Monday, December 27, 2010

Political Economy: False Choices and the True Dilemma

In 1789 a group of men gathered in Paris to sound the death knell for the ancien regime, and to inaugurate the modern political world.  But there were some differences among them.  Some wanted to abolish the old order more completely.  Others wanted to retain some vestiges of the old privileges.  In this "National Constituent Assembly" of France, the ideological birds of a feather sat together; the more radical members on the left, the more conservative members on the right.

On that day, on the eve of the French Revolution, not only was the modern political world born, but so was its terminology.1  To this day, politics is bisected into a "left wing" and "right wing".  Now with regard to specific fleeting political agendas, vague distinctions like this make sense.  Movable umbrella terms are necessary since legislation involves shifting coalitions of people who do not agree on every single point.  The trouble starts when the terminology of the political moment is imported wholesale into the language of science, in which precise, fixed distinctions are called for.  The "left/right" divide is downright confusing for social science.

Where this confusion is most pronounced is in intellectual discussion of western society following World War I. According to common opinion, there are two politico-economic extremes: communism (or socialism) on the left, and fascism (or Nazism) on the right.  Sound policy then is considered a balancing act between two opposite forms of totalitarianism.  If one leans too far to the left toward the interests of the poor and weak, one arrives at communism/socialism.  Veer too far to the right toward the interests of the rich and strong, and you get fascism.  This political taxonomy is entirely unscientific.  Neither fascism, nor Nazism have ever been scientifically identifiable social orders.  They are party platforms, and thus are assemblages of often-contradictory ideas and slogans.  Calling fascism a "social order" makes as little sense as calling "Tea Partyism" or "Blue Dog Democrat-ism" a social order.

Moreover, as Ludwig von Mises demonstrated2, the allegedly "right-wing" social order of Nazi Germany was just as much socialism as was Lenin's Russia.  Through economic interventions the German government completely took over the economy.  The only "market" left was a sham.  Private individuals owned the means of production in name only.  Real ownership of the means of production was in the hands of the state.  This is what Mises called "socialism of the German or Hindenburg pattern".  This variety of socialism is also known as Zwangswirtschaft, which is basically German for "compulsory economy".  Those who were once entrepreneurs, devolve in a Zwangswirtschaft into mere shop manager (Betriebsfuhrer in Nazi legalese), following the orders of a central command.

The only way in which "socialism of the Russian or Lenin pattern" (as Mises termed the more familiar variant of socialism) is distinct from the Zwangswirtschaft is in the non-essential fact that it has no such veneer of faux-private ownership.  Its socialism is simply more overt.

Another way of stating this is as follows.  In the populist propaganda of Bolshevism, under "socialism of the Russian or Lenin pattern" the people ostensibly own the state, and the state in turn owns the means of production.  While, under the sham capitalism of Nazism and "socialism of the German or Hindenburg pattern", the people ostensibly own the means of production, but the state in turn owns the people.

Thus these occupants of different political "poles" really occupy the same ground, and are only separated by a trivial technicality: the existence or absence of a sham market.  Each variant of socialism does indeed have its own distinctive path.  But it has nothing to do with "left vs. right", "poor vs. rich", or "weak vs. powerful".  Rather, it is a matter of "bureaucratization vs. interventionism".   Bureaucratization, by forthrightly gobbling up the market bite-by-bite, leads to the overt socialism of the Russian or Lenin pattern.  Interventionism, by subtly crippling the market and replacing it incrementally with a network of government diktats, leads to the sham market of socialism of the German or Hindenburg pattern.3

Revolutionary socialist governments, like the Nazi and the Bolshevist states, will generally adopt one path or the other.  But it is by no means necessarily an either/or choice.  Gradual approaches toward socialism, like the one the U.S. is currently taking, often rely on both: here overtly socializing an industry via nationalization, there covertly socializing an industry via market interventions.  And one type of socialization often leads to the other.  Thus through this gradual, dual approach to socialization, one can imagine what one day might be called "socialism of the American pattern" arising, characterized by a hodgepodge of vast bureaus and sham markets.

Thus it is conceivable that there can be a single socialist system that is a mixture of the two varieties of socialism.  However, a mixture of capitalism and socialism is entirely inconceivable, in spite of the fact that many think of all real world economies as "mixed systems".4

As Mises wrote, the mere existence of some bureaus and state-owned firms does not alter the capitalist nature of society and make it a "mixed system" of capitalism and socialism.  Such institutions, although they are inept in comparison with private firms, exist in the midst of a market society.  Because of this, they have recourse to market prices, and can thus have some rationality in their budgets.  Rationalization of the social division of labor is thus still effectuated by the market.

Another important distinction is that, according to Mises, bureaucratization is not a form of interventionism.5  Bureaucratization makes people poorer to be sure, but it does so by constraining the ambit of the market, not by interfering in its workings.

Some have said "interventionism" is system in-and-of itself, and they propose it as a sensible, "middle of the road" policy between capitalism and socialism.  Mises exploded this fallacy.  Utilizing the findings of classical political economy, as well as the findings of modern economics (including his own original insights), he demonstrated that all economic interventions are, in effect, contrary to the purposes of all; including the purposes of those who advocate them.6  They are thus destructive, not constructive.  Interventionism is not a system of social production; it is nothing but a hampering of capitalism.  A hampered capitalist order is still a capitalist order.  The social division of labor in a hampered capitalist order is always effectuated by the sectors of the market which have not yet been crippled by interventions.

When one is confronted by the contrary-to-purpose effects of an intervention, one has two choices in dealing with those effects.  One can undo the intervention, in which case one chooses capitalism.  Or one can try to eliminate the harm with further intervention.  However, further intervention can only lead to still more harm, which would thus call for yet further intervention.  Thus, if one does not choose capitalism, one must choose ever-increasing interventions, which ultimately will completely destroy the market and culminate in socialism of the German pattern.7  If one does not choose capitalism, one chooses socialism.

Not everybody associates "fascism" with the economic policy of the Nazis.  Those who know their history remember that part of the economic policy platform of Benito Mussolini, the founder of fascism, was "corporativism", in which production was directed by "corporatives", each of which represented the participants of a specific industry.  Some even call our present economic order "fascist", because they equate "corporatism" with the "corporativism" that they identify with fascism.  But corporations lobbying for privileges (corporatism) is not the same thing as whole industries collectively owning the means of production relevant to their industry (corporativism).  The two notions are distinct, and must be treated separately.

Corporatism is not a system of social production.  Corporations lobby for privileges which hamper capitalism, it is true.  But, regardless of who instigates the hampering, hampered capitalism is capitalism nonetheless.

And as Mises explained, corporativism is no more a permanent social order than is interventionism.8  The crux of the matter is: who is to determine policy decisions within a given corporative: the landowners, the capitalists, or the workers?  If the state adjudicates between them, then it is the state which is essentially disposing of the means of production, and thus corporativism devolves into socialism.  If the corporatives operate according to a democratic principle, then it is the majority workers who will dictate policy, and thus corporativism devolves into syndicalism.

Under syndicalism, the means of production of each industry are owned by the workers of that industry.  The syndicalist program is distilled by the slogans, "the railroads to the railroadmen!" and "the mines to the miners!"  Syndicalism too has been put forth as another candidate as a "third way" between capitalism and socialism.  But syndicalism is no system of social production either.9  As soon as the needs of society change in the slightest, how is a syndicalist order to adapt?  Under capitalism, shifts in consumer demand adjust prices.  In seeking profits, entrepreneurs try to anticipate these price adjustments, and thereby adjust the structure of production to best satisfy consumer wants in the new state of affairs.  In the flux of the market, resources shift from one industry to another, in response to consumer demand.  But, under syndicalism, why would any producer's syndicate acquiesce to a diminution of its importance and wealth in society?  Production is for the sake of consumption, never the other way around.  Therefore, any system of social production worthy of the name must have some means of at least conceivably adjusting production for the sake of consumption.  Even socialism ostensibly fits this bill, because the central administration at least has the authority to adjust production by diktat, in order to try to better serve society (if not the intellectual means to do so rationally).  But no syndicalist has ever put forth any idea of how a syndicalist state would do so, that did not involve becoming, in essence, capitalism or socialism.

