depend on how utile it is to you. For it to be of equal value to another brick, the end it fulfills would have to be of equal preferrability to you. The only situation in which that would obtain would be where you needed a definite quantity of goods to bring about a desired end, where any one of them being missing will fail to bring about the sought after end, and therefore where they only acquire value (to you, not in general) as a set.

The bricks still have value if one is missing. I would rather have a wall with a hole in it than no wall at all. But I really do not want a hole in the wall. I don’t see how one can prefer ends in this way. I can only fulfill the marginal end if I have already fulfilled the other ends. I can’t choose the final brick over the penultimate brick. What I do choose the final brick over is whatever I give up for the final brick.

Marginal utility has little to do with “enjoyment” per se. It concerns fulfilment of more urgent preferences as against less urgent ones, in a purely formal, contentless manner.

What does “urgent” mean? Does this have something to do with time preference?

If you are constrained by a budget and opt for one fulfilment over another, you demonstrate preference for it.

I don’t see how this has anything to do with marginal utility. Because I choose to buy a brick instead of a flower pot doesn’t mean the value of the brick is based on how many other bricks I have.

It isn’t concerned with enjoyment in some abstract sense or indeed preference divorced from action i.e. mere wishing/dreaming.

Yet it considers the relationship between the final and the penultimate brick to be a relation of “preference” even though one can never demonstrate such a preference in action.

In what sense does it not? You seem to be proceeding from a conflation of utiltiy with “enjoyment”. Why? Again, you are not talking about preferences but “enjoyment” in your example.

Because the decision isn’t made based on the things themselves but on what substitutes for them. It is not because there are more of them that one is valued less than the other. There is no reason to suppose that I would be willing to pay less for the second concert.

It can certainly explain reality as a conceptual analysis of valuation.

Not when it ignores the fact the goods a producer produces have no or little utility for the producer.

As for “prediction”, why should this be its goal?

David, for one, has said that one of Austrianisms chief advantages over Marxism is in its ability to predict.

Now Mises’s formulation of it may not be perfect yet I have not seen anything better to supplant it, and certainly not from you or Marx.

Out of curiosity, what have you read by Marx?

73

Time Preference

Mises’s chapter on “Action in the Passing of Time” is quite possibly the most confused chapter in the entire book. Why is it so confused? First off, it’s flat out contradictory. For instance, Mises says: “[Acting man’s] only concern is to make the best use of the means available today for the best possible removal of future uneasiness.” But just a little later he asserts something completely different: “The uneasiness which acting man wants to remove as far as possible is always present uneasiness.” Which is it? Does acting man only want to remove future uneasiness or does he always want to remove present uneasiness? Are the present and the future the same thing for Mises? That might explain why his analysis is so static, so confused about the nature of time.

But that’s just the start of the problems. Just try to entangle this bit:

He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

What does this even mean? If someone who consumes something reveals a preference for satisfaction in a nearer period of the future, then someone who does not consume something must then reveal a preference for satisfaction in a later period of the future. But someone who prefers satisfaction in a later period will never consume. Does this mean then that since I am not eating breakfast right now that I will never eat breakfast? Where does Mises get this idea that people always want to consume sooner and that later means never?

Then Mises notes an apparent exception to his time preference rule:

There are enjoyments which cannot be had at the same time. A man cannot on the same evening attend performances of Carmen and of Hamlet. In buying a ticket he must choose between the two performances. If tickets to both theaters for the same evening are presented to him as a gift, he must likewise choose. He may think with regard to the ticket which he refuses: “I don’t care for it just now,” or “If only it had been later.” However, this does not mean that he prefers future goods to present goods. He does not have to choose between future goods and present goods. He must choose between two enjoyments both of which he cannot have together. This is the dilemma in every instance of choosing. In the present state of his affairs he may prefer Hamlet to Carmen. The different conditions of a later date may possibly result in another decision [emphasis mine].

It seems to me that this exception would apply at all times (and which the bold sentence seems to admit). One can never do everything at once. We must always choose between various forms of satisfaction. One might think Mises is differentiating between satisfaction in general and dissatisfaction (which would mean all he is saying is that people prefer satisfaction to dissatisfaction). But this, he doesn’t seem to be doing either. For he says that the act of provisioning (and with it I assume production and saving) is itself satisfying:

If action is primarily directed toward the improvement of other people’s conditions and is therefore commonly called altruistic, the uneasiness the actor wants to remove is his own present dissatisfaction with the expected state of other people’s affairs in various periods of the future. In taking care of other people he aims at alleviating his own dissatisfaction.

It is therefore not surprising that acting man often is intent upon prolonging the period of provision beyond the expected duration of his own life.

Therefore, all action is satisfying and one is never choosing between present and future satisfaction. One is always choosing between counterfactuals of the same period of time. The correctness of this choice brings satisfaction.

