Hayek v. Mises

Sinclair’s post and the John Papola video on Mises v Marx was a really interesting but I doubt will have the same penetration as did his early video on Keynes v Hayek. This continues to provide some kind of ground for understanding the economic policies of our time, and the disasters of a demand-side approach to managing an economy. Central banks are now the major carriers of the disease.

As it happens I am in the last stages of completing my manuscript on Classical Economics and what is needed for a modern economist to follow the classics, which studying modern theory makes virtually impossible. This is the draft opening to the chapter on Austrian economic theory for your interest. Comments welcome.

Although Carl Menger initiated the Marginal Revolution with the intent to find a unified theory of value, the names now most closely associated with the Austrian School are Friedrich Hayek and Ludwig von Mises. And while both are seen from a distance as almost one and the same, up close they were quite different from each other. There are many ways to highlight their differences, but here their approaches will be compared through their attitudes to John Stuart Mill, since both specifically identified themselves with the classical liberal tradition.

Where it matters is in the social aims an economist might hold. The essence of Mill’s approach to economic theory was to attempt to answer the question, what ought to be done to create the greatest amount of good for the greatest number of people? Uppermost in his mind was the question of what can be done to raise the living standards and economic wellbeing of the individual members of the community. Yet while he called himself a “socialist”, it was the kind of socialism that by today’s standards would have had him grouped among the most market-oriented political theorists of the present day. In particular, he would find modern macroeconomic theory, and the policy matrix that accompanies its Keynesian basis, completely false. While he saw a definite role for government involvement in the economy, the basic framework was that everything that can be left to the market should be, while also understanding that not everything can be left to the market. He saw a clear but limited role for government regulation.

Hayek’s approach is similar to Mill’s (and I would say my own). Hayek discusses the economics prior to the publication of Menger’s Principles of Economics in 1871, noting that this was only “a mere twenty-three years since the great restatement of classical economics by John Stuart Mill (Hayek 1992: 96-97). He continues:

“It is important for proper appreciation of Menger, that we do not underestimate what had been achieved before. It is misleading to think of the preceding period, 1820-1870, as simply dominated by Ricardian orthodoxy. At least in the first generation after Ricardo there had been plenty of new ideas. Both within the body of classical economics as finally expounded by John Stuart Mill and even more outside it there had been accumulated an array of tools of analysis from which later generations were able to build an elaborate and coherent structure of theory after the concept of marginal utility provided the basis of the unification. If ever there was a time in which a quasi-Ricardian orthodoxy was dominant, it was after John Stuart Mill had so persuasively restated it. Yet even his Principles contain very important developments which go far beyond Ricardo. (ibid.: 97)

The point was that Mill had provided much of the raw material that the marginalists had been able to consolidate into a more unified whole. Hayek stops to state that

“It is indeed quite difficult to understand how a scholar of the penetration and transparent intellectual honesty of John Stuart Mill could have singled out what was so soon felt to be the weakest part of his system for the confident assertion that ‘there is nothing in the laws of value which remain for the present or any future writer to clear up; the theory of the subject is complete.” (ibid.: 98)

That Mill, the greatest utilitarian scholar of his generation, had no interest in making utility the core of his own theory of value may have been a conundrum to Hayek, although it might also have suggested that utility had been considered by Mill but then rejected. Yet the core point here is that there is no question that Hayek had a profound and extremely high regard for the economics of Mill, self-proclaimed “socialist” though he may have been. This is opposite to the attitude taken by Mises.

The economics of Mises is astonishingly detailed and profound. But what makes his approach so austere is its narrow focus on economic issues almost entirely outside the social and political arena. Hayek, like Mill, was continuously thinking through how economic conditions could be improved using as many arms as policy as possible, while always understanding the limits that are placed on the various possibilities available by the laws of gravity of economic theory which forbid various approaches to be adopted. Mises, on the other hand, thought that only an absolutely rigid adoption of market-based economic theory was acceptable. And unlike Mill, who even in 1848 could see how economic policies would be constrained by popular pressures to alleviate economic pressures and to use governments to temper economic outcomes, Mises accepts no compromise with the hard-edge views of how a market economy must operate. Here he discusses his views of John Stuart Mill in his Liberalism in the Classical Tradition (Mises 1985).