Thus, every economic policy decision is a two-pronged fork in the road; there is no third prong.  And neither are the two prongs toward the "left" and the "right".  There is capitalism, and there is socialism.

One is tempted to say that the two prongs are "forward" and "backward".  This would be to adopt the strategy of the Marxists who characterized everything they liked as "progressive" (as well as everything the disliked as "reactionary").  But again, this would be eschewing scientific distinctions for political word games.  The honest man does not rely on catchwords and slogans, in hopes that the gullible public will latch onto his program by dint of its association with words that resound favorably in their ears.  The honest man tries to speak to the mind of his auditors, not to their ears, because he is confident in the inherent strength of his ideas.  He will even accept unflattering names for his position, and grant flattering names to his opponent's position, if that will but put an end to the distracting word games, and allow the true debate to begin.

What is more "social" than the coordinated ecumenical society of mutual benefactors produced by capitalism?  It is true that capitalism progresses via the accumulation of capital.  But the upshot of increased capital in proportion to labor is an increase in the marginal productivity of labor, and thus a rise in real wages.  And if anything is prejudicial to the vested interests of the already-rich capitalist, is it not pure capitalism, which does not let him rest on his laurels, but demands that he put himself up to the test of the market again and again, lest his fortune gradually dwindle?  Thus should not the market order be given a more flattering (and descriptive) name than "capitalism"?  Should not socialism, that fundamentally anti-social program, be stigmatized with an ugly appellation?

Such are the distracting games of demagogues, and they would only slow liberalism down.  The most direct path to success is to use the terms at hand, as they are found in the best literature in our tradition (which happens to be the oeuvre of Ludwig von Mises), and simply explain what we mean by them.  Any sane person who learns what is truly entailed in "that which is called capitalism" and what is truly entailed in "that which is called socialism" will choose the former over the latter.  That is because socialism (which, again, is the only direction one can choose besides capitalism) is social suicide.  As Mises irrefutably proved as early as 192010, the socialist state has no way of rationally directing production.  Socialism means discoordination, capital consumption, famine, and death.  Thus between capitalism and socialism (which, once more, are the only two choices), the informed chooser could not have an easier choice to make.

And this is the choice that is before everybody.  The fact that everybody in their right mind would choose capitalism, if only they knew what the choice really meant, is why there is a harmony of interests.  Cognizance of this harmony of interests is what underpinned the scientific liberalism (one might call it "harmonist doctrine", as Mises does11) that first arose in the writings of men like Hume, Smith, and Condillac; that intellectually won the field in the days of Ricardo and Say; and that had its greatest impact on policy in the days of Cobden and Bastiat.  And it was the denial of this harmony of interests-- what amounted to a philosophy of irreconcilable conflict (or, as Mises termed it, an "anti-harmonist doctrine")-- that underpinned the revolt against liberalism which reached its culmination in the twentieth century.

This philosophy of irreconcilable conflict is yet another common feature between the totalitarians of the so-called "left" and "right".  With the overthrow of liberalism, the world once again came to embrace the "Montaigne dogma"12: the incorrect notion that no group can gain except by another group's loss.  This was the social philosophy of the mercantalists, which was heroically overthrown by the early liberals.   The people of the early 20th century west came under the sway of the new "anti-harmonism", dominant among the intellectuals of the time.  Thus, adherence (or at least acquiescence) to the party programs of the both the "far right" and "far left" came naturally to them.  They either adopted the lebensraum doctrine of national conquest promoted by the Nazis, Fascists, and other national imperialists, or the doctrine of perpetual class warfare promoted by the internationalist Marxists.  As Mises brilliantly characterized it, the only important difference between the two doctrines, was that one divided society into irreconcilable camps vertically (along national lines) and the other did the same horizontally (along class lines).13

The sooner classic liberals abandon the sloppy distinctions of party politics,  and adopt the scientific distinctions of Ludwig von Mises, the better will it be for our efforts in explaining to our fellow man the stark choice that lies before him.  Right vs. left, fascist vs. communist, all the alleged "middle ways" (interventionism, syndicalism, corporativism, etc.): these are all false choices.  As Mises demonstrated, ultimately there is one true dilemma in political economy: capitalism vs. socialism.

1Dean Russel, The First Leftist

2Ludwig von Mises, Socialism

3Mises, Critique of Interventionism

4Mises, Socialism

5Mises, Bureaucracy

6Mises, Interventionism: An Economic Analysis

7Mises, Interventionism: An Economic Analysis


9Mises, Socialism

10Mises, Economic Calculation in the Socialist Commonwealth

11Mises, Theory and History

12Mises, Human Action

13Mises, (gotta look up where I read that)

Saturday, December 25, 2010

Understanding Mises | The Theory of Money and Credit | Chapter 3: The Various Kinds of Money

Chapter 3 of The Theory of Money and Credit establishes the terminology Mises will use to construct his theory of indirect exchange.  Mises stresses that terminological discussions are not an end for science, but a means for discovering principles.  And the principles to be discovered for monetary theory are economic principles, not juristic or numismatic principles.  More specifically, the goal of monetary theory is to discover the "laws that determine the exchange ratio between money and other economic goods."

The terms and distinctions Mises settles upon are as follows.

First there is the distinction between money and money substitutes.  Claims on money are not considered to be money themselves, but rather are termed money substitutes.  An important qualification is that a claim on money is only considered a substitute for that money if it is (a) perfectly liquid (no significant expense must be incurred for the claim to be redeemed), (b) perfectly secure, and (c) payable on demand (that is, it doesn't need to "mature" like, for example, a Treasury bill or a Certificate of Deposit).  If the claim does not satisfy the above criteria, then it is not a money substitute.  If it is used as a general medium of exchange, then it, by definition, is money proper.  But it is obviously not the same kind of money as that which it is redeemed for.  It circulates as its own kind of money.

Thus token money is, by definition, a money substitute and not money proper.  To conceptually lump a token money with specie as money proper, simply due to its metallic content would be to think as a numismatist, and not as an economist.  What matters for economics is the thing's role in market exchanges.

Mises subdivides money proper into three categories:
We may give the name commodity money to that sort of money that is at the same time a commercial commodity; and the name fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person.
Now a claim on money can only be credit money if it is an "imperfect" claim against other kinds of money.  Because, again, if the claim is (a) perfectly liquid, (b) perfectly secure, and (c) payable on demand, then it qualifies as a money substitute, and not as money proper.

The important distinction between commodity and fiat money is that the latter is technologically indistinguishable from things that are not money.  A note of non-redeemable fiat paper may have the exact same chemical make-up as a bill of board game play money.  It is the legal status of each that is the decisive difference between the two.  Gold specie, on the other hand, is money by virtue of being gold.  It has its own use value (although no "intrinsic" value as is so often claimed, even by fans of Austrian economics); a use value that was decisive in it initially acquiring exchange value.

A school of monetary theorists which Mises refers to here as "nominalists" (and elsewhere as chartalists and etatists) would have it that all money is fiat money.  Moreover, they say the "money nature" of fiat money arises immediately from the state declaring that it is money.  Mises demonstrates with references to documentary evidence, that historically money has in general been exchanged by weight and quality, and not by "tale" (denomination), so long as any relative debasement has been detected.  Therefore, most money throughout history has been commodity money.