What then is an example of this supposed preference of nearer satisfaction? Mises provides only one example, one that once again clashes with his other principles:

Those contesting the universal validity of time preference fail to explain why a man does not always invest a sum of 100 dollars available today, although these 100 dollars would increase to 104 dollars within a year’s time. It is obvious that this man in consuming this sum today is determined by a judgment of value which values 100 present dollars higher than 104 dollars available a year later. But even in case he chooses to invest these 100 dollars, the meaning is not that he prefers satisfaction in a later period to that of today. It means that he values 100 dollars today less than 104 dollars a year later. Every penny spent today is, precisely under the conditions of a capitalist economy in which institutions make it possible to invest even the smallest sums, a proof of the higher valuation of present satisfaction as compared with later satisfaction.

First, he seems to forget that he doesn’t consider having money (or even spending it) to be a form of consumption—that is, a direct means of satisfaction. The fact that I don’t invest $100 doesn’t necessarily say anything about my desire for present consumption. Second, there is no reason to presume that investing my money is the best way to maximize my satisfaction in a year’s time. Perhaps spending the money at a bar to develop friendships, or going out on a date with a potential romantic partner will lead to greater satisfaction in a year’s time.

A more concrete example is found in Daniel James Sanchez’s article “Of Time and Marshmallows.” Sanchez mentions an article in the New Yorker about a study conducted with children. The children are given a choice between having one marshmallow now or having two marshmallows after waiting an indefinite time (about 15 minutes it turns out) for the experimenter to return. Most children apparently can’t resist and eat the marshmallow within the first 3 minutes. Sanchez concludes that this is an example of how we prefer present satisfaction over future satisfaction. The problem with this conclusion is that it views time within a vacuum—as if we can simply add time to something without changing what is being chosen. The children are not merely choosing between one marshmallow now and two later. They’re choosing between one marshmallow or two marshmallows plus waiting 15 minutes (and for all they know it could be longer) by themselves in a boring room. They might be choosing between sitting in a room and playing outside. One might think a better way to conduct the experiment would be to measure the preference of spending mundane time before a supposed satisfaction to spending the mundane time after the satisfaction. One could, for example, allow people the choice of either waiting in line for an hour before they go on a roller coaster to waiting in line for an hour after they get off of the roller coaster. But even this can’t measure what it claims to because any period of waiting occurs between supposed periods of satisfaction, and thus the contrary proposition that people always prefer future satisfaction would fit the data just as well.

The fact is, we can only do one thing at a time, and at all times, we must be doing something. Therefore, anytime we choose to do something now, we are also choosing to defer something we could be doing to a later time. This is not to say that time preference can’t take the form of a pathology. Procrastination is certainly a real phenomenon, but no one procrastinates 100% of the time.

Sanchez extends the marshmallow example into a hypothetical scenario involving interpersonal exchange:

Time preference plays just as fundamental a role in interpersonal exchanges as it does in “autistic” exchanges. Let us imagine Craig and Carolyn as parties in a potential exchange. Craig has no marshmallows, but is expecting to get two from his mother in 15 minutes. Carolyn has one marshmallow. They both consider the following potential exchange: Craig “borrows” Carolyn’s marshmallow to eat now in exchange for “paying her back” with the two marshmallows he’ll get in 15 minutes. This potential exchange is precisely analogous to the “autistic” exchange of the Stanford experiment, except for all the additional considerations that are wrapped up in relations with others (wanting to befriend/please/not please/etc., the other person).

This is a good illustration of how Austrian economists err in equivocating between autistic and interpersonal exchange. The error here is that autistic exchange is always about using while interpersonal exchange is always about owning. This leads to two conceptions of consumption: one in which an object is used up and another in which an object is removed from circulation and from producing anything which can be circulated. Owning in fact does not refer to the relationship between a person and an object, but between a person and another person. A person who owns an object has the power to forbid another from using it. When Sanchez moves from the concept of autistic exchange to that of interpersonal exchange, he also moves from the concept of using to the concept of owning but does not acknowledge it. Craig and Carolyn are not in fact negotiating between when each will eat (use) the marshmallows but when each will own them. (Also note how the goods aren’t produced by either of the participants, nor do they give up anything they produced for them. They simply have them coming as a gift in the future—just like in the prison economy.)

To make this point clearer, let’s first up the count of marshmallows. Carolyn still only has 1 marshmallow but Craig has 20 marshmallows coming. However, they aren’t coming until 5 hours. Assuming the same interest rate compounded every 15 minutes, Craig now has to give 20 “future” marshmallows for Carolyn’s present marshmallow. Now let’s reverse the number. Carolyn has 20 present marshmallows and Craig has no marshmallows but 1 coming in 5 hours. In order for Carolyn to exchange the 20 present marshmallows for Craig’s 1 future marshmallow, a negative interest rate must be in play. From the perspective of owning, this is clearly absurd and unrealistic. “All else being equal,” Mises would say, one would prefer to have more now than less later. Thus, Mises concludes that one prefers the satisfaction of wants in the present to those in the future. But wait, when he refers to the satisfaction of wants, doesn’t he mean use and not ownership? What is the use of a marshmallow? Surely it is to eat it. So let’s reconfigure the scenario.

