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In the example there are no debts. Savings in money terms are the dollars held, therefore the savings rate is unchanged. Savings in corn or cattle are unaffected by the change in money quantity.
Why would the law of supply and demand not rest on marginal utility, rather than selfishness? Just because I have a selfish desire doesn't mean that I can satisfy the desire. Utility and means mix together with self interest to render choices regarding use of scarce resources.
That is not an economic model or prediction of utility for the purpose. It will remain to be understood what happens to all other prices and production when this single adjustment is made. In addition, the question arises why the price is being adjusted. For example, what decisions were made and what conditions changed, either actually or by way of changes in understanding, which caused the prices to change?
Besides, your example is in reference to the law of supply and demand.
Prices change based on the law of supply and demand.
Consider Bernanke’s recent comments about the control the Fed has over the economy.
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
(Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])
Swimmy, I think perhaps you are not following the argument regarding inflation.
If one created a simple model wherein everyone had x currency units today, and then tomorrow an additional quantity of costless new money was created, such that each person had 2x currency units, then inflation would serve no purpose. Each person's purchasing power would be unchanged.
What is the mathematical and logical error you see in that model?
Thanks for your remarks teageegeepea.
There is a difference between modeling and manipulating.
To model, is to create a framework that describes something.
To manipulate is to choose one or more elements among the known attributes of the model which can be controlled and then use that to coercively accomplish goals; then set the model up to "show good things are happening" based on the all wise management of the modeled system by the managers.
You note "a significant degree of accuracy". The point is that the degree of accuracy that can be attained is insufficient for the purpose.
Thanks nateemmons. I appreciate the distinction being made.
My reason for mixing is the centrality of private property and the consequent violation of property rights, using the standard of theft or fraud, that follows manipulation of currency, favored business license or heavy taxation for the purpose of redistribution. My interest in the school of thought is less theoretical and more practical application; i.e. how the body of knowledge affects the decisions by government that we then have to live with.
The problem I have here is the ganging up on the Austrian school in general because of a methodology used at the base of the theory. Mises said certain things cannot be done; he didn't say don't do them. If someone believes his presuppositions are wrong then simply prove it by doing what he claimed cannot be done.
To criticize Mises presuppositions is to claim a different set of presuppositions; i.e. we can experimentally measure the concept labeled human action and that there is nothing meaningful about human action that is antecedent to the study of history. I would say to the one making the claim, if this is the presupposition you would have us accept, please show your work.
Austrians believe that modeling for purposes of prediction is fruitless. Modeling for the purpose of control is unethical and oppressive because property rights are violated.
Other economists believe they can successfully model and manage an economy. They deal in numbers without taking into consideration human action at a level that has explanatory power. Monetarists, Keynesians, etc. ignore human action and generally treat the notion as unimportant. Austrians claim human action cannot be modeled, but knowledge of human action is required in order to model.
Austrians, for example, are able to model the effects of unrealistically cheap money, which is the source of malinvestment which leads to a boom bust cycle. We are experiencing the bust now.
With Austrians, things that can be modeled are modeled. Things that cannot be modeled or achieved are accepted, rather than, like the Keynesians, arrogantly claiming knowledge which is proven wrong time and time again.
Every time we have a bust, we are first told it should never have happened because after the last bust the bankers were given the tools necessary to prevent the bust. Then we are told that they just need a few more tools in their bag in order to fix the problem and ensure it never happens again. Then it happens again, each time bringing us nearer to the hyperinflation of 1920s Germany or today's Zimbabwe.
The economists which claim to be able to manage our economy for our good are either liars or incompetents or both. And we are supposed to accept their critique of the Austrian baseline?
Claiming the presuppositions are wrong is fine, if one can show that these need not be presuppositions because they can indeed be measured and worked into a predictive model... This proof I have not observed in a research model, let alone in the applied science, which we live with daily.
Human action can indeed be to some measure predicted.
For instance, if I conducted an experiment with 100 people wherein I presented each person with the opportunity to place their bare hand on a red hot burner on a stove, including leaving it there for one minute, I predict 100% would say no. I could even model that experiment.
However, this kind and degree of predictability is meaningless in the context of economic modeling.
What if the person who is being presented with the choice in the Allais Paradox just lost their mother to death, as well as losing their job in the same week? How does this affect the model? What does that research show?
How does one account for decisions made without adequate consideration, or when the decision maker doesn't understand the problem? What about the follow on effects of choices made in the past which encumber via contract, or cause emotional or financial pain, such that the decision is not rational or the risk assessment is distorted? Or the reverse when the rewards have been great in the past?
