Monthly Archives: April 2015

The Subsistence Market, part two

Hennings’ other circular flow diagram incorporates a different role for capitalists: they do not just mete out funds for producers to purchase factors, but also claims to present output. Both are offered/exchanged in the loanable funds market.

This is why Hennings refers to Böhm-Bawerk’s subsistence market as just an expanded loanable funds market.

Screen Shot 2015-04-28 at 10.26.49 AM

In this version,

  • Capitalists indirectly own the rights to future output by saving claims to present output.
  • The claims to future output are offered on the loanable funds market and borrowed by producers who do all the discounting in this model.
  • They convert factors into present output and exchange the right to the whole product (which only exists in the future) for the present use of factors.
  • The owners of the factors exchange their claims to future output for claims to present output on the loanable funds market.
  • Some of these claims are saved (not redeemed) and are advanced to the producers for future production (factor owners that do this act as capitalists).
  • Others are redeemed for consumption by exchanging in the output market.
  • Producers repay advances and any difference between what is consumed and what will be produced is first discounted and then paid out as profits.

Hennings remarks that the first version is more similar to post-Keynesian circular flow, but it is also the version more frequently revealed by Böhm-Bawerk. The diagrams are not in Böhm-Bawerk’s work, but are gleaned from his work by Hennings.

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The Subsistence Market

Hennings slices up Böhm-Bawerk’s “subsistence market” in chapter 9 of The Austrian Theory of Value and Capital. Subsistence, apparently, is everything.

But Böhm conceived of the general subsistence market on an even broader scale; for he argued that supply on such a market is constituted by the total stock of capital goods in an economy which on his reckoning included the stock of consumer goods not yet sold. Demand comes from all those who demand ‘subsistence’, but also from producers who demand capital goods. Thus the general subsistence market includes virtually all the goods traded in an economy.

Such a broadly conceived concept is difficult to handle.

No joke. Hennings handles it by breaking down the subsistence market into a market for land and labor, a market for consumable present output, a market for capital goods, and a market for loanable funds. He also divides the capitalist-entrepreneur into two people: a capitalist and an entrepreneur.Screen Shot 2015-04-28 at 10.16.02 AM

Starting with the bottom-right corner,

  • Consumers buy present output in the output market, which is revenue for the producers.
  • The producers use this revenue and any advances from the loanable funds market to produce the real goods and services offered in the output market.
  • The producers purchase factors and repay capitalists.
  • The owners of the factors take their wages and rent and allocate some to consumption and some to savings/investment.
  • Capitalists use savings, profit, and the repaid advances to reinvest or consume.
  • The circle is completed when consumers use loans, profit, wages, and rent to buy present output.

Hennings has another diagram based on a different role for the capitalists and a different form of payment to the factor owners (claims to future output instead of present output). Look for that tomorrow.

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Arigato Sushi Boutique

Arigato has the best sushi in Auburn. Unfortunately, that’s not saying much, but it is good enough on its own merit, too.

Arigato has two Auburn locations: downtown and South College. The menu and the quality of the sushi are the same at both places–the only notable difference between them is the atmosphere. The one downtown is darker and smaller (even a little cramped), while the one on South College is brighter, larger, and more open.

My taste for sushi is still developing, but I can say that everything has tasted fresh. Lauren doesn’t go for the rolls with raw fish, but the bites of hers I’ve tried tasted good, too. I usually go for the Arigato roll, which is like a Rainbow roll with some sauce zig-zagged on top. Lauren goes for the Yammy Yammy roll, which has crab, avocado, and cream cheese and comes in large diameter slices.

We haven’t tried any of the other entrees, but Lauren likes their miso soup and creamy ginger salad. I like Naruto’s ginger dressing better than Arigato’s, but it’s still good.

They have great prices for what you get (above average sushi). Gimmick alert: All the sushi is always half price (or are the prices on the menu always double? hmmm…), which brings each roll below $8.

At lunch they have an all-you-can-eat sushi deal for $10 (limited selection) or $15 (expanded/premium selection and you get soup and salad). For me, though, one roll is enough. I’ve tried this deal before, but it turned into a game for me to try to get my money’s worth out of the sushi and getting full instead of enjoying the flavor and savoring each bite like you should with sushi. If you can handle a belly full of rice and raw fish, go for it.