There are 20 marshmallows which Carolyn must eat now unless she negotiates with Craig. There is 1 marshmallow which Craig must eat in 5 hours unless he negotiates with Carolyn. Now the tendency towards a positive interest rate disappears entirely. While most would prefer to own 20 marshmallows as opposed to 1, most would rather eat 1 at a given moment than eat 20. Even if we change it to something more agreeable, like French fries, it is still no more likely that one will prefer 20 French fries now to 1 in 5 hours than 1 French fry now to 20 in 5 hours. Ownership is the power to determine use and not use itself. In the original scenario, Carolyn could eat 1 marshmallow now or eat that same marshmallow after 15 minutes. Craig could only eat his two marshmallows after 15 minutes. Thus, the reason the interest rate is always positive is not that we always prefer to use something now as opposed to later, but because we prefer to have the ability to use something now or later to just the ability to use something later. This becomes even clearer when we talk about money, which is of course what we are actually trying to explain here. Money is one of the only things—perhaps the only thing—that is completely imperishable. One dollar received now and saved “under the mattress” buys exactly the same things in 5 years that a dollar received after those same 5 years does. Though perhaps incomplete itself, the Keynesian concept of liquidity preference captures this reality much better than the Austrian concept of pure time preference. The other thing we have to consider is the fact that in a capitalist economy, money is capable of turning over through the production process. This itself allows for the possibility of interest (more on the importance of turnover in a future appendix).

This insight has a range of profound implications. We can no longer see the lender as making a sacrifice of present use. The fact that I’d prefer not to eat my 20 marshmallows right now does not infringe upon my ability to lend them at interest. I’m in fact being rewarded for something I’d prefer not to do in the first place. What the interest rate really does is compensate me for my loss of social power—my power to control others through the regulation of the use of objects. Second, the borrowers do not necessarily decrease the amount of future use-values by their spending. Housing, transportation, food, healthcare, education—in short, what those with “high time preferences” spend most of their money on—may actually be the best way to maximize one’s future use-values. For the average worker, $5000 spent on a car to get her to a job will result in much more future satisfaction than $5000 put in the bank. Yet the difference in time preference is supposed to be the explanation for the inequality of wealth.

So how did Mises get to this theory of time preference? Let’s return to his faithful disciple Rothbard, who has the merit of revealing Mises’s mistakes in more explicit fashion:

A fundamental and constant truth about human action is that man prefers his end to be achieved in the shortest possible time. Given the specific satisfaction, the sooner it arrives, the better. This results from the fact that time is always scarce, and a means to be economized. (Man, Economy, and State, ch. 1)

And there we have it. Time preference is derived from a concept we have already debunked as nonsense. Rothbard’s view is that we have a certain amount of time that we are “spending.” And if we don’t achieve our end right away, we are wasting scarce time. But this is only true if we accept Rothbard’s conception of wants conceived outside of time. In a way, this is simultaneously a rejection of the truth of time preference, namely that people prefer different things at different times. It frames things as if we want these particular things whenever, and it’s just a matter of economizing our time so that we can get them as quickly as we can. The falsity of such a conception should be clear to anyone who is willing to think about it critically.

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Appendix I: Time Preference as an Explanation of the Price of Land

Steve Keen recently noted* the difficulty in changing economic paradigms by referring to the transition between the Ptolemaic and Copernican/Galilean theories of the solar system. Part of the difficulty, he explains, arises because the old model was used to explain so many things that any new model has to address a number of periphery issues in addition to its core claim. He gives the example that people had a hard time accepting the Copernican/Galilean system because they used Earth’s position in the center of the universe to explain gravity. If the sun is the center of the solar system, then why don’t objects fall towards the sun?

A similar obstacle is encountered when challenging the Misesian theory of time preference. In addition to explaining interest, Mises claims that time preference is necessary to understand how land can have finite prices:

Moreover, the phenomenon of originary interest explains why pieces of usable land can be sold and bought at finite prices. If the future services which a piece of land can render were to be valued in the same way in which its present services are valued, no finite price would be high enough to impel its owner to sell it. Land could neither be bought nor sold against definite amounts of money, nor bartered against goods which can render only a finite number of services. Pieces of land would be bartered only against other pieces of land. A superstructure that can yield during a period of ten years an annual revenue of one hundred dollars would be priced (apart from the soil on which it is built) at the beginning of the second year at nine hundred dollars, and so on.

While this explanation may seem plausible at first, on closer examination it becomes clear that it is based on poor reasoning. Mises claims that land can produce an infinite return but money and commodities can’t. He gives the example of a superstructure that last 10 years and brings in a total of $1000. He says that this constitutes a finite return, but he ignores the fact that the money made from this production can be reinvested indefinitely (or “infinitely” to use his term). At the end of 10 years, the superstructure deteriorates, but the capitalist has made $1000. How much does a new machine cost? $1000. The same could occur after the next 10 years and so on.

