Final Response to Andy Katherman

About a month ago I wrote a post critiquing a video by Tom Woods and Jeff Herbener.  In the video Woods and Herbener were having a Q & A discussion on deflation.  You can find my initial write-up here as well as a link to the video.  Andy Katherman's originally reply is here, and my response to this reply can be found here.  Finally, Andy Katherman's latest reply can be found here.  

In my opinion, what I said was economically non-controversial and I think Woods and Herbener did not address deflation in an appropriate manner.  No economist that I have read argues that people will put off buying coffee indefinitely because of falling prices.  No economist argues the lowering of prices due to advancements in technology is a bad thing (the  argument in the video about computers implies this).  My original write up focused on the reality that in general economists agree that deflation is not going to hurt the economy as long as it is not caused by drastic cuts in the money supply.  If there is deflation caused by drastic cuts in the money supply there will be negative consequences to the economy just as there are negative consequences to the economy when there is a drastic increase in the money supply.  I want to emphasize that this is not a controversial position.

Andy Katherman, who is well read and very knowledgeable on the Austrian theory, turned the argument into a philosophical debate about what money is and why deflation is good when it is due to increased productivity.  While his replies were thorough they ultimately did not address the points I made.  If Andy is trying to argue that drastic cuts in the money supply will have zero negative effects on the economy he is simply mistaken.  Drastic cuts in the money supply will necessarily cause negative effects in the economy and there is nothing more to be said on that matter.

In his most recent response he makes arguments that I agree with, namely that the market can correct for the supply of money.  I never said it couldn't.  I initially argued that if we have a federal reserve its goal should be to maintain a stable dollar.  This seems highly non-controversial, for the alternative is to have an unstable dollar.  At this point, I am not arguing about the philosophical definition of a dollar etc.  It seems as though Austrians tend to direct the debate toward an avenue that fits their philosophical positions which is why arguing with Austrians is such a daunting task - instead of staying on the point I was making the debate is changed into what a dollar is.  I made a non-controversial claim that is not a part of Austrian theory and Katherman turns it into a debate that should not even exist, which is a debate between Austrian theory and Chicago school/monetarist theory.  Instead of discussing the economic consequences of deflation the debate is all of a sudden arguing against Milton Friedman's positions and why they are allegedly wrong.  I would have little to disagree with if Katherman had said, "I hold to the Austrian theory of deflation and money but agree that Herbener and Woods do not address deflation properly."  Instead, he defended the video and as I have already pointed out the video lacks economic rigor; when the arguments in the video are weighed they are found wanting.

I present this final question to Andy:  If the Fed cut the money supply by 50% in one day, would that have a negative effect on the economy?  If your answer is no, then I seriously question the Austrian lens you are examining the world with.  If your answer is that the market will adjust to the new supply that is a non-sequitur.  If your answer is yes, then you agree with my point.  This is a yes or no question, which Andy can answer by utilizing the Austrian "imaginary construction" method.  This question has nothing to do with the optimal supply of money so any answer alluding to this should be considered as dodging the question.  

Imaginary Constructs and Regression

One of the methods of doing Austrian economics is imaginary constructions of economic situations.  When utilizing this method, the economist ponders how certain economic factors will affect other economic factors.  For example, I want to think about how the rise in a price of a substitute good will affect the demand of the good in question.  Another way to put it would be, how will a decrease in the price of chicken affect the demand of turkey.  When doing this, the economist has to hold certain variables constant in a thought experiment.  Using the chicken and turkey example, one must hold constant the fact that it is not November.  This is a good tool when constructing economic theory, no one will deny that.  However, the reason why Chicago School economists use regression is to find out the degree of which a price decrease in chicken will affect the demand in Turkey.

