“This ‘Great Forgetting,’ as Cutsinger and Salter call it, has consequences. One is that many young economists ‘focus on applied research using sophisticated statistical tools without an underlying theoretical framework to guide them.’ The effects, however, go beyond formal economics. The marginalization of price theory in the academy is increasingly mirrored in the conduct of public policy—and the results are dire.”
– Samuel Gregg. He is writing in relation to a new CATO Institute publication that addresses why price theory is, so it appears, a neglected field in mainstream economics, and why this matters. The way I see it, prices are information about relative scarcity and plenitude. I learned a few things about what’s known as “Austrian” economics, and one of them is that a reason why central planning and socialism do not work, is that from an epistemological point of view, they are barren in terms of information. And that leads to barren economies. (At the extreme, you get the terrible famines of Communist nations, in part because economics is, in a sense, banned.) George Gilder, who writes a lot about business and technology, even has a book on the topic of the “information theory of capitalism”.
It seems to me that the labor theory of value fits in with a technological focus on energy (value comes from the amount of physical work that went into a product), but the marginal theory of value fits in with a focus on information (value comes from the improbability of obtaining a product). Of course the roots of the informational approach were formed in the nineteenth century, in Maxwell’s formulation of statistical mechanics, but their implications didn’t emerge till decades later.
Ludwig Von Mises warned about this ignoring (or even denying) of the fundamental principles, which are logical NOT empirical, as economists became bewitched by pretending to be physicists – concerning themselves with data and mathematical analysis.
It is a great tragedy that the work of Ludwig Von Mises, indeed even his name, was WITHOUT HIS CONSENT taken by the late Murray Rothbard and associated with support of the Confederacy in relation to the Civil War, a pro Imperial Germany account of the First World War, a National Socialist (Nazi) influenced account of the run up to World War II (which presents the Hitler government as the victim of British plotting), a pro Soviet account of the Cold War, a pro Islam account of the struggles with the Jews in the Middle East – and on-and-on.
The point is not so much that Rothbard and his followers were wrong about these historical and political matters, although they were wrong, but rather that these political questions were not relevant to the basic methodological point that Ludwig Von Mises was making – namely that economics must be based on logical principles, and that departure from these principles would produce terrible economics – regardless of the mathematical impressiveness presented.
When we see some “economists” defending such things as government backed “Collective Bargaining” (Microsoft “Copilot” is full of statistics “proving” that forcing people to join unions is a good thing – as well as saying that opposition to this is, I-kid-you-not, based on “racism”) and then being baffled by the rise in UNEMPLOYMENT, “economists” defending rent control, contract breaking “secure tenancy” and endless other regulations, and then being baffled by the increase in HOMELESSNESS, and “economists” even supporting price controls to prevent “gouging” (as if increased prices were based on “greed”) and then being baffled by SHORTAGES and the emergence of a “Black Market” (whether for goods or for labour – as with the “informal economy” of so many Latin American nations were people are forced out of the legal labour market by “Labour Codes”) then we can see what a mess university economics has become.
An unjustly neglected part of Ludwig Von Mises’ classic work “Socialism” is the last section “Destructionism” – where Mises examines the terrible harm done by the various “Social Reform” interventions that were becoming fashionable in the early 20th century.
As early as 1884 (“Man Versus the State”) Herbert Spencer noted that the principles of economics were being disregarded – not just by foreign political leaders such as Otto Von Bismarck – but also by British ones such as the recently deceased Disraeli (of the Conservative Party) and Joseph “Radical Joe” Chamberlain (of the Liberal Party) and Herbert Spencer also made the point (against such writers as Thomas Paine – a century before) that it did NOT matter whether government spending schemes (and fiat money) and regulations were pushed by Kings or elected Parliaments – the evil was in the interventions themselves REGARDLESS of whether the government who did them was democratic.
When one reads the works of Thomas Paine in the late 1700s, which basically say that it would be a bad for a King to do XYZ but it would be good for a democratically elected government to do the same things, or the words of Joseph Chamberlain from 1865 onwards (which say the same thing) it is hard not to think “what a blithering idiot” – but, yes, this is with hindsight. However, the point of understanding economic principles is that one does not need hindsight – one can use reason to predict the harm that policies do BEFORE that harm has been done.
