Economic Rockstar

Connecting Brilliant Minds in Economics and Finance

156: Peter Boettke on Hayekian Economics, Political Economy and Social Philosophy

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156: Peter Boettke on Hayekian Economics, Political Economy and Social Philosophy

Peter Boettke of George Mason University joins me once again on the podcast.

He discusses the Hayekian principles laid out in his new book “F. A. Hayek: Economics, Political Economy and Social Philosophy”.

If you are at a university and your university library has the Springer subscription (which most do), you can order a print-on -demand version for $25, so that makes it somewhat more reasonable than the library prices.  You can click here for a discount flyer to get 20% off.

Patreon

If you’re a fan of the podcast and would like to show your support in anyway, please check out my Patreon page at www.patreon.com/economicrockstar where you can sign up for any of the awards for as little as $1 a month or you can simply follow me on the Economic Rockstar Facebook page or on Twitter or simply recommend the show to a friend, especially if they have never had the opportunity to study economics.

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108: Steve Horwitz on Spontaneous Order, the Microfoundations of Macroeconomics and Three Economic Myths

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108: Steve Horwitz on Spontaneous Order, the Microfoundations of Macroeconomics and Three Economic Myths

steve-horwitz-rush-economic-rockstar

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY and is currently Visiting Scholar at Ball State University, Indiana.

Professor Horwitz is also an Affiliated Senior Scholar at the Mercatus Center Virgina, a Senior Fellow at the Fraser Institute in Canada, and a Distinguished Fellow at the Foundation for Economic Education.

Steve is the author of three books, Monetary Evolution, Free Banking, and Economic Order, Microfoundations and Macroeconomics: An Austrian Perspective, and Hayek’s Modern Family:  Classical Liberalism and the Evolution of Social Institutions.

He has written extensively on Austrian economics, Hayekian political economy, monetary theory and history, and American economic history.

Steve has a series of popular YouTube videos for the Learn Liberty series from the Institute for Humane Studies and blogs at Bleeding Heart Libertarians and writes regularly for FEE.org.

A member of the Mont Pelerin Society, he has a PhD in Economics from George Mason University and an AB in Economics and Philosophy from the University of Michigan.

Economics:

In this episode, Steve discusses and mentions: Austrian economics, spontaneous order, microeconomics, macroeconomics, free markets, capital markets and government.

Economists:

In this episode, Steve discusses and mentions: Adam Smith, F. A. Hayek, Karl Menger and Ludwig von Mises.

In this Episode, you will learn:

  • whether macro problems are the result of micro problems or is there a reverse causality.
  • Menger: the link between Adam Smith and F. A. Hayek.
  • the micro foundations of Adam Smith’s ‘Spontaneous Order’.
  • how the private sector responded better than government to the devastation caused by Hurricane Katrina. Is this a case for free market economics?
  • the three economic myths, including the gender wage gap and the rich getting rich and the poor getting poorer according to Professor Horwitz.
  • and much much more.

Where to Find Professor Horwitz:

Links:

Writing Tips:

  1. Write something everyday. Be in the habit of writing. Don’t feel like you’ have to edit everything as you go along.
  2. If you have writer’s block, just push through. Just start writing. There’s an old aphorism among writers: “How can I know what I think ’til I see what I say”.

Pedagogy:

Think about teaching as coaching. Like a coach, help students develop a skill. In this case the skill is the economic way of thinking – Steve Horwitz.

Books:

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072: Friedrich A. Hayek – That Entrepreneurial Knowledge is Situational and Commonsensical, Not Scientific

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072: Friedrich A. Hayek – That Entrepreneurial Knowledge is Situational and Commonsensical, Not Scientific

HayekIn this essay, I present a personal essay based on the work of Freidrich A. Hayek, most notably concerning his thoughts and discussion on how knowledge cannot be scientifically calculated for use within a centrally planned organisation, which is argued in his own essays ‘The Use of Knowledge in Society’ (1945) and ‘Competition as a Discovery Procedure’ (1984). 

 

That Entrepreneurial Knowledge is Situational and Commonsensical, Not Scientific

Part One:

Explanation and Development of the Thesis

In Austrian theory, that entrepreneur is an agent whose character has been carefully explored. Such on entrepreneur operates in a market economy, which is referred to as a ‘discovery process’ by Hayek¹. That entrepreneurs knowledge of the market is imperfect due to do reasoning that knowledge is dispersed amongst the undertakers of the business.

Entrepreneurs possess a certain degree of knowledge dust is unique to them individually and one that cannot be expressed quantitatively. Thus, Hayek disregards all neo-classical and Keynesian economics as they seem to dismiss the role of the entrepreneur via use of quantitative analysis (of averages and aggregates) in measuring equilibrium points to which all entrepreneurs must strive towards and achieve.

