Dmitry Chernikov’s Blog

On the Mises blog Nicholas Sorrells has written: “Evidently power is only to be feared if it comes from government (i.e. power accountable to the people), not if it comes from big business (completely unaccountable to the people).” This seems like a common misconception. Of course, business, whether big or small, is fully accountable to the people qua consumers. They also have contractual obligations to their business partners and employees.

And what a good libertarian ideology must prevent him from having: capitalist profits and socialized losses.

From Tyler Cowen at the Marginal Revolution blog.

In 2001 Lew Rockwell penned an article, in which he mentioned the cost per student in public vs. private schools. At that time, according to his research, it was $6,000 vs. $3,100 with many public schools being in awful conditions, so it makes sense to speculate that the higher prices did not buy better quality. (Quality in a socialized industry? Say what?) The numbers need to be updated: in 2004-05 the government schools cost $10,892 per student per year. The government does not publicize the relevant recent data on private schools for obvious reasons (e.g., their Characteristics of Private Schools in the United States: Results from the 2005-2006 Private School Universe Survey has no finance information); it appears that the most recent private schools data they have is for 1993-1994, the cost averaging at around $3,000/student. So, still government schooling costs at least twice as much as private education. I am not saying that this is the only reason to privatize all government-run schools, but it is surely a potent one.

Update. I have obtained a private schools tuition datasheet by request, and my calculations show that the average per student cost in 2003-04 was $5,410.

Jude Wanniski, may he rest in peace, when he was alive, spent his time sending “memos” to politicians and federal bureaucrats advising them on a variety of policies. His most famous supplication was that the policy-makers use the Laffer curve to determine the “optimal” tax rates, optimal meaning that which would bring in the most revenue. It just so happened, in Wanniski’s opinion, that marginal tax rates were too high even from the point of view of the rulers themselves, and lowering them would increase tax revenue. This was supposed to happen because with lower federal taxes the economy would grow faster due to the greater incentives to work and invest and generate more taxable income. This caused us libertarians to look at him with some favor. Now Rothbard had some unkind words to say about this scheme (Ten Great Economic Myths, Myth #9; A Walk on The Supply Side), but I want to apply Hoppe’s insights to this matter.

Hoppe first sets up the right endpoint of our curve: “Where nothing has been produced, nothing can be expropriated, and where everything has been expropriated, all future production will come to a shrieking halt.” Then he considers the incentives to the state if it is monarchical: “Hence a private owner of government (a king) would avoid taxing his subjects so heavily as to reduce his future earning potential to the extent that the present value of his estate (his kingdom) would actually fall, for instance. Instead, to preserve or even enhance the value of his personal property, he would systematically restrain himself in his taxing policies, for the lower the degree of taxation, the more productive the subject population will be, and the more productive the population, the higher the value of the ruler’s parasitic expropriation monopoly will be.” (Democracy: The God That Failed, 19) It is apparent that Wanniski’s memos might have succeeded, had he been tutoring a prince. In a democracy, however, things are very different. “A democratic ruler can use the government apparatus to his advantage, but he does not own it. … He owns the current use of government resources, but not their capital value. In distinct contrast to a king, a president will want to maximize not total government wealth (capital values and current income) but current income (regardless and at the expense of capital values). … Accordingly, it must be regarded as unavoidable that public-government ownership results in continual capital consumption. Instead of maintaining or even enhancing the value of the government estate, as a king would do, a president (the government’s temporary caretaker and trustee) will use as much of the government resources as quickly as possible, for what he does not consume now, he may never be able to consume. In particular, a president (as distinct from a king) has no interest in not ruining his country. … For a president… moderation offers only disadvantages” (24)

Scott Adams, the creator of Dilbert, agrees with the view that “economics (real economics, not the nonsense you get on talk shows and business hours) is very, very difficult and involves a great deal of complex math.” That’s emphatically not true. Economic theory is a logical a priori science. Moreover, it is accessible to everyone, certainly to any intelligent layman. As Mises argues,

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence. …

There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon “experts” and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake.

Very few are capable of contributing any consequential idea to the body of economic thought. But all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty. (Human Action, 878ff)

