Some Thoughts.

Economics Economics Questions
1

First, I’m not sure if I understand what is so uniquely Austrian about the calculation argument. As I understand it the point is that entrepreneurs maximise profits by putting goods to their most valued uses and the price system is exactly what allows them to do this by means of relative price adjustments and profit and loss accounting (very briefly put). My first point is that this implicitly assumes some sort of harmony of interests, in some cases where this assumption doesn’t hold, I don’t see how the calculation argument is valid. In the case of asymmetric information, externalities or monopoly power entrepreneurs maximise profits by going against what is in the public interest (yes, Austrians will find this term objectionable). But the other point I’d like to make is that this is a pretty standard point in even principles level micro…

Second, in reality firms costs are highly interdependent and often inextricable from one another. What implications does this have for profit loss accounting? Well, as far as I can tell a lot of big firms don’t actually know exactly how to maximise profits so they resort to rules of thumb. My can’t government do this? And more importantly, in firms still exist and are efficient, clearly there are some other considerations as to what serves consumers best, why shouldn’t they be applied to governments as well?

Third, one of the big arguments against math that I’ve noticed is that it isn’t necessary, something along the lines of “we can express these arguments in verbal logic”. I think this is completely besides the point, identifying correct arguments and saying, ex post, that we can say what is in mathematical terms in verbal logic misses the point. The math was useful in fleshing out these arguments in the first place.

Four, I’ve asked this before, but I want to ask it again: what justifies the large salaries of econ PhD in the private sector? Their model building abilities and econometric skills are often used so what causes firms to be so systematically misguided (that is, according to Austrians).

Five, what is wrong with the concept of willingness to pay?

2

The calculation argument is quite complex. There are highly technical aspects that deal with the valuation of capital goods and the absolute necessity of unhampered financial markets and prices. The neoclassical economists sided with the Austrians, against the Neo-Marxists, about the role of prices in the coordination of economic activities, but they turned against the Austrians when it came to the valuation of capital goods. They believed (including Schumpeter) that the value of capital can be obtained by measuring final demand (demand vectors) and imputing them into various production functions.

Once you get passed “standard microeconomics” the analysis becomes more complicated and increasingly fruitful.

  1. __Asymmetric Information:__The calculation argument is so powerful precisely because of the existence of asymmetric information, that is, that individuals have their own entirely subjective value scales, expectations, etc, and the price mechanism facilitates a free flow of tacit and idiosyncratic information amongst economic actors coordinating economic activity. It attempts to match entrepreneurial expectations with reality (optimal production techniques and capital combinations inline with consumer preferences).
  2. Externalities and Monopoly: Such phenomena are considered inefficient by those who adhere to a very broad and primitive understanding of economic efficiency, namely those that focus solely on allocative or “x-efficiency.” Allocative efficiency concerns itself with maximizing “total surplus” which is then distributed to either producers and/or consumers, i.e., it attempts to eliminate so-called “dead-weight losses.” But there is another type of efficiency, first introduced in the 17th century by Spanish economists (school of Salamanca), and it is known as “dynamic efficiency” (Schumpeter is given credit for this insight). Dynamic efficiency states that the ability to earn supernormal profits creates an incentive to innovate and elevates total investment in the long-run (firms invest and innovate in order to gain competitive advantages, create cost barriers, and capture additional market share). This, in turn, pushes the production possibilities frontier outwards. Simply put, the argument is that it’s better to be under the frontier and continuously pushing outwards than to remain on the same frontier forever, in a completely static state.

You will cover this material in your Industrial Organization class (highly recommended). Next, there are major theoretical problems associated with analyzing and measuring the “allocation of surplus” (welfare economics):

  • Interpersonal utility comparisons are nonsensical.
  • It implicitly assumes cardinal measurements of utility. It attempts measure geometric areas of value, usually denoted in monetary terms. Value is not an area to be measured; it is simply a list.

Why can’t governments use rules of thumb in order to centrally plan the economy? See “the calculation argument.”

Because the government is structurally incapable of doing so. It is not bound by the profit/loss constraint, overrides the price mechanism, and is captured by special interest’s. See “the calculation argument” and various articles written by public choice economists.

3

This is the type of garbage you typically hear from clueless undergraduate economics majors with 2.4 GPA’s, but I will respond to your non sequiturs one-by-one.

I specifically titled this topic “Some Thoughts” to show that they’re just thoughts that I’ve been trying to flesh out lately, I didn’t expect them to be knock down arguments, I’d just like to here some feedback from other members of the topic who would identify themselves as Austrian, or, “enlightened undergraduate economics majors with 4.0 GPAs” if you will.