The unquantifiable (tacit) knowledge, possessed by the entrepreneur, is therefore ignored when scientific knowledge is made available. As Hayek stated ‘the knowledge of the particular circumstances of time and place… is… the body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules’ (1945).

In the writings of Hayek, sScientific knowledge is associated with centralized planning whereas entrepreneurial knowledge is associated with a market order where knowledge is dispersed and situational. The latter includes tacit knowledge, as it is not directly communicable.

‘Every individual… possesses unique information of which beneficial use… [is] based on… [the] knowledge of people of local conditions and of special circumstances… of the fleeting moment not known to others… The sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority and statistical form’ (Hayek, 1945: 251).

The market economy can only operate at its most optimum level given the knowledge of entrepreneurs who mutually adjust via negative feedback. There is no role for scientific knowledge, as such use would ‘collectively’ combine the knowledge of all entrepreneurs in some mathematical formulation, thereby ignoring situational and commonsensical knowledge.

The market is a ‘discovery process’ for all undertakers who aim to eliminate in perfect knowledge by receiving ‘information for judgments about… matters by reading…, watching…, experiencing…, chatting…, strolling… Much of what he thereby observes – or senses – he could not express in explicit words or numbers’ (Yeager, 1996).

Thus, the entrepreneur will base decisions regarding cost minimisation, prices, allocation of resources, etc. on what they know and what they believe is the right and optimum choice. Scientific knowledge is irrelevant, as it does not quantify the ‘feel’ for the market. It aims for an equilibrium point in time, is costly, his complicated and fails to adjust to changes in the market at the required time.

Tacit knowledge is often not consciously known, even to those who process it, and come never be communicated to a central authority or used in their scientific evaluations. Such entrepreneurial knowledge is unknowingly transmitted throughout the economy as an unintended consequence of individuals pursuing their own ends. The unintended consequences of an economy fail to be recognized by those reliant on scientific knowledge, whereas the entrepreneur with situational knowledge, will recognize such and act accordingly.

Spontaneity is key to the entrepreneur and utmost for the market economy, thereby suggesting that the process towards obtaining equilibrium is a never ending process. As Knight put it, ‘business decisions deal with situations which are far too unique, for any sort of statistical tabulation to have any value for guidance’ (1971: 231).

Part Two:

A] Argument Against the Thesis

Hayek’s thesis that entrepreneurial knowledge is not scientific has drawn the attention of its critics, most notably Lange, Dickinson and Stiglitz. All three believe that entrepreneurial knowledge consists of scientific information as it practically improves business decisions.

Lange (1938) proposed that scientific knowledge of, say, conditional prices for all goods and factors of production should be made available and that these could be taken as parameters in the decision-making process of the entrepreneur. The result would speed up the equilibrium process and enhance the knowledge of the entrepreneur regarding market indicators.

‘the Central Planning Board has a much wider knowledge of what is going on in the whole economic system than any private entrepreneur can ever have’ (Lange, 1938).

In the advent of supercomputers, Lange stated that entrepreneurs could use scientific information to aid in their decision-making and that such scientific knowledge could be obtained in real-time given the demands of the market.

Dickinson agreed with Lange, stating that rational calculation under socialism was at least theoretically possible. Dickinson believed that any economy could be formerly represented by a Walrasian system of equations from which the undertakers in the market base their decisions to achieve an equilibrium point. Such scientific knowledge is vital for entrepreneurs if they wish to remain competitive and understand the direction taken by the market as a whole.

Stiglitz refers to ‘imperfect knowledge’ as known-to-be-available information that is costly to produce. Stiglitz states that such information, not known by the entrepreneur, could be obtained by acquiring statistical and computable data about the markets which can aid in the process of eliminating the imperfect knowledge of the entrepreneur and reduce uncertainty and risk.

Each decision is made within a well-defined framework made up of a given objective function, a given set of resource constraints, and a given set of technologically or economically means of transforming resources into desired objectives².

A famous physicist, Lord Kelvin, stated that ‘When you cannot measure your knowledge is meager and unsatisfactory’³ a statement that many critics of Hayek will stand by.

B] Arguments in Favor of the Thesis:

The main body of argument for Hayek’s thesis came from Hayek himself, although many supported his writings such as Kirzner, Gray and Yeager. Hayek argued that entrepreneurial knowledge is by no means scientific. Knowledge is dispersed throughout society and it is embodied in habits and dispositions of the entrepreneur.

Entrepreneurial knowledge ‘is “knowing where to look for knowledge” rather than knowledge of substantive market information’ (Kirzner, 1973: 68). Entrepreneurial knowledge cannot be quantified or recognized by a central planner or any undertaker in a market who uses a scientific approach.

