Monthly Archives: March 2015

Needs vs. Wants in Capital Theory

Although Richard von Strigl never mentioned Taussig in the text of his Capital & Production, the two economists present notably different conceptions of capital, roundabout production, and the wages/subsistence fund. Strigl did mention Taussig in a “Literature” appendix, but only as a part of a list of other authors who have discussed the wages fund doctrine, capital, and production. Taussig’s Wages and Capital is not explicitly mentioned, but we can assume Strigl was referring to the title when he said, “The literature on the wage fund theory shall only be mentioned in general. The authors cited […] link the theory of capital more or less closely with the wage fund theory”.

The root of their differences is one of needs versus wants. Taussig maintains want-satisfaction as the end for laborers in roundabout production. Wages are the real goods and services paid in exchange for labor services that the laborer prefers over alternatives, including other employments or not working (no wage and no disutility of labor). Money wages may be paid by the direct employer, but these money wages are simply the “key” to real wages. Taussig makes this clear in his first chapter: “[the laborer’s] wages for present exertion are what he buys with the cash which, under a money regime, he receives for the day’s or week’s work” (emphasis mine). Although Taussig does not emphasize the point or discuss it separately, the language of his book maintains that wages are the consumable goods that laborers prefer and accept in exchange for labor services rendered.

Strigl’s focus, on the other hand, is in the biological needs of the laborer. Wages, or the subsistence fund, are what laborers need to survive the production period. Strigl makes this clear from the start in a thought experiment involving a country that must “start from scratch” regarding production:

Let us assume that in some country production must be completely rebuilt. […] Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production [land and labor], a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. [emphasis mine]

This language and conception of remuneration to labor dominates the rest of Capital & Production. We can hardly call it a wage, in the economic sense of the term, because it is no different than the grease applied to a machine in a factory, or the fuel pumped into a shipping truck. There is no consideration of the laborer’s choice to accept or reject a wage offer. It is assumed that all production is geared toward the biological needs of the laborers.

This line of reasoning leads Strigl to conclude that finished consumer goods are capital when they are used to sustain, or “support”, laborers involved in any part of a roundabout production process. Consider the development of his conclusion here:

Thus, the production of consumer goods must also “support” (alimentieren) the creation of durable factors of production and the appropriation of raw materials, i.e., it must supply these production processes, which themselves produce nothing that can be directly considered consumer goods, with those consumer goods necessary for the subsistence of those employed in these production processes. Naturally, the form which this support assumes depends on the organization of the economic system.

Strigl maintains that the “form” in which the wages or subsistence get to the laborer is the only part of this discussion that is related to “the organization of the economic system.” This is in contrast to the bulk of other Austrian capital theorists’ method of building theory on preset assumptions of private property, unhampered markets, and exchange. Mises especially stressed the importance of calculation and markets in capital theory, but I’ll save that for tomorrow.


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Jeffrey Herbener’s PTPT book introduction

Professor Herbener’s introduction to The Pure Time-Preference Theory of Interest is excellent. Not only does it have very quotable passages (see below), but it details the fundamental differences between Böhm-Bawerk’s theory of interest and that of Frank Fetter, siding with the latter. Herbener argues that Fetter’s conception of time preference and interest is in the vein of Mengerian economics, and that Böhm-Bawerk’s is a departure from Menger. He also points to the influence of John Rae on Böhm-Bawerk in understanding time preference as an agio on present goods over future goods, instead of present satisfactions over future satisfactions. I think this distinction is important for responding to contemporary criticisms of PTPT.

I felt vindicated when I read Herbener’s take on Mises crediting Böhm-Bawerk as the foremost among time-preference theorists:

As the excerpt from Human Action, included in this volume, shows Ludwig von Mises accepted Fetter’s PTPT of interest, although he failed to give Fetter proper credit in developing the theory. In Mises’s view, “economics owes the time-preference theory to William Stanley Jevons and its elaboration, most of all, to Eugen von Böhm-Bawerk.” Fetter’s contribution was in helping to perfect the theory. “It was on the foundation laid by him [i.e., Böhm-Bawerk],” Mises wrote, “that later economists—foremost among them Knut Wicksell, Frank Albert Fetter and Irving Fisher—were successful in perfecting the time preference theory.”