Furthermore, even money that is truly fiat money is not established as money immediately upon state pronouncement.  To think otherwise would be to think as a jurist, and not as an economist.  What makes a thing a money is that it is actually used as a general medium of exchange by individuals on the market.  Legal tender laws may be the deciding factor in convincing individuals to use the government's paper as money, but it is the use that makes it money, and not the law.

Thursday, December 23, 2010

Mises on Self-Education in Economics

"Whether one likes it or not, it is a fact that the main issues of present-day politics are purely economic and cannot be understood without a grasp of economic theory. Only a man conversant with the main problems of economics is in a position to form an independent opinion on the problems involved. All the others are merely repeating what they have picked up by the way. They are an easy prey to demagogic swindlers and idiotic quacks. Their gullibility is the most serious menace to the preservation of democracy and to Western civilization.

The first duty of a citizen of a democratic community is to educate himself and to acquire the knowledge needed for dealing with civic affairs. The franchise is not a privilege but a duty and a moral responsibility. The voter is virtually an officeholder; his office is the supreme one and implies the highest obligation. A citizen fully absorbed by his scientific work in other fields or by his calling as an artist may plead extenuating circumstances when failing in this task of self-instruction. Perhaps such men are right in pretending that they have more important tasks to fulfill. But all the other intelligent men are not only frivolous but also mischievous in neglecting to educate and instruct themselves for the best performance of their duties as sovereign voters."

Ludwig von Mises, Bureaucracy

Friday, November 26, 2010

Understanding Mises | The Theory of Money and Credit | Chapter 2: On the Measurement of Value

In chapter 1 of The Theory of Money and Credit, Mises explained what money is (a universally, or at least commonly, used medium of exchange).  In chapter 2, Mises explains what money is not.  Contrary to the common fallacy, it is not a measure of value.

The notion of money as a measure of value as an artifact of the value theory of the "older political economy".  By this he means the "classical economics" of Adam Smith, David Ricardo, and John Stuart Mill.  The classical economists by and large believed that the value of a good was an objective attribute of the good itself.  Economic actors, according to classical theory, exchanged goods if the respective values of the goods were equal (a fallacy that goes back to Aristotle1).  And how do economic actors determine if an objective attribute of one thing is equal to the same objective attribute of another thing?  Well, how do you determine equality between other objective attributes (like length, weight, volume, temperature, etc)?  You measure, of course!  And assuming value is an objective quantitative attribute, it would seem that the best unit of its measurement would be the money unit.

However, the classical economists were entirely backwards in their value theory.  Therefore, their conception of money as a measure of value (derived, as it was, from their value theory) was equally backwards.  Classical value theory was finally supplanted by what Mises calls "modern value theory" in the late 19th century.  By this, Mises means the subjective marginal utility theory of value.  To understand Mises' monetary theory, it is necessary to understand subjective marginal utility.  To come to do so, please read the following three comics.

According to modern value theory, then, value is derived from utility.  Valuation is a matter of preferring one good over another according to the goods' respective marginal utilities.  When you prefer one thing to another, you give the goods a sort of rank order.  Therefore "ordinal numbers" (1st, 2nd, etc) can be applied to the valuation of goods.  For example, you can say that, in order of your preference, a plum is 1st, an apple is 2nd, and an orange is 3rd.  But preferring is not measuring.  Therefore, "cardinal numbers" (1, 2, 3 1/3, 4.5 etc) cannot be applied to the valuation of goods.

While, after the advent of modern value theory, most economists accepted that valuation is not objective, and thus not cardinal, they just could not let go of cardinality altogether.  Cardinality is necessary for the use of measurement and mathematics, and according to the prejudice of many thinkers, "science is measurement"2.  Value could not be cardinal, because it is a subjective preference based on utility.  But maybe utility itself could be thought of as cardinal!

Even one of the greatest pioneers of modern value theory (and Mises' teacher) Eugen von Bohm-Bawerk tried to bring cardinality back in in this manner.  However, instead of formulating measurable utility, Bohm-Bawerk formulated measurable satisfaction.  (The two notions are closely related; the "utility" of a good is the good's "causal relevance" for the satisfaction of desire.)  Irving Fisher, on the other hand, did try to conceive of a way to measure utility itself. The following comic illustrates how how Mises, in this chapter, endeavors to correct Bohm-Bawerk and Fisher by showing that both attempts directly contravene the law of dimishing marginal utility (see the previous slideshow).  Mises nicely summed up the core of why any idea of measuring utility is fallacious in Economic Calculation in the Socialist Commonwealth:
"Marginal utility does not posit any unit of value, since it is obvious that the value of two units of a given stock is necessarily greater than, but less than double, the value of a single unit."  
He never quite explicitly spells that argument out in Theory of Money and Credit.  For the most part, he just states that the law of marginal utility precludes measuring utility, and assumes his target audience (other economists) should be able to see why that is so at once.  However, that will leave most readers these days bewildered, so I hope the following comic helps in that regard.

Mises then goes on to counter Joseph Schumpeter's attempt to quantify satisfaction.  He does so by pointing out that Schumpeter assumes that valuation must be preceded by some prior measuring process.  But simple reflection demonstrates that, we are perfectly capable of looking at an apple and an orange and simply selecting one based on a direct comparison of the two choices.  We do not need to infer any intermediary quantities, and then decide based on an arithmetic comparison of those two quantities.

In Section 2, Mises argues that since value cannot be quantified, neither can values be summed up to infer the "total value" of a collection of goods.

In Section 3, brings money back into the picture.  Money is not a measure of value, because valuation is a process of prioritization, not of measurement.  When a man buys a newspaper for a 25 cents, he is not really demonstrating that 25 cents is the measure of its value to him.  He is demonstrating the he values the newspaper over 25 cents.  Furthermore he values the newspaper over 24 cents, 23 cents, etc.  And he may value the newspaper over 26 cents as well.  And presumably, there is a certain number of cents above which he values the money over the newspaper.  Strictly speaking, when a newspaper is purchased for 25 cents, 25 cents is the newspaper's price, not its value.

Money, however, does introduce arithmetic into economic affairs in an important way.  While money does not measure value, money prices can quantitatively express value in a commensurable way.  This makes economic calculation (which is the hallmark of the market economy) possible.  However economic calculation, while closely related to it, is outside the theory of money and indirect exchange, and thus it must be covered in a future article.

Murray N. Rothbard, It All Began, As Usual, with the Greeks (excerpted from An Austrian Perspective on the History of Economic Thought), Section 1.8

2This being the original motto of the Econometric Society. See Murray N. Rothbard; The Mantle of Science.

Friday, October 29, 2010

David Hume: Nemesis of Mercantalism

One of the most important theorems that played a role in smashing mercantalism was that of the specie-flow mechanism, the chief proponent of which was David Hume. It should be noted that Richard Cantillon formulated the theorem first. But Cantillon's work was not published until after Hume wrote on the subject. Mark Thornton has an interesting paper claiming that Hume may have had access to Cantillon's work nonetheless. I will definitely write about that paper at some point.

Also significant in smashing mercantalism was Hume's work with the quantity theory of money (although Hume's formulation was inferior to that of Cantillon's) and his insight that money was a "lubricant" of prosperity, not a "fuel", as well as his insights regarding the importance of commerce in general.

Online IP Course Starts Monday

 Cross-posted at the Mises Economics Blog.

See below for weekly topics.  Read instructor Stephan Kinsella's article about the course.  Click here for more details and to enroll.

Sunday, October 24, 2010

Understanding Mises | The Theory of Money and Credit | Chapter 1: The Function and Origin of Money

Is money not absurd?  Daily we give up perfectly useful goods and services for the sake of little green pieces of paper.  But it is not just the fiat paper money we are familiar with that can seem strange in this regard.  Even commodity money can seem weird when you think about it.  Why would people give up goods and services for little disks of silver and gold that they never actually used?  Such disks are passed around via innumerable exchanges, perhaps never ultimately providing any ornamental or industrial services.  What a bizarre custom!