Consider how a Chicago School economist will handle this problem.  First, they will make use of the imaginary construct the same way an Austrian economist would.  Obviously, a decrease in the price of chicken should decrease the demand in turkey because they are substitute goods. Unless of course it is November where the demand of turkey sky rockets regardless of substitute goods.  So at this point the Austrian and the Chicago Schooler should have arrived at the same point.  Here is where regression comes in.  The next step for the Chicago schooler is to collect chicken prices and quantities of turkey sold over the same geographical areas and time periods.  This is where they will find the degree of how much price changes in chicken actually affect the demand in turkey.  It might be very large or very small.  What we can do to further test the affects the month of November variable has on this is introduce a "dummy variable," which basically tells us how much November increases the demand for turkey.

Why is this useful?  If a firm selling chicken and turkey has found turkey sales are declining they can now make a better estimate of how much they need to increase the price of chicken in order to increase the demand of turkey.  In my view, the theory is vitally important but the firm is more interested in the results produced by the regression.  Another reason why regression is so useful is because it holds the other variables constant in order to see your imaginary construct as values.  For example, if the price of chicken decreases by 50 cents the demand of turkey will decrease by .5%, holding all other variables constant.

Why Mises would claim that if we were to do a study using regression we learn nothing other than the amount price changes in chicken will affect the demand for turkey in that particular time period and geographical area is misguided at best.  In my view, a firm can gain vast amounts of information by using regression methods.  The firm learns how to change the demand for turkey by manipulating chicken prices, ceteris paribus.  Obviously we cannot change them based on quantitative certainty but it gives important insight insight nonetheless.

The Market and Concert Tickets

I often hear or read people complain about how it is such a travesty that people can buy concert tickets with no intentions of attending the show and sell them for double the price originally paid.  When I see these statuses or tweets I can't help but think of how this is a perfect example of the market making corrections.

When considering this issue we must examine supply and demand.  The band selling the tickets to certain venues has a supply ceiling, this is obviously caused by the venue's capacity.  This causes a shortage of tickets and therefore prices have to increase in order to correct for this shortage.  Since the producers (the band in this situation) cannot increase the price on their own a market opens up to people clever enough to buy tickets and resell them at a hefty profit.

How could the problem be solved?  There needs to be an increase in supply (more seats) or an increase in price.  Often times the only option is an increase in price.  This would lower the quantity of demand to the amount where supply and demand are closer to equilibrium.  Obviously the band will never be able to perfectly guess which price will be in perfect equilibrium but the answer for this problem is increasing prices.

Increasing prices will discourage people from buying unwanted tickets and reselling them in two ways. First, with increased prices the buyer has to invest more money into these tickets which, if they are truly unwanted, becomes more of a risk because if he does not sell them he can now endure a greater loss.  Second, the profit to be made will be less.  If a ticket is demanded at $200 and you can buy it at $100 that is $100 profit.  However, if it is $150 dollars that is less profit which makes the added risk less worthwhile.

What all this will do is decrease the amount of people willing to buy unwanted tickets in order to make a profit and get tickets to the real fans at a lower cost.  It will be at a lower cost because they will be getting them at the actual price instead of the scalper's price.  So, when people complain about this you can tell them it is the bands fault for charging too low of a price and this is just the market correcting itself because of a shortage.

Milton Friedman Collection

(Image Courtesy of Google Images) 

Milton Friedman on Freedom

Rothbard on Friedman

Classic Friedman Teaches a Liberal an Economic Lesson

Capitalism and Freedom

Is Milton Friedman a Statist

The Minimum Wage Myth

Response to Andy K on Deflation

I am currently in a debate/discussion on inflation vs deflation.  My initial post is here be sure to read the comments, and the link to his response to my comments can be found in the comment section.  Here is my response to his blog post:

I'd like to point out that Woods and Herbener directly claim that when economists are talking about deflation they are talking about price decreases.  Not cuts in the money supply.  Hence, I addressed this argument.  I'd like to further point out that Andy is doing the same thing.  He is pointing out the benefits of price decline due to increased productivity.  Of course this is good for the economy.  Milton Friedman's theory allows for this.  If we increase a targeted money supply each year by say 3%, and if we have a year of high growth, this will cause mild price declines due to increased productivity.  This is why I claim that Milton Friedman and other economists are not afraid of mild deflation or price declines.