I’ll answer the rest of your post later.

4

[EDIT]: I apologize for my conduct on this thread.

5

@Esuric: Yeah, you overreacted a bit.

@EIT: I’m not an economist so I don’t approach this from the technical perspective. Basically, the reason the government (or, more archaically, the Prince) cannot calculate is because it cannot go out of business. Governments are not subject to the discipline of losses and bankruptcy. For this reason, governments that attempt to monopolize all industries under their purview cannot know when they are producing goods and services that people actually demand and when they are not. Such governments end up producing things for which there is no demand and end up failing to produce things that people highly demand.

However, simply because government is not subject to the discipline of market losses does not mean that government has no profit motive. The government does seek to maximize its revenues. To be more specific, the private interests which comprise the driving forces of government seek to maximize their respective revenues/wealth through the apparatus of government. In pursuit of this end, the government has a much larger set of tools because, unlike any private organization, it is only accountable to itself for its actions.

However, the government can “go out of business”, in a manner of speaking. Namely, the government can cease to exist by revolution or conquest (or political unification, but this is more like a corporate merger or buyout). So, the ever-present threat of internal overthrow and/or external conquest by a foreign power is what drives the “loss” side of the Prince’s calculation. As you can guess, this means the government has very different motives from other actors which exist in the context of the relatively level playing field of the private market.

As Hoppe’s work shows, there is a marked difference between calculation by a monarch and calculation by a corporate government (republican/democratic, etc.) because the incentives facing actors within a system of corporate government are markedly different than the incentives facing a monarch (Prince). The Prince will, as long as his family can manage to hold onto the throne against revolution or usurpation by other royal houses, pass his crown to his heir. For this reason, the Prince’s time-preference is dramatically lower than the time-preference of elected rulers. Hoppe characterizes it as the difference between a land-owner and a renter. The Prince has a permanent interest in the capital value of the territory(ies) he rules because he will be passing them to his heirs. Elected leaders are merely caretakers with temporary access to the levers of power over the capital value of the governed territory. Their interests are to get as much as they can, as quickly as they can. The predictable result of corporate government is the rapid plundering of the capital value of a territory which is governed by it. On this view, democracy is a sociological weapon of mass destruction.

Clayton -

6

This is one of my favorite arguments.

Understandably, tentacles of the State would have an incentive to stock themselves with economists whose beliefs typically approve of government intervention. However, private firms (e.g., Google) have more straightforward goals like profit; why is the Chief Economist there Hal Varian and not Peter Boettke? If Austrians have cornered truth so successfully, one would suspect that the most profitable economists would be Austrian ones.

If PhD economists are, essentially, mastering useless information, then why do firms find them so useful to hire?

Put another way, if I were seeking an economics job, I would almost entirely dedicate myself to mainstream economics; I would consider my resources to be more highly valued after graduation if I had been trained in econometrics, indifference curves, etc. That is a market signal right there. For the sake of inquiry and perhaps to steal gold nuggets, I’d probably still research Austrian economics, but I would never be an Austrian per se.

Totally. Plus, the math is more explicit: assumptions are stated, conclusions are notated properly, etc. As Alfred Marshall said, “(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often.”

7

Why were witch doctors and shamans employed at every single village and held in such high esteem? Surely, this must mean that they really did have magical powers! Either way, the econometric models in question have failed miserably, and have tarnished the reputation of economics as a science.

In order to refute Austrian economics, you need to actually refute it. Appeals to authority/majority wont cut it.

8

Once you get passed “standard microeconomics” the analysis becomes more complicated and increasingly fruitful.

  1. __Asymmetric Information:__The calculation argument is so powerful precisely because of the existence of asymmetric information, that is, that individuals have their own entirely subjective value scales, expectations, etc, and the price mechanism facilitates a free flow of tacit and idiosyncratic information amongst economic actors coordinating economic activity. It attempts to match entrepreneurial expectations with reality (optimal production techniques and capital combinations inline with consumer preferences).
  2. Externalities and Monopoly: Such phenomena are considered inefficient by those who adhere to a very broad and primitive understanding of economic efficiency, namely those that focus solely on allocative or “x-efficiency.” Allocative efficiency concerns itself with maximizing “total surplus” which is then distributed to either producers and/or consumers, i.e., it attempts to eliminate so-called “dead-weight losses.” But there is another type of efficiency, first introduced in the 17th century by Spanish economists (school of Salamanca), and it is known as “dynamic efficiency” (Schumpeter is given credit for this insight). Dynamic efficiency states that the ability to earn supernormal profits creates an incentive to innovate and elevates total investment in the long-run (firms invest and innovate in order to gain competitive advantages, create cost barriers, and capture additional market share). This, in turn, pushes the production possibilities frontier outwards. Simply put, the argument is that it’s better to be under the frontier and continuously pushing outwards than to remain on the same frontier forever, in a completely static state.

