Category Archives: Ludwig von Mises

On the Political Economy of Native Tribes

My latest Mises Canada post is all about Native tribes:

Ludwig von Mises wrote that, “[d]emocratic control is budgetary control. The government has but one source of revenue—taxes. … But if the government has other sources of income it can free itself from this control.”[1] This principle is particularly important for understanding the internal politics of Canadian Native tribes, whose governments are the recipients of large transfers from the Canadian federal government.

A recent scandal involving the Squamish Nation, a Vancouver-area tribe with a population of about 4,000, is a case in point. Two political officials of the band spent $1.5 million from an emergency fund for their personal ends. According to the investigation that eventually exposed them, “it was clear they handed out funds to develop political support from members.” [2] The scandal derives from the fact that funds earmarked for one purpose, emergencies, were used for a different purpose. But the interesting economic story would nonetheless hold if the funds had been used only for their intended purposes.

According to its most recent financial statements,[3] the Squamish Nation earned $11.3 million from Aboriginal Affairs and Northern Development Canada, i.e. the Canadian Federal Government, and only $8.4 million from taxation in 2014. As Mises suggests in the quote above, a government with alternative sources of income besides taxation can use this income to free itself from democratic control. Robbing Peter to pay Paul is a favourite activity of all governments, but when the robbery occurs through taxation, it is at least limited by Paul’s awareness that he is being robbed.

Go read the rest at Mises Canada.

About Those Monotonic Transformations…

Well, this is awkward. You told us that utility was strictly ordinal, that utility functions were unique up to a monotonic transformation. But whenever there’s a problem that requires them to be cardinal in some sense, you just revert right back to cardinality, don’t you? Remember how interpersonal comparisons of utility were supposed to be impossible? You made them anyways. You were never committed to the idea of ordinal utility. You just told us that to make us think we were safe. You lied to us.

In my newest post on Mises Canada, I critique expected utility theory on the grounds that it depends on cardinal utilities. Go read it and report back.

Economic Calculation and Education

A key difference between Austrian economics and the neoclassical-mathematical economics developed in the mid-twentieth century by Paul Samuelson and others is the assumption by the latter that people are essentially omniscient. What neoclassical economists call “rationality” effectively means omniscience. When the agents in neoclassical models face any uncertainty, the uncertainty is always fully understood in advance; for instance, a stock’s value tomorrow might be drawn from a normal distribution with a known mean and variance. Without the assumption of omniscience, the Austrian school faces the important question of how people can make economic decisions in a complex, uncertain world.

Ludwig von Mises’ answer (see his 1920 essay, Economic Calculation in the Socialist Commonwealth) was that capitalist entrepreneurs calculate in monetary terms. That is, they use the prices of the immediate past as their starting data, and attempt to direct factors of production in such a way as to maximize the spread between costs and revenues. If their predictions of price changes are good, they earn profits. If their predictions are bad, they earn losses. Thus, their direction of scarce resources is subject to immediate and consequential feedback allowing a selective process for only the best entrepreneurial forecasting methods. Without monetary exchange and prices, the problem of directing factors of production to their highest uses becomes intractable.

An interesting thing about Mises’ calculation argument is that it does not only relate to socialism, but to free, capitalist societies also. Mises states that, “Economic goods only have part in this system [of monetary calculation] in proportion to the extent to which they may be exchanged for money.” Thus, when a good cannot be exchanged for money, for any reason, it is subject to a Misesian calculation problem. Continue reading Economic Calculation and Education

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The Austrian Cult and Mathematical Economics with Ash Navabi

In this episode, Ash Navabi discusses whether the Austrian School of Economics is a cult and the value of mathematics in economic theory. Ash is an economics student at Ryerson University.

Ash wrote an article responding to recent criticisms of the Austrian school by Keynesian bloggers Noah Smith and Paul Krugman. Krugman approvingly referenced Smith’s attacks on the “hermetic system that is Austrians.” Just a week later he made the following telling comment about the economics mainstream:

“And modern academic economics is very much an interlocking set of old-boy networks; to some extent this has become even more true since the decline of the journals, with most discourse taking place via working papers long before formal publication. I used to refer to the international trade circuit as the floating crap game — the same 30 or 40 people meeting in conferences all over the world, reading and citing each others’ work; it’s the same in each sub-field. And to some extent it’s inevitable: there’s so much stuff out there, and you have to filter somehow, so you mainly read stuff by people you know and people they tell you are worth reading.”