There are, according to Weber, at least two “perspectives” on life: that of the moment and that of the life as a whole. Each entails different values. What is valued from the momentary point of view may prove almost irrelevant when viewed from a “bird’s-eye perspective.” For example, getting stung by a bee is painful and elicits seemingly urgent attempts to deal with the situation. But on your deathbed or while looking at your life during a heavenly “life review” this episode might seem to be of no interest or of little significance. On the other hand, “[j]ust as some genuine values are lost to narrower perspectives, as they are accessible only to broader perspectives, some values are lost to broader perspectives, as they are accessible only to narrower perspectives.” (Satisficing and Maximizing, 85) OK, but so what? Somehow, Weber claims in an example, one might limit one’s professional aspirations, even though this does not result in a better life overall. This is permitted, however, “in virtue of the claims of the momentary perspective.” (88) On the other hand, “all the minor ups and downs of day-to-day life are of little importance from the perspective of one’s life as a whole. What matters most to the quality of one’s life are one’s long-term projects, which may include commitment to family, career, art, or politics.” (90) Immediately we see a problem. It is not written in the stars that long-term projects must necessarily outweigh (in importance or expected upon completion utility) short-term pleasures. It’s up to each individual to form his own entirely subjective preferences and thereby to decide whether to exercise his tactical or strategic intelligence and whether to care more about the moment or about far-flung future. Secondly, Weber denies that “there is a single, authoritative measure of value. … Well-being is relative to a perspective, and each perspective makes genuine normative claims.” (93) I couldn’t disagree more. The choice between favoring immediate delights as vs. those that require long-term investment is ranked on the same single value scale within the mind of every individual. And one has to choose, if the values, such as values belonging to some two “perspectives,” come into conflict. That choice demonstrates which perspective the actor has allowed to influence the choice and which perspective was, on the contrary, slighted. Choosing one or the other reflects each person’s attempt to — what else? — maximize happiness. Third, our author himself writes: “One might ask: If it doesn’t matter from the perspective of one’s life as a whole, why not go ahead and maximize momentary good … if from the momentary perspective one has a marked preference for A to B, and from the perspective of one’s life as a whole one is indifferent between A and B?” (92) Weber privileges the “life as a whole” perspective, saying that in momentary matters we can be happy with what is “good enough.” Such privileging may be sensible, but it is only an assumption and certainly not a necessary one. Some people may privilege the moment; is Weber going to claim that now in matters affecting life as a whole such a person would be content with what is good enough? What if one cares for both? After all, a life is made out of single moments. For example, suppose that in studying today I get an interesting idea. That occurs in the now, in the present moment, but surely, it contributes crucially to my overall career as a philosopher. No, the split value scale among different perspectives is an untenable idea.

Lastly, our author argues that maximizing conceptions “seem to take only one of the other perspective into account” and are therefore “not humane.” (99) Of course, he has it completely backwards. It is the maximizing individual who balances the demands of all perspectives to achieve the greatest possible happiness. Satisficing, on the other hand, calls one perspective master and makes it rational not to improve your well-being as seen from the slave perspectives. You are supposed to be happy with what is supposedly good enough. Why, I haven’t a clue.

To be continued…

Of the many things argued in this essay, two are interesting. First, Schmidtz claims that incomplete information and non-zero transaction costs, such as costs of acquiring information entail that in many cases satisficing is the proper strategy. We need a stopping point “that limits how comprehensive a body of information we insist in gathering before stopping the search…” (Satisficing and Maximizing, 37) Alright, suppose that you indeed find something “good enough.” But if you could instead get something you perceived was better and felt contributed to your happiness more at zero cost, wouldn’t you do it? What could possibly stop you? It seems that the reason to limit your resources spent on information gathering is to avoid psychic loss which occurs if the costs of getting the information necessary to make a decision outweigh the benefits. Now Schmidtz might argue that without proper information you can’t optimize at all. Let’s grant him this point for the sake of argument. Then satisficing will be the optimal strategy. Or, rather, trying to make the best choice based on incomplete information will be fully equivalent to choosing something “good enough.” But satisficing can never produce results better than optimizing; if it does, then it itself becomes the optimal course of deliberation.

Suppose, for example, that your strategy for searching for a new house is to wander around the neighborhoods aimlessly hoping to find something suitable. You don’t know the state of the market, relative house prices, where to go, or when to stop. Assuming in our example that the information costs are prohibitive, delineating the criteria for an acceptable house and stopping after finding something that satisfies them, though it seems like satisficing, might well be optimal, as well.

Second, Schmidtz gives examples of situations in which there seems to be no optimum at all.

(1) “[S]uppose you are immortal and are also fortunate to have in your possession a bottle of EverBetter Wine. This wine improves with age. In fact, it improves so steadily and so rapidly that no matter how long you wait before drinking it, you would be better off, all things considered, waiting one more day.” (42) You have to drink the wine at some point, lest the bottle proves to be useless to you, yet no matter which day you pick, you don’t want to drink it then. Reply: Pleasure from the sense of taste cannot be infinite, so the example is contrived.

(2) Computer hardware has improved in accordance to an empirical trend called the Moore’s law. That means, quite fast. The moment you buy a computer, it is already obsolete. Must you therefore always wait for a better machine, never buying one? Reply: Waiting has disutility, so that has to be weighed against the utility of a computer that allows you to do everything you want for a period of time. A future computer may be technologically superior but it need not satisfy your desires any better than a less powerful device. In that case, it is rational to buy.

(3) Suppose the bank offers you 100% per year interest on your loan. Does it mean that you will never use the money, because it will seemingly always pay to keep the money in the bank, growing at this enormous rate? Reply: Once you have, let’s say, a few billion dollars, the marginal utility of money (the utility of an extra dollar) will become negligible; the disutility of waiting will make itself felt; and it will become reasonable to withdraw and spend the money.

(4) Buying a better house will cost you $1000; living in that new house yields $100 worth more happiness than living in your original house. Abstracting from discounting the future, you will recoup your investment in 10 months. Suppose now that after 4 months of living in the new house, an opportunity arises to move into a still better house which costs $2000, and living in this third house is $200/month better than living in the first house. And so on ad infinitum. But if you keep moving forever without stopping, you will never profit. Yet stopping at any point seems arbitrary. What’s going on? Reply: Again, there seems to be a natural limit of how pleasurable a new house is going to be compared with the old house. At some point the utility of a marginal physical improvement will be reduced to 0. Hence this example is also dubious and does not entail the reasonableness of satisficing.

