Tuesday, July 28, 2009

Ben Bernanke Was Wrong: Featured on Mises.org

My piece Ben Bernanke Was Wrong is a Daily Article today on the Mises Institute web site.  Here is the article and the comments page.  I've fleshed out my commentary on the transcription to make it more of an actual article.  I've also updated the article here on Summa Anthropica.  One of the things I added was the following bit at the end:

But even the most powerful and sequestered bureaucrat is not completely invulnerable. The Federal Reserve Transparency Act and the End the Fed movement have ruffled the Fed's feathers enough that Bernanke actually felt the need to address the public in a "townhall forum" to be broadcast on the News Hour. According to NPR,

after the forum was over, a Fed employee passed out souvenirs, an unintended metaphor perhaps for what some fear Bernanke's aggressive policies may eventually do to the currency: shredded cash.

The Fed employee, who apparently suffers from a defective sense of irony, was even recorded saying, "Here, you want money?" and, "Here's some free shred folks, thanks for coming by, we appreciate it,"

No, no, thank you and your boss, Mr. Fed employee. Within the space of days, we've been provided, courtesy of the Fed itself, with footage that perfectly distills the complete failure of Fed forecasting and planning, and audio that encapsulates splendidly the only thing that the Fed actually accomplishes: the destruction of money.

Wednesday, July 22, 2009

The Second Coming of Keynes: Featured on Mises.org

My article "The Second Coming of Keynes" (originally posted here) has been published today as a front-page Mises Daily.  Here's the article and the comments page.
Best.  Mises.org.  Image.  Ever....

Tuesday, July 21, 2009

Aristotelean Eudaimonia and Value Theory

In the following, I shall discuss the principles of Aristotle's ethical and political theory, paying close attention to what Aristotle meant by eudaimonia, and what he didn't.

Most of the following quotes are from the beginning of Book 1 of the Nicomachean Ethics (as published on the web by MIT).
Every art and every inquiry, and similarly every action and pursuit, is thought to aim at some good;
By saying, "is thought", Aristotle seems to be expressing a commonplace notion.  As is consistent with his general method, he is preparing to derive non-commonplace implications from commonplace notions.  The "some good" here is not eudaimonia, otherwise he would be making an unbacked philosophical assertion and declaring it as an axiom, which is not his style.  Rather the "some good" is simply referring to individual agathos ("good", as in a useful thing) that individual arts and inquiries aim at.
and for this reason the good has rightly been declared to be that at which all things aim.
The good...at which all things aim" is tempting to be characterized as eudaimonia.  But again, he uses the word agathos (useful thing), which he just finished speaking of regarding arts and inquiries.  He certainly didn't present an argument for eudaimonia theory being an implication of the commonplace notion earlier in the sentence, and it is certainly not self-evident how that would be; so this also must be interpreted as speaking of a commonplace notion of particular human ends.
But a certain difference is found among ends; some are activities, others are products apart from the activities that produce them.
Here he is setting up a simple means (activities) / ends (products, as well as activities not intended to produce anything) dichotomy.  He shifts from speaking of agathos (useful things, or human ends) to telos (ends).  It seems obvious to me that he thinks of agathos as a sub-set of telos; good-aimed-at/useful things/human-ends as a sub-set of ends in general.
Where there are ends apart from the actions, it is the nature of the products to be better than the activities.