So there is no difference between land and other means of production in regards to finite and infinite returns. What then does determine the price of land? It’s quite simple. The price of land is based on the rate of profit. The superstructure when combined with labor yields the capitalist a certain amount of profit. Assuming that the capitalist wants to reinvest this profit, he has to decide between adding more superstructure and labor to his existing land or buying new land. If he has $100 from his previous profits, reinvesting this year-by-year may yield him additional profits of $10 each year. As long as he is reinvesting this $100, he can’t spend it on consumption. Now suppose a given amount of land is also capable of yielding $10 of profit each year. How much would someone be willing to pay for this land? Well, if someone with $100 could make $10 or profit per year by investing in superstructure/labor and presumably make $20 per year by investing $200 in superstructure/labor, then it wouldn’t make sense for them to invest $200 in land that will only yield $10 per year. Thus, the capitalist won’t pay more than $100 for the land. A similar line of reasoning could be applied to the seller of land.

We see then that time does play an important role in the determination of the price of land, but not in the “sooner or later” terms of Mises. Rather, it is the amount of profit that can be made in a given period of time (i.e. the rate) that determines the price of land.

*Keen’s site seems to be down at the time of this posting.

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FOTH : Does acting man only want to remove future uneasiness or does he always want to remove present uneasiness? Are the present and the future the same thing for Mises? That might explain why his analysis is so static, so confused about the nature of time.

He’s not confused, you didn’t quote the complete passage :

Mises : Action always aims at the removal of future uneasiness, be it only the future of the impending instant. Between the setting in of action and the attainment of the end sought there always elapses a fraction of time, viz., the maturing time in which the seed sown by the action grows to maturity. The most obvious example is provided by agriculture. Between the tilling of the soil and the ripening of the fruit there passes a considerable period of time. Another example is the improvement of the quality of wine by aging. In some cases, however, the maturing time is so short that ordinary speech may assert that the success appears instantly.

So, he basically says that Action takes time to achieve the end sought. To initiate or begin an action demonstrates a desire to change the future, and is by definition an improvement (subjectively) of the present.

So when he says (Mises) : As a rule what separates the actor from the goal of his endeavors is more than one step only. He must make many steps. And every further step to be added to those previously made raises anew the question whether or not he should continue marching toward the goal once chosen.

He means that during a period in which man is acting toward an end to appear at some future time, he must continue to prefer to do the thing he is doing over all other actions he could instead perform. If some other action would remove uneasiness of the present more than the current action, it would happen. It seems to me he completely understands how a man moving through time must relate himself mentally in his evaluation of the world and of his own actions.

But you next ask in a very odd way about the present good vs. future good preference. Or current satisfaction to future satisfaction. At least I think you do.

Mises : He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

FOTH : What does this even mean? If someone who consumes something reveals a preference for satisfaction in a nearer period of the future, then someone who does not consume something must then reveal a preference for satisfaction in a later period of the future. But someone who prefers satisfaction in a later period will never consume. Does this mean then that since I am not eating breakfast right now that I will never eat breakfast? Where does Mises get this idea that people always want to consume sooner and that later means never?

Again the sentence right before the ones you quote gives us a clear representation of what he means…

Mises : Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not–other things being equal–preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

He means that consuming a good now to whatever ends means that you prefer to satisfy that end now, as opposed to satisfying that end 1 minute from now, or 5 minutes from now, or 1 hour from now. You ask about breakfast, or any eating in response to hunger. Well hunger changes, meaning you become hungrier and hungrier, when he says all things being equal, he means all things being equal, your level of hunger conditions your response. Because the passage of time changes your preference.

He means again, that the fact that you ever act means that the end you acted towards is one that you prefer not only over other ends you could have acted towards, but that you also preferred achieving that specific end sooner to achieving it later (assuming that it could have been achieved at both points). He acknowledges that certain ends can only be achieved at specific times, in reference to the concerts which you bring up later, but that’s not the same thing.

I’ll reform the statement a little more clearly :

Process D produces end E. (eating a sandwich, feeling full for a period of time). The process takes 3 minutes, and it takes an additional 4 minutes to feel full. When I’m not eating now we know that my expected uneasiness at now + 7 minutes is not sufficiently dissatisfying that it impels me to perform D instead of whatever it is that I’m doing, but if I do in fact eat at some point A, it means by definition, that I prefer feeling full at A + 7 to feeling the hunger I would feel at A + 7. It also necessarily means that I preferred starting at point A to starting at A+1, and therefore that I preferred feeling full at A+7 instead of feeling full hungry at A+7 and full at A+8.

Right? I don’t see how you can’t see this isn’t true.

If one can only get the same level of satisfaction at time A and time A+1 then time A is preferred. The only reason to delay till A+1 is if the satisfaction at that time could in fact be greater. This could only be true if “all things are not equal.” Something other than just the end of consuming at time A must present in the end of consuming at A+1, and that this new factor makes the End of consuming at A+1 a different and more highly valued end than A.

How can this be confusing?

His concert example is not an apparent exception, he in fact points this out. It’s a choice between achieving an end at all, and not achieving it at all.