Ludwig Von Mises had the “benefit” of seeing the madness of Interventionism proceed much further, and he also examined the irrational nature of “Interventionism” (as the French called it) in a more systematic way. His understanding of economic principles was superior to anyone before his time (and to the vast majority of people after his time) – and so whilst he correctly denied that economics was about prediction (after all many things influence the future so a bad policy may still coincide with a good result – even though without the bad policy the result would have been better) – he was able to predict the results of various policies. For example, the crash of 1929 came as no shock to Mises and other “Austrian School” economists – it was what they expected from the Benjamin Strong (New York Federal Reserve) Credit Money expansion of the late 1920s.
There as nothing particularly “American” about a Credit Money bubble bursting – indeed if I may be allowed a Michael Caine “not many people know that” moment, the Credit Money bubble in Japan in the late 1920s burst before the American one did (establishment economists such as Irving Fisher seem to have just ignored this warning bust).
Lastly…..
Bad economics is sometimes accidental, the result of ignorance, but sometimes INTENTIONAL.
Take the example of supporting more government benefits and services (the sort of policies that Karl Lueger pushed in Vienna or Mayor Curley pushed in Boston) – when, for example, the (misnamed) Economist magazine goes to the LEFT of the leader of the Chinese Communist Party by demanding more government benefits and services in China it is not (not) trying to harm China – the ignorant people who write articles in the Economist magazine sincerly believe that the policies they suggest would benefit the Chinese people – after all more benefits, more services, what is not to like? Nothing – if a person does not grasp basic economic principles such as that these things come as a COST (and the cost of such interventions is, inevitably-logically, greater than the benefit).
But when dealing with the “Cloward and Piven” strategy pushed by the left in the United States since the 1960s no such honest ignorance is involved – what is involved is much darker.
The husband and wife team of “Cloward and Piven” knew perfectly well that getting more and more people addicted to government benefits and services would do terrible harm to society – both economic harm and cultural harm.
But this was precisely their intention – they wanted to do terrible economic and cultural damage to society, as did the radical left in general. This, they believed, was the way to “bring down capitalism”.
So when Ludwig Von Mises suggested that the primary public function of an economist was to warn people of the terrible results of proposed policies – so that they would “not drink a glass of potassium cyanide thinking it is a glass of milk” – he did not take enough account of this factor.
The radical left in the West, the Herbert Marcuse types, the “Cloward and Piven” types, and on and on – want (yes want) Western civilisation to drink a glass of potassium cyanide – to destroy society is the purpose of such things as the “Great Society” programs (although President Johnson and Vice President Humphrey were not informed of this “detail” by their academic advisers – and I suspect that Mr Biden has NOT been told that destroying American society is the purpose of “DEI” in relation to the culture).
Economics (Praxeology – the study of exchanges) is, as Mises showed us, part of the general study of human beings and society – but both economic and cultural warnings fall at the first fence if the people one is dealing with are not of good will.
And many the academic (and other “expert”) advisers of governments (and major corporations) are NOT people of good will – on the contrary, their conscious and deliberate aim (objective) is the destruction of “capitalist” society – they are like the “wolves in sheep’s clothing” shown in the “Fabian Window” (look it up).
Where Mises lost me in terms of taking him seriously is that he really does not account for the irrational in economic transactions. Everything to him is mechanistic and fixed by logic…
Which would be fine, were we dealing with perfect spherical cows in an ideal space, but… We ain’t.
Applying logic to economics seems like good idea, right up until you realize that you’re dealing with people. Who are anything but logical creatures. You think you’re able to apply logic, and… Poof. People.
An example would be the assumptions made about people’s decisions when it comes to, oh… Say, alcohol and alcoholics. Instead of taking their limited resources and buying necessities, the alky takes his/her money and buys alcohol. Consistently. You can make a calculated prediction based on track record.
Only… You really can’t, because one day something happens, out of the blue, and that alky suddenly realizes they’ve bottomed out, and that it either means they quit drinking and then start spending their resources more in accordance with your “logic”, or they do not reach that conclusion and wind up continuing along the path of no logic at all, eventually dying.
That’s a microcosm of the issues. Entire societies do irrational things… Witness the Tulip Mania in Holland, or the South Seas Bubble in the UK. Various other bubbles come to mind… None of which are accounted for in Mises “logic”.
Proper economics has to account for the irrational and illogical. I’m not going to say that I’ve read a great deal of Mises, because I found his highly logical and mechanistic view of the subject as difficult to agree with. Like I said… “Assume a perfectly spherical cow…”, and while that’s fine in a physics class, economics is a dismal and highly unpredictable science taking in math and human psychology, two very disparate realms. I think you can apply predictive math to a limited subset of economic actions, but not everything and everywhere. And, that’s what my reading of Mises more or less made me conclude, that he wanted to impose system on chaos, which has never, ever worked to my knowledge.