Like I said before and explained in my previous post they disfavor cuts in the money supply.  One argument the Austrians utilize is to ALWAYS refer to the price decline due to added production in the late 19th century.  That is not what I am talking about when I am talking about investment.  I am talking about 2% decrease in the money supply each year.  Maybe I did not make that clear.

To claim that fiat money and stable dollars is an oxymoron is truly confusing.  I commend you for not being a believer in gold standards, but rather a fan of competing currencies.  I as well believe we should allow competing currencies.  And just to point out Milton Friedman was not in the favor of the federal reserve.  All of his theorizing is given that it exists.

But if we had these competing currencies, would people not swarm to the company that is providing stable money, as Hayek points out in his paper "A Free Market Monetary System"?  He even says the most desired dollar could possibly be fiat as long as it is stable.  If it is not stable people will leave the dollar.  Even Herbener points this out in the video.  If deflation is all you make it out to be why would people be dumping this deflated dollar?  It is because you did not address the consequences of cutting the money supply, but rather you address the benefits of falling prices due to increased productivity.

Friedman wrote the book on monetary history of the United States, so if you want to see how he speaks about the 20's through the depression I suggest that you read his work.  But in summation, what he says is that the crash of 1929 is a normal bust caused by the federal reserve.  You would agree with that.  What he goes on to say is that the severity of it is caused by a 33% decrease in the money supply over the next 3-4 years.  Is a third of the banks closing good for the economy? No.  So what Friedman argues is that we should have had less of a boom in the 20's by proper monetary policy which would have not caused as large as a bust in the 30's.

You wrote very eloquently on the benefits of price decline caused by increased productivity and are obviously very knowledgeable on the subject.  But the reason why mainstream economists don't adopt Austrian theory is because it is incomplete.  There HAS to be consequences to cuts in the money supply.  If deflationary policies were as much of the bees knees as Austrians point out, 1, people would adopt the Austrian Theory, and 2, we would constantly be using deflationary policies and the economy would be perfect all the time.

EDIT:

I'd like to add a few things here:

1) My example about the 100 million dollar investment seems to have validity due to the fact that Herbener's solution to this problem that deflation creates is to abandon the currency that is deflating.  We obviously cannot do that in America.  Hence, deflation will cause real problems.

2) During the twenties Andy pointed out the dollar was still stable.  This is not entirely true.  The main thing to take home is that the fed was newly enacted and for the most part clueless.  They thought they could just use quantitative easing and make everyone millionaires.  This is why the crash happened.  Milton Friedman was against quantitative easing.

3) Andy points out that economists are regularly arguing that any slow down in the money supply will be disastrous.  These are Keynesians who do believe that is true during an economic crisis that we have right now.  However, I still hold to my claim that even Keynesians are not afraid of mild deflation during normal economic times.  Deflation is built into their model in order to steer other economic factors.  Obviously I disagree with that, but I do not believe they think it will be a catastrophe if they advocate it at certian times.

4) Milton Friedman, points out in an interview that during the economic crisis of the 70s two of the things we needed to do is cut spending and start slowing down the money supply (along with other things)

The Notion of Utility

In a blog post a while back I briefly discussed the notion of utility.  The Austrian's view of utility can be summed up by a quote I provided in that post (to view the initial blog click here).  Here is the first half of the quote again for a reference.

"Finally these valuations are entirely subjective in two ways: Jones's utility or satisfaction from wearing a pair Oakley's cannot be compared quantifiably to his satisfaction from wearing a pair of Ray-Bans.  Even by his own inspection."

As I mentioned in the previous post, Austrian economists make this claim very often.  One thing I have never seen them do though is argue against von Neumann and Morgenstern who wrote in 1944 that we can make such interpersonal measurements.  Furthermore, to do so, it takes no more than a simple thought experiment which Austrians should love.

Let me point out before I summarize the von Neumann and Morgenstern argument that they acknowledge the fact that this is a controversial topic.  Also, if you want to read their full argument, and I highly suggest you do so, it is in Theory of Games and Economic Behavior in the section entitled The notion of Utility.  Hence the title of this blog post.