It doesn't take an economist to see the social benefit of such an arrangement.  And once everybody is already using money, each individual in accepting money would expect to benefit, confident that others too will accept the money.  But how did it start?  This is a question I asked myself even as a child.  At the beginning of it all, it would seem that the first person who accepted money would have no such confidence in its future purchasing power.  So why would he do it?  It would seem to necessarily involve a private sacrifice for the sake of public gain.

To a certain stripe of thinker, compelling such sacrifices is the raison d'etre of the state.  So to them, it is natural to think that the state must have first instituted money.  Thus, the "etatist" theory of the origin of money was dominant through most of the history of economic thought.

The etatists were wrong.  But that was just one of the many problems with the sorry state of monetary theory up through the mid-19th century.  The whole field was a hodge-podge of disjointed insights.  Nobody knew how to inegrate those insights into a system, much less how to integrate monetary theory with the rest of economics.

Carl Menger, founder of the Austrian School of Economics, started to unravel the mystery of money in the late 19th century.  In the early 20th century, Ludwig von Mises finally unloosed the Gordian knot with The Theory of Money and Credit (1912), arguably the most important single advance in monetary theory in the history of economic thought.  In that treatise, Mises erected a theory of money of astounding originality that was complete and internally integrated: as well as externally integrated with modern, subjectivist economics in general.  With this book, Mises completed the victory of the "marginal revolution" by extending its conquest to the monetary realm.  In doing so, Mises finally made economics whole.  The following is a guide to chapter 1 of this epochal work.

Section 1

Money is defined by Mises later in chapter 1 as a "universally employed" medium of exchange.  This differs from how Mises would define money in his 1949 treatise Human Action: as a "commonly used" medium of exchange.

Mises delimits the realm of money by indicating in which economic situations money would have a function, and in which economic situations money would not have a function.

Mises notes that there is no need for money in autarky.  In autarky there is no division of labor among household units.  Each household consumes only what it produces and only produces for its own consumption.  In such conditions there is no exchange, and therefore no use for money.

Secondly, there is no need for money in socialism.  In socialism there is a division of labor (however chaotic that division may be).  However, since there is no private property, that also precludes the possibility of exchange, thereby eliminating any use for any medium of exchange.  In his 1922 book, Socialism, Mises changes his mind on this matter.  He states that, in socialism while money would have no role with regard to the means of production, it could still have a function with regard to consumers' goods.1

Thus money, according to Mises in 1912, is only useful under capitalism: the state of affairs in which means of production are privately owned.  In capitalism, the function of money is to facilitate exchange by making indirect exchange possible.

Section 2

In Section 2, Mises explains how money comes to be. The development occurs through three steps.

Step 1: From Commodity to Medium of Exchange

Mises explains how a commodity becomes a medium of exchange on the market.  Mises explains this process through hypothetical examples, using letter names (A, B, m, n, etc) for market participants and goods.  Since these kinds of the examples can be hard to follow, I've created the following a 14-page comic-style illustration of the passage. Click below to to enlarge and view.

In sum, direct exchange (barter) requires a "double-coincidence of wants".  For the shoemaker to get the dozen eggs that he wants in exchange for a pair of shoes, it is not enough that he prefers the eggs to the shoes.  The chicken farmer must also happen to prefer the shoes to the eggs.  A big problem is that such a "double-coincidence of wants" is rare; it would be quite a stroke of luck for the egg-craving shoemaker to come across a barefoot chicken-farmer.  However, the individual can solve that problem by resorting to indirect exchange.  For example, the shoemaker may notice that the chicken-farmer needs candlesticks, and the candlestick-maker needs shoes.  He can then trade his pair of shoes for some candlesticks, and then trade those candlesticks for the dozen eggs.

But the solution of ad hoc indirect exchange is a very limited one.  It would still take a huge amount of luck and alertness to be able to find someone offering something the chicken-farmer wants and who also wants shoes. Chances are that the best series of exchanges that would get the shoemaker his eggs would be a lot longer. Perhaps he would need to trade shoes for rope, and then rope for timber, and then timber for fish, and then fish for candlesticks, and then candlesticks for eggs. And what about all the other goods the shoemaker wants? Many of those very well may each involve the same logistical nightmare.

Mises notes that, "[i]ndirect exchange becomes more necessary as division of labor increases and wants become more refined."  The more people specialize, the less likely it is that any individual can acquire the various things he wants in exchange for the niche product that he brings to market.

Step 2: From Medium of Exchange to Common Medium of Exchange

After thus explaining how a commodity becomes a medium of exchange, Mises then explains how a medium of exchange becomes a common medium of exchange.

Whether a good arises as a common medium of exchange hinges on its marketability.  For "marketability" Menger used the term "saleability", which he defined as the "facility with which [a good] can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same".  Menger uses the example of grain as a good with high marketability and an astronomical instrument as a good with low marketability.  In his article "The Origin of Money and Its Value", Austrian economist Robert Murphy explains the example very clearly:
For example, someone selling wheat is in a much stronger position than someone selling astronomical instruments. The former commodity is more saleable than the latter.
Notice that Menger is not claiming that the owner of a telescope will be unable to sell it. If the seller sets his asking price (in terms of other goods) low enough, someone will buy it. The point is that the seller of a telescope will only be able to receive its true "economic price" if he devotes a long time to searching for buyers. The seller of wheat, in contrast, would not have to look very hard to find the best deal that he is likely to get for his wares.
(...) we might find that one telescope trades against 1,000 units of wheat. But Menger's insight is that this fact does not really mean that someone going to market with a telescope can instantly walk away with 1,000 units of wheat.
Moreover, it is simply not the case that the owner of a telescope is in the same position as the owner of 1,000 units of wheat when each enters the market. Because the telescope is much less saleable, its owner will be at a disadvantage when trying to acquire his desired goods from other sellers.
Because of a recognition of this disadvantage, vendors of less marketable (saleable) goods will generally trade for more marketable goods before they enter the market for the things they want to use themselves. Since marketability, according to Mises, is a function of how "general and constant" the demand for the good is, this sets off an upward spiral of marketability for some goods: their high marketability draws more demand, which increases their marketability, which draws forth still more demand, and so on.  This continues until a few goods are selected as "common media of exchange".

Step 3: From Common Medium of Exchange to Money

Yet the selection process does not stop there.  Naturally, individuals will want to trade their goods for the most marketable of these common media of exchange.  As consensus grows as to which common medium is the most marketable, the upward spiral of marketability will tend to benefit only that medium, at the expense of others.  Thus do inferior common media of exchange tend to drop out of the market entirely, and a single medium becomes universally used: in other words, becomes money.

Mises then explains how through the process of what is now called "globalization", moneys tend to die out as markets merge and competition begins anew among the moneys of the various markets.  This process leads toward the establishment of a single money for the whole world.

In an interesting incidental passage, Mises seems to endorse state-enforced "monometallism".

Section 3

In section 3, Mises explains how the alleged "secondary functions" of money, which many theorists write about, are really just instances of its primary and sole function: to facilitate exchange by making indirect exchange possible.

The facilitation of credit transactions is not a separate function, as is often supposed, because credit transactions are simply exchanges of present goods for future goods.  Let us say a would-be lender who has produced present goods and services would like to acquire a claim to a greater amount of future goods and services.  However borrowers on the market are not likely to be interested in the specific goods and services he has produced.  So the lender facilitates future exchange by exchanging his goods and services for present money, which borrowers on the market will likely desire.

The transmission of value across space is not a separate function either.  Exchanging "a good here" for money, in order to exchange money for "a good there" is, again, simply another instance of acquiring a good via indirect exchange, which would have been impossible to acquire via direct exchange.