In this I see a faint shadowing forth of Austrian subjective utility theory.  "Ends are naturally better than their means," is but a short distance from, "Ends impute value to their means."
Now, as there are many actions, arts, and sciences, their ends also are many; the end of the medical art is health, that of shipbuilding a vessel, that of strategy victory, that of economics wealth.
Here we have concrete examples of the generalities he was speaking of earlier.  The end (telos) of the art (tekhne) of shipbuilding is a vessel.  The vessel, as a human telos, is also an agathos. We can see here the commonplace level he is still speaking in regards to "the good": eudaimonia is nowhere yet to be seen.
But where such arts fall under a single capacity- as bridle-making and the other arts concerned with the equipment of horses fall under the art of riding, and this and every military action under strategy, in the same way other arts fall under yet others- in all of these the ends of the master arts are to be preferred to all the subordinate ends; for it is for the sake of the former that the latter are pursued. It makes no difference whether the activities themselves are the ends of the actions, or something else apart from the activities, as in the case of the sciences just mentioned.
More pre-Austrian foreshadowing here.  Bridle-making derives its value from it usefulness for furthering the art of riding, so the latter is "preferred"; the art of riding derives some of its value from its usefulness for furthering the art of war, so the latter is "preferred".  Value is imputed backward through the production process.  Aristotle is explicit regarding such a value theory in the following passage.
The cause of this is that existence is to all men a thing to be chosen and loved, and that we exist by virtue of activity (i.e., by living and acting), and that the handiwork is in a sense, the producer of activity; he loves his handiwork, therefore, because he loves existence. And this is rooted in the nature of things; for what he is in potentiality, his handiwork manifests in activity.
Now, back to the beginning of the Ethics...
If, then, there is some end of the things we do, which we desire for its own sake (everything else being desired for the sake of this), and if we do not choose everything for the sake of something else (for at that rate the process would go on to infinity, so that our desire would be empty and vain), clearly this must be the good and the chief good.
The "chief good" we "choose everything for the sake of" might be interpreted as eudaimonia. But again, I think Aristotle is saying something more down-to-earth here.  I don't think he means there is;one ultimate telos for all the individual things we do. For as he said earlier, "as there are many actions...their ends also are many." The idea he is introducing here is not that the philosopher should seek for the "one end to bind them"; rather, he is making the point that the philosopher, when considering the ends of actions, should seek out ultimate ends (which may still vary from action to action), and not be content with discovering subordinate ends.  Again this is a very pre-Austrian insight.
Will not the knowledge of it, then, have a great influence on life? Shall we not, like archers who have a mark to aim at, be more likely to hit upon what is right?
Aristotle may here be saying that, for example, if the bridle-maker knows that a less-subordinate end of his bridle is for the art of war, this awareness might inform his art more completely than only knowing of the more-subordinate end of simple riding.
If so, we must try, in outline at least, to determine what it is, and of which of the sciences or capacities it is the object. It would seem to belong to the most authoritative art and that which is most  truly the master art. And politics appears to be of this nature; for it is this that ordains which of the sciences should be studied in a state, and which each class of citizens should learn and up to what point they should learn them; and we see even the most highly esteemed of capacities to fall under this, e.g. strategy, economics, rhetoric; now, since politics uses the rest of the sciences, and since, again, it legislates as to what we are to do and what we are to abstain from, the end of this science must include those of the others, so that this end must be the good for man.
The expression, "the good for man" seems to scream "eudaimonia". It should be noted that this Greek word has still not occurred in the text. "The good for man" here is translated from "tanthr├┤pinon agathon". We can recognize the second word as a form of agathos(good, useful thing). The first word is related to our "anthropo-" prefix. Here Aristotle is asking what science is most appropriate for studying human ends. From the following passage...
Further, the state is by nature clearly prior to the family and to the individual, since the whole is of necessity prior to the part; for example, if the whole body be destroyed, there will be no foot or hand, except in an equivocal sense, as we might speak of a stone hand; for when destroyed the hand will be no better than that.
...it is evident that Aristotle has an organic view of the state, with individuals as organs.  Just as the telos of the liver is the telos of the man, the telos of the man is the telos of the state.  That is why he thinks the science of the state (politics) is the science of man's ultimate telos: the ultimate "good for man". Evidently, for Aristotle, this is "one end to bind them", but it is more like "raison d'├ętat" than eudaimonia. Such an interpretation is resoundingly supported by the next passage.
For even if the end is the same for a single man and for a state, that of the state seems at all events something greater and more complete whether to attain or to preserve; though it is worth while to attain the end merely for one man, it is finer and more godlike to attain it for a nation or for city-states. These, then, are the ends at which our inquiry aims, since it is political science, in one sense of that term.
The bridle-maker makes the bridle for riding, which is for the sake of war, which is for the sake of the state. The farmer raises grain for the sake of feeding himself. But, since he is an organ of the state, even this is ultimately a matter of politics.
Let us resume our inquiry and state, in view of the fact that all knowledge and every pursuit aims at some good, what it is that we say political science aims at and what is the highest of all goods achievable by action. Verbally there is very general agreement; for both the general run of men and people of superior refinement say that it is happiness, and identify living well and doing well with being happy; but with regard to what happiness is they differ...
In the above passage is where we finally meet the word "eudaimonia". It is translated here as "happiness". But the footnote at the Perseus translation is enlightening: "This translation of eudaimonia can hardly be avoided, but it would perhaps be more accurately rendered by ‘Well-being’ or ‘Prosperity’; and it will be found that the writer does not interpret it as a state of feeling but as a kind of activity."
So here, he is saying that the ultimate telos of the polis is eudaimonia for the people, although he has not settled what eudaimonia really is. Later he defines eudaimonia as "an activity or actions of the soul implying a rational principle."

Thus, to Aristotle, human actions are for the sake of the state, which is itself for the sake of further particular human actions which implies a rational principle. The exercise of reason, it seems, is the "one end to bind them": a rather convenient conclusion for a philosopher, I should say.

Saturday, July 18, 2009

Ben Bernanke Was Wrong

 We now have the diametrical opposite of the famous "Peter Schiff Was Right" video (a compilation of 2006 and 2007 clips in which Schiff, a financial expert who subscribes to Austrian economics, predicted the deep recession that would follow the bursting of the housing bubble).

The new, opposite video is a compilation of the 2005–2007 prognostications of Federal Reserve Chairman Ben Bernanke. In it, Bernanke is shown to have been just as embarrassingly wrong as Schiff was uncannily right.