‘Pantometria’ fails to recognize the tacit knowledge of the entrepreneur and, thus, competitive market behavior relying on scientific knowledge, cannot be a true reflection of entrepreneurial undertakings.

‘there is… a body of very important but unorganised knowledge which cannot possibly be called scientific… the knowledge of the particular circumstances of time and place… every individual… possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active co-operation’ (Hayek, 1968, 250).

In response to Langes criticisms, Hayek states that the ‘imperfect knowledge’ of the entrepreneur is actually ‘previously unthought of knowledge’ which must be discovered by the entrepreneur without any need for science. The entrepreneur, given unique and tacit knowledge, can’t adapt to changing requirements of the market process.

Those who possessed scientific knowledge aim for an equilibrium point in time but fail to recognize that ‘long before [equilibrium] is reached the circumstances to which the local efforts adapt themselves will have changed themselves’. Only the entrepreneur who possesses unique and tacit knowledge will ‘change their plans in the direction made necessary by actual changes’.

‘One major flaw in all proposals for the economic planning is that they are all bound to attempt to transform entrepreneurial perception of opportunities into mechanical procedures for resource-utilization and to incur vast losses of efficiency in so attempting’ (Gray, 1998: 38).

With the application of scientific knowledge, entrepreneurs misinterpret the markers process and, as such, tacit knowledge is lost when averages and aggregates our computed. Entrepreneurs, due to the ‘organised complexity [of the market process] where we expect to find permanent constant relations between aggregates or averages’, must not rely upon scientific knowledge.

Part Three:

Argued Statement of Writer’s Own Position

  1. Acceptance of the Thesis

Having read the relevant literature and wait of the arguments for and against the thesis, the author is in the position of agreeing with Hayek’s thesis.

It is true that not all knowledge can be observed and represented by variables to be inserted into complicated scientific models and conceptual frameworks. Each entrepreneur possesses unique knowledge that orders do not have. Such knowledge is based upon intuition, beliefs, sense and first-hand know-how, which is collectively and instinctively used by entrepreneur to achieve his/her ends.

We human beings live in a world where science seems to preoccupy our minds and influence our decisions. However, such scientific knowledge it is based on the law of averages and probabilities, which persuade entrepreneurs that some optimum outcome will be achieved at some point in time.

The author shares the view of Hayek that there exists a body of knowledge that is ‘particular to the circumstances of time and place’ which cannot be detected, quantified or interpreted by any scientific machine, framework or equation. For example, become attrition’s aim to explain the relationships between variables, but there exists an error term in each regression due to unknown variables that are omitted from the model.

Introducing the case of the BSE crisis, a conflict of interest between individual and scientific knowledge is apparent. It is all well and good to provide statistical data, but entrepreneurs, who operate in the beef industry, do not need such information, how’s they already knew of the crisis when it became apparent.

Such knowledge was situational to entrepreneur and it was common sense that the affected cattle would be a threat to his/her undertakings. The entrepreneur, by a discovery process, will operate in the best possible market available under such a crisis. No scientific knowledge is required in predicting an equilibrium point for the farmer.

2. Objection to the Thesis

Despite accepting that entrepreneurial knowledge is situational and commonsensical, the author shares the view of Stiglitz that’s of entrepreneurs cannot afford to be ignorant of the fact that scientific methods are vital in expanding the decision making process of the entrepreneur. It is evident to every undertaker in a market. Scientific evaluations of costs, prices and other indices are available I’m very helpful in finalizing decisions.

Part Three

Responses to Objections Against the Writer’s Position:

In the previous section, it had been acknowledged that entrepreneurial knowledge is situational and commonsensical, but it is the belief of the writer that such knowledge is incomplete without the use of scientific knowledge.

Scientific knowledge is considered a net benefactor to entrepreneurs as it provides vital information that can almost drastically eliminate imperfections of knowledge. ‘Misallocations’ or ‘wastes’ would be minimised.

However, it is understandable to criticize the above statement and defend the position of Hayek. Entrepreneurs will eventually eliminate the imperfection that they possess via the ‘discovery process’ without the dependency of science.

To describe entrepreneurial activity as wasteful because it corrects mistakes only after they occur seems, as Kirzner put it, ‘similar to ascribing the ailment to the medicine which heals it, or even to blaming the diagnostic procedure for the disease is identifies’ (1973: 236).

To conclude, the writer believes that entrepreneurial knowledge is situational and to some degree commonsensical but it also includes an element of science.

References:

Caldwell, B. J. (1997). Hayek and Socialism. Journal of Economic Literature, 35(4):1856-1890.