A common misconception is that the Mengerian market process theory of the origin of money praxeologically disproved the etatist theory.  But, as Mises stated in Human Action, chapter 17, it is for history, not economics, to disprove the etatist theory.  However unlikely it is that once upon a time a king or parliament invented money, it is not praxeologically impossible.

The unlikelihood is indeed staggering however.  Murphy sums up the problems with the notion that a wise ruler foresaw the benefits of a money economy and imposed it by law upon his subjects:
First, as Menger pointed out, we have no historical record of such an important event, even though money was used in all ancient civilizations. Second, there's the unlikelihood that someone could have invented the idea of money without ever experiencing it. And third, even if we did stipulate that a ruler could have discovered the idea of money while living in a state of barter, it would not be sufficient for him to simply designate the money good. He would also have to specify the precise exchange ratios between the newly defined money and all other goods. Otherwise, the people under his rule could evade his order to use the newfangled "money" by charging ridiculously high prices in terms of that good.
Money did in fact arise.  So if the extremely unlikely etatist story did not occur, money must have arisen in some other way.  And the market process of the Mengerian theory is the only other candidate.  Moreover, that market process is the necessary outcome of certain assumed conditions (i.e. scarce double-coincidences of wants, varied marketability of goods, etc) that conspicuously match the real world.  So while the economist qua economist must remain dutifully silent on the question, the economic historian must conclude that that is indeed how money originated in the real world.

No state enforcement is required to institute money by compelling private sacrifice for a public gain.  The emergence of money need not involve such selflessness in the first place.  As Mises tells the story of the origin of money, the economic actor benefits at each step of the way: when he first resorts to indirect exchange, when he first uses a common medium of exchange, and when he first accepts money for his wares.

The market process origin of money is often characterized as a "spontaneous order", as against the "deliberate order" of the etatist theory.  But that should never obscure the fact that each step of the way in the market process origin of money is, as in all economic phenomena, a deliberate action undertaken by an individual to improve his state of affairs.

1" the socialist commonwealth, exchange itself has a much narrower significance, since it is confined to consumers' goods only."; Ludwig von Mises; Socialism: An Economic and Sociological Analysis, Part 2, Chapter 7.

Introducting Story V: The Rise and Reign of the Res Publica Christiana, From Gregory the Great to Boniface VIII

The close-knit symbiosis between Throne and Altar known as "Caesaro-Papism" characterized virtually all states throughout ancient history, from the Egyptian Pharaohs who reigned as living incarnations of the god Horus, to the Athenian Democracy which executed Socrates for impiety, to the Roman imperial cult of Sol Invictus, to the literal Caesaro-Papism of the Byzantine Empire.

The first great sundering of the historic partnership of Altar and Throne began with the fall of Rome in the west.  The Papacy managed to survive in Rome even after the Empire had died out in the west, and managed to hold sway over the hearts of many converted barbarians, largely through the efforts of men like Gregory the Great.  The Papacy used this sway to play off ruler against ruler and to thus maintain a great deal of independence in spite of its diminutive temporal power.

It eventually was able to become dominant in Europe.  The moment that perhaps inaugurated its dominance was when Holy Roman Emperor Henry IV trekked barefoot to the Castle of Canossa in Italy in a hair-shirt to beg Pope Gregory VII to lift his excommunication.  In humbling the emperor, the Pope instituted the Papal Monarchy and heralded the Res Pulica Christiana of the High Middle Ages.

But this Papal Monarchy did not go on to become an empire.  The Church was powerful and independent enough to counter and limit the power of European monarchs, but not enough to become a full Europe-wide state itself.  The fragmentation of power that the church imposed upon Catholic Europe emboldened nobles and clerics against kings, lesser nobles against greater nobles, and peasants and burghers against lords.

This unprecedented breakdown of Caesaro-Papism set Catholic Europe on a course widely divergent from the rest of the world.  Caesaro-Papism and the despotism it made possible persisted in medieval and early modern times throughout the east, even including Orthodox Russia and Byzantium.  It is the history of political fragmentation shared by all of Catholic and post-Catholic Europe and its colonies that most distinctly sets "the west" apart from the rest of the world.  The Magna Carta, signed in 1215 in Runnymede was a check on royal power that was most characteristic of this relatively free age.

The relative freedom made possible by political decentralization led to the industrial and commercial revolution of the high middle ages which is egregiously ignored by contemporary popular history.  During the middle ages, water and wind mills peppered Europe like never before.  The increased energy thus harnessed and its automaticity had an explosive effect on productivity.  Cereals grains were processed with unprecedented efficiency.  The greater heat of medieval furnace technology initiated the true iron age, during which quality iron was available for widespread use for the first time.  There were huge improvements in agricultural technique, including in field rotation.  The medieval harness unleashed the motive power of the horse in agriculture, which dramatically increased productivity.  Scientific husbandry at monastery sheep farms led to an explosion in wool productivity.  All this happened, and much much more.

Unfortunately, 70 years after Runnymede, European saw the coronation of a monarch who would prove to be the herald of an age of absolute monarchy.  Philip IV of France (known as "the Fair" for his good looks) committed a wide number of atrocities (bringing on the Hundred Years War, expropriating and expelling the French Jews, expropriating and murdering the Knights Templar, imposing crippling taxes on the vitally important fairs of Champagne).  But the most significant of these was his arrest of Pope Boniface VIII in 1303.

As the culmination of an intense power struggle between the King and the Pope (particularly over the king's desire to tax the clergy), Boniface excommunicated Philip.  Philip responded by sending two thousand mercenaries to the Papal palace at Anagni.  The mercenaries plundered the palace, and captured the Pope, nearly murdering him.  Although rescued by locals, the Pope developed a fever shortly after this incident, and died.  Within a few years, the Papacy was relocated to Avignon, a French-dominated territory, and was relegated to slavishly generating moral authority for the French crown by rubber stamping its  atrocities.  Just as the humiliation of a monarch at the hands of a Pope at Canossa signaled the beginning of an age of relative freedom and prosperity, so did the humiliation of a Pope at the hands of a monarch at Anagni ring that age's death knell.

David Hume: Begetter of the "Most Exquisite Outcome" of the Enlightenment

To get an idea how important an economist David Hume was in the judgment of Ludwig von Mises, note that Mises regarded British Political Economy as "the most exquisite outcome of the philosophy of the Enlightenment"and that, according to Mises, Hume was "the founder of British Political Economy"2

1The Historical Setting of the Austrian School of Economics

2Money, Method, and the Market Process, Chapter 5

Saturday, October 23, 2010

Supply and Demand Webcomic Updated

I finished comic-ifying "Lesson 11" from Lessons for the Young Economist by Robert Murphy.  I also made the voice-bubble text bigger, so it should be more legible now.

Friday, October 22, 2010

Introducting: Story IV, The Decline and Dissolution of Classical Civilization, From Commodus to the Execution of Boethius

