Mises Institute Article

Today I read an article on the Mises Institute entitled "Monopoly Through Austrian Lenses" that left me truly dumbfounded.

In the beginning of the article, Newman feels the need to "bash" a tool that neo-classical economists use.  He argues against the introductory monopoly model used to teach students why monopolies are inefficient, and then he acts as if this is as rich as monopoly theory gets to the neo-classicals.  If one wants to argue against a certain school of thought, should they not be arguing against the most advanced and highly celebrated theory?  Certainly they should not be arguing against the learning tool for college freshman.  Also, the differences aren't just compared to the perfect competition model either, they are compared to the oligopolistic model, and the monopolistic competition model.  But that is neither here nor there, just one more thing he forgets to mention, as if the only models are monopolistic and perfect.

In essence what he is doing is using a teaching tool to argue that the methodology is wrong.  This is similar to me bashing the "broken window fallacy" to say that Austrian Economics is the wrong way to study.  The broken window fallacy does not take into account the desire for the shopkeeper to want a new suit, or hat or whatever his desires are.  Since all individuals are different with different degrees of desires, how can we conclude that the shopkeeper won't use a credit card to buy what it is he desires, or take out a loan?  Now he has to fix the window, which leads to increased spending and he buys the suit he so desperately desires.  Hence the multiplier is real and the broken window fallacy is a farce.  Austrian economics must be the wrong way to do economics right?  But of course this argumentation is not right.

The next thing he does left me as perplexed as the first.  He compares it to individuals selling their labor.  This surprised me because the monopoly model used in the article holds zero bearing when considering individuals selling their labor.  There is an entire different field of study for that.  It is called Labor Economics and recognizes that each person has a monopoly on their own labor.  This again goes back to what I mentioned in the blog I wrote a few weeks ago.  If Austrians want to start getting taken more seriously they need to start making coherent arguments.  One must have taken two economics courses, labor and micro, to realize this argument does not mean anything.  So what do you think someone with a PhD in economics thinks of it?

Just a few more things to consider.  First he talks about calling things "unjust" or "unfair".  I hope he is not bashing neo-classicals with this argument but rather the interviewer.  No where will you find a good economist in any school of thought talk about things being unjust or unfair when they are doing economics.  However, this might not be the case if they are talking about political philosophy.

One last thing I would like to consider is the following statement, because Austrians seem to make this claim all the time.

"Finally these valuations are entirely subjective in two ways:  Jones's utility or satisfaction from wearing  a pair of Oakley's cannot be compared quantifiably to his satisfaction from wearing a pair of Ray-Bans, even by his own inspection.  Similarly, Jones's satisfaction from wearing a pair of Oakley's cannot be compared to Smith's satisfaction from wearing an identical pair of Oakley's.  Interpersonal utility comparisons are impossible, and even intrapersonal preferences are only ordinally ranked."

No economist would disagree with the Austrians that we cannot put a number on our "happiness" and then compare them.  There have been economists that have given us tools to look at this in a different way, such as Von Neumann and Morgenstern in TGEB.  Austrians have never addressed these arguments as far as I have seen (I plan on writing about this in a different post).

Here is one way how Jones can do it.  Say for example the Ray-Bans cost $150 while the Oakley's cost $130.  If he buys the Ray-Bans, clearly he prefers them by at least $20.  And in his head it is completely plausible for him to think "I'd pay up to $180 for these!"  I do this in my head all the time.  Almost every time I purchase something I do this.  Think about the next time you go to McDonald's you are either going to buy off the value menu or not.  If I do, that means I don't value a Big Mac at its original price.  However, if it is 2 for $3.33 I might buy them.  I can then compare the utilities as prices.

Finally Jones's satisfaction of wearing Oakley's to Smith's can be done the same way.  They both know what they would be willing to pay and compare the prices.  It's not rocket science.

This of course is exactly what airlines do when setting their prices.  Clearly someone buying tickets 3 months out from a flight is not going to be willing to pay as high of a price as someone whose parent gets sick and needs to fly out immediately.  Hence the airline charges more to the more needy person.  Their "satisfaction" from getting the ticket is higher than the person who has 3 months to make other arrangements. 