(The first and fourth example are Schmidtz’s; the second and third are mine.)

To be continued…

In his discussion on slavery Timothy Sandefur for some reason fails to quote the most important sentence in Mises’s treatise on this subject: “Slavery and serfdom were abolished by political action dictated by the spirit of the much-abused laissez faire, laissez passer ideology.” (Human Action, 632) It is certainly true that people can use inefficient methods of production for years, decades, and centuries. Russian socialism lasted for 70 years. North Koreans, those miserable people, still worship their leader. We live in the shadow of the Federal Reserve which causes trade cycles and underwrites every aggressive US war. The government budget is around $3 trillion. Even slavery is booming in Africa. These things and numerous others are contrary to all reason. Yet these perversities have not disappeared. And Mises agrees that “natural selection” need not always favor the system with greater productivity: various “systems of unfree labor were sheltered by political institutions against the competition of enterprises employing free workers. …the abolition of slavery and serfdom could not be effected by the free play of the market system.” (632)

But the recognition of these facts does not undermine Mises’s insights. For the political activists who destroyed slavery used the higher productivity of free labor and therefore greater gains to society and to the common man as one of the reasons for pushing their reforms. They tried to persuade the masses that it is in everyone’s interest, except perhaps that of a tiny clique of vested interests like slave-hunters, to abolish slavery. Mises relates that where possible, “slave owners themselves resorted to measures which were bound to abolish, step by step, the whole system of unfree labor.” (631) Imagine that slave labor was more productive than free labor. I submit that the political revolutions which did away with slavery would not have happened. The abolitionists would have had to speak like Mises’s peace-loving humanitarian (Liberalism, 24), which would have made them far less effective.

Also, I don’t understand, is Sandefur claiming that the more slaves one owned, the greater the “sentimental” utility, “based on a romanticized, neo-medieval fantasy of plantation lordship” the slave-owner derived from them? That sounds silly. Sandefur disputes Mises’s claim that slaves cannot be as productive as free men. “Mises provides no empirical support, at all,” he writes, “for his claim that ‘[w]hen treated as a chattel, man renders a smaller yield per unit of cost expended for current sustenance and guarding than domestic animals.’” Is our author going to provide empirical support for his own claim, which is prima facie implausible, that slave labor can effectively compete with free labor? I thought that his whole point was that efficiency, productivity, and wealth were not the only motives of the slavers but that they held fast to “a romanticized, neo-medieval fantasy,” etc.

But did Mises really need to prove this point? On the free market your higher productivity leads to higher wages. To what does higher productivity of a slave lead? Only to more uncompensated work. A slave would have every reason to hide his abilities and not to develop his talents, lest his owner beats the performance he knows the slave is capable of out of him. A slave does, however, have an incentive to convince his owner that he can only perform the most comfortable job available. Where on the market a worker is motivated to show himself as competent as possible, a slave is motivated to show himself as incompetent as possible in order obtain the easiest job. And a slave-owner is not God who can see the slaves’ minds and hearts. (It is conceivable that a slave might find it advantageous to allow the owner to “invest” in him, e.g., by teaching him to read and write. Then he can tutor his master’s children which is an easier job than laboring in the fields. But such a thing would be a reward for higher productivity and therefore already not pure slavery.) And what of creative and entrepreneurial pursuits, in which, unlike unskilled labor, the success cannot be predicted in advance? A slave would have no opportunity to engage in those, a restriction which would harm society.

It is true that compulsory labor has not disappeared. In America people labor for months for the state (Tax Freedom Day for 2008 has been calculated to be April 23) and only then are premitted to work for themselves. But this is due in part to insufficient competition. E.g., suppose that the world consisted of a confederation of thousands of city-states. Then if one city allowed slavery and all others did not, then the slave-city would enjoy less prosperity, people would leave it for greener pastures, slaves might flee to those cities where the law says they cannot be extradited to their “owners,” and eventually the local government would go bankrupt. It is partly because the size of slave-owning states was large that the slave system was shielded from competition. The robust competition of the cities’ political systems under my scheme would not allow slavery, should it arise again, to persist.

Conclusion. Mises is innocent of any charge of being a “neo-Confederate pseudo-libertarian,” whoever these peculiar creatures are.

“Reduce the corporate tax rate to 25 percent to keep American companies competitive with the rest of world.” So responsible and respectable. Hey Cato, there is no such thing as lowering taxes without reducing spending. It will either be a rearrangement of the tax burden to benefit the friends of the Republicans and punish their enemies; or revenue will be sought elsewhere, such as through borrowing either from US citizens (which causes high interest rates), from the Fed (monetizing debt with inflation), or from foreign savers and central banks (which results in a trade deficit, a fine thing for as long as you can get away with it). When was the last time you advocated cutting something, anything, from the federal budget?

And look, they care about the Republican “brand.” It’s not what this miserable party does that’s important; it’s what they appear to the public as doing. Another perfectly respectable thing to worry about.