…because I had the same thoughts when I recently read the same passages in Human Action. This shouldn’t discredit Böhm-Bawerk’s other notable contributions, just the popular view that he was a great progenitor or expounder of PTPT as laid out by Mises or Rothbard.

Fetter’s “Interest Theories, Old and New” is in his Capital, Interest, and Rent compilation edited by Murray Rothbard and in Herbener’s book, The Pure Time-Preference Theory of Interest. Fetter shares Herbener’s opinion of Böhm-Bawerk and Fisher: “From the moment Fisher begins his first approximation he takes his standpoint in the money market and supposes an existing rate of interest to which rates of time-preference of individuals are later brought into conformity. His treatment throughout is of the actuarial, mathematical type, concerned with the explaining and equalizing of incomes which are assumed to be present.” Fisher’s (early) work on interest was circular in this regard, as was Böhm-Bawerk’s, but for different reasons.

I mentioned at the beginning that there are some very quotable passages in Herbener’s introduction. Here is one example (brace yourself for a long quote–I promise it’s worth it):

The thrust of Menger’s approach, in contrast, is to discover the causal laws of human action and integrate them into a single coherent system, a body of true propositions that explain the underlying, universal causes of all human action as well as those for each relevant sub-category of human action, consuming, producing, buying, selling, and so on. The wellspring of all economic theory is the reality of the human condition. As a finite being, man makes a distinction between ends and means. He cannot attain his ends by an act of will alone, but must apply means to attain his ends. Man lives in an orderly, but finite world. Using means produces only limited effects in attaining ends. Endowed with reason, man is able to perceive the causal connection between the use of means and the attainment of ends. Any action toward the attainment of an end requires surrendering the attainment of another end with the same means. And any action using a set of means requires foregoing using another set of means to attain the same end. Action, therefore, requires choice. As a purposeful being, man selects what he perceives to be higher-valued ends to pursue and what he perceives to be lower-valued sets of means to employ. Choice, therefore, requires a judgment of the mind. Since attaining the end is the purpose of an action, the value a person attaches to the attainment of the end is primary. A person attaches only derivative value to the means used in action since they are merely aids to the attainment of the end. Means have no value independent of the value a person attaches to the end they help attain. The human mind imputes value to the means according to the aid they render in attaining a valuable end. The technical properties of each of the means that combine to attain an end can be valued differently by different persons or by the same person at different times and, therefore, have no causal impact on choice and action independent of the judgment of the mind.

As a temporal being, man distinguishes between sooner and later. He can, therefore, judge the value of attaining an end sooner differently than attaining it later. Just as the principle of preference is implied by man’s finitude, time preference is implied by his temporality. [*] Temporal beings prefer the satisfaction of an end sooner to the same satisfaction later. Man places a premium on present satisfaction over future satisfaction. Since time preference refers only to the difference in value of the satisfaction of an end sooner instead of the same satisfaction later, the discount a person places on the future will be uniform across all actions with the same intertemporal structure. Moreover, the discount applies to all actions regardless of when a person chooses to undertake any one of them. In choosing to take an action later, a person is demonstrating that the value of the action in the future exceeds its value in the present, even when the discount of the future is applied. His temporal choice, then, conforms to the general principle of action, that he chooses a more-highly valued alternative and foregoes a less-highly valued one. He economizes his actions across all aspects of action subject to choice: ends, means, place, and time.

In short, the human mind integrates all the factors affecting human action into a systematic whole, reconciling the objective, technical features of the world, including time, through judgments of value in a way that renders the highest satisfaction of ends.