Could their differences in economic understanding have anything to do with this remarkable dichotomy? I have transcribed most of the video, and offer my own comments interspersed with it.
July 2005
INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?
BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.
This is not only wrong in hindsight; it's a complete misunderstanding of the issue. Bernanke said that the housing boom was fine because it was supported by, among other things, growth in jobs, incomes, and in the economy in general. But that very growth itself was supported by the housing boom! For example, most of the job growth was in the housing sector. Witness Bernanke's amazing levitating economy: its housing sector is held up by economic growth, which is held up by its housing sector. And it's just as ridiculous that he denied the existence of a housing bubble by pointing to low mortgage rates. The low rates were a chief cause of the housing bubble, and were a direct result of his actions as Federal Reserve chairman.
July 2005
INTERVIEWER: Tell me, what is the worst-case scenario? Sir, we have so many economists coming on our air and saying, "Oh, this is a bubble, and it's going to burst, and this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario, if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don't think it's going to drive the economy too far from its full employment path, though.
As Peter Schiff pointed out in his speech "Why the Meltdown Should Have Surprised No One," while it is true that up until the housing crash, house prices hadn't gone down on a nationwide basis, it's also true that they had never risen so precipitously before either. Bernanke's argument is akin to getting someone drunk for the first time, putting them in a car, and then saying, "He'll be fine; he's never been in a car accident before."
That interview continued:
INTERVIEWER: So would you agree with Alan Greenspan's comments recently that we've got some areas of that country that are seeing froth, not necessarily a national situation, but certainly froth in some areas?
BERNANKE: You can see some types of speculation: investors turning over condos quickly. Those sorts of things you see in some local areas. I'm hopeful — I'm confident, in fact, that the bank regulators will pay close attention to the kinds of loans that are being made, and make sure that underwriting is done right. But I do think this is mostly a localized problem, and not something that's going to affect the national economy.
Bernanke's Fed itself created the false signals that led to vast disruptions in the housing market. Speculators try to see through those disruptions and anticipate how prices will change as valuation mistakes are corrected in order to profit from them. In fact, their speculation is part of the correction process. If their speculation is on the mark, it speeds up the price-correction process. If it's wrong, then the consequences are on their heads. Speculation is nothing but high-uncertainty entrepreneurship; and entrepreneurship is how optimal prices are found and markets clear. It was the Fed under Bernanke himself, and his predecessor Alan Greenspan, that created the price disruption and high uncertainty that made speculation profitable in the first place.
November 2006
BERNANKE: This scenario envisions that consumer spending, supported by rising incomes and the recent decline in energy prices, will continue to grow near its trend rate and that the drag on the economy from the [inaudible] housing sector will gradually diminish. The motor vehicles sector may already be showing signs of strengthening. After having cut production significantly in recent months, in response to the rise in inventory of unsold vehicles, automakers appear to have boosted the assembly rate a bit in November, and they have scheduled further increases for December. The effects of the housing correction on real economic activity are likely to persist into next year, as I've already noted. But the rate of decline in home construction should slow as the inventory of unsold new homes is gradually worked down.
Here we have the Keynesian fallacy (which I have written about here) that consumer spending, in and of itself, creates general increases in wealth. And note the irony in Bernanke applauding the boost in automotive production: the products accumulated during that boost turned out just to be more malinvestment to be liquidated or bailed out when Chrysler and GM collapsed.
February 2007
BERNANKE: We expect moderate growth going forward. We believe that if the housing sector begins to stabilize, and if some of the inventory corrections still going on in manufacturing begin to be completed, that there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of the new year.
Our assessment is that there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy.
For Bernanke, healthy lending is the same thing as "a lot of lending." This dovetails with his statement in the first interview, hailing low mortgage rates as a self-evidently good thing. He has no conception of an equilibrium interest rate determined by society's average time preference, so bubbles will always surprise him. For more on this calamitous gap in Bernanke's understanding, see "Manipulating the Interest Rate: a Recipe for Disaster" by Thorsten Polleit.
July 2007
BERNANKE: The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards, and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further, as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth in coming quarters, although the magnitude of the drag on growth should diminish over time. The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.
Strengthening in 2008? Perhaps the biggest confirmation ever of Rockwell's Law: always believe the opposite of what government officials tell you.
Bernanke's own words, in light of how the crisis developed, are a testament to much more than his own personal failings as a forecaster and policy maker. They demonstrate the complete inadequacy of mainstream macroeconomics in its present state, devoid as it is of the essential insights of the Austrian School. They also reveal the folly of the very idea of giving a single man and his institution the power to centrally plan the most important price in the economy: the rate of interest. Make no mistake: the present economic crisis was brought on by central planning. It is unsettling to think that the fellow in the new video who so badly misread an economy on the brink is arguably the most powerful central planner in the world.
But even the most powerful and sequestered bureaucrat is not completely invulnerable. The Federal Reserve Transparency Act and the End the Fed movement have ruffled the Fed's feathers enough that Bernanke actually felt the need to address the public in a "townhall forum" to be broadcast on the News Hour. According to NPR,
after the forum was over, a Fed employee passed out souvenirs, an unintended metaphor perhaps for what some fear Bernanke's aggressive policies may eventually do to the currency: shredded cash.
The Fed employee, who apparently suffers from a defective sense of irony, was even recorded saying, "Here, you want money?" and, "Here's some free shred folks, thanks for coming by, we appreciate it,"
No, no, thank you and your boss, Mr. Fed employee. Within the space of days, we've been provided, courtesy of the Fed itself, with footage that perfectly distills the complete failure of Fed forecasting and planning, and audio that encapsulates splendidly the only thing that the Fed actually accomplishes: the destruction of money.

Friday, July 17, 2009

Menger on Qualitatively Different Goods

This post is part of a series exploring Principles of Economics by Carl Menger.  The following explores content from chapter 3.