Our author can be brutal:

The market is a social body; it is the foremost social body. The market phenomena are social phenomena. They are the resultant of each individual’s active contribution. But they are different from each such contribution. They appear to the individual as something given which he himself cannot alter. He does not always see that he himself is a part, although a small part, of the complex of elements determining each momentary state of the market. Because he fails to realize this fact, he feels himself free, in criticizing the market phenomena, to condemn with regard to his fellow men a mode of conduct which he considers as quite right with regard to himself. (Human Action, 315)

For example,

The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction. They do not care a whit for past merit and vested interests. If something is offered to them that they like better or that is cheaper, they desert their old purveyors. In their capacity as buyers and consumers they are hard-hearted and callous, without consideration for other people. (270, italics added)

And:

Labor is appraised like a commodity, not because the entrepreneurs and capitalists are hardhearted and callous, but because they are unconditionally subject to the supremacy of the consumers of which today the earners of wages and salaries form the immense majority. The consumers are not prepared to satisfy anybody’s pretensions, presumptions, and self-conceit. They want to be served in the cheapest way. (610, italics added)

Update. In other words, unless the point is already obvious, capitalists in producing act with the same self-interest as the general public does in consuming, with the former being the consequence of the latter.

This book is impossible to review, as it’s one subtle argument after another. The main thrust of it is that there had arisen by the time of the book’s publication an academic movement of “analytical Marxism” which attempted to use rigorous philosophy to heal the dying body of classical Marxism. If that required drastic measures such as eschewing the labor theory of value, the dialectic, the inevitability of historical change culminating in communism, and other seemingly essential tenets of Marxism, then very well, no sacrifice was deemed to be too great. The only thing to be preserved was Marx’s contempt for capitalism and the exploitation doctrine, though the means by which workers are allegedly exploited have been suitably modified.

Gordon argues that once these analytic philosophers are done with classical Marxism, there is not much left of it. Their own arguments are dealt with in the book. I shall concentrate on G.A. Cohen’s work as presented by Gordon. What I’ll try to do is to add a few more arguments to Gordon’s own. Where he dances around, I’ll go for the jugular.

1. Initial appropriation is declared to be unjust. I have argued that a teleological approach to claiming unowned objects is superior to the Rothbardian assignment of rights based on the potential owner’s being the efficient cause of a thing’s or a piece of land’s formal cause. Ownership is a legal formalization of one’s control of the thing owned. Hence the first person to control a thing should come to own it.

Now Gordon anticipates my arguments and attempts to rescue the labor-mixing requirement. To see where it goes wrong, however, let’s consider its strongest case, taken from theology. God, according to Christianity, is the efficient cause not only of the form but also of the matter of the world, far more than is required. He creates matter and orders it according to His design: “the earth was formless and empty, darkness was over the surface of the deep, and the Spirit of God was hovering over the waters.” (Gen 1:2) But God can be thought of as the owner of creation only in an attenuated sense. This is because he has no use for it. He is perfectly happy and does not, in traditional thinking, benefit from the universe. Human beings, on the other hand, must use nature in order to survive and prosper. The “in order to” signifies final causation. We come to own the land and natural resources ultimately because we, unlike God, make use of them for our own profit. That in so doing we also transform them is, in my view, less fundamental than this.

But I digress. Mises cuts through all these intricacies as follows:

Private property is a human device. It is not sacred. It came into existence in early ages of history, when people with their own power and by their own authority appropriated to themselves what had previously not been anybody’s property. Again and again proprietors were robbed of their property by expropriation. The history of private property can be traced back to a point at which it originated out of acts which were certainly not legal. Virtually every owner is the direct or indirect legal successor of people who acquired ownership either by arbitrary appropriation of ownerless things or by violent spoliation of their predecessor.

However, the fact that legal formalism can trace back every title either to arbitrary appropriation or to violent expropriation has no significance whatever for the conditions of a market society. Ownership in the market economy is no longer linked up with the remote origin of private property. Those events in a far-distant past, hidden in the darkness of primitive mankind’s history, are no longer of any concern for our day. For in an unhampered market society the consumers daily decide anew who should own and how much he should own. … Only in a legal and formalistic sense can the owners be considered the successors of appropriators and expropriators. In fact, they are mandataries of the consumers, bound by the operation of the market to serve the consumers best. Under capitalism, private property is the consummation of the self-determination of the consumers. (Human Action, 683)

The point is that we need not care for Cohen’s notions of “justice.” They are utterly irrelevant to any and all present concerns. Where, for example, are land areas or natural resources still unowned (or collectively owned, as Cohen prefers to see matters)? Antarctica? The Sahara desert? This issue is of no practical import. There was a problem with cybersquatters in the early days of the Internet, but it was long ago resolved quietly and peacefully. However things were initially distributed, right now all of that is ancient and unknown history. Even if the initial distribution gave all property to some one person who would call himself king, eventually people would buy up most of the land they were renting from him and normal free market would ensue. And even if the initial distribution were equal, it would become unequal very quickly as different people cultivating different natural resources, selling and buying land and capital goods, etc. would result in a wide variety of incomes and wealth.

Sure, there may still be unowned oil and coal and suchlike. And these resources come to be owned according to some version of “finders keepers.” But the precise way in which initial appropriation takes place pales in importance in comparison with the fact that their becoming owned according to some procedure would be to the benefit of all.

(One way to defend “finders keepers” is to say that the appropriators cannot, usually, be stopped. Think of, for example, an oil rig in the ocean. Who is going to come and challenge the oilman’s claim to his newfound property? This is not conflating an “is” with an “ought” but using “ought implies can.” At any rate, the point is to get the oil to the market as quickly as possible, and this method of gaining ownership of it works.)