“John Stuart Mill is an epigone of classical liberalism and, especially in his later years, under the influence of his wife, full of feeble compromises. He slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people. Nevertheless – or perhaps precisely because of this – one must become acquainted with Mill’s principal writings:

Principles of Political Economy ˆ(1848)
On Liberty (1859)
Utilitarianism (1862)

“Without a thorough study of Mill it is impossible to understand the events of the last two generations. For Mill is the great advocate of socialism. All the arguments that could be advanced in favor of socialism are elaborated by him with loving care. In comparison with Mill all other socialist writers – even Marx, Engles and Lassalle – are scarcely of any importance.” (Mises 1985: 195)

An indication of how adamantine Mises’s political judgements are may be recognised in the following comment from the preface he wrote for Liberalism in 1962.

“In England the term ‘liberal’ is mostly used to signify a program that only in details differs from the totalitarianism of the socialists.” (ibid.: xvi)

At any rate, no actual socialists have ever cited Mill as the source of their views on how an economy ought to be managed. Yet Mises’s concerns over the drift of economic theory and government policy remain a vivid warning of how dangerous economic theory has become, both economically and politically.

Mill discusses the Quantity Theory of Money in 1848

From Mill’s Principles:

If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process . The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the quantity of money in circulation [M] is equal to the money value of all the goods sold [PT], divided by the number which expresses the rapidity of circulation [V]. (Mill [1848] 1871: 494 – letters in parentheses inserted into the text)

Note that the money value of all goods sold is PT, with the T standing for Transactions. This is the accurate rendering of the concept since the same item might be sold many times over. A sack of flour might find itself sold first to a distributor, and then to a retailer and then finally to a consumer. It is the number of transactions that matter. The transactions also incorporate all of the sales between input producers that occur well before, perhaps years before, some item is sold as a final good to a consumer.

Thereafter we come to the quantity equation which is actually a quantity identity since it is true by definition. It is true only because it could not be anything else.

M ≡ PT/V

Or in its more typical formulation:

MV ≡ PT

The number of times a unit of money is exchanged is equal to the total money value of all sales that take place inside an economy. Since there is no means to calculate T or the average price of all of the items that are turned over in the market, PT is a number that can never be calculated.

Following that para from The Principles are a large number of additional considerations that help make sense of the point and also make it more comprehensible in relation to the operation of an economy.

Whatever else Mill is or is not trying to do, what he is not trying to do is provide some means to regulate an economy by trying to adjust any of the four elements within the identity.

A thief walks into a store

Here is a question from Quora I have slightly changed which I leave for you to work out for yourself:

A thief walks into a store and steals $350. The thief then buys $350 worth of goods at the store. In the end, did the store lose any money and if so, how much?

To help you along, let me add in this quote from John Stuart Mill’s 1844 Essay, “Of the Influence of Production on Consumption”.

“The man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune.”

I need hardly add that Mill thought he was being fantastically ironic. But there is then this, the third iteration.

A government who taxes you to the hilt but then spends the money it took from you on whatever the government chooses to buy, provides a benefit to you and everyone else since it adds to the level of demand and therefore helps maintain full employment.

This is modern economic theory and practice to the back teeth. In looking at this third iteration, bear in mind the money spent on all of the various unproductive forms of stimulus spending that occurred following the GFC.

[My thanks to Tony for bringing this Quora question to my attention.]

Jordan Peterson discusses the Nazis in comparison with communists

How does one make the moral distinction, he asks, between the Nazis and the comms with the speaker actually using the term “socialism”? The video shows his answer. But here’s a hint about his answer: I really really like what he says.