The service is hit or miss. Be prepared to wait a while for your food if it’s crowded. Also, don’t expect southern charm and hospitality. It seems the young wait staff mentally vacate to California or something when they show up for work. The service isn’t bad, it’s just not always zippy and smiley like other places in Auburn.

In all, though, I recommend Arigato, but only if you like sushi and if you go with an understanding that they’re kind of a fish out of water being in Auburn (pun totally intended).

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Link Parade: 4.24.15

Russia is shutting down 2 out of 5 universities. “The majority of cuts will affect private universities that provide a poor standard of education.” Do we need a similar sort of shakedown?

Robert Murphy has a fun little piece on the importance of market prices using karaoke (his, um, specialty) as an example.

Salerno’s War on Cash bit got Rick Santelli’s attention.

Intervention Mad Libs, by Matt McCaffrey. One day I’ll use this exact form for a blog post just to see if anybody notices.

Peter Klein at O&M: “This may be the most useful document ever produced by a government agency“.

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The Austrian Theory of Value and Capital, by Klaus Hennings

Klaus Hennings’ The Austrian Theory of Value and Capital: Studies in the Life and Work of Eugen von Böhm-Bawerk is under-appreciated.

It’s going for $165 on Amazon. Roger Garrison has a nice review of it. Elgar has a barebones page for it (and is selling it for £89.10).

So I’m unofficially requesting a new (hopefully less expensive) edition. It does need some editing help. Some pages are a big wall of text and could use some formatting. A few commas and a fresh spellcheck would help, too. Other than these superficial issues, though, the book is a great critical review and summary of Böhm-Bawerk’s contributions to economic theory.

It includes a biographical chapter, Böhm-Bawerk’s place in the history of economic thought, summaries of his ideas on consumer and producer behavior, overviews of his theories of capital and interest, and critical notes all along the way. There is what looks like a comprehensive bibliography of Böhm-Bawerk and some correspondence he had with Knut Wicksell in an appendix.

The Austrian Theory of Value and Capital is a great contribution to history of economic thought literature, but Hennings gives some of his own original and thought-provoking theoretical offerings, too.

Since there are close to zero online samples of his text, I’ll offer one here, with my own (only superficial) edits to make it more blog-friendly. This showcase of Hennings’ book came from the “Theory of Interest” chapter, pages 114-116 in the Elgar edition.

What Böhm gave in this first volume of his treatise is a critical scrutiny of the building blocks of various theories of interest. His rejection of these different ideas, and his reasons for it, therefore reveal much about the approach he was to follow in the second volume of his treatise. It is this aspect of the Geschichte und Kapitalzins-Theorien which is of interest here.

Outwardly the book follows a broad historical pattern. After a review of ancient and mediaeval disputes about the ethical admissibility of interest, Turgot is credited with having turned an ethical into an economic problem, while at the same time drawing on the sum of previous debates. Then Adam Smith is shown to have pronounced, in one form or another, most of the ideas on the rate of interest which were later elaborated upon by various writers. At this stage, Böhm leaves the historical pattern, and instead takes up these various ideas under systematic headings. He did, however, follow a loose historical sequence within each chapter.

This structure is blurred by the fact that Böhm was evidently at a loss to fit Ricardo and the majority of English classical economists into his scheme, so that he treated them together under the heading of ‘Colourless Theories’— a procedure which cannot have endeared him to Marshall. It was further blurred in later editions by various additions Böhm saw fit to include in the text: in particular, his long discussion of John Rae. Moreover, Böhm felt obliged to include brief analyses of minor writers even though he concentrated on major ones. This made for a rather prolix and involved treatment which hides rather than lays bare his underlying analytic argument.

In order to bring out the latter more clearly, Böhm’s reasoning will be summarized here without attention to historical detail and in a somewhat schematic manner under six headings, which correspond more or less to the main chapter headings in Böhm’s volume:

  1. The rate of interest is a real phenomenon, not just a matter of monetary economy, as Turgot and Adam Smith have shown.
  2. It is not sufficient to show that interest is paid because capital is productive. Böhm does not deny that capital is productive, if this is taken to mean that with capital a physical surplus can be produced. Yet on his reckoning this is not sufficient because the rate of interest is used in the calculation of the value of capital, and the fact that capital can be used productively is taken account of in this evaluation. Hence the ratio between the value of capital and the value of its return (which is what the rate of interest is) has to be explained by the way in which capital and its return are evaluated; it is not explained by reference to the fact that capital is productive. That is a necessary, but not a sufficient condition for the explanation of the rate of interest. Thus Böhm held that productivity theories of interest do not give enough.
  3. The same is true for the idea that the productivity of capital can be reduced to the productivity of land, which Böhm found expressed (among other things) in Turgot. Again he did not deny that land is productive; but only that the physical productivity of the land can explain a phenomenon he considered to be related to value.
  4. A similar argument is applied to Rodbertus and Marx, whom Böhm took as the main exponents of the idea that interest (or profit) is a form of exploitation. He finds this idea based on two premises which he considers equally unacceptable: (1) there is yet again the idea that interest can be explained by a physical productivity, the productivity of labour, and (2) there is also the labour theory of value which of course conflicted with his own theory of value.
  5. Nor is interest paid for abstinence or any other cost incurred by capitalists, as Böhm took Senior to say. Not only was the implied cost theory of value unacceptable to Böhm; he also contended that this particular argument involves double counting. The capitalist who has chosen a stream of returns in the future in preference to the enjoyment of funds in the present cannot also be rewarded for abstaining from present enjoyment. Nor can he be rewarded for any other work involved in this choice.
  6. As for the argument that interest is paid for the use of capital — an argument he found in the Continental classical tradition, and Hermann, Schäffle, Knies and Menger in particular — Böhm claimed that he had shown in his first book that capital goods can be considered as a stream of ‘stored-up’ services, and that they are evaluated as such. Hence the use of capital is clearly allowed for in the calculation of its value, and cannot constitute a separate item for which interest is paid.

In sum, then, the rate of interest is a real phenomenon, but it cannot be explained on the basis of physical productivities alone because it is too intimately tied up with the evaluation of capital as a sort of services. Rather, the rate of interest has to be explained on the basis of these evaluations. Moreover, as the evaluation of capital is based on the evaluation of future services, it will not do to consider past costs of constructing or acquiring capital.

With these considerations Böhm anchored the rate of interest firmly in the realm of value theory; and all the more so as his arguments amount to saying that interest is not paid ‘for’ something, whatever the ‘something’ may be. Rather, it is (as he was going to show) a necessary aspect of intertemporal evaluations. It was therefore in the framework of an intertemporal theory of value that Böhm was going to search for his own solution.

This solution is of course based on many of the ideas reviewed in the Geschichte und Kritik der Kapitalzins-Theorien — much more so in fact that Böhm was prepared to admit. For the first volume of Böhm’s treatise is basically a ‘negative theory’ (as Edgeworth called it) which prepared the way for his Positive Theorie des Kapitals.

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Have we lost the real Austrian economics?

Janek Wasserman argues that what we know as modern Austrian economics is just politics, hand-waving, and name-dropping. Also, it began less than a century ago. In the United States.

Austrian Economics, as it is commonly understood today, was born seventy years ago this month.

Wasserman is referring to Hayek’s Road to Serfdom, which many contemporary Austrians would credit as consequential and/or popular, but not foundational. Most would point to Carl Menger’s 1871 Principles of Economics as the first treatise in the line of scholarship known as Austrian economics. Well-read Austrians could also point to earlier “proto-Austrians” like Bastiat and Cantillon as Steven Horowitz explains in his take-down of Wasserman’s piece.

Horowitz’s treatment of Wasserman is good. He shows that Wasserman has somehow overlooked the broad, vibrant scholarly work in the Austrian tradition despite citing and linking to some organizations dedicated to such work at the start.

I’d like to point out another error in Wasserman’s piece, though. He says that Austrian economics became politicized and therefore lost its claim as a legitimate, scientific area of study.

Furth, Hayek’s lifelong friend and an adviser to the Federal Reserve, felt that Austrian Economics had to be rescued from its American acolytes. There was nothing inherently libertarian or even liberal in Austrian economic theory, Furth reasoned. It was a school of economics not politics. Machlup argued that he had to bow to contemporary usage. Since the mid-1940s, a new libertarian stream had come to dominate American discussions of Austrian thought. He could not change that reality; he could only maintain a distance from the most egregious ideologues.