But you go on, to give his money example as his only example, and then criticize it:

FOTH : First, he seems to forget that he doesn’t consider having money (or even spending it) to be a form of consumption—that is, a direct means of satisfaction. The fact that I don’t invest $100 doesn’t necessarily say anything about my desire for present consumption. Second, there is no reason to presume that investing my money is the best way to maximize my satisfaction in a year’s time. Perhaps spending the money at a bar to develop friendships, or going out on a date with a potential romantic partner will lead to greater satisfaction in a year’s time.

Not investing it doesn’t say anything about your desire for present consumption. It says something about your valuation of 100$ now vs. not having the 100$ for a period of time in exchange for having 104$ at some future time. Of course the value of the 100$ now must and can only be related to the anticipation of how you might use it between now and when you would have gottent 104$ back. You say, “there is no reason to presume that investing my money is the best way to maximize my satisfaction in a year’s time.” The word presume demonstrates a lack of understanding who is making the decision. If you invest it you are presuming it’s a better use of your money than to hold 100$ and whatever potential use you might use it for in the intervening time. That’s a fact of reality that I can know.

You did a lot of weird stuff that doesn’t make sense to me in the marshmallow examples, I’ll dig into them more deeply and get back to you in my next post. But you form a conclusion that doesn’t make sense to me, and I’ll point out why.

FOTH : We can no longer see the lender as making a sacrifice of present use. The fact that I’d prefer not to eat my 20 marshmallows right now does not infringe upon my ability to lend them at interest.

“Having to eat 20 marshmallows right now,” is not an analogous to holding cash. You introduced it as a device to make a point, that depended on that point. When a lender foregos lending and holds cash it’s because he anticipates the potential to either A) invest it for more or B) that some other use of that money is likely to provide greater satisfaction to him between now and the time when he would have gotten 104$.

FOTH : I’m in fact being rewarded for something I’d prefer not to do in the first place. What the interest rate really does is compensate me for my loss of social power—my power to control others through the regulation of the use of objects.

How does having cash instead of lending it equal having the power to control others through the regulation of the use of objects? You mean he might buy stuff with it? Buying stuff with it transfers ownership of the money to them, and ownership of the good or the results of the service to you. Control of the use of objects changes, and each gains control of a thing they want control of more than the thing they give up control of. You’ve gained control by spending it. You already had control by owning it in the first place. If you lend it, someone pays you a premium for temporary control of it. Of course they pay an interest rate, if they want they money they have to. Otherwise go save your own goddamn money?! I’m not obligated to give someone else my money that I acquired through my own savings. The fact that I saved money means that I purchased and consumed less than the market rate of my labor paid me.

FOTH : Second, the borrowers do not necessarily decrease the amount of future use-values by their spending. Housing, transportation, food, healthcare, education—in short, what those with “high time preferences” spend most of their money on—may actually be the best way to maximize one’s future use-values.

Without getting into the inanity of “use-value” vs. value. Of course they prefer the thing they’re getting to use now. Otherwise they wouldn’t have done borrowed for it.

FOTH : For the average worker, $5000 spent on a car to get her to a job will result in much more future satisfaction than $5000 put in the bank. Yet the difference in time preference is supposed to be the explanation for the inequality of wealth.

Poor vs. rich is generally a reflection on accuracy in calculation about the future, and especially so in a free market. Unlike other forms of economic and political organization liberal capitalism, tends to take from the lazy and stupid and give to the hard-working and savvy. Rich kids lose daddies money, and poor driven kids work smarter and harder and get rich. We see it all the time. Wisdom about how one saves, borrows, invests, and purchases goods, results in the accumulation of wealth.

Now, the car loan is a great example. I’m amazed you had the guts to use it :slight_smile: Let’s get detailed on the worker’s car and her job and look at choices being made, in the economy we know.

  • Car : the car provides transportation. to and from work, to and from stores for necessities, to and from leisure activities. At the same time there are many different cars she might choose to pursue buying, she might get a really cheap used car for 2000$. She could spend the 5000$ you mentioned for a slightly better used car. She might also want to purchase a brand new sports car for 100k$. Instead she might choose to forego the car and use some other means of transportation, bike to work, walk to work, take a bus to work, borrow a friends car for trips to the store, etc.
  • Job : the job pays a wage, but there are in the market many jobs a worker can find, and in selecting any job one needs to look at all of the expenses that come with the job, and all of the income that comes from the job. Subtracting expenses from income is the way one calculates profit.

In picking a job then and deciding on whether or not to buy the car (using a loan), all of these factors need to be considered. If a job that requires a car to get to and perform, provides sufficient profit (remember the costs of transportation are part of the expenses) then that is a profit calculation.

BTW, do socialists learn basic accounting? Anyway, those who correctly anticipate their costs, and generate a profit in their monthly budget (whether you’re a worker or a capitalist) will increase their wealth. Those who do badly at estimating their costs and generate a loss (or break even) will lose their wealth. Almost all people in society will fluctuate in wealth. I’ve personally had unexpected issues come up in my life which ended up being very large expenses to me. These expenses set back my personal wealth accumulation by a huge amount.