Gray, J. (1998). Hayek on Liberty. Third edition. Routeledge: London and New York.

Hayek, F. A. (1945). The Use of Knowledge in Society. American Economic Review. XXXV, No. 4. pp. 519-30. American Economic Association.

Hayek, F. A. (1968). Competition as a Discovery Procedure. The Quarterly Journal of Austrian Economics 5, No. 3 (Fall 2002): 9–23.

Check out this FREE Kindle ebook ‘The Essential Hayek’ by Donald Boudreaux

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048: Steve Hanke on Currency Boards, Moral Hazard and the Benefits of Privatization

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048: Steve Hanke on Currency Boards, Moral Hazard and the Benefits of Privatization

Steve Hanke is a Professor of Applied Economics, specializing in currency boards. He is Co-Director of the Institutesteve hanke for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore.

Steve is a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute in Washington, D.C. and a member of the Charter Council of the Society of Economic Measurement and the Financial Advisory Council of the United Arab Emirates.

Previously, Professor Hanke was a Senior Economist on President Reagan’s Council of Economic Advisers and was also an Advisor to the Presidents of Bulgaria, Venezuela, and Indonesia.

He played an important role in establishing new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania, and Montenegro. Professor Hanke has also advised the governments of many other countries, including Albania, Kazakhstan and Yugoslavia.

In 1998, Steve was named one of the twenty-five most influential people in the world by World Trade Magazine.

Professor Hanke is a well-known currency and commodity trader and serves as Chairman of Hanke-Guttridge Capital Management, LLC.

Steve Hanke’s most recent books are Zimbabwe: Hyperinflation to Growth (2008) and A Blueprint for a Safe, Sound Georgian Lari (2010).

Influencers:

Friedrich Hayek, Kenneth Boulding of the University of Colorado  and Bob Mundell

Economics:

In this interview, Steve mentions and discusses: currency boards, monetary policy, inflation, hyper-inflation, interest rates, currency reserves, optimum currency area, common currency, fiscal policy, moral hazard, eurozone, ECB, the World Bank, property rights, investment, central bank, dollarisation, interventionist policy, privatisation, hedging, Chicago Mercantile Exchange, futures contract and bitcoin.

Economists:

In this interview, Steve mentions and discusses: Kirk Schuller, Milton Friedman, Friedrich Hayek, Adam Smith, Robert Mundell and Kenneth Boulding.

There have only been 56 hyper-inflations in world history and I think I’ve stopped more of them than any living economist – Professor Steve Hanke

In this episode, you will learn:

  • what is a currency board and the reason why a country should resort to one.
  • about Bulgaria’s currency crisis in 1997, how hyper-inflation hit 142 percent per month and what Steve Hanke did to solve the problem.
  • the successful use of currency boards in Bulgaria in 1997 to significantly reduce inflation and interest rates.
  • why Bulgaria has one of the lowest fiscal deficits of any country.
  • about Yugoslavia’s hyper-inflation of 313 million percent in 1994.
  • why Montenegro dumped the Yugolsav Dinar for the Deutschmark during Slobodan Milosevic’s presidency of Yugoslavia.
  • how Montenegro will join the euro currency without having to do a currency changeover.
  • if it makes sense to leave a currency board to join a monetary union and giving up fiscal autonomy.
  • why it’s best for Bulgaria to stay outside the eurozone due to the issue of moral hazard.
  • why Greece ran up a fiscal deficit of 12.7% of GDP when the Maastricht Treaty stated a strict adherence to a maximum level of 3%.
  • about the Greek bailout of $472 billion and how it amounts to almost $43,000 for every man, woman and child in Greece.
  • how a currency board removes the moral hazard of a unified currency area by financing spending with current taxes or the private bond market.
  • if Greece should abandon the euro and set up a currency board and pegging their currency with the euro.
  • how a Greek currency board would operate if Greece left the eurozone.
  • about the success of the Hong Kong currency board and how it operates without a central bank.
  • if we are heading toward a one world currency.
  • why most small countries should abandon their currency and anchor it to the euro, dollar, yen or yuan.
  • whether Greece should sell off its ports, lands and other property to private investors just as Hayek proposed and Ronald Reagan did in the US in the 1980s.
  • about Ronald Reagan’s privatisation programme in the US in the early 1980s.
  • about the Bureaucratic Rule of Two and why privatisation is an optimal outcome for government, enterprise and society.
  • what Hayek was like as a person and what he thought of Ronald Reagan, The Intellectual.
  • about candling in the old days when grading eggs for futures contracts.

On Currency Boards:

A currency board system is a system in which you issue a domestic currency, which is anchored to a sound currency at a fixed exchange rate that’s fully convertible. The local currency is backed up with a 100% anchor currency’s reserves. So the local currency really becomes a clone of whatever the anchor currency happens to be.