Previously in this series: A Mengerian Solution to the Diamond-Water Paradox

In section C of the chapter on value in Principles, Menger shifts from questions of quantity to questions of quality.  In the following explication, I will use examples that are similar, but not necessarily identical, to Menger's.  Let us compare two pairs of goods: (A.) steak vs. stale bread and (B.)  beech wood vs. fir.  Let us say the two pairs are of identical weights.  In such cases, the difference in quality can have two different kinds of effects on how the goods satisfy needs.  The qualitative difference can have (1.) a qualitative effect on how the two goods satisfy needs.  For example, although both steak and stale bread supply nourishment, only the steak provides enjoyment.  Conversely the qualitative difference can have (2.) a quantitative effect on how the two goods satisfy needs.  For example, beech wood is better firewood for providing human warmth than fir.  However, fir still does provide human warmth, just not as much, per weight; so the difference is quantitative.  If you provided enough additional fir, you could bring about just as much human warmth as with the lesser amount of beech wood.  But all the stale bread in the world wouldn't provide a whit of enjoyment.

if coal of inferior carbon content, oak bark of inferior tannin content, and the ordinary labor services of tardy or less efficient day-laborers are only available to economizing men in sufficiently large quantities, they can generally replace the more highly qualified goods perfectly. But even if unpalatable foods or beverages, dark and wet rooms, the services of mediocre physicians, etc., are available in the largest quantities, they can never satisfy our needs as well, qualitatively, as the corresponding more highly qualified goods.

Since the value of a good is imputed by the importance of the satisfaction supplied by the good, any given amount of beech wood would be valued equally with the amount of fir that provides the same amount of human warmth.  Any amount of fir less than that, even if it is still greater than the amount of beech wood, would still be less valuable than the given amount of beech wood.

Let's say a man has two kinds of goods at his disposal which can both be used for two different uses, and that one is superior to the other in a quantative way.  The value scale rankings of the satisfactions provided by all four good-use pairs are as follows.  (Remember, a higher number is of higher ranking.)

...
Use A
Use B
Superior Good
5
2
Inferior Good
3
2

Now let us say the man loses one unit of the superior good.  What could he do then?

He could allocate things so that Use A had one less superior good assigned to it than before.  This would entail a loss of satisfaction he ranks as 5.

He could take a unit of his remaining supply of the superior good away from Use B and assign it to Use A.  This would entail a loss of satisfaction he ranks as 2.

He could take a unit of the inferior good away from Use B and assign it to Use A.  This would entail a loss in Use B satisfaction ranked as 2 and a loss in Use A satisfaction ranked as 2, because the inferior good would only supply a rank-3 satisfaction as opposed to the lost unit of the superior good, which supplied a rank-5 satisfaction (5-3=2).  Menger contends that the Use B loss together with the Use A loss would mean a combined loss of satisfaction of rank-4 (2+2).  The rank of the least important "Use A" satisfaction rendered by the superior good (5) minus the rank of the satisfaction ultimately lost if a unit of the superior good is lost (4, as calculated above) is called by Menger the "value quota", which in this case would be 1 (5 - 4 = 1).  According to Menger the use value of the superior good is the rank of the least important satisfaction provided by the superior good (which would be the Use B satisfaction ranked as 2) minus the value quota calculated above (1).  Thus in this case the use value of the superior good would be ranked at 1 (2 - 1 = 1).

All this adding and subtracting of ranks seems to be antithetical to Austrian economics as it is now conceived.  Any help in resolving this seeming paradox would be much appreciated.

Tuesday, July 14, 2009

The Second Coming of Keynes

Paul Krugman wants to be our savior.  Moreover, he wants to be a specific kind of savior: a magus of the scientific age, a blackboard prophet.

The roots of this curious ambition can be seen in his recent profile in Newsweek:

Krugman says he found himself in the science fiction of Isaac Asimov, especially the "Foundation" series—"It was nerds saving civilization, quants who had a theory of society, people writing equations on a blackboard, saying, 'See, unless you follow this formula, the empire will fail and be followed by a thousand years of barbarism'."

Now here we are at an economic zero hour for the American empire, and perhaps for modern civilization itself, and many in the global urban elite think this establishment triathlete with his Princeton professorship, his New York Times column, and his Nobel Prize, has the equation for salvation.  So what is Krugman's formula?  What commandments for us, his plebian flock, does the magus have scrawled on his blackboard?

To understand that, one must understand Krugman's intellectual heritage, such as it is.

Paul Krugman is a devotee of John Maynard Keynes.  He's such a hard-core disciple that he was Keyensian when Keynesianism wasn't cool: the period between the 1970's stagflation, which seemed to disprove Keynesian doctrine, and now, when it is groundlessly renascent due to our society's stunted memory span.  He himself proudly admits his devotion to Keynes.  He has written such headlines as "The Greatness of Keynes" and "Why Aren't We All Keynesians Yet?"  But what does it mean to be keen on Keynes?  What diagnosis does Krugman's Keynesian economics have for the economic crisis, and what remedies does he prescribe?

The Keynesian Diagnosis: A Deadly Case of Frugality

The Keyensian culprit in the whodunit mystery of depression economics is nothing other than savings.  That's right, savings: that necessary precondition for all capital development, and thereby all gains in productivity, and thereby all increases in general human prosperity.