I do not understand why there has to be a separate way to look at monopolies for the Austrians.  Other schools of thought have already absorbed the proper Austrian Theory into their theories, why can't Austrians do the same?

Here is the link to the article I am referencing:
http://mises.org/daily/6468/Monopoly-Through-Austrian-Lenses

Debate on Globalism

Recently I got into a debate on open borders with respect to trade and labor.  I am in favor of free trade between countries and also open borders wrt labor, almost all schools of thought are in accordance with this theory.  Monetarists, Austrians and even Keynesians all agree.  In a nutshell, the theory states open borders will lead to increased economic activity and increase the standard of living.

The person I was debating was a fan of Adam Smith and was claiming that Smith was against open borders to trade and labor, or at least as far as I could tell.  He thought that open borders to trade and labor, and commodity backed money would lead to "mutually assured economic destruction".  I have read some Adam Smith, probably not as much as I should have, but I have read a little more since the debate and I found out that the person I was debating had it completely backwards.

I was surprised to hear someone claiming that Smith was against open borders in the first place.  I knew he was in favor of free trade and I could not imagine him being wrong on this.  So I read into his views on borders and one quote sums up his view very well.  "The core of free trade, is the free circulation of labor".  Clearly this implies that Smith opposed any mercantilistic restrictions with regards to not only trade but labor as well.  It makes sense that he would be in favor of open borders, every good economist I have ever read or spoken with is in favor of it.  Furthermore, it is almost all economists pet peeves to hear people talk about why tariffs are good and we can't let immigrants steal our jobs etc. etc.

I had no idea what Marx thought of immigration at the time of the debate but he sent me a link of something that said Marx was in favor of open immigration to reduce national identity.  This sounded like something Marx might say, but my research did not agree with this assessment.  Basically, Marx was against any immigration thinking it was a ploy of the bourgeoisie to bring in cheap labor to drive down the wages and further exploit the labor.  It also makes sense that Marx would be against it.  He is one of the worst economists in the worlds history.

Disclaimer: When economists talk about open borders to trade and labor they are not endorsing letting anyone in the country at anytime.  Rather, they are endorsing making it easier for people to enter a country for jobs if they are demanded.

Litigation Fear

I asked our twitter followers if there was anything in specific they would like me or my brother to write about and someone asked us to contemplate the question "Does fear of litigation force doctors to overcompensate?"

The immediate response in my head was "it has to force them to overcompensate".  Here is why:

If we consider this through a decision theoretic approach it is easy to see why doctors are likely to overcompensate.  Decision theory is similar to game theory except instead of considering multiple individuals making decisions against each other, we consider a single individual making decisions against "states of the world".  The possible states of the world we must consider are: x = not overcompensating and correct diagnosis, y = overcompensating and correct diagnosis, z = not overcompensating and wrong diagnosis, w = overcompensating and wrong diagnosis.

Now consider what "states of the world" are most favorable.  Obviously it is either x and y, and to the doctor the difference between them is negligible even if to the patient they are not.  This leaves z and w as the two least favorable situations, of them, w is more favorable to the doctor and z is more favorable to the patient ( z >w for the patient because lower medical bills, w>z for the doctor because "they covered all their bases" and is less likely to lead to litigation).  From this we can see the rational decision for the doctor is to overcompensate because it maximizes his expected "payoff".  (payoff being keeping his job, not getting sued etc.)  The payoff is greater because the payoff of x=the payoff of y, but the payoff of w > payoff of z.

What effect does this have on society is the next question.  Well for one, it increases costs to the patient.  In the state of Illinois women had to buy psychiatric coverage, unlimited overnight stays in the hospital, OBGYN coverage, unlimited mammograms and a plethora of other things.  The reason why they had to buy these is because doctors have to "cover their bases".  This obviously increases health insurance costs.  It seems absurd that a woman who is sane, not trying to have a baby shouldn't be allowed to buy basic coverage.  This is why, well part of the reason why, so many people could not afford health insurance.  This of course leads to all sorts of other costs to society, such as medicare/medicaid, for example.