I won’t question Esuric’s knowledge of 17th century spanish economists, but I am not quite sure he is fully appreciating the full meaning of modern terms like “asymmetric information” and “externalities” in his response to EIT.

1) asymmetric information - esuric is right that you can view the subjective preferences/expectations/etc of other people as an “asymmetric information” problem. but is the insight that you can’t read other people’s minds what made asymmetric information a popular and revolutionary topics in the 1960s and 1970s? not really. more important are situations, for example, where the quality of the good being traded is known to the seller but not the buyer.

consider the popular tale of the market for lemons. in that hypothetical example, you might have someone wanting to sell their “peach of a car” for $2,000 bucks and there is a customer who would be willing to pay $2,000 if he knew it were a peach. but he would only be willing to pay $1,000 if it is a “lemon”. the problem arises when the buyer can’t know if the car is a “peach” or a “lemon” without buying it. so he essnetially has to make a gamble on the purchase. and for this gamble, suppose he knows the probability of buying a peach or a lemon are 50/50. so, if the buyer is risk neutral, the most he is willing to pay is $1,500 (0.52000 + 0.51000). but, the seller isn’t willing to sell the car for that much so the trade doesn’t take place. and if this problem is wide spread enough, the entire market for used cars collapses and the price system cannot do its job. now, there are other ways outside the price system to fix this problem, but that’s kind of exactly the point. in cases like the one outlined above, the price system alone is not enough to coordinate the decisions of buyers and sellers.

2) externalities - esuric’s dicussion on dynamic efficiency makes sense but doesn’t at all address EIT’s concern about externalities. if negative externalities are present in a particular market, then that means there are costs being incurred that are not being reflected in the price of the good being traded. and if the price doesn’t fully reflect the costs of production, i don’t see how we can expect the price system to always lead to efficient outcomes in any time frame.

now, you may want to argue that market based solutions will be found to these externalities (through introduction of new technologies or creation of new markets) and that in that sense the price system does its job by creating incentives for solving these kinds of problems. but if thats the route you want to go, i would like to see some sort. i have yet to see a rigorous essay or academic article making the case that we should always expect negative externalities stories to have happy, market-based endings (though I did create a thread asking for exactly such articles earlier this fall).

this post has gotten too long, but I wanted to address EIT’s first thought more directly. so i will follow up in a second with a quick response.

9

My first point is that this implicitly assumes some sort of harmony of interests, in some cases where this assumption doesn’t hold, I don’t see how the calculation argument is valid. In the case of asymmetric information, externalities or monopoly power entrepreneurs maximise profits by going against what is in the public interest (yes, Austrians will find this term objectionable). But the other point I’d like to make is that this is a pretty standard point in even principles level micro…

EIT, I think you bring up some good points, but that you may be missing the forest for the trees. you are right that there are various problems that may lead an unregulated price system to inefficient outcomes. but i think the austrians were still very much right that can not expect a centrally planned economy to effeciently allocate resources among their various uses. to me, the question then becomes whether moderate government interventions could improve on market outcomes in select cases.

on a side note, i think you might be interested in the work of stiglitz, ackerlof, and others. i personally think that they don’t get enough credit from austrians for taking the insights of hayek on information and running with them to new and deeper insights. specifically, i think they revealed that the market process is much more complicated than just shifting relative prices.

10

**

This may appear condescending but I don’t intend it to be. I just want to point out how far off some of you are from understanding key Austrian positions. Based on your comment above, what would be the Austrian follow up argument for this?

Key publicly known economists have been making fools of themselves for the past decade on guestimating future/present economic events and conditions. And you seem surprised that they are misguided? How much proof do you need? As Esuric stated, people have in the past placed more faith in witch doctors. Point 4 has been answered time and time again. Not every single entrepreneur was meant to predict future conditions correctly. Thats the difference between a good entrepreneur, and bad ones.

One of the problems of the modern neo-classical method is that they have only just begun to add the “Entrepreneur” to their equations. Where before that variable was entirely overlooked and left out. Now they’ve attempted to add the entrepreneur into their equations but as some sort of unified constant variable, they expect these individuals to fit in their mechanistic view of how things work. Quickly forgetting that we are talking about human beings.

