Critique of Mathematically Perfected Economy

Regarding Montagne's first premise, I write:

"If I buy a candy bar for 89¢, I do so because candy bars are not equal in value to 89¢; they are greater in value, at least to me. Obviously, the candy store owner has just the opposite view – he’d rather have the 89¢. Why does the candy store owner have such a different valuation of the candy bar? Is he just a stupid person who doesn’t know how good they taste? No. It’s because he has a lot of them – whole shelves full. I, on the other hand, have none – and I’m hungry. So we both come away from the trade with something of greater value than what we brought to it.

"Montagne’s first premise is wrong. Neither now nor in the days of barter was it true that 'no one takes from the trade anything but the equal of what they contribute to it.' In fact, they always take something of greater value. It is not because of a vague 'propensity to truck and barter' (Adam Smith) that people enter into trades, but because they specifically intend to come away from the trade with something of greater value than what they brought to it."

Regarding Montagne's second premise, I write:

"Montagne’s second premise is no better. He does not seem to understand the concept of time preference. People value the same item more if they receive it sooner rather than later. How much more determines the rate of interest that they are willing to pay and is the inverse of the mean of the Distribution of Wealth over the Capital Structure, DWCS, as I proved in my Critique of Austrian Economics. In my Rejoinder to Mr. Murphy, I write,

"To get an intuitive feel for what the mean of the DWCS represents, ask yourself, “How much of my wealth is in my house, which is intended to provide shelter for twenty years, how much is in my car, which is intended to provide transportation for five years, and how much is in peaches or fashionable clothes for my girlfriend, which will be valuable for about a week before becoming overripe or going out of style?

"For wealthy people, the mean of their personal DWCS is around twenty years, that is, most of their wealth is in long-term projects. Their interest rate is about 5%, slightly less than what they get on certificates of deposit. For middle-class people, the mean of their DWCS is around five years, that is, most of their wealth is in their car. Their interest rate is about 20%, slightly more than what they pay on their credit cards. For people living in hardscrabble conditions, their horizon does not extend beyond a month and their yearly interest rate is about 1500%. This is slightly more than what they pay at the pawn shop when hocking their possessions.

"So, in answer to Mr. Montagne, when one person loans money to another at interest, it does not imply that the latter is being cheated; only that two people have different time preferences. They made a trade based on that difference in the same way that the candy store owner and I were able to make a trade because we had different valuations of a candy bar. The only thing new about this theory is that they are trading present goods for future goods, whereas the 89¢ and the candy bar that I traded it for both existed in the present."

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Shaka, you so crazy! www.sniperflashcards.com

It's shaping up to be quite a debate over there.

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Shaka, you so crazy! www.sniperflashcards.com

Drawing a timeline to world-wide economic collapse and calling oneself “mathematically perfected” is very similar to Marx predicting the inevitable collapse of capitalism and calling himself “scientific.”

Joshua Muravchik (2004, p. 60) has written about the “spectacular inversion” of what is meant by the term “scientific socialism:”

"What is science but the practice of experimentation, of hypothesis and test? Owen and Fourier and their [utopian] followers were the real “scientific socialists.” They hit upon the idea of socialism, and they tested it by attempting to form socialist communities. In all, there were scores of these tests in America and England – and all of them failed, utterly and disastrously.

"Then Marx came along and said never mind these experiments at bringing about socialism by human devices, it will be brought about by the impersonal force of history. In other words, under the banner of “science,” Marx shifted the basis for socialism from human ingenuity to sheer prophesy."

http://www.axiomaticeconomics.com/montagne.php

However, you conclude, "we seriously need to get the Austrian economic theory front and center in the United States if we are going to thrive in the future." Actually, Austrian economics has problems of its own.

Specifically, I have identified seven serious problems with Austrian economics.

1) As discussed in Section II, Hayek was unclear whether his structure of production represents a yearly flow of goods or a distribution of wealth. Mises and Rothbard, like Hayek, seem to mean one and [I]also[/I] the other. Skousen is at least consistent but, unfortunately, he is consistently wrong. He definitely means the amount of goods flowing by every year. This author’s work (1999) is about stock, not supply.

2) As discussed in Section III, Hayek’s triangle is printed sideways and backwards. The former problem can be corrected by rotating the graph but the latter problem is more fundamental. Hayek is speaking from the perspective of the owner of the final product looking back on his costs of production. He is speaking from Marx’s perspective. The perspective that we want is from right now, at time zero, looking forward into the future.

3) As discussed in Section IV, there must be some temporal measure or the Hayekian’s incessant references to “lengthening the period of production” would not mean anything at all. Their theory of business cycles depends on credit expansions lengthening the period of production and on the inevitable contraction shortening it. It is impossible to talk about something being lengthened or shortened unless one knows how to measure it.

4) As discussed in Section V, Hayekian theory depends entirely too much on the specificity of capital goods. In reality, many companies make products or provide services which are used in all of Hayek’s five stages – and they experience cyclical behavior too. Rothbard was wrong when he said “To the extent that the new money is loaned to consumers rather than businesses, the cycle effects do not occur” (1970, p. 940 footnote).

5) As discussed in Section VI, Garrison’s conceptions of the natural rate of interest is faulty. The Hayekians are naïve to cling to this mythical concept. There is no such thing as a natural rate of interest. In any case, credit limits are more important than interest rates. The necessity of a bust following boom times is adequately explained by the transfer of capital from smaller companies to larger ones.

6) In Garrison’s own words: “the [Hayekian] theory of the business cycle is a theory of the unsustainable boom. It is not a theory of depression per se. In particular, it does not account for the severity and possible recalcitrance of the depression that may follow on the heels of the bust” (2001, p. 120). In 1930, Hayek could explain how the depression started. In 1936, he could not explain why it still persisted. See Section VII.

7) Austrian economists seem naïve because their belief in a natural interest rate implies an ethical judgment on what is natural or unnatural, their discussion of the inevitable collapse of a credit expansion is typically presented as a sort of morality play and because they advocate an impractical 100% reserve requirement based solely on ethical considerations. See Section VIII.

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Shaka, you so crazy! www.sniperflashcards.com