The flawed foundations of Austrian economics

[go1111111]

It seems that many people here subscribe to Austrian economics. I think its foundations have several flaws that are well described here, in section 2: http://econfaculty.gmu.edu/bcaplan/whyaust.htm. IMO, Bitcoin is best understood via Chicago-school economic views.

I have never seen an Austrian convincingly reply to the objections to section 2 of the above link. If there is a good link that addresses them, can someone post it? If not, can someone defend against the above critique (section 2 only) in this thread?

 

[Zangelbert Bingledack]

Caplan's critique is very odd in that he mentions Mises but nearly always ends up quoting Rothbard. Rothbard was sloppy. Mises was far more precise. It is fair to say that no subsequent Austrian besides maybe Hayek and Ebeling really understood Mises's approach.

Not that Mises and Menger had it all correct; the idea that money is valued because it is a medium of indirect exchange is incoherent - but then no other school I know of is better. The ledger understanding of money is the correct one, I think.

When most people mention Austrian economics being crucial for understanding Bitcoin, I think they usually mainly mean any non-screwed-up economics, and Austrian comes closest to that as far as I can see.

EDIT: The simplest answer is actually that Caplan is (would be) basically claiming that mainstream (micro-) econ, read properly, is just as suitable a foundation for Bitcoin because it doesn't appreciably differ from Austrian economics on the relevant points. In which case you can take references to Austrian econ in Bitcoin as chosen more because Austrians *harp* on the relevant aspects and make a point of avoiding obscuring them in any way. Whatever Caplan's critique, I would still be far more comfortable having all the Core devs read an Austrian text than a mainstream one. When I refer to AE I am certainly not meaning to endorse every point of doctrine, and I suspect this is generally true of others.

And more than Human Action or Man, Economy and State, I would want them to read Economics in One Lesson or watch I, Pencil: The Movie - which isn't even particularly Austrian; It's more that it's not non-Austrian.

 

[Christoph Bergmann]

Oh no ... I spend years discussing economic and society with a friend who was obsessed with austrian economics. In the I was obsessed too, untill I learned that it all was theory and that reality is grey and that the free market doesn't solve the problem that mankind has a tendency to enslave itself.

 

[Zangelbert Bingledack]

@Christoph Bergmann

The free market puts a major dent in the problem, though. This clip is still the very best, most lucid explanation I've ever heard:

 

[Zarathustra]

The free market is an oxymoron. Economy/market is per se a State Bastard, sanctioned by organized violence of the government. I know just one Economist who understands how money and economy developed. Non-governed people have been self-sufficient and did not know or need an economy. The purpose of the market/economy is to produce taxed surplus, payable as tribute to TPTB (Church and State).

Either you have:

a) State/Organized Violence/Citizens/Economy/Patriarchy or

b) Self-sufficient communities/Anarchy

http://www.miprox.de/Wirtschaft_allgemein/Martin-Symp.pdf

 

[Zangelbert Bingledack]

There is no organized government violence to defend dark markets, nor children trading Halloween candy at the end of the night. "Free market" is just the name given to normal trade, as exists anywhere it is not otherwise prohibited AND the community size is too large for everyone to know everyone else. Hayek nails this one.

By using the term "self-sufficient community" you define away the problem. Any community that is self-sufficient is by definition not trading with any other community. Thus if it is small enough for everyone to know everyone there is no need for a market, and if it is big enough that everyone cannot know everyone, it becomes less of a community and more a conglomeration of communities.

 

[Zarathustra]

> There is no organized government violence to defend dark markets,

A dark market is just a submarket of the official one. Without the official market, there is no dark market. A market is per se a playground of the mafia (state mafia and/or private sub-mafia)

> nor children trading Halloween candy at the end of the night.
> "Free market" is just the name given to normal trade,

'Normal trade' is just the given name to abnormal human behavior: Enforced interacting with aliens.


> as exists anywhere it is not otherwise prohibited

... as exists anywhere where humans are collectivized (patronized, governed)

> AND the community size is too large for everyone to know everyone else.

Then it's not a community. It's a society (= collectivism, organized violence beyond Dunbar's numbers).


> By using the term "self-sufficient community" you define away the problem.

By using the term „self-sufficient community“ I use a tautology. A community is per se self-sufficient.

> Any community that is self-sufficient is by definition not trading with any other community.

As soon as a community is not self-sufficient anymore, it won't be a community anymore.
A community is based on consensus; a society is based on organized violence.


> Thus if it is small enough for everyone to know everyone there is no
> need for a market, and if it is big enough that everyone cannot
> know everyone, it becomes less of a community and more
> a conglomeration of communities.

Which is a society. Taxed, patronized, ruled, governed, enslaved.

 

[lunar]

@Zangelbert Bingledack

I have to say that Hayek interview is fantastic. It cleanly answers something that has been bugging me for years about bitcoins future. Namely the inherent selfishness of a total free market/anarchy future compared to a 'more enlightened' socialistic model that cares for the weak.