2. Workers under developed capitalism are said to be “collectively unfree” to quit working for capitalists and start their own firms or cooperatives. Gordon writes: “Even if everyone who wishes to leave is able to do so, the proletariat collectively cannot. Since only a few exits are available, the fact that an individual is free to leave depends on it being true that most workers do not wish to leave.” (101)

First it needs to be pointed out that there is a distinction between freedom and power. No human being is, by his actions or existence, preventing any worker from leaving. What workers lack, according to Cohen, must be collective power to leave not freedom. This is important, because nobody promised omnipotence to anyone under capitalism, only the normal equal and extensive freedom of action. No defender of the free market said that the market maximizes human power as opposed to human freedom. (In a sense, capitalism does maximize human power over nature. But that is a separate argument.)

Second, workers do not ultimately work for capitalists; they work for the consumers. Mises puts it this way:

The orders given by businessmen in the conduct of their affairs can be heard and seen. Nobody can fail to become aware of them. Even messenger boys know that the boss runs things around the shop. But it requires a little more brains to notice the entrepreneur’s dependence on the market. The orders given by the consumers are not tangible, they cannot be perceived by the senses. Many people lack the discernment to take cognizance of them. They fall victim to the delusion that entrepreneurs and capitalists are irresponsible autocrats whom nobody calls to account for their actions. (272)

Of course, that’s not so, says Mises. Capitalists are subject to the supremacy of the consumers, and so are, through them, their employees. Each worker, in his capacity as a consumer, is keenly interested in the preservation of the system of production under which human effort is most productive and consumers are served most efficiently.

Third, the absurdity of this idea is hinted at by Gordon who, however, does not do it justice: “Cohen might reply here that even if workers will accept lower income, there still will not be enough exits. A developed capitalist economy requires large-scale production; if there were ‘too many’ small businesses, the standard of living would drastically decline.” (105) Exactly! So, why would the workers want to be “collectively free” to exit? Supposing they are not, if they were, wouldn’t an attempt to do so lead to a disaster? Perhaps we want to put artificial obstacles to workers’ leaving! A worker may want to leave, but he cannot want other workers to leave, as well, and not for the reasons (supposed competition due to collective unfreedom) Cohen gives. Therefore, a system in which a worker can leave only if he possesses some rare talent, such as entrepreneurial prowess, is precisely what we want. And that’s capitalism under which this talent is not arbitrary but filters workers who want to become business owners in such a way as to maximize efficiency and human welfare.

For example, workers are collectively unfree all to become landscaping artists. We may or may not lament this on existential grounds, perhaps as a metaphysical evil. But in addition, social cooperation will break down if everyone does become a landscaping artist. So, the fact that there are natural, embedded within the market system, protections against this sort of thing (namely, wage incentives) is perfectly great.

Fourth, Gordon gives an example of two people one of whom specializes in growing wheat and the other, in growing barley. (112) If they exchange part of their products with each other, both benefit and no one is subordinate to the other. We could say that the two farmers in this example both use each other and serve each other. The use each other insofar as division of labor allows both of them to get more goods than they could obtain under autarky. They serve each other insofar as each farmer has an incentive to produce what the other wants. The same relationship occurs in the employer-employee nexus: there is both mutual use and mutual service. In using the other, each is his master; in serving him, each is his servant. Perhaps the two “cancel each other out,” leaving both equal in dignity. Where’s the exploitation?

Finally, suppose that the workers are indeed “collectively unfree.” If it is contrary to the interest of most of them to leave, of what concern is this lack of freedom? As Rothbard argues in an example of a log-shipping business, people may want to remain workers,

[b]ecause (a) they didn’t have the capital; in short, they hadn’t saved up the requisite money by reducing their previous consumption sufficiently below their income to accumulate [enough money]; and/or (b) they wanted money payment while they worked, and were not willing to wait for the number of months it took for the logs to be shipped and sold; and/or (c) they were unwilling to be saddled with the risk that the logs might indeed not be saleable [profitably]. (The Ethics of Liberty, 39)

Not everyone can make the cut as an entrepreneur. And there are advantages to remaining a worker. Also employment is an Artisan-Guardian nexus. Many people are simply temperamentally unsuited either to uncreative work or to creative work and entrepreneurship.

3. Supposing for the sake of argument that capitalism is exploitative, does socialism come the rescue? Gordon brutalizes the system of mass cooperatives under some sort of market socialism on economic grounds. We can safely conclude, as Mises does of the related scheme of syndicalism, that “In short, it is nonsense.” (820)

In sum, this is a highly useful book dealing with an interesting attempt to revive a discredited system of thought. As Gordon proves, this attempt fails. As an aside, I wish I were as capable of the finesse and complexity of argumentation as the author himself is.

In this FOX Business interview Ron Paul is challenged to justify his opposition to central banking and fractional-reserve banking, even though “[t]he fact that the banking system was allowed to make loans for which it didn’t have the capital allowed new enterprises to exist that wouldn’t have existed otherwise. Our entire computer revolution was built on this kind of debt. So was our cable system for our cable TVs by which people are now seeing you, so in fact there are some real purposes, real creations, because of our banking system.”

