Where Horwitz Is Wrong

Steven Horwitz recently wrote an essay on Cato Unbound on the issue of connection between the Austrian economic analysis and empirical studies.

Let us start with what Horwitz does not say. Contrary to many critiques that have already been made, he does not seem to say that necessarily true universal praxeological statements should or may be tested against the empirical data. He writes:

In short, Mises was making a Kantian claim about the human mind and the way in which minds are similarly structured across humans. We all have “a set of tools for grasping reality” that comes to us from our evolutionary heritage. The commonality of those tools allows us to engage in the reflection on action and the development of that core of economics as a set of necessary insights about how humans act. This core economic knowledge is not contingent but part of the very structure of human minds and is something that we can come to know

The problem, however, is that, following Kant and Mises, Horwitz seems to view praxeological categories such as action as somehow distinct from the empirical world in the broad sense. But there is no reason for us to stick to this dualism and claim that the praxeological categories are somehow ontologically different from other things in the world we know.

There is, in other words, no need to ruminate on whether praxeological statements are truly apriori, what matters is that we know from introspection directly that they are true because we just cannot imagine things to be otherwise.

Adding to the fundamental praxeological statements some other universal truths about the world we live in, we arrive at fairly elaborate theories (which are part of a unified body praxeology) describing necessary causal connections between various human choices and their implications (though formulated, as Hulsmann has demonstrated, mostly in counter-factual form).

Then, comes the serious question of how we should use the theory (praxeology) in the analysis of concrete events. And it is at this point that Horwitz goes astray significantly, perhaps due to the Kantian dualism mentioned above:

However, beyond that, and especially including any claims about policy, economic arguments depend upon contingent claims about human behavior and preferences, the applicability of our assumptions, and the accuracy of our chains of argument. Good economics for Austrians means sound arguments, not just valid ones. Too much of modern economics consists of valid reasoning from false premises about human action.

What Horwitz seems to be saying, is that when analyzing concrete events we should not just determine whether instances of certain praxeological categories are present in the phenomena at hand. We should somehow empirically (and that is where Horwitz's discussion about perceptions of the actors seem to fit in) demonstrate that praxeological categories "behaved" (Horwitz does not use this term) as they are supposed to "behave" in theory. But this is mistaken because if instances of praxeological categories are present they must behave in the way their behavior is described in theory.

A rigorous logical exposition of ABCT

I long searched for a rigorous logical exposition of the Austrian Business cycle theory. Since I have not been able to find one, I decided to write such a logical exposition myself. That is what I managed to do. 

1. There is a period of time T for completion of N investment projects in an economy. This means that consumer goods from these projects will only be available after the expiration of the period T.

2.      All the amounts are fixed for the period T.

3. There is an amount of savings of S available over the period T.

4. Due to the policy of the Central Bank the amount of credit Cr exceeds S by ECr (excessive credit) so it is S + ECr.

5. There is R resources (capital goods) in the economy available over the period T. The amount of Rc is allocated to the production of consumer goods during T, Ri is to be allocated to completion of the investment projects. R = Ri + Rc.

6. If an amount of resources Ri was used in the investment projects it would have been sufficient for completion of all N investment projects over the period T.

7. Cr is planned to be used by entrepreneurs to acquire Ri.

8. The amount of resources Rc is only sufficient to produce C consumer goods during T.

9. Entrepreneurs carrying out the investment projects are not aware of the fact that Cr exceeds S, they expect that Ri will be sufficient for completion of their investment projects.

10. The entrepreneurs draw down all the credit and start the projects.

11. Consumers have the amount of money M that is sufficient to buy more than C consumer goods. The excess purchasing power of consumers is equal to ECr. The excess consumer goods that they demand is Ce.

12. Consumers demand Ce consumer goods in addition to C. Rc is insufficient to meet the demand for Ce.

13. Producers of consumer goods during T start competing for Ri with the investment projects. The price of Ri rises. The amount Cr turns out to not be sufficient to cover the boosted price of Ri.

14. Some of the investment projects N must be abandoned.

It needs to be mentioned that this exposition rests on the assumptions of fixed amounts for simplicity. But I think that it will suffice for the beginning.

The Ethics and Economics of Intellectual Property

In this post I'll try to briefly explain why intellectual property is incompatible with libertarianism and is economically harmful.

Let us start with ethics. Why do we need private property? Many libertarians believe that private property is justified by the so-called homesteading principle. That is, because someone had mixed his labour with an unowned object, the object is now her property. Since she now has property in that object she may freely dispose of it or create other objects by using it.