11

filc,

and i don’t want to sound condescending, but I find it distressing how narrowly some individuals on this board define “austrian economics”.

to the extent we are talking about political positions, i personally agree with Hayek that there are certain goods and services which we could not expect to be provided in the absense of government precisely because of reasons listed above. national defense or law enforcement for example. i believe that positive externalities lead to free rider problems that would make provision of these services difficult if not impossible by a private firm.

and i don’t see how that normative political position is inconsistant with the positive conclusions of austrian economics in general.

if you think that being “austrian” dictates that you must be an anarchist, I would only respond that your definition of “austrian” is too narrow for my tastes.

12

This has nothing to do with politics. Dissmissing praxeology and calculation is not Austrian. Sorry.

13

so help me understand what you found about my quoted statement to contradictory with austrian economics. any specifics?

14

Student:
the question then becomes whether moderate government interventions could improve on market outcomes in select cases.

This may appear condescending but I don’t intend it to be. I just want to point out how far off some of you are from understanding key Austrian positions. Based on your comment above, what would be the Austrian follow up argument for this?

copy/pasted

I couldn’t get much more specific. I wanted you to point out the conflict here. This excersize may be annoying, and I know it’s pompous of me, but it’s important. A many of persons are debating points giving a facade that they have substantial knowledge of the Austrian School of thought. Hayek is just one teacher, in a collection of many. Some of his texts are frequently debated amongst modern and historical Austrians. You can’t only be familiar with Hayek, then claim to be sufficiently familiar with AE all together. In doing so you ignore all the foundational concepts Austrian Economics builds apon. And the point of this exercise, and pointing out your quote above, shows that.

15

i am not sure what you are getting at.

ps* is it just me or is it common belief on internet forums that communication problems can be solved by simply copying and pasting previous posts over and over again?

16

No we don’t have to proceed. Your quote here answers everything.

Sorry to be vague.

FYI I edited my last post to provide more information. IDK if it will help however.

17

I couldn’t get much more specific. I wanted you to point out the conflict here. This excersize may be annoying, and I know it’s pompous of me but it’s important. Many of you are debating points giving a facade that you have substantial knowledge of the Austrian School of thought. Hayek is just one teacher, in a collection of many. There are even some written texts of Hayek’s which is frequently debated about amongst modern and historical Austrians. You can’t only be familiar with Hayek, then claim to be sufficiently familiar with AE. In doing so you ignore all the foundational concepts Austrian Economics builds apon. And the point of this excersize, and pointing out your quote above, shows that.

i am not only familiar with hayek, he is just the austrian economist i enjoy the most. but i didn’t even mention hayek in the context of that quote, so I am not sure how that is at all relevant.

so it still isn’t clear to me what you are asking. when you ask for an “austrian” follow up, I can think of many. Rothbard would have a different response than Hayek who would have a different response than blah blah.

the only answer i can think of is that there would be no unique “austrian” follow up to that statement. if you think there is one, then please hold forth.

18

You gusy are fantastic at never defining your terms, and then proceeding to conclusions based on them nonetheless.

19

No my friend, I am being extremely specific. In fact I am referring to a single specific, and generally dominant, position of the Austrian School. Especially amongst modern Austrian economists(More so than historical). There are a few on this forum who have spent a considerable amount of time and self reflection scrutinizing praxeology and what consequences it’s logic implies. I have no doubt folks like LS know exactly what I am referring to based on the quote I pulled from your post. I know it appears unfair for me to be vague to you, but I assure you to someone who sufficiently understands the calculation argument, I am referring to specifics. I’d prefer that you spent time reading texts such as HA, and coming to your own conclusion. Rather then me try and teach it to you.

Lets review again. Here is the quote you provided.

**

Do you not see why some Austrian’s would take issue with this? What argument would they employ?

Your response is

Your not aware of any Austrian argument that would be in conflict with your statement? Lets say it’s a fringe argument? Nothing comes to mind? I don’t want to give it away. :slight_smile:

20

I realize it was unfair of me. The point of the excercise was to show Student, and perhaps others, that there is more they can read up on. At any rate Student has been fair and up front. It’s me who’s been playing coy.

The topic I was referring to was calculation. The only way government intervention could improve the market economy is by accident. My assertion is that this is a generally accepted argument, and a shared view amongst many modern Austrians. That this position implies a lengthy understanding of several key foundational austrian topics.