The way I see it, prices are information about relative scarcity and plenitude.
It’s much more complicated.
Prices are information about fads or fashion of whims of the public (the buyers), about herd hysteria (bitcoin), about the whims of Chinese subsidies… etc. etc.
Prices are definitely useful info, they help guide our action in a very complicated world.
They are not necessarily any specific info.
As for the “science” of economy – I believe Mencius Moldbugs’ saying: on every issue of economics you’ll find prominent economists on both (opposed) sides of the issue.
The Labour theory of Value is equivelent to the Labour theory of Sex. Just because you spend 8 hours phuqing doesn’t mean you’re any damn good at it.
Not really Kirk – Ludwig Von Mises accepted that people could make mistakes, or even have crazy objectives – for example “I must buy all the green apples in this shop or the Great Sprit Pookong will strike me dead” – there being no such being as the Great Spirit Pookong and he-she-it having no reason to strike you dead if you do not buy all the green apples in the shop even if he-she-it did exist.
But, even allowing for all that, human beings allowed to interact voluntarily, will still do a better job than the state.
Jacob – you are mistaken Sir. There most certainly is a science, in the sense of a body-of-knowledge, of economics – or praxeology (the word economics means the study of a household – so it is a bad word for what is actually a science of the interactions between households).
“There are economists on both sides of every issue” – I have already shown this objection is misguided Sir. That the world calls some people “economists” or gives them “Nobel Prizes” or whatnot does NOT make them economists.
If you want to see what an economist is, how the study of the laws of economic interactions works, and you feel that Ludwig Von Mises “Human Action” might be hard going (I did not find it so – but I am many decades older now than when I first read it, if I had never read it before and tried to read it for the first time now – I might indeed find it hard going) then start with Henry Hazlitt’s “Economics In One Lesson”.
Although, come to think of it, you may have already have read that Jacob – indeed I suspect you have.
John Galt – yes indeed.
I would just say “The Labour Theory of Value is FALSE” – but your way of putting the matter is rather more memorable.
Basic Economics by Thomas Sowell is also a solid introduction.
Some years ago I tried digging into Ricardo’s book on economics. I was surprised to see him saying that you could estimate the “value” (market price) of a commodity from the amount of labor that went into making it—in other words, that it wasn’t a fundamental truth, but a workable approximation—and that there were some commodities for which this just didn’t apply. It was Marx who turned it into a universal dogma.
As an approximation, it’s not hopelessly bad; even now, for a lot of commodities, the labor costs are a substantial part of the total cost of production. And ca. 1800 it was surely a lot closer to true. So I don’t fault Ricardo too badly.
That the world calls some people “economists” or gives them “Nobel Prizes” or whatnot does NOT make them economists.
OK, I got it. Economists that agree with me are “true” economists, the others are fake economists and don’t count.
The Austrian economics is the only true religion. I tend to accept this statement. But you can’t ignore the fact that most economists practice other religions.
I think economics is rather like sociology. It tries to observe some aspects of human behavior. But the matter is very complicated. So, what we get is a deluge of words. In the end we are no wiser, and have no idea which of these words are correct and which not. (“Correct” – in the sense that they describe what really is out there). Especially that, as I said (or rather Mencius said) the deluge of words contains contradictory statements about every topic imaginable.
I’m going to slightly disagree with Jacob here. 8 hours at anything is at least practice. Most people get better at most things with practice.
Which is not to say that someone else may not come up with a way of achieving the same thing in 10 minutes that it takes you 8 hours to achieve.
I get the Austrian idea of “value” – makes perfect sense.
But I have never quite understood how one then gets a “price”
eg A subjectively values something at $100, B subjectively values it at $40. B currently owns it so it makes sense for it to be sold from B to A for a price exceeding $40 but not exceeding $100. How – theoretically speaking – do we discover where in the $40 to $100 range, the price “should” fall.
I also vaguely appreciate that in an economy with competing producers, if Producer B is willing to sell A the something for $90, Producer C may be willing to sell for $70 to snatch the sale from B, but still make a profit. So “theoretically” the price ought eventually to fall to $41 or so.
But – theoretically – there isn’t any difference between a producer and a consumer – in a trade they’re equally traders. So how do we arrive at a general explanation of where in the $40 to $100 range any particular transaction is going to happen ?