This is how I think of this problem and hope it helps everyone understand the situation more clearly!

Anarcho-Capitalistic Dogmatism

(Image Courtesy of Google Images)

Yesterday I read a comment posted by an anarcho-capitalist that was truly mind boggling.  The comment that was made said they (the advocate of anarcho-capitalism) had more respect for the reasoning of the authoritarian than for the reasoning of the advocate (classic liberal/libertarian/paleo-conservative) for a limited government.

Basically, this anarcho-capitalist has more respect for the reasoning of Marx, Stalin, Lenin, Mao, and Hitler than for Locke, Bastiat, Jefferson, Ron Paul, Rand Paul, and Mises. 

Ladies and gentlemen, this is the product of the Neo-Austrian movement that is taking place.  While Ron Paul encouraged everyone dedicated to liberty to study the classic literature of limited government the Neo-Austrian/Neo-Rothbardian anarcho-capitalist is turning a rich intellectual heritage into slogans and intellectual quips.  They are doing to liberty what Sean Hannity has done to Conservatism. 

"You think government has a legitimate role in society!  Statist!"

"Oh, you are against monopolies?  So why do you support the monopoly of the state!?!?! Statist!"  

"You support the Constitution?  Don't you know that the Constitution allows for taxation and that all taxation is theft?!?!?! Statist!"  

"So you think the government will always exist?  That is like saying slavery will always exist! Statist!"  

"You think a consumption tax is voluntary?  Statist!"

This is what it amounts too - One extreme of a fascist, authoritarian, totalitarian state on one side or anarcho-capitalism on the other.  There is nothing reasonable in between.  This position, in my view, is an absurdly ridiculous position to argue on behalf of because it puts forth a false dilemma.  Slavery or freedom - meaning, any government possibly conceived of or freedom.  This is not free thinking.  This is mindlessly attaching yourself to an ideology with zero practical application to our current situation.

The philosophical hypocrisy is apparent when it is recognized that the Neo-Rothbardian anarcho-capitalist is supportive of folks like Mises and Ron Paul.  Mises emphatically denies the reality of a stateless society when he says this: 

"The anarchists overlook the undeniable fact that some people are either too narrow-minded or too weak to adjust themselves spontaneously to the conditions of social life.  Even if we admit that every sane adult is endowed with the faculty of realizing the good of social cooperation and of acting accordingly, there still remains the problem of the infants, the aged, and the insane.  We may agree that he who acts antisocially should be considered mentally sick and in need of care.  But as long as not all are cured, and as long as there are infants and the senile, some provision must be taken lest they jeopardize society.  An anarchistic society would be exposed to the mercy of every individual.  Society cannot exist if the majority is not ready to hinder, by the application or threat of violent action, minorities from destroying the social order.  This power is vested in the state or government. 

State or government is the social apparatus of compulsion and coercion.  It has the monopoly of violent action.  No individual is free to use violence or the treat of violence if the government has not accorded this right to him.  The state is essentially an institution for the preservation of peaceful interhuman relations.  However, for the preservation of peace it must be prepared to crush the onslaughts of peace-breakers." (Human Action, Mises, Pg. 149) 

Awkward!

Here are some of the flaws in the anarcho-capitalist reasoning.  They think since their society will be absent of taxation that the threat of force is somehow more legitimate because the institutions that exist to preserve social order will be subject to the market.  This is naive.  First, just because people voluntarily give their money to a police-like institution doesn't mean they are living in a "force-less" society because they are still sanctioning the institution to use force against those who partake in criminal activity.  It isn't force they have an issue with it is taxation, since force will still exist in the anarcho-capitalist society.

I want to say that again, the problem isn't really about force, it is taxation.

The question that needs to be addressed is whether or not it is possible to have taxation that is voluntary.

In my view this is possible.  Let us consider a society that has a limited government and within this society the Constitution is followed to the letter.  In order to provide funding for a police force, 100% of the citizens of this society vote in favor of a consumption tax placed on gasoline.  At this point, people are free to choose whether they want to consume gasoline or not.  In fact, if the police force gets out of line and starts to abuse their power, the society can go on a "gas-strike" and defund the police in order to demand a change in policy.