Marcus Aurelius, who died in 180 AD was the last of the "Five Good Emperors", a succession of highly competent and fortunate Roman rulers that began with Nerva in 96 AD.  After Aurelius, and beginning with his son Commodus, Rome began its long, permanent decline.  Here is Ludwig von Mises on the fall of the Roman Empire:
The showdown came when in the political troubles of the third and fourth centuries the emperors resorted to currency debasement. With the system of maximum prices the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society's economic organization. The more eagerness the authorities displayed in enforcing the maximum prices, the more desperate became the conditions of the urban masses dependent on the purchase of food. Commerce in grain and other necessities vanished altogether. To avoid starving, people deserted the cities, settled on the countryside, and tried to grow grain, oil, wine, and other necessities for themselves. On the other hand, the owners of the big estates restricted their excess production of cereals and began to produce in their farmhouses--the villae--the products of handicraft which they needed. For their big-scale farming, which was already seriously jeopardized because of the inefficiency of slave labor, lost its rationality completely when the opportunity to sell at remunerative prices disappeared. As the owner of the estate could no longer sell in the cities, he could no longer patronize the urban artisans either. He was forced to look for a substitute to meet his needs by employing handicraftsmen on his own account in his villa. He discontinued big-scale farming and became a landlord receiving rents from tenants or sharecroppers. These coloni were either freed slaves or urban proletarians who settled in the villages and turned to tilling the soil. A tendency toward the establishment of autarky of each landlord's estate emerged. The economic function of the cities, of commerce, trade, and urban handicrafts, shrank. Italy and the provinces of the empire returned to a less advanced state of the social [p. 769] division of labor. The highly developed economic structure of ancient civilization retrograded to what is now known as the manorial organization of the Middle Ages.
The emperors were alarmed with that outcome which undermined the financial and military power of their government. But their counteraction was futile as it did not affect the root of the evil. The compulsion and coercion to which they resorted could not reverse the trend toward social disintegration which, on the contrary, was caused precisely by too much compulsion and coercion. No Roman was aware of the fact that the process was induced by the government's interference with prices and by currency debasement. It was vain for the emperors to promulgate laws against the city-dweller who "relicta civitate rus habitare maluerit." [4] The system of the leiturgia, the public services to be rendered by the wealthy citizens, only accelerated the retrogression of the division of labor. The laws concerning the special obligations of the shipowners, the navicularii, were no more successful in checking the decline of navigation than the laws concerning grain dealing in checking the shrinkage in the cities' supply of agricultural products.
The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy. A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police. The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.1
Along with the classical civilization's economic dissolution came its cultural dissolution.  The primitive economy of the Dark Ages could not support scholars and artists.  Greek culture had pervaded Roman civilization, because Roman intellectuals learned Greek.  So, almost none of the Greek classics had been translated into Latin before Rome's fall.  And while many of the barbarians who supplanted the Roman elite learned Latin, they did not learn Greek.  So the untranslated Greek classics were eventually lost to the west.  The Roman philosopher and statesman Boethius foresaw this fate, and tried to avert it by embarking on a project to translate the complete works of Plato and Aristotle into Latin.  He only managed to get through the Timaeus of Plato and Aristotle's works on logic before being executed in 524 AD by Theodoric, the barbarian ruler of Italy.

1Human Action, Chapter 30, Section 2

David Hume: Father of Scientific Liberalism

In Appendix 1 of his book Liberalism, Ludwig von Mises wrote:
Liberal ideas are already to be found in the works of many of the earlier writers. The great English and Scotch thinkers of the eighteenth and the beginning of the nineteenth century were the first to formulate these ideas into a system.
When fragmentary insights are integrated and systemetized, that is the mark of a science.  Mises then offers a list of these "scientific liberals", and the works by them which one should read.  The earliest work on his list is: David Hume, Essays Moral, Political, and Literary (1741 and 1742).

Introducing Story III: The Formation and Rise of Classical Civilization, From Homer to Marcus Aurelius

 In Story III, I will tell of the flowering of humanity known as the Classical Civilization.  A distinct civilization was born in archaic Greece, and (to a large extent) thrived through the Hellenic, Hellenistic, and much of the Roman Period.  Out of it came some of the most remarkable achievements of the human mind in science and culture.  I will argue that this flowering was predominantly the result of a basically (if deficiently) propertarian and individualist social order that itself is the classical civilization's greatest gift to us.

Hume as Causal-Realist

Joseph Salerno has done a lot of interesting work characterizing Austrian Economics in the Mengerian tradition as "causal-realist". Causal realism is defined by as:
The view that substantive causal connections exist in reality
Causal realism is considered to have a diametric opposite in the Regularity Theory of Causation, which according to the above-mentioned site:
analyzes causation in terms of nothing but regular sequence
The chief formulator of the Regularity Theory of Causation is considered to be David Hume. But there has been a wave of new studies referred to as the "New Hume" interpretation, which characterizes Hume as actually having been a causal-realist. One of the themes of this blog will be looking into this "New Hume Debate".

Thursday, October 21, 2010

Mises Academy Online Classes Starting in January

Cross-posted at the Mises Economics Blog.

Notice that the Mises Academy has lowered its prices by about 40% !!

Murphy on the Fed

8 weeks, January 10, 2011 - February 28, 2011
Anatomy of the Fed with Robert Murphy will cover both the theory and history behind the Federal Reserve, the central bank of the United States. Instructor Robert Murphy will first detail the theory of free-market banking, and contrast it with the distorted banking sector resulting from special government privileges. Murphy will relay the sordid tale of how the Federal Reserve Act was designed on Jekyll Island in a secret meeting of government officials and international bankers. He will also cover the mechanics of modern Fed operations and the commercial banking sector. The course will also apply Austrian business cycle theory to the stock market crash of 1929 and the recent housing bubble.

Gordon on Logic

7 weeks, January 13, 2011 - February 24, 2011
How to Think: An Introduction to Logic with David Gordon will present some of the essentials of logic—the science of correct reasoning. Deductive reasoning transmits truth from premises to conclusion. If one starts with true premises, and reasons correctly, the conclusion will be true also. We will identify common fallacies and give examples of these from discussions in politics and economics. The course will emphasize ordinary language reasoning rather than mathematical logic.Although we will stress practical applications, some of the philosophical issues that logic raises will also be covered. Whatever your field of study, you will find a grasp of logic of great help in your work.

Dilorenzo on Lincoln

6 weeks, January 18, 2011 - February 22, 2011
In Omnipotent Government (p. 268) Ludwig von Mises wrote that “the adversaries of the trend toward more government control describe their opposition as a . . . contest of states’ rights versus the central power.” To Mises, centralized governmental power was the greatest threat to liberty. And as Edmund Wilson once noted, no one is more responsible for the birth of the centralized, bureaucratic state that Americans slave under than Abraham Lincoln, the “Great Centralizer.” This course, The Great Centralizer: Lincoln and the Growth of Statism with Thomas DiLorenzo, will apply Austrian economics and Austrian social theory to understand the economic and political legacies of the real Lincoln, the man who waged total war on his own citizens, killing some 350,000 of them; who shredded the Constitution and essentially declared himself dictator; who suspended Habeas Corpus and imprisoned political opponents by the thousands; who shut down opposition newspapers by the hundreds; who intimidated federal judges and deported an opposition member of Congress; who ignored how most of the rest of the world ended slavery peacefully; who destroyed the voluntary union of the founding fathers that was based on states’ rights and federalism; and whose regime introduced America to income taxation, military conscription, decades of protectionism, corrupt corporate welfare, the internal revenue bureaucracy, and transformed the country from a republic to an empire.

Klein on the Networked Economy

5 weeks, January 19, 2011 - February 16, 2011
What is the new, networked economy all about? What are “information goods” and how do they differ from traditional goods? How are online businesses different from brick-and-mortar establishments? Is the large firm with its centralized managerial hierarchy obsolete, to be replaced by decentralized, disaggregated, peer-to-peer communities? Is government regulation needed to keep digital markets free, fair, and open? More generally, does the new economy call for a new kind of economics, or is traditional economics still useful? This course, Networks and the Digital Revolution: Economic Myths and Realities with Peter Klein, suggests answers to these and related questions, focusing on recent examples, applications, and illustrations, while grounding the discussion on basic economic principles. We begin by studying the growth of the Internet, wireless communication networks, and related technologies, trying to assess just how widely information technology has diffused throughout the economy. We then explore how these changes in technology, along with changes in regulation and global competition, have affected firm boundaries, competition, human resource management, regulation, sources of financing, and the assignment of property rights.