Uncertainty can always throw a monkey wrench into peoples plans. But if you want to convince me that there is something inherently unfair that the owner of a pizza restaurant can buy a Mercedes for cash, and his pizza cook can only buy a used Ford Focus… I’m not feeling it… The owner by investing a large amount of his personal wealth, is able to provide an income to all of his employees and to himself. He is not guaranteed to make a profit. He is taking a risk. If he generates a profit, that profit is a direct result of his risk taking and the labor he does in fact put into running the restaurant. Go look at the restaurant business. The life of a private business owner is very, very risky and requires huge amount of labor. His larger income is a direct consequence of his risk taking and the labor he puts into the attempt to generate a profitable business. He has risked his own financial wealth to do so. Some business owners get loans, but they put up their own capital to secure the loan, either the assets of the company or their own personal homes or property.

Those who get wealthy are those identify and take potentially lucrative risks, who save up wealth (generated by working) and then put it at risk in productive efforts. If they are smart and hard working, they end up providing a productive business that not only generates a profit for them, but also enriches the rest of the social community by providing goods that meet demand, and provides a steady reliable income to other less wealthy members of society who either have not yet saved up their own wealth.

I’ll tell you what, the longer this Marxist drivel holds the attention and adulation of a significant portion of the population the longer we’re stuck trying to get people off their asses and into their own pursuit of wealth using the economic behaviors that work.

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@FOTH

One other question, isn’t a theory supposed to explain the world as it is? Not propose the world as it ought to be and explain how the world is messed up?

For example, contrary to many libertarian’s believe Praxeology doesn’t actually tell us how the world should be, it explains how it actually works. All the phenomena of current modern economies is understandable and explainable.

The eventual collapse and utter economic ruin of communist states is also predicted and explained by Austrian Economics. But it doesn’t tell us what “Should come to pass”. There is no “libertarian capitlist state yearning to break free” from the bonds of statism, buried somewhere in the capitalist teachings of Austrian Econmics.

The support it provides to Liberalism and Capitalism is indirect. It just predicts results of those systems that are preferred by the overwhelming majority of humanity. Unfortunately it’s union leaders and corporate bigwigs and special interest groups that favor Keynsianism, State intervention, and/or Socialism instead.

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David: So, he basically says that Action takes time to achieve the end sought. To initiate or begin an action demonstrates a desire to change the future, and is by definition an improvement (subjectively) of the present.

Well, if removing present uneasiness is a necessary result of aiming to remove future uneasiness, then that contradicts what Mises says about man being concerned only with removing future uneasiness. What you quoted only clarifies the first sentence, but it doesn’t resolve the contradiction it has with the second.

I’m confused by your use of the word “improvement.” Improvement over what? An earlier period of time? Why do you add “(subjectively)” afterward? Is there a type of improvement that is not subjective?

Mises: No mode of action can be thought of in which satisfaction within a nearer period of the future is not–other things being equal–preferred to that in a later period.

Sure one can. I might want to have a baby at some point. Having a baby constitutes a form of satisfaction. However, I prefer to have this satisfaction in a later period as opposed to a nearer period.

He means again, that the fact that you ever act means that the end you acted towards is one that you prefer not only over other ends you could have acted towards, but that you also preferred achieving that specific end sooner to achieving it later (assuming that it could have been achieved at both points). He acknowledges that certain ends can only be achieved at specific times, in reference to the concerts which you bring up later, but that’s not the same thing.

But every action also demonstrates a deferral of something else. So it doesn’t make sense to say that I always prefer something sooner. I prefer different things at different times. If this is what you are saying, I agree with you. But this doesn’t tell us anything about the interest rate or the inequality of wealth. Why is the interest rate almost always positive and never negative or zero? This doesn’t tell us that.

Process D produces end E. (eating a sandwich, feeling full for a period of time). The process takes 3 minutes, and it takes an additional 4 minutes to feel full. When I’m not eating now we know that my expected uneasiness at now + 7 minutes is not sufficiently dissatisfying that it impels me to perform D instead of whatever it is that I’m doing, but if I do in fact eat at some point A, it means by definition, that I prefer feeling full at A + 7 to feeling the hunger I would feel at A + 7. It also necessarily means that I preferred starting at point A to starting at A+1, and therefore that I preferred feeling full at A+7 instead of feeling full hungry at A+7 and full at A+8.

Right? I don’t see how you can’t see this isn’t true.

If one can only get the same level of satisfaction at time A and time A+1 then time A is preferred. The only reason to delay till A+1 is if the satisfaction at that time could in fact be greater. This could only be true if “all things are not equal.” Something other than just the end of consuming at time A must present in the end of consuming at A+1, and that this new factor makes the End of consuming at A+1 a different and more highly valued end than A.

How can this be confusing?