The Keynesian story of depressions in a nutshell is that 1) excessive savings leads to 2) underconsumption which leads to 3) unemployment.  Unemployment engenders even more dread savings, completing the loop of a vicious cycle.  This theory was a spit in the face of hundreds of years of progress in economic thought.  Economists before Keynes painstakingly, analytically, and progressively built up a mighty edifice of knowledge and truth, all of which centered around how markets find optimal prices and equilibrate in response to changing situations.  Keynes blithely dismissed it all as "orthodoxy" and falsely characterized the market as an inherently dysfunctional mechanism that tends to seize up into permanent depression without intervention from the wise government.

Paul Krugman completely buys the Keynesian story.  He wrote recently:

one of the high points of the semester, if you're a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

So to Krugman, the road to economic hell is paved with the good intentions of frugality.  This "underconsumption theory" is basically what he's talking about whenever you read Krugman warning ominously about "saving gluts", the "paradox of thrift", "consumer capitulation", "insufficient aggregate demand", etc, etc.  It's all just adult jargon dressing up a childish theory.  As Gary North wrote, underconsumption theories

...speak of saving as if it were a system for hiding paper currency under a mattress. They refuse to answer this crucial question: What does the bank do with the money that a consumer deposits instead of spending? Put another way: What analytical or conceptual difference does it make whether a saver deposits a dollar his bank, which the bank will lend, or whether he spends it, enabling the seller to deposit the dollar in his bank, which his bank will lend?

And even if saving were a matter of greenbacks and mattresses, any particular amount of such "hoarding" would not lead to underconsumption, as Murray Rothbard showed in his economic treatise Man, Economy, and State, but merely "an increase in the real value of their cash balances and of the monetary unit."  This would depress business revenues in nominal terms, but it would lower business costs as well, leaving businesses just as profitable in real terms as before.

The Keynesian Remedy: Spend Your Way to Riches

With such an backwards diagnosis of depressions as Krugman's, it should be no surprise that his Keynesian remedies would be equally wrong-headed, and disastrously destructive besides.  The Keynesian prescription to ward off depression is government stimulus.  This is what Krugman is talking about whenever he calls for "priming the pump".  Keynesian stimulus comes in two forms: monetary and fiscal.  With monetary stimulus, a central bank (like the Federal Reserve) greatly increases the money supply, which dramatically lowers interest rates, which in turn stimulates spending.  This is the "pro-bubble" side of Krugman's economics, which I've written about here and here.  His now-notorious prescription of an induced housing bubble was to be accomplished (and was actually accomplished) via monetary stimulus.  Krugman said in an interview with Lou Dobbs:

Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. (Emphasis added.)

This was his prescription for the recession in 2001.  The rest is housing bubble history.

The ironic thing is that monetary expansion, Krugman's cure for depressions, is the very poison that causes them in the first place.  According to the Austrian Business Cycle Theory, which was first expounded in 1912 by Ludwig von Mises, the great Austrian economist who predicted the Great Depression, monetary expansion misdirects resources, causing excessive investment in stages of production that are more removed from the final products.  This lengthening of the chain of production is unsustainable, given the actual amount of savings available for continuous investment. Eventually businesses realize this fact, and that the malinvestments need to be liquidated and resources reallocated toward sustainable projects.  Further monetary stimulus (or any government intervention for that matter) only serves to retard that reallocation process and to prolong the depression.  For a nice primer on the true story behind business cycles, I recommend this article and this speech (video) by Tom Woods.

According to Krugman's assessment of the current state of the economy, monetary stimulus has done pretty much all it could do (thank God for that!), and we are now coming upon a Keynesian "liquidity trap", which, as he characterizes it, is "a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero..."  What does Keynesian doctrine prescribe in such situations?  It calls for massive fiscal stimulus: government spending intended to fill the hole in aggregate demand that underconsumption has left.  This is how Krugman himself characterized it in February, according to a University of Pennsylvania e-newsletter:

With monetary policy a non-starter, "That leaves nothing but government spending" to prime the pump, Krugman said. "That's pure Keynes."

Krugman estimated that the "spending hole" in the U.S. economy is $2.9 trillion dollars.  Because of that, he complained, President Obama's stimulus package should be over three times its present size!

"It's helpful, but it does not cover even one-third of the gap, so it's disappointing," Krugman said. Out of the $789 billion approved, only about $600 billion adds real stimulus, in Krugman's opinion. "So you've only got $600 billion to fill a $2.9 trillion hole."

The only hole that needs filling is the one in Krugman's understanding.  As we have already seen, the notion that stimulus does any good by moving money out of mattresses and bank vaults is fallacious.  And as Ludvig von Mises wrote:

a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity. 

This leads to the question of whether government spending and investment does more good than private spending and investment.  Sound economics answers this question with a resounding "no"; yet we don't even need to consider the question in regards to Krugman's Keynesianism.  This is because ultimately Keynesian fiscal stimulus is not even about the goods and services produced by the additional spending (infrastructure, welfare, etc).  You see, the fiscal stimulus might as well be literally filling holes, as well as figuratively, since according to Keynes' ridiculous understanding of how an economy works, it doesn't matter what the government spends money on.  Even digging up holes just to refill them would qualify as beneficial stimulus.  You might think that this must not be literally true: "Keynes may have been wrong on some things, but no economist as prominent as he was would believe something so foolish!"  Read the man's words for yourself:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The above passage was not some off-hand note written to a colleague in a fit of academic speculation.  It was written in his chief contribution to economics, upon which his reputation rests: The General Theory of Employment, Interest, and Money.  I don't care how prominent, credentialed, or "accomplished" an economist is.  If he says that burying cash in the ground can be a boon to society, then he should be immediately dismissed from public and academic discourse.