I think Paul should have mentioned the key word, malinvestment. Many of those new enterprises were not sound investments. Yet they were revealed as such only after a period of time. The production structure was being torn apart, and something had to give. Further, we see the computer revolution, etc. that did take place; we do not see sustained growth with many fewer wasted resources and even greater progress that would have taken place given sound money and banking.

Update. Mises thought that what sustained the present business cycle-generating system was the ideology of “inflationism,” that is, the belief that credit expansion unbacked by real voluntary savings can make us all vastly more prosperous than the alternative of honest banking and commodity money. The host is clearly a believer in this ideology.

Suppose that instead of a good you have n units of an economic bad. Now an economic bad is something that takes away your utility, deepens your dissatisfaction, provides services you’d rather be without. In other words, a bad is something it costs (money, let’s say) to get rid of. For a normal good, the first unit of that good is put to its highest valued end on one’s value scale. The second unit is put the second highest valued end. Etc. And the nth unit is assigned the least important job. With bads its the reverse. Suppose it takes $10 to neutralize one unit of a bad (e.g., dispose of 1 pound of pollution). Then the first $10 you spend to free yourself from the first unit of the bad is taken away from the least valued use of your total money stock. For example, now you have to live without that extra cone of ice cream — a trivial pleasure. Spending the next $10 on the second unit of the bad, however, will be equivalent to sacrificing the next-to-last pleasure that this $10 could have bought for you, had you not wanted to eliminate the bad’s influence. And so on, until the last, say 20th unit of the bad is disposed of with the last $10 of the $200 you had. And this last $10 would have been put to the highest valued use of this amount of cash, such as paying a utility bill. It follows that the first unit of the bad is the least unpleasant, and the last unit is, on the contrary, the most hurtful to your wallet, despite the equal price of getting rid of both.

Consider reading the first 4 pages of this short piece by Rothbard entitled “Professor Hebert on Entrepreneurship.”

It seems to me that we can dissolve Rothbard’s critique by a simple terminological slight of hand. Let’s call an entrepreneur “alert” if he is perceiving a truly or genuinely profitable opportunity and “deceived” if he is excited by a merely apparent but in fact false and loss-causing profit opportunity. It’s true that we cannot normally know in advance whether he will profit or not, because the future is uncertain; the whole purpose of being alert is to spot truly profitable ventures better than others — but that is beside the point: an investment into a production process will either be profitable, break even, or be unprofitable; there is no fourth possibility. We can judge whether an entrepreneur was alert only after the results of his actions come in, but: a given production plan will objectively either work or fail to work; it’s just that it is revealed to be one of these only once the goods are sold to their consumers. And uncertainty does not necessarily entail unpredictable randomness or the mystical libertarian free will; for example, an omniscient God can predict our entrepreneur’s status.

We can modify Kirzner’s example to allay Rothbard’s concerns as follows: as he is walking down the street an “alert” man will grab the $10 he sees lying on the ground; a “dull” man will miss the $10, and a “deceived” man will fall into an open manhole. And you can either profit if you are alert; sell your labor and spend your money, thereby breaking even if you are dull; or lose your capital if you are deceived.

Of course, any entrepreneur must risk capital in putting his idea into reality. But, again, if by alertness we mean forecasting the future correctly, then the idea man’s (i.e., the Kirznerean entrepreneur’s) actions, when he receives the starting capital, will by definition succeed.

Objection: knowledge can exist without power to put it into reality. Again we can redefine alertness slightly as noticing only those opportunities of which one is capable of taking advantage. An untaken opportunity is a purely speculative creature, and economics, after all, deals not with contemplating men but with acting men.

On a separate page, contra Jörg Guido Hülsmann.

The term “roundabout” does not mean “requiring more capital and intermediate steps before final production” by rather simply “requiring more time.” According to Gene Callahan, “Eugen von Böhm-Bawerk… attributed the bulk of increases in productivity to the adoption of more time-consuming, or roundabout, methods of production.” (Economics for Real People, 131ff) Adds Mises: “As acting man prefers those processes which, other things being equal, produce the products in the shortest time, only such processes are left for further action which consume more time. People embark upon these more time-consuming processes because they value the increment in satisfaction expected more highly than the disadvantage of waiting longer for their fruits.” (Human Action, 481) It is time that costs money, along with labor and land; the actual number of intermediate steps is next to irrelevant. If it takes 10 years to carry good A through 10 transformations down to the final consumer good, and it takes 1 year similarly to carry good B through 100 transformation, then the process involving A is more roundabout than the process involving B. “Roundabout” may be synonymous with “circuitous,” but its technical economic meaning is “requiring more time.”

Four points:

1. Callahan continues that “It is not always true that the only available method of increasing production is to adopt more roundabout methods. Perhaps a shorter route to some goal just has not been imagined yet. … But historically, the constant agitation of humans to improve their circumstances is such that most of the opportunities to increase productivity lie in the adoption of more roundabout processes. Humans are adept at spotting the direct route to a goal in the first place.” (134)

   Reply: Suppose Crusoe uses sticks to collect berries and replaces his stick once it wears out, a process which takes him 1 day. But then he finds a cache of sticks on a steep hill, such that to go there, grab a stick, and come back takes 1 hour. Unfortunately, climbing the hill is too much for Crusoe. So, we see that not all shorter processes are in use.