OK. This might be nitpicky, but I think it might clear things up. First off, one isn’t choosing between being hungry or full at A+7 by eating or not eating the sandwich. If I don’t eat the sandwich, that doesn’t mean that I will be hungry at A+7. And if I will be hungry and I do eat it, it doesn’t mean that I will now be hungry at A+8. So eating a sandwich now doesn’t demonstrate a preference to feeling full now versus full later since there is no reason to assume that I will be hungry later.

Second, you talk about the satisfaction at A+1 being greater than the satisfaction at A. I disagree that praxeology could make this conclusion. As I’ve been saying, action doesn’t demonstrate a comparison of satisfaction between time. This is how I would reinterpret the preference for eating a sandwich at A+1 versus A.

[A: Don’t eat sandwich] [A+1: Eat sandwich] > [A: Eat sandwich][A+1: Don’t eat sandwich]

You see that the equation is not reducible to [A+1: Eat sandwich] > [A: Eat sandwich]. That’s because these aren’t the only things being chosen. I’ve expressed the other component as a pure negative–“don’t eat sandwich.” But this can also be expressed as a pure positive if we know what fills the time, for example, post on Mises.org.

[A: Post on Mises.org] [A+1: Eat sandwich] > [A: Eat sandwich][A+1: Post on Mises.org]

So if I post on Mises.org now, I demonstrate a preference to eat a sandwich at A+1. But I can’t abstract away the act of posting to conclude that I simply choosing a sandwich later to now. It’s an entire package that I am choosing. There are four distinct variables, none of which cancel each other out.

His concert example is not an apparent exception, he in fact points this out. It’s a choice between achieving an end at all, and not achieving it at all.

How does one choose not to achieve an end at all? Isn’t that a contradiction?

Not investing it doesn’t say anything about your desire for present consumption. It says something about your valuation of 100$ now vs. not having the 100$ for a period of time in exchange for having 104$ at some future time. Of course the value of the 100$ now must and can only be related to the anticipation of how you might use it between now and when you would have gottent 104$ back. You say, “there is no reason to presume that investing my money is the best way to maximize my satisfaction in a year’s time.” The word presume demonstrates a lack of understanding who is making the decision. If you invest it you are presuming it’s a better use of your money than to hold 100$ and whatever potential use you might use it for in the intervening time. That’s a fact of reality that I can know.

Again, this doesn’t shed any light as to why the interest rate is positive. Why is it a better use of the poor’s money to consume it versus invest it? Could it be because they do not have as much? That they don’t already have cars, houses, education, and medical care? Indeed, don’t these facts add more to our understanding of the rate of interest than a theory that amounts to “people prefer what they prefer because they prefer it.” If someone came to this message board and asked “why do people always elect interventionists who know nothing about economics?” Wouldn’t you consider it a pretty bad answer if someone simply answered “people elect interventionists because they prefer to elect interventionists to noninterventionists”?

“Having to eat 20 marshmallows right now,” is not an analogous to holding cash.

You’re exactly right. That’s the point I was trying to make. The author of the article gave an example of a study about eating marshmallows and then assumed that eating marshmallows amounted to the same thing as holding cash.

How does having cash instead of lending it equal having the power to control others through the regulation of the use of objects?

If I have cash in my possession, then I control its use. If someone else tries to use it, I can have them thrown in jail. However, if I loan the cash out, I no longer control its use. If someone else tries to use it, I don’t have the power to have them thrown in jail. The person borrowing the money does.

Of course they pay an interest rate, if they want they money they have to. Otherwise go save your own goddamn money?! I’m not obligated to give someone else my money that I acquired through my own savings. The fact that I saved money means that I purchased and consumed less than the market rate of my labor paid me.

I’m not saying anything about what you are obligated to do or what should be done. I’m not saying anything about Mises’s prescriptions. I’m saying that his explanation of why things are the way they are is bad.

Without getting into the inanity of “use-value” vs. value. Of course they prefer the thing they’re getting to use now. Otherwise they wouldn’t have done borrowed for it.

My point is that they are not necessarily choosing between satisfaction now and satisfaction later by “consuming.” They may be choosing to maximize their future wealth just as much as the “investor” is.

Poor vs. rich is generally a reflection on accuracy in calculation about the future, and especially so in a free market. Unlike other forms of economic and political organization liberal capitalism, tends to take from the lazy and stupid and give to the hard-working and savvy. Rich kids lose daddies money, and poor driven kids work smarter and harder and get rich. We see it all the time. Wisdom about how one saves, borrows, invests, and purchases goods, results in the accumulation of wealth.

I’ve certainly seen Misesians explain inequality in terms if time preference. See this article, for example. “The more pronounced one’s “future orientation,” the higher one’s social class … as opposed to ‘underclass values’ or ‘high time-preference’ behaviors such as improvidence, hedonism, purposelessness, immediate self-gratification of needs or wants, and capricious spontaneity or irresponsibility.” Oh, those poor people who spend most of their money on food, housing, and healthcare. They’re just stupid lazy bastards. If only they would just acquire a higher time preference so they could rack in some dough while starving to death.