The first thing they point out in the section is that in the past there have been certain phenomena that were considered non-measureable up to a certain point in time.  E.G. sensations of light, heat, muscular activity etc.

"All this [utility] is strongly reminiscent of the conditions existent at the beginning of the theory of heat: that too was based on the intuitively clear concept of one body feeling warmer than another, yet there was no immediate way to express significantly by how much, or how many times, or in what sense.

This comparison with heat also shows how little one can forecast a priori  what the ultimate shape of such a theory will be.  The above crude indications do not disclose at all what, as we now know, subsequently happened.  It turned out that heat permits quantitative description not by one number but by two: the quantity of heat and temperature."

They go one further and argue that

"The historical development of the theory of heat indicates that one must be extremely careful in making any negative assertions about any concept with the claim to finality.  Even if utilities look very unnumerical today, the history of experience in the theory of heat may repeat itself, and nobody can foretell with what ramifications and variations"

As you can see, they are laying down the groundwork for numerical utilities in these arguments.  Who is to say at one point we will not have developed a certain device that measures the dopamine that is produced when we consider consuming certain goods in order to help us satisfy our wants more accurately.  Such a device would allow us to measure utility to an exact number.  If such a device were discovered, would the Austrians  reevaluate their views on this matter or would they dig in their heels while keeping their antiquated theories that have been refuted or improved?  How they would react to such findings is speculation, but I digress.

The next thing von Neumann and Morgenstern do is demonstrate how to gain information on the degree to which I might prefer one good to another by doing a thought experiment.  Let me point out that utility is just a word economists picked to discuss the topic at hand.  Clearly we do get some satisfaction out of consuming goods and utility is just the word given to such satisfaction to use in conversation.  I personally like to think of it as a "payoff" of sorts.

Consider an individual with the choice of three goods, call them A, B and C.  Without loss of generality assume this individual, Mary, prefers B to A, A to C, and B to C.  Next consider Mary having two options on how she might receive these goods.  She can either choose A automatically, or choose the option of getting either B or C with 50-50 odds between the two of them.  She will get one of them with 100% certainty.  If she chooses A over the bundle this tells her some information of how much she prefers A to C and B to A.  Now since B and C are both compared to A, she can induce a comparison between B and C.  This thought experiment gives us a way to determine "distances" between the utilities one receives from the three goods.  Since we have distances, we can enumerate them.

Morgenstern and von Neumann actually go one step further and show numerical measures can be used more directly if we consider all probabilities.  I am not going to go into that now.  I do plan on addressing it at a different time.  However, I think this thought experiment Morgenstern and von Neumann introduce is rather convincing allows us to consider how we can derive "distances" between utilities which Austrians continuously claim is not possible.

Neo-Classical Economics

As of late I have been getting into many debates with adherents of Austrian Economics about how economists should do economics.  One thing I have found to be in common with all these debates is that Austrians don't fully understand how neo-classicals actually do economics.  They tend to think the neo-classical sits at a computer with data and tries to empirically find economic principles from this data.  This could not be further from the truth.  I have written a few economics papers and there is a standard way to go about writing them.

Step one of writing a paper is deciding what you are interested in.  I personally am interested in education, environmental economics, game theory, agriculture and others.  Step two is to come up with a theory involving your area of interest.  This is no easy step.  The theoretical portion of the paper is THE most important part of the paper.  If the theory is wrong then the rest of the paper means nothing.  Up to here, neo-classicals and Austrians agree.  Theory is the most important part of economics.  That being said, I can understand the Austrians grief with mathematical economics.  A lot of mathematics is replacing theory.  This is not good for economics.  This does not mean that mathematics does not belong in economics, or have uses in economics, however.

After the theoretical part is done, step three is to do literature review.  Often times in this part of your paper you will be able to find whether your theory is on target or needs to be adjusted.  Furthermore, during the literature review you see how other economists have addressed this problem.  This part of writing a paper is important as well because here is where you decide whether past economists have made mistakes in their theory or their model and can find areas to improve upon.