Karl Marx famously said about orthodox Marxism, “If that is Marxism, I am not a Marxist.” Similarly, native-born Austrians ceased to be “Austrian” when Mises and a simplified Hayek captured the imagination of a small group of businessmen and radicals in the US. Consequently, our understanding of a broader Austrian Economics, which made seminal contributions to several social scientific disciplines, has suffered—as has our comprehension of a more complex and less radical Hayek.

Rothbard is left unmentioned, but he is probably one of the “radicals” referred to in the last paragraph. Mises and Rothbard would completely agree that politics and economics are two separate sets of claims–politics is made up of normative claims, while economics is made up of positive claims.

Rothbard knew this:

If ethics is a normative discipline that identifies and classifies certain sets of actions as good or evil, right or wrong, then tort or criminal law is a subset of ethics identifying certain actions as appropriate for using violence against them. The law says that action X should be illegal, and therefore should be combated by the violence of the law. The law is a set of “ought” or normative propositions.

…and even criticized other economists for annexing, whether intentional or not, normative goals and claims in their theorizing.

Another serious problem with the Coase-Demsetz approach is that pretending to be value-free, they in reality import the ethical norm of “efficiency,” and assert that property rights should be assigned on the basis of such efficiency. But even if the concept of social efficiency were meaningful, they don’t answer the questions of why efficiency should be the overriding consideration in establishing legal principles or why externalities should be internalized above all other considerations. We are now out of Wertfreiheit and back to unexamined ethical questions.

Now, Rothbard’s particular view was that value judgments were inherent in “doing” economics and that the proper recourse for economists is to make such values known at the start. I don’t agree that economists have to do this to be economists, but you can see him wrestle with Mises’ view here:

Mises offered two separate and very different solutions to this problem. The first is a variant of the Unanimity Principle. Essentially this variant affirms that an economist per se cannot say that a given governmental policy is “good” or “bad.” However, if a given policy will lead to consequences, as explained by praxeology, which every one of the supporters of the policy will agree is bad, then the value-free economist is justified in calling the policy a “bad” one.


Now this is surely an ingenious attempt to allow pronouncements of “good” or “bad” by the economist without making a value judgment; for the economist is supposed to be only a praxeologist, a technician, pointing out to his readers or listeners that they will all consider a policy “bad” once he reveals its full consequences.

But ingenious as it is, the attempt completely fails. For how does Mises know what the advocates of the particular policy consider desirable? How does he know what their value scales are now or what they will be when the consequences of the measure appear? One of the great contributions of praxeologic economics is that the economist realizes that he doesn’t know what anyone’s value scales are except as those value preferences are demonstrated by a person’s concrete action.

I don’t agree with Rothbard’s criticism of Mises here. I think that the economist, as policy advisor, can just ask, “What sort of consequences do you want?” and, in practice, trust the policy maker is being honest about his or her own values.

When I order a hamburger at a restaurant, I expect the waiter and cook to believe me. When a policy maker asks a policy advisor for a specific effect, the policy maker expects the advisor to believe him. This way, an economist can legitimately give policy advice and explain the cause and effect involved in various economic theory without sacrificing the value-free nature of economics.

Rothbard covered Mises’ other solution later on:

There is another and very different way, however, that Mises attempts to reconcile his passionate advocacy of laissez faire with the absolute value freedom of the scientist. This is to take a position much more compatible with praxeology: by recognizing that the economist qua economist can only trace chains of cause and effect and may not engage in value judgments or advocate public policy.

This route of Mises concedes that the economic scientist cannot advocate laissez faire, but then adds that he as a citizen can do so. Mises, as a citizen, then proposes a value system but it is a curiously scanty one. For he is here caught in a dilemma. As a praxeologist he knows that he cannot (as an economic scientist) pronounce value judgments or advocate policy; yet he cannot bring himself simply to assert and inject arbitrary value judgments. And so, as a utilitarian (for Mises, along with most economists, is indeed a utilitarian in ethics, although a Kantian in epistemology), what he does is to make only one narrow value judgment: that he desires to fulfill the goals of the majority of the public (happily, in this formulation, Mises does not presume to know the goals of everyone).

An economist can make positive claims all day but as soon as he or she stumbles into normative claims, they are no longer speaking as an economist but as a real human being with a heart and values. I’m on board with both of Mises’ solutions for an economist to approach policy and therefore value judgments.