The market economy performs this integration for society. Prices are determined by the underlying preferences of buyers and sellers. Objective factors have no independent effect on prices, but influence prices only through preferences. Prices of consumer goods are directly determined by the preferences consumers have for them as expressed in their demands for the goods. Prices of producer goods used to produce each consumer good are indirectly determined by consumer preferences as they generate revenue for entrepreneurs to justify the demand entrepreneurs express for them. Entrepreneurs pay each factor of production the monetary value of its contribution to production. If the factor payment is made sooner than the revenue is received from the sale of the output produced, then the payment is discounted because of time preference. This discount of future money relative to present money is interest and determines the pure, or time preference, rate of interest. Because all exchange of present money for future money of the same time structure involves time preference, the pure rate of interest is uniform across all such intertemporal exchange. It follows that all present goods that generate future money will have their prices determined by discounting the future money by the rate of interest to obtain the equivalent amount of present money. This process of capitalization results in a uniform rate of interest as the difference between the present money spent to acquire factors of production and the future money obtained from selling the output produced. Prices, so determined, are the basis for economic calculation which permits entrepreneurs to appraise the lines of production and investment that people find most valuable.

*My only critical comment about this passage is that Herbener sort jumps from just one premise in the logic of time preference (we exist in time) to the conclusion of time preference (we prefer sooner to later) without giving the other premises or careful reasoning. Herbener does a cannonball into the deep end of the pool instead of carefully wading in. I try to connect the dots here.

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The Hound


The Hound is an up-scale, southern bar and restaurant behind the main strip in downtown Auburn. It faces a parking deck and the ugly back entrances of the shops and restaurants in its vicinity, but inside, the food is top-notch and the atmosphere warm and comfortable, making this place very much a diamond in the rough. The Hound is popular, but if you have to wait for a table, there are two seating areas in addition to the bar where you can enjoy a drink and relax with your party.

I would classify the menu as gourmet southern. The menu rotates seasonally, but features red meat (beef and bison), chicken, pork (bacon has a prominent role at The Hound), and some fish. I didn’t try any, but I’ve never seen anybody not finish their meatloaf, or any meal for that matter. I like burgers and I have a graduate student’s income, so I look for them on the menu when I go to places like this.

The first burger I had at The Hound was a special for the evening in that the patty enveloped duck meat, which should give you a clue about the experimental leanings of the chef. The chef even visited our table during our meal to see how we liked the duck burger special–a nice gesture, even if there was no doubt about our answer: my carnivorous friends and I liked it very much. I’ve also tried the bison burger. It’s topped with swiss cheese, sautéed mushrooms, and fried onions. The crispy fried onions give the burger an intriguing texture, and the swiss and mushrooms really complement the mellow, almost sweet bison meat.

Appetizers at The Hound feature bacon, pimiento cheese, and their various in-house jams and jellies. Don’t let their low-key, straightforward names fool you (like “Mama Sue’s Pepper Jelly” or “The Hound’s Spicy Pimiento Cheese and Crackers”). They are just as gourmet as the rest of the menu. I’ve tried just one dessert, the ice cream with berry compote (also made in-house) and granola and I savored every bite save the ones I reluctantly surrendered to Lauren.

The Hound also touts extensive draft and craft beer options, as well as some signature drinks and wine. Everybody in your party should be able to find something they like and something new they’re willing to try. My Maker’s Old Fashioned was more bitter than others I’ve had, but not in a bad way. I also like dark, flavorful beers, which are always available on tap.

The Hound, minus the food and beverages, is comfortable and inviting. It sports masculine decorations including rough-cut wood, antlers and horns, and brick. The lighting is low, but you can still see your friends and across the room. Something that is important to me in places like this is that I can actually hear what people are saying at my table. I assume the brick and wood, combined with the exposed ceiling and relatively spaced out seating substantially reduce the noise, which I appreciate very much. Many places in Auburn blast music, cram you right next to another table, and are built like the inside of a drum with hard plastic and wood bouncing all the sound everywhere.

Finally, the waitstaff and hostesses are friendly and have always offered fast service. Ordering with even minor changes to what’s printed on the menu is no issue for the servers or the kitchen. We’re not picky eaters–I asked to sub in the soup of the day (chorizo and black eyed peas!) for my fries and Lauren simply asked for no onions on her burger, and both of us were accommodated without hesitation or question.

Overall, The Hound is a great experience, but know that it comes with a relatively higher price tag than other places in Auburn. You definitely get what you pay for. I recommend The Hound without any reservations. Well, you might want to get reservations. Ugh, you know what I mean.