How many life choices exist in such pristine, simple and clear conditions as the Allais Paradox?
Are not our choices, responsibilities, assets, liabilities, obligations, future earnings, job markets, work relationships, preferences, skills, talents, capital, regulatory environments, choices of other people, comparative advantages, currency fluctuation, taxation, inflation, religious beliefs, IQ, education, weather, genetics, resource allocation, scarcity, social stability, time constraints, competing demands, influence of peers, influence of media, family relationships, beliefs about the future, and more, all knit into each decision made?
Are you really claiming that the minor complexities presented in such a simple model as the Allais Paradox rise to the level of mathematically illuminating, for the purpose of useful economic modeling, the myriad decisions inherent in daily life? After all, everything in life depends, at some significant level, on exchange of productivity, which is generated as a result of the decisions of life.
My point is that the models relating to human action which are herein employed as proofs, are not sufficiently complex to be useful or meaningful in economic modeling.
You criticize the Austrian school on the basis of presuppositions which are designed to note the limits of our ability to construct theories or predict future events. At the same time, all that is offered to suggest we are not limited are simplistic and wholly inadequate models which do nothing to solve the problem. As long as Mises claims we can't know or test these things and no one else shows that we can, I have to agree with Mises.
Besides, if these things were knowable, Mises would never have accepted stopping at this level. He would have anticipated and likely discovered and modeled the information so as to press another layer deeper, in hopes of gaining a greater mastery of the subject.
Austrians recognize that there is an unquantifiable variable in economics, namely human action, which heavily influences economic outcomes. You want to insert an arbitrary (estimated) variable value, i.e. probability estimate, in a model to account for something that Mises claims cannot be accounted for based on experience and historical fact.
Since you seem to believe that the variable value can be known and quantified for modeling purposes, what is it? What are the attributes of the variable collection which represent human action in economics?
Mises claims that human action is present, significant and cannot be measured. Are you claiming human action is absent, insignificant or measurable?
If you can set up the conditions to prove your case experimentally, then you have an argument.
How are your assumptions, i.e. probability estimates, inserted in a model going to provide feedback that will enable a valid update of the priors? Is that not circular reasoning?
If the claims made by Mises and the Austrians went no farther than to say human action cannot be measured and therefore nothing in economics can be measured, you would have an argument simply because their thinking would be inadequate. This is not the case.
To the contrary, Mises thinking regarding economic calculation in the socialist commonwealth clearly shows that human action coupled with ownership is a required component of a healthy and sustainable economy. Human action is necessary and yet cannot be measured or predicted, except that people are going to act in such a way as to satisfy their own self interest, which is conditional and subjective.
If experience and fact can be used to account for human action in economics, then Mises claims are false.
If they cannot, why discount his theory because he acknowledges a real-world constraint using a presuppositional argument?
I understand this point, but the presupposition has a purpose beyond itself. It is not intended to exist as a statement of truth which cannot be refuted. Its purpose is to acknowledge the lowest step in the Austrian analysis for which we can describe our understanding. That point is the touchstone for what we cannot know and for that which we cannot go beyond because of the nature of the things in question.
The Austrian view observes certain outcomes which can be quantified and then works backward through regressions to describe what we can know about why these observed and knowable outcomes are indeed the outcomes.
In essence, the claim being made in the Awful Austrians piece is that the theory should not claim to not know or be incapable of measuring anything in the regression toward the foundation of the thought, else the measurable conclusions should be disdained.
The implication then is that these things described by the presuppositions can indeed be measured or quantified, or else that they are irrelevant to the question and something else is the correct next measurable regression in the theory.
For instance, as a Public Choice libertarian, do you recognize the mathematical and logical truth that when inflating a costless money supply, if everyone receives the new money on the same day, then inflation serves no purpose? If you do, step back through the regressions from this level until you discover some part of the theory that is unsustainable. If that point is at the presuppositions which in essence are describing what cannot be known, then where is your argument?
The presuppositional construct is a method of attaching symbols to concepts regarding which we can only see the shadows. The evidence they reject is that which irrationally claims to confirm or disconfirm their starting point, not the following layers of theory which exist within our quantifiable apprehension.
According to the about page, this group holds mathematical modeling in high esteem. A central idea being that the mind itself, individually and, by extension, groups of minds, can be mathematically described and modeled.
I would be interested to hear how one claims to correlate the results of a model to the workings of the mind. It sounds to me more like the result of industrious researchers mixed with computing power which is sufficient for the task of repeatedly tweaking a complex model until the product resembles an observed reality. Afterward, chosen variables can be modified singularly or in groups, such that some brilliant claim or conclusion can be drawn from the model.