Which brings to mind this quote from John Stuart Mill which I ran across today:

Apart from the peculiar tenets of individual thinkers, there is also in the world at large an increasing inclination to stretch unduly the powers of society over the individual, both by the force of opinion and even by that of legislation. And as the tendency of all the changes taking place in the world is to strengthen society, and diminish the power of the individual, this encroachment is not one of the evils which tend spontaneously to disappear, but on the contrary, to grow more and more formidable. This disposition of mankind, whether as rulers or as fellow-citizens, to impose their own opinions and inclinations as a rule of conduct on others, is so energetically supported by some of the best and by some of the worst feelings incident to human nature, that it is hardly ever kept under restraint by anything but want of power; and as the power is not declining, but growing, unless a stronger barrier of moral conviction can be raised against the mischief, we must expect, in the present circumstances of the world, to see it increase.

He wrote that 150 years ago. Just think how much more applicable and terrifying all that is today. If you haven’t read On Liberty, you really should.

Classical economic theory and employment

At the very core of the classical arguments against public spending as a means to raise employment is John Stuart Mill’s 1848 Fourth Proposition on Capital: “Demand for commodities is not demand for labour”. There is no relationship between the level of employment and the level of aggregate demand. Everything that matters happens on the supply side, with the only role of demand being what gets produced, but not how much or how many people are employed. It’s always been difficult to understand, but with macro now specifically stating that demand for commodities does raise the demand for labour, there is virtually no one who any longer even knows what Mill and the classics had said, never mind actually being able to explain why that might be. So with this in mind, there is a quite interesting story that just appeared the other day at Zero Hedge: Finland Abandons ‘Helicopter Money’ Experiment: No New Jobs Created. He’s the whole thing:

With socialists rising to the calls of the ‘free shit army’ and the ever-more-left-leaning liberal intelligentsia imagining ever-more-creative ways to pretend to fund their massive government interventions (Modern Monetary Theory), the topic of “QE for the people” or “helicopter money” or the more academic-sounding “Universal Basic Income” is becoming ever-more-prevalent.

Well, we have some more results in on the impact of Universal Basic Income (UBI) experiments – handing out free money to citizens with no strings attached.

As part of its experiment, in Finland 2,000 unemployed people aged 25-58 were paid a tax-free €560 (£490) monthly income. This was independent of any other income they had and not conditional on looking for work.

As Valuewalk reports, UBI-expert from the Institute for Policy Research at the University of Bath (UK), Dr Luke Martinellicomments:

“Universal basic income has ascended policy debates in recent years, motivated by the shortcomings of existing welfare systems, and our rapidly changing – and increasingly dysfunctional – labour markets.

“Yet despite the idea’s widespread appeal, there remain substantial and unanswered questions about its economic viability and political feasibility. This is why all eyes will be on Finland this Friday and why the results of its UBI experiment will be so revealing.

“We expect these results will provide us with the first really robust evidence on how UBI could affect changes in employment and people’s overall finances, as well as wider measures of wellbeing.”

So what were the results?

Simple (and Dr Martinelli – and the left – won’t like it):

1) People were happier, and

2) No new jobs were created.

As Yahoo reports, this was the widest such study to be conducted in recent years in Europe

“The recipients of a basic income had less stress symptoms as well as less difficulties to concentrate and less health problems than the control group,” Minna Ylikanno, lead researcher at Finland’s welfare authority Kela, said in a statement.

“They were also more confident in their future and in their ability to influence societal issues,” she added.

Results at this stage are preliminary and relate only to the first year of the study, meaning Friday’s findings are far from conclusive. But a hoped-for stimulus to levels of employment has not yet materialized, the project’s researchers said.

“The recipients of a basic income were no better or worse than the control group at finding employment in the open labour market”, Ohto Kanninen, research coordinator at the Labour Institute for Economic Research, said in a statement.

Shocker!!  Who could have seen that coming?

Give people free money for doing nothing, with no conditions, and they will be happier to sit around all day in non-productive utopia.

Finally, we note that, based on these results, Finland’s social affairs minister, Pirkko Mattila, conceded on Friday that the government has no plans to roll out the scheme across the whole country.

And let there be no doubt that whoever might have received this helicopter money would have spent it, to the last Euro.

Coming out conservative

It’s actually a quite to the left video since she accepts the left on every issue but the economy. I suppose you have to start somewhere.