The Hound’s website

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Links, paraded and annotated

Matt McCaffrey knows when a good teaching moment is only a good teaching moment. In Diablo II, certain in-game items developed into media of exchange for the players to trade other items more easily. This makes for an excellent circumstance and framework to explain Menger’s theory of the emergence of money on the market, but may fall short if we take it too far and try to connect all the dots or form-fit all the details.

David Stockman and Zero Hedge point to the CAPE ratio, the Q-ratio, and the Buffett Indicator and notice that all three are getting close to being two standard deviations higher than their long-run means. The CAPE ratio compares the S&P 500 index to a 10-year running average of earnings of S&P 500 companies. The Q-ratio compares non-financial firms’ equity to their net worth. The Buffett Indicator compares the corporate market value to GNP. All three compare measures of present valuations and prices to more grounded, real, and long-run measures, hinting that everything is overpriced right now, again. One Zero Hedge commenter made me chuckle: “It’s Lake Woebegone.  Where all the charts show above average.”

Louis Rouanet, my next door neighbor in the research wing, wrote a popular article on Molinari and technological innovation. I’m shocked that this is still an issue. This error–distrusting new technology that so obviously makes production more efficient and everybody better off–needs to be smashed. Bon travail, Louis.

Speaking of being shocked, Rothbard says “shockaroo” three times in this one speech. I linked to 25:50 on purpose–listen to Rothbard’s infectious cackle less than a minute later. That he is beloved by so many at the Mises Institute is no shockaroo.

Mark Thornton was interviewed on Ted Cruz’s ideas on tax reform and was able to work in that there is “nothing fair about taxes”, the government is “just taking our money”, and that taxes are a “kind of slavery”, all while the news reporters laugh and carry on like news reporters do.

The University of Pheonix saw enrollment drop over 50% over the course of five years. (link warning: video autoplay) The CNN article frames it as poor foresight in anticipating consumer demand on the part of the for-profit university. I would frame it as an indicator of what may come for the rest of higher education.

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Böhm-Bawerk’s Labor Theory of Capital?

In Capital, Interest, and Rent, Fetter criticizes Böhm-Bawerk’s attempt to construct a coherent, non-circular theory of interest. There are three issues involved here–three (and a half) questions both authors are trying to answer:

  1. What is capital? (1a) What is it’s value?
  2. What is the relationship between capital and the roundaboutness of production?
  3. Where does interest come from?

Fetter quotes Böhm-Bawerk as answering the “What is capital?” question with “Previous labor is a rough but essentially true definition.” Böhm-Bawerk clarifies in a footnote: “It is more exact to say, stored-up, previously applied productive force, which can be not only labor, but also valuable natural forces or uses of land.” Fetter claims that this is a “value concept of capital” and therefore “comes near to the discredited labor value theory.” I think we can give Böhm-Bawerk the benefit of the doubt and assume that he didn’t mean the value of capital is solely based on the number of labor hours involved in producing capital, but was just trying to measure the average length of production. Fetter thinks Böhm-Bawerk is answering question #1, when he is probably on his way to answering #2. It’s worth mentioning that in the ERE, there is no difference between the value of capital and the value of the labor that goes toward its production, except for interest because of time preference, which gives us the answer to #3.

Fetter summarizes his objections to Böhm-Bawerk’s argument that an increase of capital in production is the same as an increase in the production period via the labor hours involved in the production of the former:

If we put together these objections to the argument, we have it in this form: if it were true in any case, it would be true (1) only when the diminishing returns of natural agents did not offset it; (2) when the change in the amount of capital is not merely the expression of a change in the rate of interest; (3) when the increase does not represent accumulated interest or monopoly gains embodied in capital; and (4) when the increase is not the capitalization of the uses of natural agents. There is involved in Böhm-Bawerk’s argument, therefore, the fallacy of an unsound premise. If all capital does not consist of, or owe its value to, previous labor, a false conclusion is drawn when the length of the production period is assumed to be fixed by the relation between the stock of capital, counted as previous labor, and the annual amount of labor.