The simple fact that Krugman regards such a fellow as an exemplar of economic scholarship would be highly telling by itself.  "Okay," you might think, "Keynes was a bit extreme.  But Krugman himself wouldn't go so far as to believe something like that."

Wrong again.  In April, Krugman actually bemoaned the fact that Obama's stimulus projects were under budget.

President Obama hails the fact that stimulus projects are coming in ahead of schedule and under budget. Yay — but boo.

Ahead of schedule is good. Under budget — well, ordinarily that’s a good thing. But the point of the stimulus is to increase spending!

That's right, Krugman would, all other things being equal, prefer government stimulus spending to be inefficient.  He then goes on to favorably quote the very same ridiculous passage from Keynes' General Theory, which I quoted above.  And the title of the piece in which he made this complaint?  "Time for Bottles in Coal Mines."

I told you he's hard-core.

This brings me to a side point I'd like to make.  One might think that in writing in such, let's say "direct", language, I'm needlessly vilifying both Keynes and Krugman.  I certainly wouldn't write this way about just anyone I happened to disagree with.  But, as should now be evident, Keynesians are special.  Their economic doctrines are so fallacious, and their policies are so destructive that, for the sake of truth and humanity, one cannot be too forthright in denouncing them.

Conclusion

Paul Krugman wants to be our savior.  Like a savior, he would perform a miracle for us: that of turning consumption into wealth.  But who would accept a messiah with such a "John the Baptist" harbinger as John Maynard Keynes, who proclaimed that credit expansion could perform the “miracle... of turning a stone into bread”?  In any case Krugman is a curious kind of savior: one more interested in seeming brilliant than in actually helping people.  In the Newsweek profile, he said of his policy advocacy:

"I am not overflowing with human compassion. It's more of an intellectual thing."

Indeed, there is something almost calculated in the unblinking wrong-headedness of both Keynes and Krugman.  You're not likely to get much notoreity as a public intellectual advocating common sense.  What's more, you can't express common sense in calculus, which is actually useful in the natural sciences, but which only provides a fallacious veil of obscurity and elitism over the social sciences.  In other words, sound economics just doesn't make for a cool-looking blackboard.  And without a cool-looking blackboard, how would Paul Krugman be the "quant nerd saving civilization"?  John Maynard Keynes reveled in the ballyhoo over his bold "new economics", even though his doctrines were merely age-old inflationist fallacies dressed up in mathematical jargon.  When confronted with the fact that his solutions would never work in the long run, he would dismissively say, "In the long run, we're all dead."  Keynes' short run was long enough for him to live the rest of his life as the scholarly savior who turned economic stone into bread.  But as Murray Rothbard used to say, now Keynes is dead, and we're all stuck living in his "long run"  (See Rothbard's essay on Keynes the Man.)  For our own sake, let's hope Paul Krugman's tenure as an influential economist, as well as the current renascence of Keynes he represents, is a mercifully short-run affair.

Monday, July 13, 2009

The Ontological Counterrevolution: Parmenides, the First Extreme Rationalist

This post is one in a series on the Epistemology and Worldview Throughout History

Previously in this series: The Ontological Revolution: The Proto-Skepticism of Heraclitus.

As discussed in the previous post in this series, Heraclitus introduced ontology into the world of philosophy, threatening to upend the cosmological systems of his Milesian predecessors.  Not only did philosophers not know how things came to be, he seemed to say, they did not even know what it meant to be, because being was a matter of flux.

Just as the purposeless universe of the Milesians may have disturbed Pythagoras, so perhaps did the unstable and unknowable universe of Heraclitus trouble another brilliant thinker: Parmenides of Elea.  Parmenides responded by not only denying Heraclitus's doctrine of flux, but by going all the way to the opposite extreme.  He insisted that nothing EVER changed: that change is an illusion.  He attempted to prove this remarkable assertion by turning ontology, the study of being qua being, back upon the changing world of Heraclitus.  His argument for this went something like this:

  1. Thinking requires an object.  When one thinks, he must think about something.
  2. Therefore, one cannot think about nothing.
  3. To think about a thing not being is to think of nothing.
  4. Therefore, one cannot think about a thing not being.
  5. Change implies a thing once was not, or is no longer.
  6. Therefore, one cannot think about change.
  7. Therfore, one cannot speak of change
  8. Therefore, natural philosophy is nonsense.