2. Isn’t it often possible to initiate a more productive and at the same time shorter process with the help of new technology? What if it’s the same process yet with lower costs of, say, labor (e.g., Crusoe gets healthier due to all the manual work he had to do and capable of climbing the hill readily)? Won’t it be more productive yet take the same amount of time?

   Reply: Yes, but reducing the time it takes to build a thing is not the only way of cutting costs. One can also rely on less labor or less land. Finding an equally good shorter process will mean disinvestment with the same revenues and therefore greater profit. The problem arises if no way of profitably disinvesting can be found. Then only longer processes remain to be considered.

3. Time is just one of the traditional three factors of production. Why not say that if a particular process has expensive labor, it will be undertaken only if it is sufficiently productive to offset the extra costs? What’s so special about time? Why do we not say: “more labor-costly processes tend to be more productive”? Or: “processes which use more and more expensive natural resources tend to be more productive”? Or don’t we?
4. Suppose process A takes 1 week to produce its consumer goods. Process B is just like A but is preceded by a 3 week diversion of digging ditches and filling them back up. Surely, B is less productive than A, and yet it is longer. What’s going on here?

   See below for answers to (3) and (4).

Now it is true both that longer processes tend to be more productive, and that more productive processes tend to take longer.

I. Longer processes tend to be more productive, if we assume that entrepreneurs tend to profit despite higher interest outlays. Again, mixing labor with natural resources or higher-order capital goods in order to advance them down to the final consumer goods or having the goods mature on their own (e.g., wine) takes time. The more time you have, (1) the more labor productivity-increasing these goods must needs be; and (2) the greater the amount of labor that can be mixed in a step-by-step fashion which makes it possible to produce such goods (which will probably be more complex and sophisticated purely from the engineering perspective). Otherwise, no entrepreneur will bother investing. Profits due to higher productivity of labor have to outweigh the extra interest payments (in terms of money; or, in Crusoe’s case, the psychic profit of more berries a week from now and for as long as the stick lasts have to outweigh the psychic cost of lessening present consumption while the stick is being built.) It is true that digging and refilling ditches will make a process longer, but that’s why we say that longer processes merely tend to be more productive: we assume the human desire not to waste production time.

To put it simply, longer processes are more expensive to set up. Hence they had better be more productive. And the same thing can be said about the other original factors: a process requiring more labor or land is more expensive, so, analogously, it’d better be more productive, as well.

We have to see why time is a factor of production. There is a general relation that the more labor-saving you want your machine to be, the more time you have to spend constructing it. You can accomplish more with more time, just as you can accomplish more with more labor or land. There is, of course, no precise equation connecting physical productivity of a machine and the time invested into building it, but a general proportion still holds. In other words, you can hire several laborers to work on things simultaneously; or you can hire a single laborer and give him more time, depending on your production needs. In both cases you invest more and hope to gain more. (Or you can do both, if all stages of production exist alongside one another at any moment in time.) Otherwise there is no explanation for our phenomenon.

II. More productive processes (producing either (a) much more of the same thing or (b) things that were completely impossible to produce in shorter time intervals) tend to take longer, because there is an incentive to utilize all the feasible shorter processes first, other things being equal: this way the waiting time will be as low as possible. I add “feasible,” because there can always be a short process that, for example, is hugely expensive in terms of the original factors other than time, such as labor (e.g., Crusoe’s climbing a hill), and for that reason is eliminated from consideration despite its shortness. However, in the case of (b) the process will be not longer but, on the contrary, the shortest possible one to a particular want-satisfaction. Even in the case of (a) the allegedly longer process is nothing of the sort; it is rather the most efficient way of satisfying a desire for more goods or services. From the point of view of technology, the new process is longer, though physically more productive; from the point of view of economics, it is the shortest one, given that we aim at a certain end and disregarding entrepreneurial error and ignorance.

Again, simply put, we want to get results as soon as possible, so it is likely that most the shorter processes have been perfected, and any increase in business efficiency must therefore require more time-consuming (and therefore more productive for reasons outlined in (I)) production processes. Of course, that’s just one of the ways of boosting efficiency.

The accelerator principle states that increased demand for consumer goods causes a more-than-proportional increase in the demand of capital goods and therefore, there is no need for voluntary savings! For example, suppose that a company maintains its capital stock consisting of 20 machines at 2 times the total sales and replaces 1 machine used to produce its output per year. (Thus, if the revenues are $30 million, then $60 million is invested into capital goods, and gross investment is $3 millon/year.) If revenues increase from one year to the next by 50%, say, from $30 million to $45 million, the number of machines ordered in that year must also increase by 50%, from 20 to 30, and therefore 11 machines will be ordered (rather than a single replacement machine), a 1000% rise in this derived demand!

Well, shiver me timbers. The problems with this are legion: see de Soto’s Money, Bank Credit, and Economic Cycles for a detailed analysis.

First, all businesses may have idle capacity maintained in order to deal with unforeseen short-term rise in the demand. The increase in the number of capital goods need not be so high.

Second, the proportion need not be the same; the exact number will depend on the productivity and prices of various kinds of capital goods and labor which may have changed in the meantime.

Third, due to entrepreneurial errors the firm that supplies machines to our company may not be able immediately to handle the sharply increased demand.