Again, it seems Böhm-Bawerk is trying to answer a different question than Fetter thinks he is answering. Böhm-Bawerk is trying to conceive of a real, tangible, and physical concept (the length of production) while Fetter is focused on the intangible, subjective nature of value and capital accounting.

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Hülsmann and Braun on time preference

I couldn’t get through the first bits of Eduard Braun’s Finance Behind the Veil of Money without first re-reading Mises’ chapter in Human Action, “Action in the Passing of Time”, and Prof. Hülsmann’s 2002 QJAE article, “A Theory of Interest”. Braun refers to both liberally in his reformulation of interest theory. Time preference, à la Mises, is cast aside as the source of value spreads over time and new explanations are offered.

Hülsmann tries to pinpoint the value spread as existing between means and ends. The thinking goes like this: means are employed to satisfy ends. Means are always employed prior to the satisfaction and are “given up” in exchange for the end. Therefore, means are valued less than the ends they attain. I will only give up present means for a future satisfaction if I value the means less than the ends.

The problem with this is that means aren’t directly valued on their own. They receive only derivative value based on the ends they can achieve for the actor. Means are never placed in a preference ranking except as a convenient way to describe the end they satisfy. When “$100 in the present” occupies a place in my preference ranking, it actually stands for “the ends I would/could satisfy with $100 in my pocket right now”. So Hülsmann’s language,

Originary interest is the fundamental spread between the value of an end and the value of the means that serve to attain this end.

is confusing and nonsensical. One cannot separate the value of an end and the value of the corresponding means. It’s more than an equality between the two (which Hülsmann criticizes along familiar lines as the criticisms against the concept of indifference), it’s that they are the same thing. The value of any means is the value of the end it can satisfy–in a literal, substantial sort of way, not a mathematical, quantitative sort of way.

Braun strikes Hülsmann with the flat of the blade, saying that the value spread comes from the categories of cost and revenue, not means and ends, and then goes on to his own reformulation of the fundamentals of action in time. The differences may just be semantics, but that remains to be seen. My current research interest is in the subsistence fund/wages fund theories (featured in Braun’s book), and Hülsmann’s and Braun’s departure from Misesian/Rothbardian time preference theory of interest may just be tangential rabbit-chasing, but maybe it deserves more dedicated and serious inquiry.

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Woods, Salerno, White, Selgin, and Wenzel in a spat

Somebody whose last name starts with “S” needs to continue this WSWSW pattern.

Tom Woods interviewed Joseph Salerno on the wrong-headed economics associated with NGDP targeting, a monetary policy prescription usually associated with so-called “market monetarism”, even if it has deeper Keynesian roots under the surface. Larry White, who has over the years been associated with Austrian economists, sometimes as a comrade-in-arms, sometimes just as a fellow traveler, but other times (like this time) as a sore thumb, recently proposed NGDP targeting in an interview as a viable and prudent policy prescription. George Selgin, who seems to take things very personally even though he was only mentioned briefly in the interview, wrote up a cranky blog post about how wrong Salerno was to criticize such a policy and the monetarist/Keynesian analysis that leads to such a conclusion, even bringing Hayek to battle (reminds me of how Dan Sanchez said libertarians on social media call on the big names like throwing a Poke ball in a Pokemon battle). Salerno and Wenzel parried each of Selgin’s attacks, including a remark on how Hayek had rebuked NGDP targeting-type policies in Prices and Production.

As a Salernian (see the brilliant last line of Peter Klein’s afterword to Salerno’s new festschrift), I hold to the standard Austrian dictum: Any artificial increase in the stock of money via credit markets triggers a business cycle. I may be able to add a bit on price stickiness, however, since it comes up a lot in these discussions. The “stickiness” of prices is a choice variable. Prices and wages are just as sticky as the market actors proposing and accepting the prices want them to be. Wage contracts may be fixed for longer periods of time, but it’s because the wage earners and payers agree to such an arrangement. Gas stations with digital signs may be able to adjust their prices with the push of a button. This same technology is even used by department stores like Kohl’s and other firms. Voluntary price stickiness shouldn’t be an issue, especially as internet and digital pricing make their way into regular use. Price controls, government regulation, and taxation are notable cases of involuntary price stickiness, the effects of which would be discoordinating.

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