Ash was quick to point out that, by the logic of the people who deride Austrian economists as “cultish” because they interact mainly with one another, each of the “old-boy networks” Paul Krugman refers to (that is, each sub-field of mainstream economics) must also be a cult. Continue reading The Austrian Cult and Mathematical Economics with Ash Navabi

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American Apparel Demonstrates a Fundamental Principle of Capitalism

The American Apparel board of directors has ousted the company’s founder. The company stock jumped up nearly 20% on the announcement. Contrary to what we see in the movies, being a successful founder of a big company does not entitle one to kick back, smoke cigars, and let the profits roll in. Dov Charney had some innovative ideas about clothing and about turning a small enterprise into a global chain, but his personal failings became damaging, so he had to go.

An interesting question to ask is “who works for whom?” A week ago we might have thought that American Apparel worked for Charney, and not the other way around, but we would have been wrong. The board that fired him is itself beholden to the shareholders; the old share price (before the 20% jump) was the result of investors restricting their investments in the company because its bad CEO made it less appealing than some alternative investments. And who are the shareholders beholden to? Continue reading American Apparel Demonstrates a Fundamental Principle of Capitalism

Mises, Probability, and the Two Envelopes Problem

In Human Action, Mises distinguishes between what he calls “class probability” and “case probability.” He defines class probability as such:

Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.

This is the ordinary sort of probability. We reach into an urn containing seven red balls and two white balls, so the probability of choosing a red ball is 7:2. We can say this because we have knowledge about the class of balls in the urn. Mises distinguishes this from case probability:

Case probability means: We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing.

Continue reading Mises, Probability, and the Two Envelopes Problem

Food Socialism Coming to an EU Near You!

The EU is legislating away food speculation to decrease food price volatility. This could not possibly backfire.

Goldman Sachs, Barclays, Deutsche Bank, JP Morgan and Morgan Stanley together made an estimated £2.2 billion from speculating on food including wheat, maize and soy between 2010 and 2012. Speculation increases price volatility and has been a major factor in the sharp spikes in global food prices of the last six years.

Continue reading Food Socialism Coming to an EU Near You!

Observations on the Causes of the Decline of Ancient Civilization, by Ludwig von Mises

Coins of the Roman EmpireHere’s a passage from Human Action that I just found so interesting that I had to post it in its entirety (pp. 767-69 of the Scholar’s Edition):

Knowledge of the effects of government interference with market prices makes us comprehend the economic causes of a momentous historical event, the decline of ancient civilization.

It may be left undecided whether or not it is correct to call the economic organization of the Roman Empire capitalism. At any rate it is certain that the Roman Empire in the second century, the age of the Antonines, the “good” emperors, had reached a high stage of the social division of labor and of interregional commerce. Several metropolitan centers, a considerable number of middle-sized towns, and many small towns were the seats of a refined civilization. The inhabitants of these urban agglomerations were supplied with food and raw materials not only from the neighboring rural districts, but also from distant provinces. A part of these provisions flowed into the cities as revenue of their wealthy residents who owned landed property. But a considerable part was bought in exchange for the rural population’s purchases of the products of the city-dwellers’ processing activities. There was an extensive trade between the various regions of the vast empire. Not only in the processing industries, but also in agriculture there was a tendency toward further specialization. The various parts of the empire were no longer economically self-sufficient. They were interdependent.

What brought about the decline of the empire and the decay of its civilization was the disintegration of this economic interconnectedness, not the barbarian invasions. The alien aggressors merely took advantage of an opportunity which the internal weakness of the empire offered to them. From a military point of view the tribes which invaded the empire in the fourth and fifth centuries were not more formidable than the armies which the legions had easily defeated in earlier times. But the empire had changed. Its economic and social structure was already medieval.

The freedom that Rome granted to commerce and trade had always been restricted. With regard to the marketing of cereals and other vital necessities it was even more restricted than with regard to other commodities. It was deemed unfair and immoral to ask for grain, oil, and wine, the staples of these ages, more than the customary prices, and the municipal authorities were quick to check what they considered profiteering. Thus the evolution of an efficient wholesale trade in these commodities was prevented. The policy of the annona, which was tantamount to a nationalization or municipalization of the grain trade, aimed at filling the gaps. But its effects were rather unsatisfactory. Grain was scarce in the urban agglomerations, and the agriculturists complained about the unremunerativeness of grain growing.* The interference of the authorities upset the adjustment of supply to the rising demand.