Next is to gather data.  This is where neo-classicals and Austrians disagree.  Austrians think that gathering and testing data is fruitless.  They have various arguments why they think it is fruitless, but these arguments are lacking.  I will address why I think they are lacking in a different post.  Gathering data can make or break your paper.  If you cannot find proper data then your paper is meaningless.  The data obviously has to be relevant, have many observations, be recent, and it must be "clean".

After you have found and cleaned your data, it is time to make your empirical model.  Many times this is a regression.  If you have ever written a proper econometrics paper you will understand a lot of effort goes into this.  This part of your paper takes around 20-30 pages of tests to make sure your estimates are not over or under estimated.  After creating your model you can now run the tests and see whether your theory has merit or not.  Then finally, the last step of writing your paper is to point out the flaws in your own paper and model.  No model is ever perfect and can always be improved upon.  This is one of the most important parts that will lead further researchers in the right direction.

Here is an example from a paper I wrote as an undergraduate.  In the movie Food Inc. (which I highly recommend) they talk about how the price of beef goes up with the price of corn and fuel.  This is bad because cows are supposed to be grass fed and it is healthier to eat local where the cows are not grown as fast and as unhealthily as possible.  I decided to test this.  What I found is that the price of corn and fuel, while it did slightly effect the price of beef it was not statistically significant.  I.E., the price of corn and fuel do not significantly affect price changes in beef.

In conclusion, I hope this sheds some light on how neo-classicals do economics.  It is not this radical data worship that Austrians can make it out to be.  Neo-classicals believe theory always comes first.  I personally think running a regression to see if your theory holds is not very radical.  As Rothbard points out, Austrians play mind games holding things constant in their head to try and extract economic principles is the same thing as a regression except regression can test how significant the economic principles are after you have played this mind game.

Inflation vs. Deflation

Inflation or deflation, which is better?  The answer can vary depending on who you ask.  Consider the question from the position of a worker as an importer or exporter.  If we have inflation, our dollar is weaker compared to other currencies so exporters will be able to sell more while importers will be able to buy less.  From this perspective it is easy to see that each profession, whether an importer or an exporter, will view inflation differently.  The same can be said for deflation.  In addition to the importer/exporter scenario the same principle holds when considering this question from the position of a borrower vs. a lender.

Let me first point out that no economist would argue that mild deflation or inflation is troubling.

Now let's consider some of the things Austrians say about deflation.  They claim it is not something to be feared and it is as silly to fear deflation as it is to think wars are good for the economy.  In a video with Tom Woods and Jeff Herbener they approach the discussion in a very frustrating way.  Tom Woods begins by saying that there are various definitions of deflation and when most economist are talking about deflation they are not referring to a drop in a money supply but rather a decrease in prices.  They go on to talk about the implications of falling prices (you can watch the video here).  One of the implications they falsely represent is that people will delay making purchases indefinitely because of the falling prices.  They laugh at the prospect of people waiting to buy coffee 10 days later because it will be five cents cheaper.  I want to address some of these arguments because they are not handled properly.

First of all, when other economists talk about deflation as a negative for the economy, they are speaking in terms of deflationary policies being implemented by the Federal Reserve.  They are not arguing that an increase in production that causes deflation is bad for the economy.  What is meant by Federal Reserve deflationary policies is exactly what Tom Woods says most economists are not referring to, which is a decrease in the money supply.  So right off the bat this video is misleading the viewer.

The next question you should be asking yourself is, why are deflationary policies unfavorable?  Consider a drastic decrease in the supply of money, say 20% (during the great depression the money supply dropped 33% over three years).  The problem is not that prices will fall eventually, the problem is that inflation/deflation takes around 9-15 months before the economy will start to feel these effects.  With this being considered, within the minimum of 9 months we would have only 80% of the the previous money supply while prices have yet to drop.  This has various implications, but clearly with less money to go around there will be less investment by businesses, less consumption by the consumer, less lending by banks etc.  The economy will slow down because of this.