Robert Murphy on the Principles of Economics

10 weeks, January 26, 2011 - March 30, 2011
Robert Murphy will again teach Principles of Economics in the Winter of 2011 , an online class for all ages that will use his book Lessons for the Young Economist. (Professor Murphy discusses his plans for the course in his article Learn Principles of Economics Online.) The class will run from January 26 until March 30, ten weeks of fantastic economics instruction from the ground up. His book, which is sure to become a standard text in the future, will be used in this class. Enrollment in the class is $150 and covers all materials, weekly lectures, office hours, quizzes, grading, and final exam. The class is designed for high school students, but it is the ideal class for gaining a solid foundation in economic science at any age. The focus is on the Austrian understanding. The knowledge gained will establish a rock-solid basis for all future studies in economics. The goal is to present economics in the same way that it was given to Mises, Hayek, and Rothbard early in their schooling, a paradigm to inspire a lifetime of understanding and scholarship.No prior exposure to economic logic is required.

Stiglitz: "We Cannot Afford Austerity"

Cross-posted at the Mises Economics Blog (lots of comments there)

From the New York Times, "Europe Is Turning Its Back on Keynes’s Cure for Recession":
The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored. (...) “Everything Keynes established about the primacy of maintaining demand at a steady pace is gone,” Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully. “Europe obviously thinks it can focus on sound finances while the U.S. manages world demand,” he said in a telephone interview, “but unfortunately we are not doing that.” Joseph E. Stiglitz argued that the British government’s plan was “a gamble with almost no potential upside” and that it would lead to lower growth, lower demand, lower tax revenues, a deterioration of skills among the unemployed and an even higher national debt. “We cannot afford austerity,” he wrote in The Guardian.

Wednesday, October 20, 2010

Introducing Story II: The Rise and Fall of the Early Great States, From Eridu to the Bronze Age Collapse and the Ancient Dark Ages

In Story II, I will tell of the rise of Eridu in ancient Sumer, which may have been the first state. I will relate the nature of the Sumerian state, and how a chain of influence extends from it to the Akkadians, the Babylonians, the Assyrians, the Persians, and even the Macedonian Greeks. I will also write about the histories of the early states of Egypt, Phoenicia, Palestine, Asia Minor, and Syria. And I will consider how it all came crashing down in what is known as "the Bronze Age collapse".

Hume's Irreducible "Determination of the Mind"

The following passages should shatter any misconception that David Hume was a crude empiricist.
Shall we then rest contented with these two relations of contiguity and succession, as affording a complete idea of causation? By, no means. An object may be contiguous and prior to another, without being considered as its cause. There is a NECESSARY CONNEXION to be taken into consideration; and that relation is of much greater importance, than any of the other two above-mention'd.Here again I turn the object on all sides, in order to discover the nature of this necessary connexion, and find the impression, or impressions, from which its idea may be deriv'd. When I cast my eye on the known Qualities of objects, I immediately discover that the relation of cause and effect depends not in the least on them. When I consider their relations, I can find none but those of contiguity and succession; which I have already regarded as imperfect and unsatisfactory.1 (...)

What is our idea of necessity, when we say that two objects are necessarily connected together. Upon this head I repeat what I have often had occasion to observe, that as we have no idea, that is not deriv'd from an impression, we must find some impression, that gives rise to this idea of necessity, if we assert we have really such an idea. In order to this I consider, in what objects necessity is commonly suppos'd to lie; and finding that it is always ascrib'd to causes and effects, I turn my eye to two objects suppos'd to be plac'd in that relation; and examine them in all the situations, of which they are susceptible. I immediately perceive, that they are contiguous in time and place, and that the object we -call cause precedes the other we call effect. In no one instance can I go any farther, nor is it possible for me to discover any third relation betwixt these objects. I therefore enlarge my view to comprehend several instances; where I find like objects always existing in like relations of contiguity and succession. At first sight this seems to serve but little to my purpose. The reflection on several instances only repeats the same objects; and therefore can never give rise to a new idea. But upon farther enquiry I find, that the repetition is not in every particular the same, but produces a new impression, and by that means the idea, which I at present examine. For after a frequent repetition, I find, that upon the appearance of one of the objects, the mind is determin'd by custom to consider its usual attendant, and to consider it in a stronger light upon account of its relation to the first object. 'Tis this impression, then, or determination, which affords me the idea of necessity.(...)

I begin with observing that the terms of efficacy, agency, power, force, energy, necessity, connexion, and productive quality, are all nearly synonymous; and therefore 'tis an absurdity to employ any of them in defining the rest. (...)

The idea of necessity arises from some impression. There is no impression convey'd by our senses, which can give rise to that idea. It must, therefore, be deriv'd from some internal impression, or impression of reflection. (...)

This therefore is the essence of necessity. Upon the whole, necessity is something, that exists in the mind, not in objects; nor -is it possible for us ever to form the most distant idea of it, considered as a quality in bodies. (...)

the necessity or power, which unites causes and effects, lies in the determination of the mind to pass from the one to the other.2
John Locke said "there is nothing in the intellect which was not previously in the senses", to which Leibniz appended, "except the intellect itself".  Mises would have agreed with Locke on that account.  Where Leibniz said "the intellect", Mises would have said, "the logical structure of the human mind".

"The logical structure of the human mind" refers to the built-in rules of inference in our minds that are ultimately given, because they cannot be inferred from any principles outside of themselves...
  • inferring final causes
  • the categories of deductive logic
  • inferring causation from regular contiguity/succession
  • inferring future regularity from past regularity (induction)

What is not understood however is that Hume would also agree with Leibniz's dictum.  As can be seen in the above passages, he recognized that there must be some "determination of the mind" to make the leap from regular contiguity/succession to causation.  This irreducible "determination of the mind" is basically what Mises was talking about when he wrote of "the logical structure of the human mind."

1David Hume, A Treatise of Human Nature, Book 1, Part 3, Section 2
2Ibid, Book 1, Part 3, Section 14

Tuesday, October 19, 2010

Tom Woods on Nullification, this November at the Mises Academy

The Mises Academy is pleased to announce Nullification: A Jeffersonian Bulwark Against Tyranny, a four-week, online course with Thomas E. Woods, starting November 16. From the description:
Nullification, the Jeffersonian mechanism of state resistance to unconstitutional acts of the U.S. government, has returned to the news in recent years, and is the subject of a new book by the instructor of this course. The course will cover the historical, constitutional, and moral arguments that have been raised for and against the idea of state nullification. Students will examine the major sources and documents that comprise this tradition of American political thought, and read and discuss the famous debates in American history over nullification and the nature of the American Union: Daniel Webster vs. Robert Hayne, Andrew Jackson vs. Littleton Waller Tazewell, and Joseph Story vs. Abel Upshur. To understand this topic is to gain an intimate knowledge and understanding of American history. (The book Nullification is the only required reading that is unavailable to read online.)

Introducing Story I: The Rise of Prehistoric Man: From the Dawn of Man to the Halaf Culture

Mainstream history textbooks hail the origination of the state as a crucial step in the “march of progress.”  However, great prosperity is the fruit of society, not the state.  And society antedates the state.

Civilization first arose in Mesopotamia, the “land between the rivers”.1  However, many societal advancements associated with “civilization” antedated the state in that region.2  Paleolithic families commerced with people as far away as Anatolia and Palestine many millenia before the rise of the Sumerian city-states.  Village life arose in Mesolithic times.  And the Neolithic agricultural revolution and introduction of pottery got underway quite nicely under stone age anarchy.

Three successive (though overlapping) proto-historical cultures arose in northern Mesopotamia: the Hassuna, Samarra, and Halaf cultures.  All three made great strides in art, trade, and the technologies of agriculture, building, implements, pottery, and even irrigation.3  And not one of them showed any signs of having a central government.  The Hassuna culture developed stamp seals, an important development in the protection of private property and in trade, as well as a precursor to the written language.  The Samarra culture invented irrigation with which they produced amazingly abundant harvests, as evidenced by the remains of capacious granaries.  The Halaf culture even had cobbled streets and specialized centers which mass produced a distinctive pottery (which has been called by the French antiquarian Georges Roux, “the most beautiful ever used in Mesopotamia”1) for peaceful exchange abroad. Pre-state Mesopotamian society was accomplishing wondrous things for itself.