Let me match that with something from Steve Hayward discussing a presentation he had made at Berkley!

although I identified myself proudly to the audience as a Fox News-watching, certified card-carrying member of the Vast Right-Wing Conspiracy, the most hostile questions from the audience were not directed at me, but rather at the new Chancellor, Carol Christ, who is an old-fashioned John Stuart Mill-quoting liberal. Just as in the 1960s, the far left hates liberals more than conservatives.

And JSM-quoting liberals are the worst, bless them.

A rare debate on Keynesian economics

You cannot imagine how rare a moment it was last night to be debating Stimulus versus Austerity. No one takes these things on, from the austerity side because hardly anyone actually understands what’s wrong with Keynesian economics as a theoretical issue, and from the Keynesian side because it is almost impossible to defend based on its theory. From the nature of the discussion, Keynesian theory is now defended only on sentiment and reflex. People want to do something, and raising government spending is in all the textbooks so we keep on doing it. Raising demand just seems obvious, which is why economics once explained why it was a terrible mistake. It is not obvious why public spending is bad for growth and jobs. And of course, infrastructure is a good thing so we should have more of it and therefore government spending is essential, whether you can afford it or not.

As for my own presentation, when in a public forum, you basically say what comes into your head, and you hope that what actually comes to mind is appropriate to the mood of the room and the case you wish to make. The one thing I told myself before I began is not to argue in the way it used to be done by John Stuart Mill, which was to point out how absolutely ridiculous the position held by other side was. He was particularly scathing on anyone who actually thought Keynesian economics had any merit at all – the carrier in his day being Malthus who had argued that demand deficiency (a general glut) was the cause of recessions, therefore requiring a stimulus to bring them to an end. But alas, in the midst of it, I found I was no better than JSM. The notion that we can wilfully waste our productive potential and that this will create jobs is so ridiculous that I just had to point it out just like that. What kind of a profession is economics if such obvious nonsense can sit at its very core?

But it’s not just theory we are dealing with. I have been on about this since the start of the stimulus packages in 2009, not one of which has brought recovery, and every one of which has had to be abandoned. They are economic poison, so why doesn’t our economic theory explain why they don’t work, rather than encouraging governments to try these experiments which inevitably fail? For me, I have no answer; you would have to go to a social psychologist to work it out.

But as I said at the start, it seems partly reflex, since this is all we have taught for 70 years, and partly sentiment, since we think we should do something. If it comes to that, I think we should do something too, but since lowering taxes on our businesses is so contrary to the anti-capitalist ethos that pervades more than just the left (but the left almost root and branch), the cure to many such people is worse than the disease. Better people should live in poverty, remain unemployed and individuals remain dependent on the government than that business profits should go up.

Anyway, a very interesting night demonstrating just how completely empty Keynesian economics is. Since the defence of the stimulus as presented was to show how the Greek economy had collapsed after international support had been removed, and that in Australia, although the data show that consumer demand ought to be rising by four percent but is only rising by two and a half percent – demonstrating apparently that we are being overly cautious and saving too much. It was also argued that capital spending is lower than expected given what it ought to be, and that real growth in incomes is flat! I can only say, that these seemed to be the kinds of things I wanted to get across. How that amounts to a defence of the stimulus I have still not been able to work out. What I do understand is that you need a heavy dose of classical economic theory to see why the economy remains flat. What will continue, I expect, is that we will teach what we teach in our economics classes, and governments will keep doing other kinds of things which are described as austerity. I just say again, that you won’t make sense of what is going on if you still think that Y=C+I+G gives you any insight at all into how an economy works.

My thanks to Joe Dimasi and the Economic Society for setting this up and to Alan Oster for his presentation of the other side.

Keynes vs the classics

A reminder that there will be a debate – more I suspect sequential talking points – between Alan Oster, the NAB’s Chief Economist, and myself on “Stimulus versus Austerity”. This is taking place on Wednesday August 19 @ 5:30 pm at the Imperial Hotel on the corner of Spring and Bourke Streets in Melbourne. If you are interested in coming, email joe.dimasi@monash.edu to let him know.