What is exceedingly remarkable about this line of thought is not just its use of ontology, but its use of extreme rationalism. Vernon J. Bourke thought of rationalism as a school of thought "in which the criterion of the truth is not sensory but intellectual and deductive"1. Perhaps inspired by the deductive geometric research going on at the time, Parmenides attempted to apply what Aristotle would later call the "syllogism" (deductions) to concerns that go far beyond abstract shapes.  He attempted a "demonstration", Aristotle's term for a syllogism which said something about the real world.  And here, at the dawn of rationalism, we have a paradigmatic instance of the tendency of rationalists to arrive via deduction at conclusions that wildly affront common sense.  The rigorous nature of deduction supposedly gives them licence to do so.  Parmenides offered a stark contrast to the observational (empiricist) methods of the Milesians and Heraclitus.  His distrust of the senses and reliance on pure ratiocination, however contentious-seeming the conclusions may be, can be seen in the following quote, which he ascribes to the goddess who puportedly showed him the "way of truth":

But do restrain your thought from this path of inquiry, and do not let habit, born from much experience, compel you along this path, to guide your sightless eye and ringing ear and tongue. But judge by reason the highly contentious disproof that I have spoken.

1Bourke, Vernon J. (1962), "Rationalism", p. 263 in Runes (1962).

Sunday, July 12, 2009

A Mengerian Solution to the Diamond-Water Paradox

This post is part of a series exploring Principles of Economics by Carl Menger.  The following explores content from chapter 3.

Previously in this series: Menger on Multi-Purpose Homogenous Goods

Let us say two men want to make a trade.  One man offers water, the other diamonds.  The water seller has a reservoir of 1,000 gallons of water.  Let us say the diamond seller offers a 1-carat diamond for 100 gallons of water.  Would the water seller make the trade?  Let's say he would.  "That disproves the use-value theory of value!" the Smithian cost-of-production value theorist would insist, "Water is more useful than diamonds!"  However, the question is not whether water-in-general or diamonds-in-general are more useful.  The insight of Menger's marginalism is that it is necessary to compare the discrete quantities: one 1-carat diamond vs. 100 gallons of water.

Let's say the water seller plans on using his current water supply over the course of a month, after which his supply will be replenished from some unknown and unimportant source.  Were he to keep the whole 1,000 gallons, he would apply his supply in the following manner:

  • 100 gallons for drinking water for his family and guests
  • 500 gallons for cleaning water
  • 300 gallons for watering the plants on his estate
  • 100 gallons for water sports

According to the law discussed in the previous post, were he to give up 100 gallons for the diamond, he would give up the least important satisfaction supplied by that particular quantity of water.  Let's say the fun of playing water sports is the least important satisfaction.  And let's say the satisfaction he would gain from the diamond is the pleasure of seeing it ornament his wife's hand.  The material question is not even "which is more important 100 gallons of water or a 1-carat diamond", because these are just means to ends of satisfaction.  The end of satisfaction imputes value to the means of the good.  What most economic historians don't recognize is that it was not Menger's marginalism that was his most important contribution to value theory; it was his subjectivism, the recognition that it is the ends, the satisfactions, which must be compared.  What Menger really inaugurated was a Subjectivist Revolution.  The truly material question in the hypothetical scenario is "which is more important, the fun of a month of water sports, or the pleasure of seeing a beautiful sparkle on his wife's hand until death parted them?"  It is no paradox that most men would choose the latter.

Next in this series, Menger on Qualitatively Different Goods

Induction in Ancient Greek Thought

This post is one in a series on the History of Epistemological Thought.  

Previously in this series: The Worldview of the Metaphysical Dualist

I have written of three major schools of thought in the ancient world.

 

 

As divergent as these three schools were in worldview, they were very similar in their methodology and implied epistemology.  They all used induction.

The theologi saw that (B) orderly human affairs was generally the work of (A) purposive action.  They noticed that (C) certain aspects of the universe were, like human affairs, also orderly (for example the cycles of the heavens.  Based on that similarity, they inductively concluded that (C) orderly aspects of the universe was also the work of (A) purposive action.

The physiologi on the other hand focused on the simple fact that (B) everyday terrestrial motion was the generally the work of (A) mechanistic forces.  They noticed that (C) heavenly bodies also moved.  Based on that similarity, they inductively concluded that (C) motion in the heavens was also the work of (A) mechanistic forces.

The Metaphysical Dualist Pythagoreans found orderly commensurability in geometry and music, and inductively concluded that there must be orderly commensurability in the heavens as well.  They saw the alleged order and commensurability of the heavens to be associated with eternity and divinity.  So they inductively concluded that if they only concerned themselves with pure order and commensurability, they could become eternal and divine as well.

Next in this series: The Ontological Revolution: The Proto-Skepticism of Heraclitus

Induction in Ancient Greek Thought

This post is one in a series on the Epistemology and Worldview Throughout History.  

Previously in this series: The Worldview of the Metaphysical Dualist

I have written of three major schools of thought in the ancient world.

As divergent as these three schools were in worldview, they were very similar in their methodology and implied epistemology.  They all used induction.

The theologi saw that (B) orderly human affairs was generally the work of (A) purposive action.  They noticed that (C) certain aspects of the universe were, like human affairs, also orderly (for example the cycles of the heavens.  Based on that similarity, they inductively concluded that (C) orderly aspects of the universe was also the work of (A) purposive action.

The physiologi on the other hand focused on the simple fact that (B) everyday terrestrial motion was the generally the work of (A) mechanistic forces.  They noticed that (C) heavenly bodies also moved.  Based on that similarity, they inductively concluded that (C) motion in the heavens was also the work of (A) mechanistic forces.