I don't really think the homesteading principle is a good libertarian justification of first appropriation (and the derivative ways of appropriation) because it hinges on magic of sorts. Instead, I think we may just say that private property is required for the maximization of liberty. The less private property is protected, the less liberty people in the society will have because people can't do the vast majority of the things they desire without certain physical objects and will thus be dependent on those (usually, the government) on whom property rights are conferred.

I have to say here that private property not only enhances freedom but also restricts it to a certain extent. But it is clear for me that on net its impact is freedom-enhancing, nonetheless.

What does private property in physical object entail? It entails the right of the owner of an object to restrict physical access to it. And thus it allows the owner to preserve the objective features of an object intact through time so that it could serve the owner's purposes. This idea is crucial. Property in a physical object does not protect the value of, say, a house, or its public image, the protection is aimed only at preserving an object from alteration by third parties.

It may seem on surface that not all violations of property rights in physical objects alter their objective features without the owner's consent. For example, it may seem that  if someone trespasses on your house she does not very much alter its objective features. But in fact she does. She alters for a certain period of time the amount of unoccupied physical space available in the house. The aim of property rights in physical objects makes them targeted restrictions of liberty, restrictions aimed only at preserving the objective features of the objects.

Now, let us turn to the so-called intellectual property. IP is a catch-term that encompasses a variety of rights. What is common for all those rights is the nature of the objects they relate to. These objects have certain objective features (e.g. a work of art may be made public or not) but it is mostly not these features that are protected by IP rights. Almost none of the violations of IP rights alters the objective features of intellectual objects. Instead, IP rights are aimed at protecting the desires and expectations of the holders of IP in relation to the intellectual objects, at regulation of the behavior of other people in relation to the objects.

Therefore, the difference is that an owner of a physical object has a right to preserve the object intact and her right restricts other people's rights only to this extent. The holders of IP strive to regulate other people's behavior for the sake of it, the only limitation being that the regulated behavior must somehow relate to the intellectual object. In my view, the purpose of IP rights, in contrast to normal property rights, makes the former incompatible with libertarianism.

Now, some economics. It is generally believed that limited IP is economically beneficial because without it there would have been less intellectual objects produced.

However, this is a wrong way to proceed from the subjectivist economics perspective from which nothing is inherently valuable. There are two general types of IP, patents and copyrights. The former are in their economic impact equivalent to a monopoly in the true sense of the word, a resource monopoly. Since any resource monopoly is by definition harmful, then so are patents. The same is true about copyrights with the modification that they are equivalent to subsidies.

In case of patents their holders receive from certain capital goods more than they would have received in the free market because they prevent other producers from using such capital goods. In presence of a free market in capital goods there will be a tendency for production of those capital goods that allow to produce consumer goods that will allow producers to receive profit. Although this process is imperfect, it in general allows a very good degree of coordination between the plans of consumers and producers. If certain capital goods cannot bring profit to their owners unless they have a monopoly on them, then good riddance to such capital goods, because otherwise the overall welfare will be reduced.

The same is true for copyrights. If, say, a work of literature can only be produced if people are forced to pay to its author more than they would have done in the free market, then the subsidy reduces the overall welfare compared to what it would have been without it.

Why There is no Consent in a Democracy

Since the time I was translating into Russian Bryan Caplan's insightful book "The Myth of the Rational Voter" I have been thinking about the connection of the main argument of the book with praxeology and its implications.

Now I think I realized how to put Caplan's argument on a sound praxeological footing and that the restated argument has even more radical implication than those envisaged by Caplan.

The main argument in TMRV may be summarized as follows. Voters in a democracy because of their sheer numbers do not have any hope of actually influencing the outcome of elections because the probability of their votes becoming decisive is close to zero. Because of this voters don't make decisions for which candidates/policies to vote based on the evaluation of the consequences of policies they vote for. Instead, they choose to be rationally irrational and vote for those policies that make them feel good. To this Caplan adds the empirical argument that voters seem to be prone to various biases that make them feel good about voting  for bad economic policies.

The problem with the argument thus stated is that it is inconsistent with praxeology. There is no necessary logical connection in it between the voters not being able to cast a decisive vote and not taking due account of the consequences of the policies they vote for.

However, there is a way to put the argument on a sound praxeological footing. Praxeology teaches us that people choose among alternative courses of action that are known to them and, what is very important for this post, that the choosing people must believe that the alternatives are realizable.

This brings us directly to the reformulation of Caplan's argument. Because voters know that they don't actually decide the outcome of the election it means that they DO NOT ACTUALLY CHOOSE among the alternatives that are on the ballot, since these alternatives are knowingly unrealizable for them.