The showdown came when in the political troubles of the third and fourth centuries the emperors resorted to currency debasement. With the system of maximum prices the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society’s economic organization. The more eagerness the authorities displayed in enforcing the maximum prices, the more desperate became the conditions of the urban masses dependent on the purchase of food. Commerce in grain and other necessities vanished altogether. To avoid starving, people deserted the cities, settled on the countryside, and tried to grow grain, oil, wine, and other necessities for themselves. On the other hand, the owners of the big estates restricted their excess production of cereals and began to produce in their farmhouses–the villae–the products of handicraft which they needed. For their big-scale farming, which was already seriously jeopardized because of the inefficiency of slave labor, lost its rationality completely when the opportunity to sell at remunerative prices disappeared. As the owner of the estate could no longer sell in the cities, he could no longer patronize the urban artisans either. He was forced to look for a substitute to meet his needs by employing handicraftsmen on his own account in his villa. He discontinued big-scale farming and became a landlord receiving rents from tenants or sharecroppers. These coloni were either freed slaves or urban proletarians who settled in the villages and turned to tilling the soil. A tendency toward the establishment of autarky of each landlord’s estate emerged. The economic function of the cities, of commerce, trade, and urban handicrafts, shrank. Italy and the provinces of the empire returned to a less advanced state of the social division of labor. The highly developed economic structure of ancient civilization retrograded to what is now known as the manorial organization of the Middle Ages.

The emperors were alarmed with that outcome which undermined the financial and military power of their government. But their counteraction was futile as it did not affect the root of the evil. The compulsion and coercion to which they resorted could not reverse the trend toward social disintegration which, on the contrary, was caused precisely by too much compulsion and coercion. No Roman was aware of the fact that the process was induced by the government’s interference with prices and by currency debasement. It was vain for the emperors to promulgate laws against the city-dweller who “relicta civitate rus habitare maluerit.”** The system of the leiturgia, the public services to be rendered by the wealthy citizens, only accelerated the retrogression of the division of labor. The laws concerning the special obligations of the shipowners, the navicularii, were no more successful in checking the decline of navigation than the laws concerning grain dealing in checking the shrinkage in the cities’ supply of agricultural products.

The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy. A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police. The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.


*Cf. Rostovtzeff, The Social and Economic History of the Roman Empire (Oxford, 1926), p. 187.

**Corpus Juris Civilis, 1. un. C. X. 37.

Continue reading Observations on the Causes of the Decline of Ancient Civilization, by Ludwig von Mises

Would Mises have Supported Fiscal Stimulus?

Ludwig von Mises
Ludwig von Mises (1881-1973)

I am currently reading Human Action for the first time, so I will pose a question here for anyone more familiar with Mises’ theory of the trade cycle than I am: Would Mises view the US government’s deficit spending as mitigating the harmful effects of quantitative easing?

Mises repeatedly emphasizes that his theory describes the sequence of events that follow from an injection of money (in the broader sense) into the economy through the loan market. If this new money enters the market in such a way as to affect commodity prices and wage rates before entering the loan market then, according to Mises, it would not generate a boom and subsequent bust. I will quote him at length (pp. 568 of the Scholar’s Edition, available here):

The Difference Between Credit Expansion and Simple Inflation

In dealing with the consequences of credit expansion we assumed that the total amount of additional fiduciary media enters the market system via the loan market as advances to business. All that has been predicated with regard to the effects of credit expansion refers to this condition.

There are, however, instances in which the legal and technical methods of credit expansion are used for a procedure catallactically utterly different from genuine credit expansion. Political and institutional convenience sometimes makes it expedient for a government to take advantage of the facilities of banking as a substitute for issuing government fiat money. The treasury borrows from the bank, and the bank provides the funds needed by issuing additional banknotes or crediting the government on a deposit account. Legally the bank becomes the treasury’s creditor. In fact the whole transaction amounts to fiat money inflation. The additional fiduciary media enter the market by way of the treasury as payment for various items of government expenditure. It is this additional government demand that incites business to expand its activities. The issuance of these newly created fiat money sums does not directly interfere with the gross market rate of interest, whatever the rate of interest may be which the government pays to the bank. They affect the loan market and the gross market rate of interest, apart from the emergence of a positive price premium, only if a part of them reaches the loan market at a time at which their effects upon commodity prices and wage rates have not yet been consummated…

It is important to pay heed to these facts in order not to confuse the consequences of credit expansion proper and those of government-made fiat money inflation. [emphasis added]

Continue reading Would Mises have Supported Fiscal Stimulus?