The currency board is not allowed to emit credit to the government. If the government needs money for fiscal expansion, the only way to get this finance (in the form of your local currency) is to take hard currency in (like the euro) and exchange it for the local currency. Bulgaria has been doing this since 1997. The government cannot sell bonds to raise finance. They convert the euro (previously the Deutschmark) into their local currency, the lev, and can then carry out fiscal stimulus. Consequently, Bulgaria has one of the lowest fiscal deficits in Europe.

On Bulgaria and Why It Should Not Join the Eurozone:

“With the currency board, they (Bulgaria) ‘clone’ the euro, so they’re in a unified currency area with the eurozone but they’re not formally part of the eurozone itself. I’ve counselled the Bulgarians, and the best thing to do is to stay with that arrangement. And the reason why is that the eurozone, the common currency area, has a huge moral hazard associated with it. That is, something that creates bad behaviour encourages bad behaviour and Greece is a perfect example.” – Professor Steve Hanke

On the Greek Deceit and Its Fiscal Deficit:

“Greece entered the eurozone in 2001 on false pretences. They cooked the books and got in. They were allowed in the club even though the club knew the Greeks were lying in terms of their economics statistics.”

“The Greeks calculated that they could spend like drunken sailors, which they did and ran a completely irresponsible fiscal operation.”

“The moral hazard is you join a club and if you think the club won’t enforce its rules and won’t force you to tow the line, you will just go on your merry way spending and deficit spending and knowing, or at least thinking that, in this case the eurozone, would bail you out.”

Greece ranks 151 out of 189 countries for the ability of doing business. If you make a contract in Greece, the probability of having that contract enforced is very low by international standards. It’s like being in Zimbabwe. Greece is supposed to be part of the European Union and a modern country but it isn’t.

Greece should leave the eurozone, set up a currency board and re-introduce the Drachma. This would create fiscal discipline just like the situation in Bulgaria.

Quotes by Steve Hanke in Episode 048 of the Economic Rockstar Podcast:

I was hedging and trading when I was 14 years of age. I was trading with my grandfather – @steve_hanke

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Hong Kong was aways a unilateralist free trader. That encourages competition, entrepreneurship and productivity. The countries with open trade tend to be more free market in general and they grow more rapidly. – Steve Hanke

“About 90 Central Banks should just be done away with completely and either a currency board be put in or a stronger foreign currency like the dollar, the euro or the yen.” – Steve Hanke

“If you want lower fiscal deficits, lower inflation and higher rates of growth you adopt with a currency board system or dollarize” – Steve Hanke

If you want to reduce corruption you privatise. But the potential gains in terms of economic prosperity are enormous – @steve_hanke

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Europe’s lands are “a mere waste and loss of country in respect both of produce and population.” – Adam Smith

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Bitcoin has a unit of account problem – @steve_hanke

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On Hayek:

“He was delightful and charming and very interesting, particularly for Mrs Hanke and myself. One of Mrs Hanke’s Great Aunts was one of Hayek’s earlier loves of his life.”

Recommended Books:

Resources:

Where to Find Steve Hanke:

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018: Mark Thornton on Austrian Economics and Why the Nazi’s and the KGB Wanted Mises Papers

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018: Mark Thornton on Austrian Economics and Why the Nazi’s and the KGB Wanted Mises Papers

Mark ThorntonDr. Mark Thornton is an economist who lives in Auburn, Alabama. Mark is Senior Fellow at the Ludwig von Mises Institute and serves as the Book Review Editor of the Quarterly Journal of Austrian Economics.

Mark’s publications include The Economics of Prohibition; Tariffs, Blockades, and  Inflation: The Economics of the Civil War (2004), The Quotable Mises (2005),The Bastiat Collection (2007), An Essay on Economic Theory (2010), and The Bastiat Reader (2014).

Dr. Thornton served as the editor of the Austrian Economics Newsletter and as a member of the Editorial Board of the Journal of Libertarian Studies. He has served as a member of the graduate faculties of Auburn University and Columbus State University. He has also taught economics at Auburn University at Montgomery and Trinity University in Texas.

Mark served as Assistant Superintendent of Banking and economic adviser to Governor Fob James of Alabama (1997-1999), and he was awarded the University Research Award at Columbus State University in 2002. Mark is a graduate of St. Bonaventure University and received his PhD in economics from Auburn University.

Economics Themes:

In this interview, Mark mentions and discusses: Competition, Entrepreneurship, comparative economic systems, economic history, business cycles, value theory, population policy, purchasing power, deflation, monetary policy and bitcoins.