This is a simple idea but if reformulated it has radical implications. First of all, it implies that there is no consent, no popular rule in a democracy and there cannot be. Therefore, democracy is a form of government where voters paradoxically determine to a certain extent what happens but do so not by means of conscious choice. Thus, all the theories treating elections as choice among policies should be discarded.

What further implications does this have? I am sure there are plenty but I will outline only two of them in this post.

1) The ethical implication. The withdrawal of actual choice from democracy deprives it of the ethical defense that makes it somehow in itself ethically more preferrable to other forms of government because at least some people in a democracy give a consent to the policies.

2) The implication for libertarians. The implication for libertarians is that it is close to useless to try to advocate libertarian changes to the general populace and hope that one day the electorate will one day swing to libertarianism.  

Debunking the Coase Theorem

The famous Coase Theorem says that in the absence of transaction costs the initial allocation of resources does not matter because resources will end up with the users who can use them most efficiently.

To check if this reasoning works, let us carry a thought experiment.

Suppose that all the resources in the zero-transaction cost economy are allocated efficiently, except one plot of land, which is already a very stringent assumption. The owner of the land, John, is the most efficient user, except for just one person, Sam (stringent assumption 2).

John gets from the plot of land $1000 per year. If the title to the land plot were translated to Sam, he would get $2000 per year from it. Assume that these amounts are changeless (stringent assumption 3).

In line with the Coase Theorem, the land plot will be immediately transferred to Sam. But does this conclusion follow from the conditions described?

The first problem is that, since value is subjective, John may value the land plot not because or not just because it brings him money. In such situation the fact that someone may use the land plot more efficiently may just not bother him. Thus, in order to try to save the Coase Theorem, we need to assume that all that agents care about is maximization of monetary income (stringent assumption 4).

But does it save the theorem? Yes, Sam will increase the productivity of the land plot but how much will John value it? In other words, will he ask from Sam $1100 or $5000 or $30000?

Sam may offer John to pay him $1000+ for every year of John’s life remaining. But if we don’t eliminate time preference from the picture, that may not be enough.

Now, suppose that there is no time preference (stringent assumption 5), and John and Sam immediately strike a deal. There is still a problem for the Coase Theorem. For now, the monetary incomes of John and Sam will change. This may change relative prices in the economy and unsettle the rosy picture that had existed prior to the transfer where all other resources in the economy, except John’s land plot, had been efficiently allocated.

And not only has this changed. The increase in the productivity of the land plot by definition means that quantity of at least one good in the economy has increased or a new good has entered the market.

I don’t think that there is a need for carrying the logic further. It is clear that Coase Theorem does not hold even with the most stringent assumptions. And I can’t even think of an assumption that would solve the final problem I mentioned. 

On Intellectual Property and Liberty

On the Equilibrium Conditions

Having read this article by Jorg Guido Hulsmann on realist approach to equilibrium I thought I should analyze one of his main points on an example to see if he is right.


The thesis in question is that both the mainstream economists and even Mises (with his Evenly Rotating Economy construct) have been in error with regard to the conditions that are sufficient for equilibrium to obtain, because for it to obtain it is not sufficient that all conditions cease to change, or that the market agents are omniscient (meaning that they know all the conditions, including the preferences of all other agents). 


To check whether the above statement is true, the following thought experiment is in order.
Imagine an uninhibited island where 6 people find themselves. Three of them decided to become gatherers and gather berries, and three – to become hunters. Suppose also that for some reason the people who are most best suited for hunting are vegetarians.


Suppose that in a given period 3 hunters (A, B and C) caught a small deer which gave them 60 kilos of meat which they divided equally among themselves.


The gatherers have achieved the following results: D - 40 kilos of berries, E - 50 kilos, and F - 100 kilos.


Let us further suppose that the agents are ready to sell their product at following minimum prices (for hunters expressed in kilos of berries per kilos of meat, and vice versa):


Hunters
A 50/20
B 50/20
C 50/20


Gatherers
D 20/40
E 20/50
F 20/30




A price of, say, 50/20, for the purposes of this thought experiment means that the agent wants to sell 20 kilos of meat for a price of no less than 50 kilos of berries.


As follows from the preferences in the table, in this situation equilibrium (i.e. an outcome when all agents would sell as much as they wanted at least at the minimum price) cannot obtain. And even if the agents know each other’s preferences and nothing changes in the following period, equilibrium still won’t obtain, unless the preferences of the agents change.