The anarcho-capitalists may retort and say that such a society does not exist in reality.  To that I say, welcome to political philosophy because neither does their version of the just society exist in reality.

Another problem that exists for the anarcho-capitalist is the problem of the preservation of their stateless society.  Our founders argued that if a Constitutional Republic is to remain viable the citizenry would have to embody certain virtuous attributes and if those virtues were left behind so would the Republic.  The same goes for the anarcho-capitalist, and I maintain that the virtues necessary for the Republic would be the same for the stateless society.  If these virtues are forgotten, so will the stateless society and their is nothing the market can do to re-establish virtue considering the fact that the market is nothing more than a derivative of the predominant individual virtues currently present within society.

Yet another problem is the Neo-Austrian/Neo-Rothbardian anarcho-capitalist rejects model theory in economics because they believe that models cannot properly capture reality.  So for example, the perfect competition model shows what an economy would look like given these assumptions:

• Infinite buyers and sellers
• Zero entry and exit barriers
• Perfect mobility of goods and services
• Perfect information
• Zero transaction costs
• Profit maximization
• Homogeneous products  
• Non-increasing returns to scale
• Property rights               

All economists realize that these factors do not exist in real-time but nonetheless, it is a theory that can be utilized for advancement of a free society.

Here is the problem for the Neo-Austrian/Neo-Rothbardian anarcho-capitalist; while rejecting models for lack of realism, the perfect competition model IS the anarcho-capitalist theory of society.  This, of course, is highly problematic.  

The Neo-Austrian needs to get off of their intellectual high horse, get rid of their superiority complex, and start to solve the problems that exist in their own philosophy.  In addition to that, they need to engage intelligent and thoughtful folks dedicated to limited government in a more meaningful way.  Spouting platitudes and chanting statist is not sound argumentation.  

Updated Note - This is the original quote I was responding to:

"I have more respect for the reasoning of the authoritarian than I do for the advocate of 'small government'. 

The former believes that because the state is good, we should therefore have as much of it as possible. Makes sense, doesn't it? 

But the latter almost always admits that the state is bad, and then unbelievably declares that we most definitely should have it on some level. I am stumped."

NOTE - Here is a link to my response to Amanda BillyRock's rebuttal - The Truth About Anarchism - A Reply to Amanda BillyRock

Thoughts

"There is no Austrian Economics- only good economics and bad economics". - Milton Friedman

This seemingly obvious statement actually has profound implications if it is considered carefully.

With Ron Paul becoming more popular more average citizens are becoming aware of economics, in particular Austrian economics.  This is a good thing for many reasons, for example, people are becoming aware of economic law, they are interested in the subject, they are reading solid arguments against government etc etc.  However, there are also some negative side effects to being exposed to Austrian economics as your first school of thought.  The main one is Austrian economists denounce all other schools of thought even if that school has made a large contribution to the field of economics.

One thing that exemplifies this situation is the housing crash in 2007.  Many Austrian economists predicted there was a housing bubble, Austrian economists weren't the only school of thought to predict this however.  That is because good economists practicing good economics can see these types of things.  However, if we look at what happened after the housing bubble popped, there were Austrian economists predicting hyperinflation, some even predicted it as early as 2010.  This was a prediction that, at least from my reading, was exclusive to the Austrian school of thought.  The reason they were wrong about this is not because they are bad economists, but rather they will not accept any theory outside of their own.  If they did accept other theory they likely would not have made this prediction.  This, in general, is why I do not consider myself an adherent of Austrian economics anymore.  Because good economists have absorbed the proper Austrian theory into their own and have advanced it using other methods the Austrians reject, such as mathematical economics.