Economists and Economic Schools:

In this interview, Mark mentions: Ludwig von Miss, Friedrich Hayek, David Hume, Israel Kirzner, Carl Menger, Richard Cantillon, Friedrich von Wieser, Eugen von Böhm-Bawerk, Joseph Schumpeter, Fritz Machlup, Adam Smith, Anne-Robert-Jacques Turgot, Irving Fischer, Milton Friedman, Ben Bernanke, Scott Sumner, George Soros, Nassim Nicholas Taleb, Jim Rogers, Paul Krugman, Austrian Economics, Merchantilists, Physiocrats, French Liberals and Classical Economists.

Influencers and Favorite Economists:

Scott Sumner, Richard Cantillon, Ludwig von Mises and Murray Rothbard.

Why Mark Read Economics:

As a teenager I could clearly see in the 1970s, the government was the problem and in college I discovered libertarianism. I was an economics major and I also discovered Austrian economics. I come from a family of entrepreneurs and there my perspective was developed. The small business person and the day-to-day interferences and interventions government introduced in the form of regulations, subsidies and taxes.

I came across economics outside of the classroom and outside of college – Dr. Mark Thornton

Mark’s Affirmation and Motto:

‘Do not give in to evil but proceed ever more boldly against it’ – Virgil

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By going by this motto, it frees you up to take a stand you actually believe in rather than watering it down or covering it up – Dr. Mark Thornton.

In this episode, you will learn:

  • about the Greek and Roman philosophical roots of Austrian Economics.
  • about the importance of deduction and logic in Austrian thinking.
  • the limitations to Austrian Economic thinking.
  • about Irish economist Richard Cantillon, who remains quite elusive in economics.
  • who Richard Cantillon influenced through his writings.
  • why the Austrian School of Economics is given its name.
  • how von Mises’ papers got in the hands of Nazi Germany and then the Soviets.
  • whether von Mises or Irving Fischer was right about the 1929 Stock Market Crash and the subsequent Great Depression.
  • who would support Bitcoins – von Mises or Fischer?
  • why bitcoins were created.
  • how similar bitcoins are with gold and the Gold Standard.

Austrian Economic Perspectives and Its Limitations

The Austrian Theory is based on logic and deduction and it tries to remain realistic. In other words, you don’t make false assumptions about humanity or the economy or the world we live in. You try to stick with realistic aspects of human behavior and you theorize, by deducing logically, what economic theory should be in order to help explain things in the real world.

The limitation for Austrian Economics is that it will never be able to have a complete theoretical understanding of the economy and it will never be able to make predictions about the future especially with respect to the magnitude of changes and the timing of actual real-world results. The Austrian School has limited predictive power about certain economic policies, regulation, subsidies, price controls, etc.

You can find Austrian insights going back to the Greeks and the Romans. It’s not until you get to the Scholastics where you see thinkers that have the same basis, realism, logic and deduction. The world works because of the ideology of the masses.

Richard Cantillon

Irish economist Richard Cantillon (1680s – 1734) is the precursor to Austrian Economics and he is the first person to put together a comprehensive treatise on economics along the lines of the Austrian School which would come after him. Cantillon was an influencer on people like Hayek, Karl Menger, the French Liberals and many of the Classical Economists and Physiocrats.

The Austrian School really starts with the publication of Cantillon’s essay ‘Essai sur la Nature du Commerce in Général’ (Essay on the Nature of Trade in General). Unfortunately, Cantillon fell out of favour with many investors that were caught up in the ‘Mississippi Bubble’ of which played a part and was subsequently ‘murdered’ when his house burnt down (there is speculation that he staged his own death to avoid the wrath of his debtors. His work was not published until 25 years after his murder. It influenced Adam Smith and Anne-Robert-Jacques Turgot. However, Cantillon’s work fell into obscurity at the time of the neo-classical school from the second half of the 19th Century to 1930 and has since been on a path of re-discovering and re-interpreting Cantillon – what he wrote, what it meant.

The Birth of Austrian Economics

Carl Menger wrote his book ‘Principles of Economics’ explaining his theoretical understanding of economics. His students von Wieser and von Böhm-Bawerk eventually became mentors to von Mises, Schumpeter and Hayek. They were known as Austrian economists simply because of their country of origin as they did not fit into any particular school of economics at that time. Hayek worked for von Mises at the Institute of Business Cycle Research. Hayek went on to work in the London School where he influenced many British economists to adopt the Austrian methods and theories.