Presumably it has something to do with how much of a monopoly any particular trader has with respect to any trade. Are there any – idiot level – books / papers out there than can explain this ?
Lee: The question is made more difficult by the fact that, in the language of 19th century political economy, “value” meant what we now call “price.” You don’t have to “get” from value to price; price is where you are.
The difference between producer and consumer is at least somewhat arbitrary in a barter economy. But once you introduce money, the person who trades for something they intend to consume hands over money to get it; so there’s a natural flow of money from the consumers to the immediate producers and from them to the secomd order producers and so on. (Ultimately, the money gets back around because the consumers supply land, labor, or capital to the producers—but they aren’t called “producers” then, because their output isn’t PRODUCTS.)
In a barter economy, if you have one person offering fish for potatoes and one person offering potatoes for fish, there is a wide range of possible ratios within which they can negotiate. But if you have multiple people on both sides, the range narrows. Eventually it narrows to where there is only one ratio, the market clearing ratio, and some people on each side are shut out because they want too much fish or too many potatoes and won’t trade for less—and the market clearing ratio is less.
In exact Austrian theory, you don’t say that A values x at $100. You say that A values x at more than $100 (or else they wouldn’t give up $100 to get it) but at less than $101 (because they won’t give up $101 to get it). It’s all inequalities: ordinal utility, not cardinal.
In exact Austrian theory, you don’t say that A values x at $100. You say that A values x at more than $100 (or else they wouldn’t give up $100 to get it) but at less than $101 (because they won’t give up $101 to get it). It’s all inequalities: ordinal utility, not cardinal.
But there is presumably some point between $100 and $101 where A is indifferent, so to save the effort of rewriting the whole theory each time I mention a value, when I say A values it at $100, I mean that the point of indifference is an infinitesimal above $100.
I’m not convinced that it’s a matter of barter v money. I think the same problem arises in an economy without money.
However I think the combination of money qua unit of account, and corporate or other business aggregations, creates an important class of traders whose “subjective” valuation is based on hard cash, and profit. Thus we can predict that such aggregations will typically value cash above any amount of the scent of flowers in bloom, and typically won’t pay more for a poor quality piece of production machinery because it was made in Rochdale than they would for a good quality piece from Essen.
In other words the further you get from individual humans and their whims, the more cold hard cash / profit will be the foundation of their valuation. Which come to think of it may be a reason why modern economists think in terms of numbers rather than the scent of flowers – there are lots of impersonal corporations in the economy. Though they are of course run by humans with their own personal value systems 🙂
No Jacob – I have already explained what an economist is, and given references to works that show how the logical reasoning of economics is.
So please do not play games my dear Sir.
Lee: I don’t think that is part of Austrian theory. Say I offer you $100.01 for your widget, and you say no. Then you value the widget more. Then say I go up to $100.02, and you say yes. Then you value the widget less. I can only ever observe > or <; there is no way I can ever observe =. And there is also no way you can offer me an infinitesimal amount of money.
William H. Stoddard.
It was indeed the great error of Aristotle that he thought people exchanged equal economic values – this led him into a terrible misunderstanding of economics.
A key insight of the great economists, including the Austrian School, was that people exchange unequal economic values – because economic value is subjective.
In this way BOTH parties gain from economic exchange – each having higher value than they did before, which to Plato and Aristotle was impossible (they thought in terms of winners and losers in economic exchanges – which leads, eventurally, to thoughts of “exploitation” and “oppression”).
Paul: When people sounded off about how terrible it was that people had vast fortunes, I used to like to say that I had bought multiple products from Apple (largely computers, but the iPod I gave my wife did more for her happiness than anything else I ever gave her), and every single one of them was worth more to me than it cost; so whatever part of that went into Steve Jobs’s pocket, he had given me something worth more in return. And that led me to believe that his enormous wealth showed that he had conferred benefits on humanity whose worth significantly exceeded it.
Of course that doesn’t necessarily apply to people like Elon Musk whose fortunes come partly from the taxpayers. And it doesn’t apply at all to people who get rich entirely from force and fraud. But those are different cases. It’s not wealth as such that’s the issue.
Jacob: Prices are definitely useful info, they help guide our action in a very complicated world. They are not necessarily any specific info.
Prices are indicative, nothing more. Along with price action we require entrepreneurial alertness, and for that matter, similarly active mentalities from consumers. A price communicates something, if only a starting point, such as “why the hell is X so expensive and what’s the alternative?”