With this confidence in the ability of science to model the mind, true believers must disdain the claim that economic modeling for management purposes is a useless endeavor. After all, the economic model is a layer above the internal mind modeling claims made here. From this starting point, one could never expect a fair analysis of the Austrian theory.
So much could be said on this; what shall I choose.
First, I recognize that Mises made some claims which, particularly when analyzed outside the purely academic context, are a reach. However, the minutia which are used by a purist to discover and articulate baseline ideas with words, which can only be symbols of ideas at best, are not where I find value in the school of thought. I am more interested in the practical and applicable knowledge that is the fruit and product of the analysis, which happens to be solid because the originators were willing to rigorously test their assertions, seeking ways to describe and model the theory.
Yes, I said model. The idea of choosing a narrow, purpose oriented term like "happiness" is designed to create and sustain resources for an intellectual model. It is to select a fairly useful term, while stripping away the baggage that distorts its purpose in the model; which is akin to isolating a variable mathematically.
Additionally, the claim that the Austrians make, which must be hard to swallow here, is that a mathematical model is useless in the field of economic prediction for the purpose of successfully managing an economy. The problems with this concept of modeling are really quite simple.
A model will not incorporate all variables. If a model incorporated all variables and each had values, it would become a copy of reality. If it is a copy of future events, then it is unbounded by time. In addition, there is the question of whether the model "knows" the future, or is describing a potential reality. If only a potential reality, then the information is useless unless the information about actions can be disseminated, but this dissemnination process would then have to be incorporated into the model, which would then be distorted. If anyone disagreed, the modeled decisions would have to be applied by force... Where does this lead and where does it end?
All variables are not known.
If all variables were known, which they cannot be, their present and subsequent values in the model cannot be known, because the values are subject to human action; i.e. individual choice at a point in time based on concurrent conditions (which are unknown variables having unknown values).
Models produce averages, which are then conceived to be the answer for each actor, which is irrational. The model itself doesn't actually claim that all actors will enjoy the average results, and yet the results are rendered, communicated and applied as averages.
Even if a model were able to incorporate all known variables, apart from an active system on the ground which can actually control a variable that the model incorporates, moving the variable would be a fruitless exercise, other than for curiosity sake.
Models are owned by men, who pursue their own "happiness". They will have an agenda. If the model has any use for wielding influence, it will be applied through a system. The goal will be to use a system to enrich the players in the process, which then reduces the model to a tool of manipulation and theft.
Therefore, we find that modeling in economics, as a method of managing an economy, is futile. However, modeling the effects of a controlled variable at play in the system, is quite attainable. The Austrian theory of the business cycle is described in part by this sort of modeling.
The Austrian theory clearly describes the mathematical effects of currency manipulation. These effects lead to a boom bust cycle, which we have observed repeatedly. The ability to control the variables of money quantity and the distribution of new money, enables economists to "model" the effects. In the economists' arrogance or disdain for the producers, they see themselves as managers of a system, when in fact they are simply pillagers who have successfully created a pillaging system with the aid of central banking and coercive government intervention.
Therefore, the presuppositions in the Austrian School provide a foundation for communicating that models cannot be created to successfully manage an economy. A model that is used to describe productivity in a genuinely free market without government intervention, would be useless. The outcomes would reduce to things like the industriousness and ingenuity of the actors.
A "brilliant" model is only attainable and useful when there is the ability to control the system by way of unavoidable force applied to the producers. When that case is exists, we find that the power to act in this way is always used oppressively.
Our monetary system is Keynesian and Keynes wrote about the destructive effect of inflation at least as early as 1919.
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
The Economic Consequences of the Peace, John Maynard Keynes, 1919
The point is missed when the Austrian effort to articulate presuppositions is attacked on the grounds that they are presuppositions.
Evidently the claim being made here, by implication, is the presupposition that the actual economy can be modeled. But that has never happened. Listen to Greenspan explain how the "housing boom" was neither predicted by the models nor anticipated by him or his staff. Either the model was useless, even with the control of currency and positive law, or the system was used to pillage, or both.
The role of an economist should be to observe and describe the economy, not attempt manage it. The Austrians understand this role and acknowledge that certain things cannot be known at all, and that other things cannot be known or controlled, unless accompanied by violation of the rights of the individual.
Mises and other Austrian economists sought a way to put into words why, in actual reality, a successful controlling model has never been created and cannot be created. Quibbling over presuppositions, which happen to be supported by experience and evidence, as a basis for discrediting the Austrian Theory is weak thinking indeed.