I want to address the coffee argument because this is an egregious oversimplification of deflation.  First and foremost, no decent economist will ever tell you people will wait to buy coffee ten days because of falling prices nor will they say that people will postpone buying a computer because the prices will fall.  This is a straw man argument.  What needs to be considered when thinking about the economic effects of deflation is whether a businessman wanting to invest $100 million into his company would wait a few months if prices are projected to fall?  Any rational business man would consider waiting because if they were to take out a $100 million loan and prices are falling by 2% each year for 30 years how much extra would they have to pay back?  My investment will have be able to generate more profit than what I am paying back in interest to the bank in addition to having to pay back the amount the dollar has deflated.  This scenario doesn't seem quite so laughable now does it?  A business man with thinking like an economist will not think it is laughable either.

Woods and Herbener do address this issue at around the 7 minute mark but the manner in which they address it is improperly handled.  In America we cannot simply switch money, which is Herbener's solution to this problem.  He claims that in times of mild deflation, historically, this did not happen but I addressed this in argument in previous paragraphs.

What might the monetarist say?

In Milton Friedman's view, he would want a slight increase in a targeted money supply.  He usually argued somewhere between 3-5% with 3% being his best recommendation.  This itself, according to Friedman, would keep inflation or deflation mild.  This is what good economists argue for.  A stable money supply leads to a stable economy.  He argued this because of the evidence Herbener points out.  During the times of great expansion there were small increases in the gold supply.  Friedman wanted to emulate this with the Federal Reserve if our economy is to operate with a Federal Reserve.

The next time you hear an Austrian argue that it is silly to fear deflation you can argue that no economist fears mild deflation.

Discovery and Mathematics

When most people think of mathematics, they usually think of algebra, geometry, calculus, differential equations, and that is pretty much it.  While there is nothing wrong with this analysis, the truth of the matter is, those subjects are on the bottom of the totem pole of mathematics.  Topology, for example, is the study of topological spaces.  Topological spaces could be anything from the real number line to the 11 dimensional shape of our universe that some theoretical physicists claim it to be.  In general, mathematics is the study of patterns.  This allows us to do remarkable things, and one example is to "see the unseen".

If we consider the history of black holes, Einstein did not believe they existed because they were too "mathematical" and couldn't arrive at their existence intuitively.  There were other physicists who disagreed with him.  Clearly Einstein was wrong here, but how was the debate settled?  Black holes have such a large gravitational pull that we cannot see them.  They do not even let light escape.  So without being able to actually physically observe them, how can we conclude that Einstein was wrong?  Well, that is where math comes in.  The laws of conservation can tell us many things but one is if we put 10 gallons of water through a hose and only get 9 gallons on the other side we know there must be a hole somewhere in the hose.  This is how physicists and mathematicians can "see" black holes.  If we observe 10 particles going through a selected area and only 3 emerge on the other side we know there must be a hole somewhere in that area.  I am a bit of a nerd so things like this are amazing to me.  We can look at a piece of paper with symbols and numbers and literally see a black hole in those symbols and numbers.  (it turns out the equations of general relativity hold true under the extreme conditions of black holes and hence, they are the strongest evidence that Einstein's theory is true)

What does any of this have to do with a blog dedicated to economics?  I am working to demonstrate the powerful tool of mathematics and its limitless ability to discover patterns in the world.  It is because of the powerful nature of mathematics to discover patterns in the world that it really irks me when certain economists act as if it is "silly" to use mathematics in economics.  Some economists even argue that those who use mathematics in economics are not doing "real economics".  Mathematical economics is relatively young and advancements to the methods are being improved constantly.  There have been 6 (correct me if I am wrong) mathematicians to win the Nobel Prize in economics for game theory.  These methods are being applied to various areas of economics, especially oligopolies, with very good results.

This isn't to say all we need is mathematics, far from it.  Good theory is always the most important part of an economic paper.  All I am arguing is that mathematics can be a useful tool to complement the theoretical portion of economics.

It took mathematics to prove one of the greatest physicists was wrong about his disbelief in black holes. Will those who denounce mathematical economics come around if there is a truly significant advancement in economics achieved mathematically?

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