It's a lightbulb moment to say:

"Altruism is an instinct we've inherited from small society". (assume this is a reference to the instinctive, but at time of interview not yet calculated concept of Dunbar's number?) "When we pass from this to the abstract (large) society that transcends our range of vision, it becomes necessary that we are guided not by the knowledge of the things we do, but by some abstract symbols. The only symbol that takes us places where we can make the best contribution is profit. in fact by perusing profit we are as altruistic as we can possibly be."

Maybe it's my limited imagination of the implications, but it seems to me profit might not be the final solution here, as there are other externals that this symbol fails to account for. eg: the destruction of habitat and extinction of species, before their worth to society has even been examined? The Unintended consequences problem.

anyway thanks for posting.

 

[Zangelbert Bingledack]

@lunar

I think Hayek was intending this in the context of the debate about socialism, involving wealth redistribution and other matters of inter-human interaction specifically. The impulse toward socialism is a healthy one that comes from instinct, but it becomes increasingly dysfunctional above Dunbar's number. Profit and the price system help mitigate the problem, but they can feel abhorrent - in the worst cases, like price gouging (a potentially life-saving practice) - to our instinctive moral sense.

In society there will always be this tension between our moral sense and our colder drive for profit and understanding of economics (one of the many intellectual interventions required by the evolutionarily discordant situations, in this case large tribe sizes). To realize that tension is there is half the battle.

In The Fatal Conceit, Hayek writes:

Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them.​

 

[Peter R]

"The impulse toward socialism is a healthy one that comes from instinct, but it becomes increasingly dysfunctional above Dunbar's number." -- @Zangelbert Bingledack

Off-topic, but reading up on Dunbar's number just now got me wondering if it partly explains the fracturing of the Bitcoin community into the big-block and small-block sub-groups.

From the wiki:

"...200 as the upper bound on the number of academics in a discipline's sub-specialization..."

"...150 [is] the splitting point of Hutterite settlements..."

"...the leadership in the company discovered that if more than 150 employees were working together in one building, different social problems could occur..."

Of course, there are a lot more than 150 people within the Bitcoin community, but if you just focus on the "public personas" in Bitcoin, then perhaps we crossed the 150 threshold right around the time the civil war broke out. Instead of a single community with shared ideology (to promote peer-to-peer electronic cash), we split into two communities each promoting its own take on the original vision.

 

[Zangelbert Bingledack]

@Peter R

It'd be pretty interesting if the old question, "Under what circumstances is a persistent split warranted?" hinged on Dunbar's number.

This reminds me of the observation by Rothbard and others that the masses are moved by authority figures who do the intellectual heavy lifting, thus it is only those intellectuals who need to be convinced, then everyone else will fall in line. Grow too far above Dunbar's number of intellectual heavyweights and you risk incompatible paradigms emerging, with the masses (and their investment money*) following one or the other.

*Meaning both sides of the fork could retain a price for a while at least.

 

[Erdogan]

*Meaning both sides of the fork could retain a price for a while at least.

But money is special. It has no value beyond the possibility to exchange it for something that can be used to support life. Therefore, two moneys of equal quality can not form a balance, one has to win.

EDIT: Formatting

 

[Mengerian]

Ideally the community could split into competing sub-groups, while at the same time converging an a universal shared ledger. The economic incentives should hopefully be strong enough to ensure that everyone converges on a universal ledger, while different groups attempt to push their competing visions. Things like the competing relay protocols (XThin, FIBRE, Falcon), and competing node implementations (Unlimited, Classic, Core) pushing their visions are steps in this direction.

 

[cypherdoc]

But money is special. It has no value beyond the possibility to exchange it for something that can be used to support life. Therefore, two moneys of equal quality can not form a balance, one has to win.

EDIT: Formatting

i think this is right.

the early adopters in Bitcoin (most of us) may in fact split according to Dunbar's number. but it's my contention that the masses of ppl round the world understand intuitively the value of Sound Money. i'm pretty sure the Argentinians, Brazilians, & Venezuelan's do. i think the Chinese do. and i think Americans and the rest of the developed nations masses do too. why do you think they pour fiat into real estate, stocks, or bonds? i'm sure they understand that they aren't receiving any significant interest rate on their savings accounts. we now have half a dozen or more countries plumbing negative interest rates. they know the price of food and higher education is way up.

ppl know intuitively their cash is devaluing. they will follow the Dunbar group who emphasizes Sound Money. by extension, i think this means usable p2p cash according to Satoshi's original vision. otherwise it wouldn't be money.

 

[Mengerian]

Getting back to the original post, my problem with the Caplan piece is that he is mostly critiquing Rothbard's critique of mainstream economics. It's a critique of a critique. Even if Rothbard is off in his criticisms of mainstream economics, that isn't necessarily an indictment of the Austrian School.