Not only do they denounce other schools of thought, they lump the people practicing those schools of thought into a single category of statists.  This is not a good thing if we want to advance the liberty movement.  I make this claim because instead of Chicago schoolers, monetarists and Austrian schoolers working together to promote freedom and liberty the Austrians are calling all the others statists.  This creates a battle amongst people that should not be battling.  Think of all the time Austrian's have spent bashing Milton Friedman, and for what cause?  Most arm-chair economists aren't going to read his academic papers on the theory of money.  They are going to read Capitalism and Freedom or Free to Choose. Both of which give tremendous arguments against the state.  These may go unread because of an article that called him a statist (if you want to see why Friedman is not a statist check out this post here).  Furthermore, all the time spent bashing him could have been time spent bashing our real "enemies" of liberty.

So in conclusion, it is good people are being exposed to economics, especially a school of thought which denounces the state.  However, one should always read outside the school of thought they adhere to further their understanding.

Is Milton Friedman a Statist?

No.

This claim that Milton Friedman is a statist mostly belongs to Austrian Economists.  They think because Milton Friedman "supported" the federal reserve this makes him a statist.  This could not be further from the truth.

Let me be clear:  Milton Friedman DID NOT support the federal reserve.  Lets look at a quote:

"Any system which gives so much power and so much discretion to a few men, [so] that mistakes -- excusable or not-- can have far reaching effects is a bad system.  It is a bad system to believers in freedom just because it gives a few men such power without and effective check by the body politic --  this is the key political argument against any independent central bank...  To paraphrase Clemenceau:  money is much too serious a matter to be left to the Central Bankers"

This quote does not seem to support the Austrian hypothesis that Friedman was a statist in support of the federal reserve.  If you read enough Friedman or watch enough of his videos you will find him saying he is in favor of abolishing the federal reserve.  He also mentions many times that when he writes or talks about the federal reserve, he is theorizing given that it exists.  Furthermore, in his 1968 paper entitled "The Role of Monetary Policy" published in The American Economic Review he points out the proper way to conduct monetary policy is a "steady rate of growth in a specified monetary total".  This is exactly what we were doing with the gold standard by mining gold in other countries and bringing it to America.  His argument for this is that historically countries with a steady rate of monetary growth have had steady economic activity while countries with wild swings of growth have had wild swings of economic activity.

One other thing to point out is that if you want to learn about basic economic issues from a capitalistic point of view youtube Milton Friedman on whatever subject you wish to see and you will more than likely find plenty of videos all of which will be denouncing the government involvement in markets.

The Case for Natural Law

From J. Budziszewski's book, "Written on the Heart: The Case for Natural Law:"

Introduction to John Locke

The basic steps in Locke's version of the theory are as follows:

1) To have a government is to have known, authorized, impartial judges over all, whose judgments can be "executed" or enforced.

2) In the beginning, however, there is no government. This is not just our original condition but our natural condition - our state of nature.

3) Having no government does not mean moral chaos because the state of nature has a law of nature to govern it.

4) But the fact that people recognize the law of nature does not mean that they always obey it, so it must be enforced.

5) Enforcement of the natural law means especially enforcement of natural rights, probably because individuals are responsible only to God in points of natural law that do not affect others.

6) Enforcement also entails imposing punishments, provided they do not exceed the natural-law limits of reparation and restraint - that is, provided that they do not go beyond what is necessary for compensation of damages and prevention of further wrongdoing.

7) But because there is no government, each person is himself an "executioner" or enforcer of the law of nature. 

8) Now, even when a person knows the principles that ought to be enforced, he finds it difficult to apply them with coolness and impartiality when his own interests are concerned.

9) For this reason, self-enforcement does not work very well; natural rights are persistently violated, and in punishment the limits of reparation and restraint are persistently transgressed.

10) The remedy for this inconvenience is for all the people in a particular area to appoint certain persons to serve as impartial judges - to be a government.

11) But this does not work unless the judges can enforce their judgments, and they cannot enforce their judgments unless people first agree to transfer their "executive," or enforcement, power to the community as a whole.

12) The mutual promise or agreement that transfers the enforcement power to the community as a whole is called the social covenant, or social contract. Once this agreement is made, people are said to have left the state of nature and entered the state of civil society.

13) Entering civil society is not the same thing as setting up a government. There is no going back on the agreement to enter civil society; however, the people can change their minds about the proper form of government.