Mises, the Nazi’s and the KGB

During World War II, Mises left Vienna due to the Nazi threat as he was both the arch-nemisis of all Socialists as well as being Jewish. On invading Vienna, the Nazi’s took von Mises works and were studied by the Nazi Intelligence Service. And when the Soviets invaded Germany, both Communists and National Socialists saw that von Mises was the main opponent of Socialism and saw that it was unviable. It was only because of the downfall of the Soviet Union was Mises’ papers rediscovered in Moscow in a KGB warehouse.

von Mises published a paper in 1920 and showed that  Socialism in its pure form was impossible and in any form was irrational. Socialism would not be efficient or productive when you have one person or one group of people making economic decisions on labor, resources and production. This would be an impossibility as they would have to come up with decisions as to what to produce, how to produce it, who to produce it for and how much to produce. They would then have to make those decisions on every good in the economy. It just can’t be done at this level, and the Soviet Union eventually realised this and they had to introduce money , wage rates and interest rates. They had to break up production by industry and introduce prices based on the West, and undergo the allocation of resources. In the end, no matter how many modifications they made, they still couldn’t produce enough food, clothing and shelter to keep their population growing.

Mises, Irving Fischer and the Fed

I ask Mark about Mises views of the economy in 1928 compared to that of Fischer’s. Fischer had been writing extensively in the public domain up to that point in time and Mises worried about the economy and the economic approach taken by government, which was largely influenced by Fischer. Fischer wrote that the US economy and investment in the stock market was safe. The 1929 Stock Market Crash and the subsequent Great Depression proved Mises correct and resulted in Fischer losing his wealth but not the use of his monetary economic perspective.

Irving Fischer was trained in Germany in modern economics with the use of statistics. The system he devised was based on a stable dollar, where the purchasing power of the dollar would remain the same. He developed price indexes to measure the purchasing power of the dollar and then suggested that monetary policy be implemented to maintain a stable dollar value. This type of mechanical economics and government bureaucracy to achieve this mechanistic view of the macro-economy resulted in Fischer being very influential in the US. He had a great influence on people like Milton Friedman and Ben Bernanke, and the modern economic policies of the US today are guided by his approach to a stable dollar and to the manipulation of monetary policy to keep a stable dollar. When the purchasing power of the dollar starts to increase the dollar – or deflation – then the monetary authorities have to throw in more dollars or credit in the system to try and dilute the value of that dollar.

Mises’ perspective and approach was different to Fischer’s and in 1928 he wrote a book outlining why Fischer’s approach was wrong and that it would cause considerable problems of size and magnitude. Mises approach was a more natural approach of the market economy that money was a weight of gold, silver or copper and the coins would remain the same weight, i.e. a silver dollar would be 25 grams of pure silver and these coins would be allowed to fluctuate in both the short-run and the long-run. This provides a shock absorber for the entire economy because the value of money is fluctuating, the value of domestic and foreign goods are fluctuating (in terms of domestic goods) and the system is not fragile. Everything can move in the economy.

However, Fischer’s approach, by guaranteeing a stable dollar and not allowing it to adjust vis-a-vis everything else in the economy creates ultimately a fragile system. Mises’ view was that you hold the metal content of the dollar constant and you allow them to fluctuate in market value, whereas Fischer believed you would essentially change the weight of the coins. He actually advocated this system but realised it to be unworkable and so retreated to making monetary policy maintain the market value of the US dollar or any currency.

Under Fischer’s approach, a bureaucracy has been created to be in charge of maintaining money and credit in the economy and giving the government the ability to increase the money supply to reduce interest rates. This has created a panacea for politicians to get out the ‘magic check book’ and make the economy ‘feel better’ in the short term.

The Central Bank is essentially a ‘legal’ counterfeiter, which is very valuable for both the political class as well as the big banks that it benefits – Dr. Mark Thornton

Bitcoins

The creator(s) of bitcoins did so in response to the financial crisis of 2008 – 2009 and they saw that central banks were responsible for that, as well as the banks who got a bailout. The average ordinary citizen ended up absorbing most of the losses.

Bitcoin is not controlled by politicians or anyone else. It’s part of an electronic marketplace and it mimics the Gold Standard in several ways:

Miners, or people who want to produce Bitcoins, have to expend real resources – their time, their money, their computing power, the purchase of special devices and a tremendous amount of electricity – just like the way gold miners expend resources on mining for gold.

The mining process becomes progressively more difficult overtime and there will be an end with production for bitcoin per se, whereas with gold, the process will go on indefinitely.

The way Bitcoin tries to alleviate the eventual deflationary pressure on bitcoins is that one Bitcoin can be broken up into a million different pieces in the same way a US dollar can be broken up into 100 pieces or cents.

Eventually people will stop allocating resources to the production of new Bitcoin. This can be a good thing because, at some point, resources will be wasted on producing valueless bitcoins from the social perspective.

Whoever invented Bitcoin did so on the Austrian perspective of the economy and on the perspective that the Gold Standard is a much better system and is decentralized in the market economy.