Rothbard had some remarks on this as well, but the point is that Rothbard knew and carefully laid out the distinction between economics and politics and between positive and normative claims.

Mises knew it, too:

Praxeology and economics do not say that men should peacefully cooperate within the frame of societal bonds; they merely say that men must act this way if they want to make their actions more successful than otherwise.

In fact, the whole normative vs. positive distinction is very important to modern Austrians, as it is still stressed in plenary lectures and writings all the way up to advanced seminars and papers. See David GordonRoderick LongDan SanchezJörg Guido Hülsmann, and countless others.

So, to answer the question in the title, no, we haven’t lost the real Austrian economics. You just have to look past Twitter and other popular media to find the positive economics disentangled from politics. This is true for any school of economic thought, though.

You may be wondering, however, why are there so many Austrian economists who are also libertarians? What is the relationship between the two if there is no overlap in the types of claims economics can make and the claims of political ideologies? Well, I have an answer for you.

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Labor Helicopter Drop

One of the issues Böhm-Bawerk had to deal with in his theory of roundabout production was measuring the period of production. He noted that technically all production that uses any bit of previously produced capital may be traced back to primitive times when the first bit of capital was built up to facilitate longer, but more productive, production. This means that the length of the structure of production would span millennia. Böhm-Bawerk resorted to thinking in terms of the average period of production and even dabbled in the (what I think is more tractable) investment period.

Klaus Hennings, in his short, but content-dense book, The Austrian Theory of Value and Capital, decides that even Böhm-Bawerk’s average period of production concept is deficient.

At this point Böhm realized that the existence of durable capital goods causes difficulties for the determination of the period of production, and therefore proposed to reckon with an average period of production instead. This is then used as an index for the roundaboutness of capital, so that the production process is described in terms of the average period of production.

It is easy to see that this argument must run into difficulties. Two main objections may be singled out from among the host of those that can be levelled against it. First, the presence of durable goods and the possibility of further usage of the materials from scrapped capital goods leads to an almost infinite historical regress […]

Second, Böhm’s device of using an average does not solve this difficulty. It is only too easy to show that rather restrictive assumptions must be made about the sequence of non-produced inputs in order to get a consistent ordering of these averages — quite apart from the fact that it may be impossible to identify the non-produced inputs which were used for the production of some particular unit of consumable output even if one disregards the possibility of joint production.

Hennings offers a way to conceive of the length of production that does not suffer from these problems:

Consider first of all a production process which is well synchronized and stationary; even if there is a lag in production it will not show up.

By “lag”, he means there is some unrealized change in output. Something has changed in an earlier stage that has not manifested itself as a change in output, yet. Hennings is abstracting away from these sorts of production hiccups.

Technically the output obtained in this period may be due to the non-produced inputs of earlier periods, but it is possible to consider the production process as if it were direct rather than roundabout.

Read: the roundaboutness of production is beside the point. Capital-intensity, complexity, roundaboutness, whatever.

The lag will show up only when the production process for one reason or another is not well synchronized (as Böhm himself noted at one stage). [Footnote: “Böhm (1895b), 126-7.”] This can be used to ‘measure’ the lag involved.

So, something happens, then later on output changes. If production does not have any unrealized changes, it may be called “synchronized”. This “synchronization time”, or “adjustment time”, may be measured. Or at least theorized.

Consider a production process in an economy with full employment, and assume that a ‘marginal’ (in the Austrian sense) amount of all non-produced resources becomes available in addition to those already used. Assume further that these additional inputs are immediately made us of, that they are used to increase the scale of operations at an unchanged method of production, and that there are constant returns to scale. Then if production does take time, some period will elapse before the production process as a whole is adjusted to the higher level of activity (as shown in a higher level of output) made possible by the increase in non-produced resources. It is this period of adjustment which I suggest is the period of production germane to the production process in operation, an which is the technical concept Böhm should have defined.

Instead of Friedman’s helicopter drop of money, imagine a helicopter drop of laborers or some other non-produced factor, immediately ready to be integrated into production. The time between their employment and the full increase in output is the measure Hennings is talking about here.

My initial response is that this is a good way to think about the length of production, especially compared to Böhm-Bawerk’s treatment, but I’d like to give it some more thought. There are a lot of assumptions thrown in, which isn’t necessarily a bad thing, but they should be considered carefully to make sure they don’t confound or assume the result.

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