The Metaphysical Dualist Pythagoreans found orderly commensurability in geometry and music, and inductively concluded that there must be orderly commensurability in the heavens as well.  They saw the alleged order and commensurability of the heavens to be associated with eternity and divinity.  So they inductively concluded that if they only concerned themselves with pure order and commensurability, they could become eternal and divine as well.

Next in this series: The Ontological Revolution: The Proto-Skepticism of Heraclitus

Thursday, July 9, 2009

About Summa Anthropica



Through this blog, I will attempt to formulate, explicate, and apply my various theories, many of which are works in progress.

My Plan
I hope to come to a sound epistemology & philosophy of mind.
From that I aim to construct my own view on the philosophy of man.
I will also expound upon economics, specifically the Austrian School of economics.
Based on the preceding explorations, I will try to explain my stance on ethics.
I will present my thoughts on political philosophy and jurisprudence, both of which stem directly from my ethical views, and would be characterized as anarcho-capitalist.
My most cherished goal is to, out of all of the above, try to construct a philosophy of education.
Finally I will try to apply my theories to history and current events.

My chief influences are Aristotle, David Hume, Ludwig von Mises, and Murray Rothbard.

Best Regards,
Lilburne


Tuesday, July 7, 2009

Krugman's Rearguard Apologists: Featured on Mises.org

My article Krugman's Rearguard Apologists (originally posted on Summa Anthropica), which follows up my Krugman's Intellectual Waterloo Mises Daily (also orginally posted on Summa Anthropica) has been published today as a front-page Mises Daily.  Please check it out and contribute to the comments.

My sincere thanks again to Jeffrey Tucker and BK Marcus.

Here's an excerpt...
This brings us to the key point that all the Krugman apologists egregiously ignore: namely that it would be surprising if such an arch-Keynesian economist as Krugman (he's written extensively on what he has called "the greatness of Keynes") didn't adovocate a housing bubble to replace the dot-com bubble, since doing so would dovetail perfectly with basic Keynesian doctrine. As a Keynesian, Krugman should have wanted lower interest rates (as he actually did want, as is revealed by the previous quote). To quote Keynes himself,
Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. (General Theory, p. 322; emphasis added, but the exclamation point is Keynes's own.)
To be true to his Keynesian principles, Krugman ought to have to welcomed the housing bubble, since to him
  1. it was a good way to achieve his coveted "soaring household spending", and
  2. it was the likely result of Keynesianism-prescribed lower interest rates.

Thursday, July 2, 2009

Menger on Multi-Purpose Homogenous Goods

This post is part of a series exploring Principles of Economics by Carl Menger.  The following explores content from chapter 3.

Previously in this series: Menger's Value Scale.

In Section 2, Part B of his chapter on value, Menger discusses "the dependence of separate satisfactions on particular goods."  He states the following law.

...in every concrete case, of all the satisfactions secured by means of the whole quantity of a good at the disposal of an economizing individual, only those that have the least importance to him are dependent on the availability of a given portion of the whole quantity. Hence the value to this person of any portion of the whole available quantity of the good is equal to the importance to him of the satisfactions of least importance among those assured by the whole quantity and achieved with an equal portion.

This law is specifically concerned with multi-purpose homogenous goods.  For example, let's say that a fellow has 6 cups of vinegar at his disposal during a one-week period.  Let's say over the course of that week, he would like to use 2 cups to make salad dressing, 2 cups for cleaning purposes, and 2 cups to make baking soda-and-vinegar volcanoes  What is the value of a given 2 cups of vinegar?  According to Mengerian value theory, the ordinal value ranking of the 2 cups, in relation to other goods, is determined by the ordinal ranking of how important the satisfaction that depends on it is, in relation to other satisfactions.  So what satisfaction depends on those 2 cups? That would be whichever satisfaction the man would give up if he was without those 2 cups: in other words the LEAST important satisfaction of all those it could possibly be assigned to.  Let's say the salad dressing is most important to the man, and the little volcanoes are the least.  The value of 2 cups of vinegar does NOT depend on the value of the salad dressing; it only depends on the value of the volcanoes  This is because if the man were 2 cups of vinegar poorer, he would do without the volcanoes, and not the salad dressing.

Next in this series: A Mengerian Solution to the Diamond-Water Paradox.

Epistemology and Worldview Throughout History

Below are links to my series of posts on the history of epistemological thought and philosophical worldviews.  This series of posts is a long-term work in progress.

I introduce the series in the following posts:

I am currently discussing the epistemological thought of the ancient Greek poet Hesiod.

The following six posts summarize his mythological and cosmological poem the Theogony.

And the next three posts search for an implied epistemology in the Theogony.

I also have two short posts discussing the epistemology of Hesiod's other great work, the Works and Days.

And here are two posts discussing, respectively, Homer and Thales.

The next three posts characterize three distinct ancient worldviews.

I discuss the common inductive epistemology of the above three worldviews in Induction in Ancient Greek Thought.

I discuss the advent of ontology, which had a profound effect on epistemology, in The Ontological Revolution: The Proto-Skepticism of Heraclitus.

I discuss the advent of rationalism in The Ontological Counterrevolution: Parmenides, the First Extreme Rationalist.