Then something happened.   Several Halafian towns were for some reason depopulated.4  And their exquisite pottery was replaced by a cruder style: a sure archaeological sign of cultural displacement.   A very different people, the Ubaid culture, had come from the south and supplanted the Halafians.  The Ubaid culture had shrines, altars, offering tables, and enormous temples: sure signs of a priestly elite.  And their temples consistently grew in size and grandeur as the ages went by: a sure sign of consolidating priestly power.   It is highly likely that the people of this culture are the famous Sumerians themselves in their proto-historical form.   If so, then the cult which originated in the Ubaid temples is the very tradition which evolved into the monstrous temple-states of Sumer, Akkad, Babylon, and Assyria.  The north Mesopotamian tradition of freedom that lasted for a millennium and a half was replaced by the yoke of the state.

This is the basic framework of Story I.

1History Begins at Sumer by Samuel Noah Kramer
2Ancient Iraq by Georges Roux


Cross-posted at Hume and Action.

One of the topics that will  be covered in this blog is wertfreiheit.  This is German for "value freedom".  Ludwig von Mises, following Max Weber, subscribed to the notion that science must be value-free to truly be a science, and not merely an expression of one's own desires.  Liberals in the tradition of Murray Rothbard generally agree with Mises that economics is a value-free science.  But Mises regarded all science, and not just economics, as necessarily wertfrei.  This was rejected by Rothbard, who believed in a "value laden" science of ethics.

Rothbard believed there is an objective ethic, discoverable by man's reason. He believed there is a natural law which provides an absolute standard of right and wrong. One can infer from the nature of man that the homesteading-and-exchange-based propertarian ethic is the only correct ethic for man.
Furthermore, he thought economic science, by itself, is not enough to make a case for liberalism (or its fullest extention, anarchocapitalism). Economics, as a value-free science, can teach what social arrangement is an appropriate means for certain social ends. But the science of objective natural law ethics is necessary to determine what ends men should have.

In The Ethics of Liberty, Rothbard wrote:
"In order to advocate public policy, therefore, a system of social or political ethics must be constructed. In former centuries this was the crucial task of political philosophy. But in the contemporary world, political theory, in the name of a spurious “science,” has cast out ethical philosophy, and has itself become barren as a guide to the inquiring citizen. The same course has been taken in each of the disciplines of the social sciences and of philosophy by abandoning the procedures of natural law. Let us then cast out the hobgoblins of Wertfreiheit...1"
Why did Mises subscribe to thoroughgoing wertfreiheit?   He believed that science only has to do with "existential propositions": with the "is".  It is only with regard to existential propositions that there can be any question of truth vs. falsity.  Value judgments are not existential propositions, and thus are not subject to proof or disproof.  Value judgments, moral or otherwise, cannot be judged as right or wrong without imposing one's own personal values upon them as the standard by which they are judged.

In Theory and History, Mises wrote:
Propositions asserting existence (affirmative existential propositions) or nonexistence (negative existential propositions) are descriptive. They assert something about the state of the whole universe or of parts of the universe. With regard to them questions of truth and falsity are significant. They must not be confounded with judgments of value.
Judgments of value are voluntaristic. They express feelings, tastes, or preferences of the individual who utters them. With regard to them there cannot be any question of truth and falsity. They are ultimate and not subject to any proof or evidence.2
This fact/value dichotomy, or "is/ought" divide, was greatly advanced by David Hume. In A Treatise of Human Nature, Hume wrote:
In every system of morality, which I have hitherto met with, I have always remark'd, that the author proceeds for some time in the ordinary ways of reasoning, and establishes the being of a God, or makes observations concerning human affairs; when all of a sudden I am surpriz'd to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought, or an ought not. This change is imperceptible; but is however, of the last consequence. For as this ought, or ought not, expresses some new relation or affirmation, 'tis necessary that it shou'd be observ'd and explain'd; and at the same time that a reason should be given; for what seems altogether inconceivable, how this new relation can be a deduction from others, which are entirely different from it.3
Mises believed the "is/ought" divide posed no problem for liberalism. This is because he believed that there is a "harmony of interests". The overriding concern of humanity is secular well-being: greater abundance, health, security etc. Now, regardless of whether one only is concerned for the secular well-being of himself, for his immediate family, for his community, for his country, or for the world as a whole, economic science shows that the secular well-being of whichever portion of humanity is concerned with would be better promoted by a liberal social order than by any other order. This is Mises' conception of value-free, individualist utilitarianism.

Mises also believed that social orders are utilitarian devices that ultimately are always determined by the beliefs of the preponderance of society with regard to the relative efficacy of various social orders. So the only way that liberalism can be effected is if enough people either (a) understand sound economics well enough to realize the efficacy of liberalism, or (b) trust thought-leaders who understand economics to that extent.

However, Rothbard's position won the day among Misesians, to the point that today, thoroughgoing wertfreiheit has nearly died out in the Austrian tradition.  Perhaps the only major Misesian proponent of it is the nonagenarian scholar Leland Yeager.

But, many of the young intellectuals who have just recently been introduced to Austro-libertarianism are unsatisfied with the arguments provided by Rothbardians against thoroughgoing value-freedom in science. Misesian/Humean wertfreiheit may yet have its day in the Austrian tradition once again.

1Murray N. Rothbard, The Ethics of Liberty, Chapter 5
2Ludwig von Mises, Theory and History, Chapter 1, Section 1
3David Hume, A Treatise of Human Nature, Book III, Part I, Section I

Monday, October 18, 2010

Hume and Action Topics

 Some of the topics I will be covering in Hume and Action:

  • Wertfreiheit and the is/ought, or fact/value, divide
  • The irreduceability of logic, causality, and induction
  • Recent Hume studies trending toward interpreting Hume as a causal-realist
  • Hume's vital role, currently neglected in the liberal tradition, in the advent of scientific liberalism and modern economics.
  • The resonance between the ethics of Hume (misleadingly called hedonism) and that of Mises (misleadingly called utilitarianism).

Also Introducing: Hume and Action

A blog, co-authored with Ian Ryan, with the theme of expounding upon resonances between the thought of David Hume and that of Ludwig von Mises.

The 10 Stories

Here are the stories I'll be telling through my blog, 10 Stories: The History of the West in Ten Tales.  You might ask what, for example, Mesopotamian history has to do with "the west".  Basically, I want to tell the story of all the antecedents of ancient Greek culture, so as to understand it.  So that involves studying Egypt and the Fertile Crescent.

I. The Rise of Prehistoric Man: From the Dawn of Man to the Halaf Culture
II. The Rise and Fall of the Early Great States: From Eridu to the Bronze Age Collapse and the Ancient Dark Ages.
III. The Formation and Rise of Classical Civilization: From Homer to Marcus Aurelius
IV. The Decline and Dissolution of Classical Civilization: From Commodus to the Execution of Boethius
V. The Rise and Reign of the Res Publica Christiana: From Gregory the Great to Boniface VIII
VI. The Decline and Fall of the Res Publica Christiana: From Philip the Fair to Charles V and Martin Luther
VII. The Reign of the Princely State: From Henry VIII to Louis XIV
VIII. The Age of Enlightenment: From Newton to Kant
IX. The Rise and Reign of Liberalism: From the French Revolution to the Chicago World’s Fair
X. The Age of Etatism: From the Spanish American War to the Present

I will not tell these stories in one long succession. Rather, I will cycle through these stories with every post. For example, I will have one post on Story I, and then a post on Story II. After I cycle through all the other stories, I will return to Story 1 and advance it, and so on.

More details and elucidations forthcoming.