Of course, the reason I’m coming along is because I cannot actually think of how to defend the stimulus at this late stage. Back in 2008-09, even though a Keynesian stimulus had never worked anywhere else, not ever, we might have ended up lucky this time. It’s in all the texts, everyone learns Y=C+I+G, so how could every single economics text in the world have been wrong? But that was then. So I have been tossing around various thoughts on what Alan might say, what I might try to argue if I were defending the stimulus. This is kind of a Paul Krugman/Ken Henry version of all the lame things that might be part of such an argument. And I emphasise, the bailing out of financial institutions is not on the table. The financial crisis was over by May 2009. I am only interested in the public spending side of it. Here are my thoughts:

1) The stimulus worked a treat – we would have been back in the Great Depression if nothing had been done. As dismal as things seem, it is a better outcome than the alternative would have been had nothing at all been done.

2) The imperative was to use up those unused savings. No one was investing. The bottom was falling out of our economies. Savings were going to waste. This is still a problem as can be seen from all those unused bank accounts. People still aren’t spending so the government must do it for us.*

3) The theory was all right but the execution was badly done. A stimulus could have worked but the money was poured into the wrong kinds of activities.

4) We didn’t spend enough. A half-hearted stimulus would not only fail to solve the problem but would discredit the very idea of a stimulus.

5) The problems run even deeper than we originally thought. We are into a secular stagnation, not just a temporary fall off in demand.

6) Let me show you the stats to prove how fantastic things turned out relative to our forecasts at the time.

7) Fiscal policy might have been relatively weak but monetary policy has made a major difference by keeping rates low and encouraging investment.

Have I left anything out? Anyway, come along on Wednesday. For my part, I am going to present a short version of my Liberty Fund postings on “Reassessing the Political Economy of John Stuart Mill”, that is, real classical economics versus Keynesian inanities. We each get twenty minutes and then it is thrown open to the floor. And being Policy in the Pub, there is alcohol as well if that’s your sort of thing.

* Just today, in the AFR, Saul Eslake was arguing more spending is needed to put “idle” capital and labour back to work.

John Stuart Mill and the market economy

I have posted my own final note on the Liberty Fund website where I have had the great honour of writing the lead article and in which I have been joined by three great scholars: Richard Ebeling, Nicholas Capaldi and Sandra Peart. The entire discussion may be found here. One seldom has the opportunity of having one’s own work put before such an informed group and I cannot tell you how privileged I feel in having had such an intense discussion about issues that for the most part hardly anyone has any genuine understanding of. It has also given me an opportunity to focus wider attention on Mill, who is still to my mind the greatest economist who has ever lived.

And what may be the most astonishing thing I may have learned during this last month is that one of the greatest Mill scholars is now president of the Mont Pelerin Society. I read Pedro Schwartz’s New Economics of John Stuart Mill (1973) quite a while back and then Nicholas Capaldi’s intellectual biography of Mill (2005) when it came out. I felt I was dealing with kindred spirits with each yet never thought there was much else to it other than a similar regard. A a result of this symposium I appreciate that Nicholas and I have a similar understanding of the economics of Mill in much the same way for many of the same reasons. But I have also just found out, only yesterday in fact, that Pedro Schwartz is the recently elected President of the Mont Pelerin Society. I cannot tell you how astonished I am.

My assumption had always been that those with free market beliefs would shun Mill because of his promotion of economic experiment and his willingness to see “socialism” of some kind or other in a positive light. I would say to others that Mill has provided the best defence of the free market and the deepest understanding amongst anyone I have ever read. No one is exactly right about everything, or even if they were, since no two people see everything the same way, there will be differences that must come up. I only now feel an ability to insist even more than before, because of the example they have set, that if you would like to understand the nature of the market system, it is to John Stuart Mill you must go. Go through the posts on the Liberty Fund first to get you familiar with what you will find. But it is with Mill that you will find the best appreciation of the way an economy works and how it can be made to grow, than from any other of the great economists of the past. And for my own pale understanding of what he wrote, the second edition of my Free Market Economics is the closest attempt there is to bring the economics of Mill into the twenty-first century.