In picking a job then and deciding on whether or not to buy the car (using a loan), all of these factors need to be considered. If a job that requires a car to get to and perform, provides sufficient profit (remember the costs of transportation are part of the expenses) then that is a profit calculation.

But part of the workers costs is the actual labor itself. In order to calculate profits, the costs have to appear in the same unit as the gain. There’s no way to conclude whether she’s made a profit or not. But I’ve explain all this in my entry on profit.

Anyway, those who correctly anticipate their costs, and generate a profit in their monthly budget (whether you’re a worker or a capitalist) will increase their wealth.

What is wealth and how do you measure an increase in it?

The owner by investing a large amount of his personal wealth, is able to provide an income to all of his employees and to himself.

If he spent the money on consumption, it would also provide an income to someone else.

He is not guaranteed to make a profit. He is taking a risk. If he generates a profit, that profit is a direct result of his risk taking and the labor he does in fact put into running the restaurant. Go look at the restaurant business. The life of a private business owner is very, very risky and requires huge amount of labor. His larger income is a direct consequence of his risk taking and the labor he puts into the attempt to generate a profitable business.

Sure, skills can certainly help make a larger than average profit. But even a complete idiot can make profits pretty much risk free by sticking their money into an S&P 500 index fund. If Mark Zuckerberg could live for ever, he could put all of his money in an index fund and live off of the interest for eternity without lifting another finger. Now I don’t want to get into whether he would be deserving of that or not. But attributing an infinite return of money to five years of work and the risks involved doesn’t seem like a very good explanation of why profits are made. Of course people don’t live forever, but money is inherited which could amount to the same thing.

Those who get wealthy are those identify and take potentially lucrative risks, who save up wealth (generated by working) and then put it at risk in productive efforts. If they are smart and hard working, they end up providing a productive business that not only generates a profit for them, but also enriches the rest of the social community by providing goods that meet demand, and provides a steady reliable income to other less wealthy members of society who either have not yet saved up their own wealth.

I think I’ve shown in my profit entry why this logic doesn’t hold up. You even said earlier that people are poor because they made poor calculations about the future. The gains of the rich then are simply the losses of the poor. You can’t say they benefit the poor by giving them back some of what they won from them in a bet.

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One other question, isn’t a theory supposed to explain the world as it is? Not propose the world as it ought to be and explain how the world is messed up?

Sure, I’m making no proposals here. My problem is with the explanation.

The eventual collapse and utter economic ruin of communist states is also predicted and explained by Austrian Economics.

Communist state is an oxymoron. The ruin of these states was also predicted by various anarchists and Marxists.

The support it provides to Liberalism and Capitalism is indirect. It just predicts results of those systems that are preferred by the overwhelming majority of humanity. Unfortunately it’s union leaders and corporate bigwigs and special interest groups that favor Keynsianism, State intervention, and/or Socialism instead.

Why didn’t Ron Paul get elected if the majority prefers liberalism to state intervention?

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I did read the rest of this post, but there didn’t seem like anything else to respond to. (Don’t want to quibble about predictin of communist regimes downfalls or the definition of communist.) I don’t think those are relevant to our dicsussion.

David : It just predicts results of [Capitalism and Liberalism] that are preferred by the overwhelming majority of humanity.

FOTH : Why didn’t Ron Paul get elected if the majority prefers liberalism to state intervention?

Because that isn’t the choice they are offered. They are offered a chance to get paid without work vs. a choice to suffer in the short term for a long term healthier economy.

But more specifically, I’ll quote Hayek from a video:

Well, I’m afraid so long as we retain the present form of unlimited democracy, all we can hope for is to slow down the process, but we can’t reverse it. I am pessimistic enough to be convinced that unless we change our constitutional structure, we are going to be driven on against people’s wishes deeper and deeper into government control. It is in the nature of our political system, which has now become quite as bad in the United States as anywhere else. What we have got now is in name democracy but is not a system in which it is the opinion of the majority which governs, but instead where the government is forced to serve a sufficient number of special interests to get a majority.

An interesting quote to say the least.

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Ok, you missed the time preference example I gave, and badly.

FOTH : Second, you talk about the satisfaction at A+1 being greater than the satisfaction at A. I disagree that praxeology could make this conclusion.

I never said this. Look carefully again at what I said. You have the greater than symbol backwards.

If “all things are equal”, I’ll choose eating at A to choosing “not eating now” and eating at A+1. If I choose instead to eat at A+1, then all things were not equal!.

I guess it might be so obvious that it’s impossible to see?

One thing to note, preference refers to valuing.

I found this quote poking around the site, let’s see if it makes things more clear

Joseph Salerno :

To act is to bring some satisfaction (expected) closer to now. This cannot happen unless there is some positive time preference. Meaning a preference to bring satisfaction closer, rather than leaving it unchange, or pushing it farther off. The reason time is brought into the discussion, is because all considerations of satisfaction require action to attain, and therefore require time to pass to bring an expected end into the present which is “more satisfactory”