Fourth, why look only at the year in which the revenues have gone up? It’s an entirely arbitrary time period. If we consider what happens in 20 years, then if there is no further boost in our company’s revenues, then on average, the demand for lower-order capital goods will have increased to merely 1.5/year.

Fifth, and most important, which capital goods will enjoy greater demand? Obviously, those closest to the final consumer goods. The demand for higher-order goods will lessen, and the production structure will flatten, widen at the “foundation,” and narrow at the top. In aggregate, total investment will decrease.

Moving from B to A due to increased consumption. You can’t have your cake and eat it, too.

My first attempt at clarifying the problem of the demand for money was somewhat successful. What’s the difference and connection between this demand (DFM) and the velocity of circulation of money? In the first place, demand for money can be measured at any instant, whereas velocity of circulation can be computed only over a period of time, where it can mean the average amount of money that changes hands.

Let’s entertain two cases. First, suppose that the DFM has increased. This causes surpluses of unsold goods. Hence the velocity of circulation of money will go down. But when prices have adjusted downward and the PPM has consequently risen, velocity will go back to its previous level, all other things, such as the money supply, being equal. Thus, velocity remains the same yet with a higher demand for money.

Second, suppose that the DFM has decreased. Temporary shortages will result. But velocity of money will be unchanged, since, like before, every good is sold, despite the fact that some buyers remained unsatisfied and would have paid the present price, had there been greater quantity supplied. But even when prices increase in response to smaller demand for money, velocity will be unchanged.

Now let’s consider the situation in which the velocity of money at Δt₁ is less than the velocity of money at Δt₂. It seems that people are more willing to get rid of their cash balances during Δt₂, and so the demand for money must decrease, and the PPM, decrease, as well. Similar reasoning applies when the velocity of money decreases.

In the first two cases I examine changes in the DFM which result in opposite price adjustments. In his article The Velocity of Circulation Hazlitt asserts that “In fact (though this happens less often), an increase in the velocity of circulation of money may be accompanied by an increase in the purchasing power of money, i.e., by a fall in prices.” In so doing he seems to be thinking of a peculiar reverse case:

1′) Prices go down yet without a corresponding increase in the DFM, so PPM increases and there is more economic activity and greater V. This is said to be possible “in a speculative collapse, as, say, in late 1929.”

2′) Prices go up yet without a corresponding decrease in the DFM, so PPM decreases and there is less economic activity and lesser V.

My final case, where I assume that V has increased, must be interpreted as caused by the smaller demand for money: “When people value money less and goods more, they will offer more money for goods, and may increase ‘velocity of circulation’.” This corresponds to (2) above. What can happen, I suppose, is that inventories will be cleared out faster, so even though I say that V does not change, in the real world it may increase. (I assume that entrepreneurs will fail to predict a decrease in the DFM and increase supply.)

In addition, Mises is quoted as saying that “In a changing world everybody is under the necessity of keeping an amount of ready cash on hand,” where I assume that by “changing” he means uncertain and un-ERE-like. I make the same point earlier: Cash balances provide “[g]reater security for the hoarder, since one of the functions of money is a ’store of value.’ In other words, it is a shield against the uncertainty of the future and against unforeseen future expenses.”

Thus the DFM can be affected by changes in both (1) the perceived uncertainty of the future and (2) the serviceability of money to protect one against this uncertainty. Changes in the DFM are due to particular monetary-type events. Thus, changes in frequency of payments to workers affect (1); expectations of inflation affect (2). Aside from those, all that change are relative prices of goods and services.

In my first article on DFM I say, following Rothbard, that “a greater number of goods and services on the market due to economic growth” will result in greater demand for money. Seemingly, (1) is unaffected (except insofar as greater security is afforded by more extensive division of labor), and neither is (2); why, then, does the DFM change? I think Rothbard has made a subtle error. For in the two cases mentioned the change in the DFM occasions an opposite change in prices. In the case of economic progress it is the lowering of prices which causes an increase in the DFM. Perhaps an even better way of putting this matter is to say that the relative supply of money has gone down.

1. Value scale is a psychological notion used to explain the process of choice. All action is always in the “now.” The scale of values can change between the two “nows” as a result of the first most highly valued goal’s being satisfied or for any other reason. The scale after the first most urgent need is satisfied need not remain as it was with that first goal lopped off. Let’s say the scale is: eat a bite of honey, watch TV, eat a sandwich. Eating a bite of honey can cause me, quite unexpectedly, to want to eat another bite 5 seconds later and even receive greater pleasure from it. But no matter how pleasant, the eating of honey is the first most urgent goal on the value scale at both t₁ and t₂.

2. Satiation: I’m planning to eat 2 bites of honey. But after I eat the first bite (at t₁), I no longer want the second one. Or: I prefer to watch TV to eating the second bite (at t₂). So, the value scale has changed despite by intention to maintain it. Happens all the time.

3. If two or more goals are satisfied at the same time, then the value scale does not change, but no observer can find out which goal was first on the value scale, which, second, etc., though the actor himself still knows.

If one goal is satisfied at t₁, and another at t₂, etc., then one can find out (namely, that the goal satisfied earlier was more urgent than the goal satisfied later), but it is always possible to err in this conclusion, if the value scale has changed in the time period between t₁ and t₂.