Austrian Economics is just another tool that can be added to one's cognitive toolbox. It is useful for certain types of understanding and analysis, but not everything. These are some of it's features that I find valuable:
- A focus on causality. The whole approach basically flows from tracing causal linkages in human actions. So it helps in understanding what effect different economic policies will have. It is not necessarily good at quantifying the magnitude of these effects.
- Analysis of time. The Austrian approach does a good job considering how things change over time, time preference, and dynamic processes. Other schools tend to focus more on equilibria that are never actually achieved in reality.
- A nuanced theory of capital. The Austrian School focuses a lot on considering the details of how the capital structure and production processes are structured, and how things like interest rates, people's time preferences, and savings rates interact with this structure of production. This helps in understanding different ways this capital structure can be distorted leading to macroeconomic problems and business cycles.
- A human-centered approach. The Austrian school is based on an analysis of peoples preferences and how they attempt to achieve their individual goals. This way of looking at things is good for understanding how to improve the human welfare of actual people, not just abstract institutional metrics like GDP.
- A theory of money. I think the Austrian approach still has the best theory of money of all the mainstream schools. It is the only economic school that has a coherent approach of applying subjective value theory to the problem of how people assign value to money. Many insights from the experience of Bitcoin can extend and add to this understanding (eg. Daniel Krawisz paper on Reciprocal Altruism and the Theory of Money)

 

[Erdogan]

I can verify that all of the above is correct. It is also a good description, highlighting the most important points.

 

[Zangelbert Bingledack]

@Erdogan

Yes only one money of equal value, but Bitcoin is still not very much a money yet, mostly still a candidate to become money. A persistent split can happen at this stage because investors have differing views on which version the market will eventually support as money, i.e., the original substantial on-chain scaling vision (big blocks) or the new minimal on-chain scaling vision (small blocks). Perhaps it is then clearer to call it a semi-persistent split?

The candidate money dynamic is explained here:

 

[Erdogan]

I think it is money now, but not for everybody yet, obviously.

 

[Erdogan]

It is correct as the central bankers say, that fiat money is good, it saves resources in its creation, while gold takes resources to produce and also it takes resources to store. Why dig it up from the ground, only to store it in caves? This argument, of course, does not factor in the very important point of the money manager, the central bankers are happy to take that trouble, since it is profitable in a hidden way.

Mises looked on the development of money, being anything that could be used to store value, but in different situations and market always ended up being gold, because of the excellent money properties of gold, including the low production compared to the existing stock. One feature of gold is the intrinsic value (ornaments, technical use) that made sure that gold will never be tossed away, even in a situation where the money value should disappear, it will always be somewhat dispersed and ready to take on the money role.

He stopped with gold, and never regarded fiat money as something that could last, but leading to crises. Only gold can serve as money over the eons.

Sorry for the long rant, here comes the point:

Now we have something completely new, never before imaginable, a money type that is even more practical than fiat, using fewer resources than gold to hold and to produce, and still being sound.

Mises would have changed all his books, using bitcoin, not gold, in the examples, and he would have had to revise the regression theorem, it has been proven obsolete.

And it happens now, in my own era!

 

[Zangelbert Bingledack]

On the regression theorem, Konrad Graf says:

As a praxeological statement, the monetary regression theorem is not threatened at all by the existence of bitcoins, nor are they threatened by it; the two merely gaze across the intellectual landscape at one another with knowing smiles.

The most succinct statement on the regression theorem I've seen is here (emphasis added):

Bitcoin is not money; it is a public ledger system keeping track of who was deemed by whom to provide a good or service the latter person valued. It is an extrapolation of "Oh you made dinner two nights in a row? We'll all remember that and fill in for you later" on steroids, enabled by modern technology. Bitcoin obviates the need for money, but it is not itself money, not a medium of exchange. Actual bitcoins are just dummy tokens to facilitate the accounting process in the public ledger system. The marketing that these tokens are "money," which is just a simplification for the masses, has been taken as fact by Austrians who correctly reject bitcoins as money without investigating what Bitcoin (the protocol and system) actually *is* so that they can evaluate it on its own merits - not as money but as an entirely new way of transacting.

Here's another one expanding on that, which I wrote for GCBUers in the old Bitcointalk thread:

Actually the regression theorem has nothing to do with Bitcoin. The regression theorem is about physical object substitutes for ledger systems, a.k.a. media of exchange. Bitcoin is not a medium of exchange; it obviates (makes unnecessary) the need for media of exchange. Media of exchange are a low-tech hack for doing what Bitcoin does.

Hence the Austrian economists are technically correct when they say that Bitcoin isn't money and that it doesn't satisfy the regression theorem. It isn't money as they define it - that is, it isn't a medium of exchange. Again, it obviates the need for media of exchange. In Austrian parlance, then, it obviates the need for "money."

Money in the Austrian sense is just a stopgag measure to deal with the technical difficulties of maintaining large accounting ledgers. That is a result of their starting definitions, though they may want to revise them now that Bitcoin exists. Bitcoin bypasses the entire Regression Theorem framework. Like someone said, Bitcoin and the Regression Theorem gaze at each other knowingly over a chasm. The one has nothing to say about the other.

The Austrians who haven't come around yet because of the Regression Theorem are simply getting tripped up by their definitions, as well as by the way the Bitcoin has been marketed so far with the focus on "coins" rather than on the ledger.

I think Mises would certainly have embraced Bitcoin after a bit of thought about ledgers and the actual purpose of media of exchange.