“Fischer was a ‘control-freak’ in many ways. He wanted to control everything, even the genetics of the American population. He would strongly disapprove of Bitcoin” – Dr. Mark Thornton

Recommended Books:

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006: Andrew Heaton on Using Comedy to Explain Economic Concepts

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006: Andrew Heaton on Using Comedy to Explain Economic Concepts

Andrew Heaton

Andrew Heaton is a comedian, writer and political satirist. He is the presenter of the witty and entertaining economics podcast, EconPop and has a Masters degree in International Politics. Andrew has been featured in a Bollywood movie, plays a lead role in the sitcom Cap South and has been voted best new comedian of 2013 in New York. Andrew hails from Oklahoma, is an Officer to a Prince and plays the Ukelele to enhance the mood of his friends’ amorous endeavors.

Economic Themes:

In this interview, Andrew mentions and discusses: wheat quotas, comparative advantage, protectionism, relative and actual growth, free markets and limited government, Austrian Theory of Monetary Creation, supply and demand, signalling, subjective value, negative externalities, tariffs and import duty, protectionism, corporation tax, scarce resources, population, abundance of resources, the Great Depression, US deficit, unintended consequences, behavioral economics and risk aversion.

Economists and Economic Schools:

In this interview, Andrew mentions: the Chicago School, the Austrian School, Libertarianism, Adam Smith, Milton Friedman, Freidrich Hayek, John Maynard Keynes, Murray Rothbard, Frédéric Bastiat, Thomas Malthus, Gene Epstein, Steven Horwitz,

Andrew’s Influencers:

Gene Epstein and Milton Friedman.

Podcasts:

EconPop is hosted by Andrew, who is joined by economist Steven Horwitz and professor of literature Paul Cantor.

In this episode, you will learn:

  • how Andrew became interested in economics while studying abroad in Scotland.
  • what parallels Andrew draws between politics, economics and comedy.
  • what economists and school of thought Andrew draws inspiration from to carve out his own views.
  • where and from whom Andrew gets his inspiration for his anecdotal writings on economics concepts.
  • how economic concepts is in abundance in life and can be found in the many movies we may have watched.
  • what qualities Andrew believes makes a successful person.
  • about Andrew being an Officer to Prince Leonard of Hutt River.
  • what comparative advantage is and how Andrew explains it in an unusual but light-hearted way.
  • why Andrew believes we will never run out of resources and why we should not worry about scarcity.

Advice:

‘If you’re gonna have a lot of activities that you are doing, you need to be mentally organised and very good at prioritising.’

‘To supercharge your day, when you are getting to your tasks, do the one you hate most first… the rest of your day is a cinch.’

‘With books, the trick is you just write a thousand words a night… your subconscious mind works on it and when you sit down the following night it’s a little bit easier.  You have a full novel in two and half months.’

Personal Habits:

  • Andrew works extremely hard to get things done. He has blended comedy with economics to allow this dismal science to become enjoyable or entertaining.
  • Andrew believes that having the right mentor is hugely beneficial and such a relationship allows him to learn and focus on reaching small milestones. This has worked out favorably well for Andrew in the field of economics where he developed a strong set of opinions on some theoretical aspects of economics. By expanding his knowledge-base through economics books and the many discussions with his mentor, Gene Epstein, Andrew has opened new doors and created new opportunities that otherwise may not have been attainable. His love of economics, particularly the Austrian and Chicago Schools and libertarianism, has given Andrew a lot of material to work on for his comedic performances onstage, online and in books.
  • Andrew writes quite frequently and believes that constant writing will have a payoff in terms of the publication of a book.
  • Andrew plays the ukelele but, unfortunately, it wasn’t ‘tuned’ correctly for him to give us a treat on this podcast. So, as an homage to Andrew, I changed the outro music theme of Economic Rockstar to one that uses a ukelele. I hope you enjoy it!

Takeaway:

On Economics and Comedy:

Economics is a dismal science, so if you can make it funny it sweetens it – Andrew Heaton

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On Humor and Economic Differences:

‘When you start arguing with somebody your adrenaline level shoots up.  Just on a biochemical level, you become much less able to hear what they are saying because you are taking a defensive posture.  Conversely, when you’re laughing, you produce endorphins.  And, if I can make you laugh, for a moment you are willing to listen to me – just for a moment.’

On Human Innovation Outpacing Declining Resources:

“We didn’t end the Stone Age because we ran out of stones”. – Andrew Heaton

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Recommended Books:

Favorite Internet Resources:

Where To Find Andrew Heaton:

Contact Andrew and start a campaign if you would like him to create a ‘Mighty Heaton’ doll!

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