Design a site like this with WordPress.com
Get started

The Open, Free Intellectual Environment Of The American University

A fellow investor friend of mine sent me an e-mail and suggested I read “What’s the point?” by UK fund manager Terry Smith. We were originally talking about Michael Burry’s commencement speech at UCLA [PDF] and the idea that one of the things that was so extraordinary about it is the way he unmasked the villains and the corruption and spoke the truth unapologetically in such a public forum. I had also, in an earlier e-mail, complained about my lack of interest in blogging, feeling frustrated lately at the nearly overwhelming volume of fallacious bullshit floating around the net that seems to deserve a response yet leaves me tired and bored out of my mind every time I attempt another mud wrestling fiasco.

I don’t know if my frustration inspired the link to Terry Smith or if it was simply the next step in the theme of telling it like it is or what, but that blog post got me thinking. I’ve long thought about giving it one last hurrah and then hanging up my hat. Because, seriously, what is the point? You can tell the truth a million times but if your opponent is bent on lies and deceit, nothing can be done. (Of course, Mises adopted the slogan, from Virgil, of “Tu ne cede malis”, but he’s a smarter man than I, with more energy, apparently.)

In light of this, I wanted to share three critical experiences I had in college during my sophomore, junior and senior years, respectively, which have stuck with me to this day and serve, subtlety and fundamentally, to color my view of the intellectual Opposition. I believe my experiences are not unique, although few people besides me may have had the required awareness to realize it, and as such where I went to school back then is not important to the story. This is not about an institution but rather the institution of the American academic system and its culture as it exists today, and likely has existed for awhile before now and probably longer still in the future.

I want to give some insight into why I find it hard not to be dismissive of many people who claim to think differently than me on various philosophical subjects.

I first became suspicious of my academic curriculum when I learned that microeconomics was not a prerequisite for macroeconomics. Rather than being treated as fundamental knowledge built upon and reexamined from a more global standpoint in macroeconomics, microeconomics was treated as a separate discipline entirely, which could be studied before, during, or after macroeconomics or even not at all (at least, if you weren’t concerned about getting an economics degree). Of course, numerous macroeconomic theories contradicted accepted wisdom taught in the microeconomics course, but no explanation was given as to the nature and source of these apparent contradictions, nor where it was in the economic causal chain that things stopped making micro-sense and started making macro-sense. There was simply a dichotomy in place and you were expected to accept it and move on.

In my second year I was excited to take a class with a professor teaching “international trade” (you know, the separate set of economic principles and rules that apply when two people exchange goods across imaginary political boundaries). Everyone I knew who had taken the class spoke highly of this professor as a competent and entertaining lecturer and said the material itself was quite fun. We spent a lot of time in that class studying the roles of quotas, tariffs and other government interference in the economy. It was really about political economy, not economics, because economics doesn’t change when you move stuff over imaginary lines.

But what rubbed me kind of raw in the class was when this beloved professor spoke quite approvingly of the idea, built into his theoretical examples in class, of providing “transfer payments” (read: violent redistributive extortion for special interest groups carried out by the government) to currently privileged groups who would be “hurt” by “free trade”. This professor advocated that paying these highwaymen off and reaping the benefits of freer trade was a good idea in the long run.

“Uh, question, professor– wouldn’t it be best to just have free trade, without a complicated system of quotas, tariffs and transfer payments to interest groups? Isn’t that most economically efficient? Why don’t we learn about that?” This question got a knowing smirk and a request to meet the good professor privately during office hours to discuss, as there simply wasn’t enough time in lecture to discuss such twaddle.

Dutifully, I scheduled some office hours time to meet with the beloved professor and discuss. Again, I posed the question to him, why are we paying these people off? Isn’t it better to let them figure out their own way to survive a competitive market place without getting welfare from everyone else? After all, they have no right to a certain income or position within the market place. Again, a knowing smirk as the professor launched into a short anecdote about how he once was full of piss and vinegar like I about these subjects. But the truth of the matter, he told me, was more complicated.

And then he, in so many words, spilled the beans– if “we” don’t bribe these special interest groups with redistributive social justice, they’ll get their pitchforks and their torches and elect another Hitler. That was it. That was why he doesn’t teach actual free trade economics in his course. That’s why he thinks transfer payments are good. That’s why he was for FDR’s New Deal and the Social Security scam. He saw it as the only thing standing between us, and Hitler.

I tried to make the point that if you fear totalitarianism, transfer payments are actually a step toward totalitarianism, not a step away. He responded by suggesting that granting these dictator-electors-in-the-wings a little welfare would create some kind of social anchor where we’d go no further toward socialism past that point, having bought the evildoers off. Never mind people tried to buy Hitler off and he just asked for more until he went to war. And never mind that the US government has had to move far, far beyond the New Deal since then to keep neo-Hitler at bay, according to his logic.

At this point, having no response to my observation of yet another contradiction, I was informed that office hours had suddenly come to an end (I’d only been there for thirty minutes and had scheduled an hour and I didn’t see anyone waiting in the hall for an audience) and that although he really enjoyed our conversation, he was going to have to ask me to come visit with him during the summer to continue the conversation. Of course he knew I was an out of state student who would be returning home during the summer so he was actually dodging his responsibility to make sense of his intellectual positions.

I left his office reeling in confusion and frustration. Here is a guy that my peers think is one of the best instructors the university has to offer, he is considered to be a thoughtful and intellectual person, etc. Yet, I come to find out he is teaching disingenuously. He is guilty of the “smuggled premise”, that is, his economic values taught in his class have nothing to do with sound economic reasoning but rather a personal, political belief that is never named nor mentioned which is thereby “smuggled” into the lessons. Instead of being honest and telling his students “I am teaching you a bunch of stuff that doesn’t make economic sense, because I think it makes political sense”, he carries out his pedagogical mission in such a way that he exploits his students ignorance and credulity.

Why can’t this professor just tell everyone what he really believes? Are we not old enough for the truth? Did we not pay for the truth? Do we not expect the truth?

To say I was disappointed by this experience would be an understatement. But I tried to put it behind me as I continued my economic studies.

During my third year, I had another run in with an economics professor, this time one teaching a “money and banking” course who had done some consulting for the Fed and who used as a textbook in his class the work of the notorious intellectual bungler, Frederic Mishkin. I raised a lot of challenges to the material which were poorly handled by the professor, but there is one in particular that will always stand out to me because of its zaniness. We were discussing the “money multiplier” of fractional reserve banking and how with a tiny base of reserves banks could pyramid large amounts of credit on top and lever up their balance sheets. I raised my hand and asked, “Doesn’t levering the balance sheet increase the risk of crisis for the bank and for the banking system?”

The professor acknowledged that, well, yes, it does, but it’s all done within the proscription of the FDIC guaranteeing everyone’s deposits and the Fed serving as lender of last resort to prevent a total collapse. Then I asked, “Well isn’t that crisis kind of inevitable when you create duration mismatch between funds that are borrowed short and lent long like this?” And the professor acknowledged, well, yes, it does, but again it’s all done under the keen watch of the overseer regulatory bodies, this time a little bit more apprehensive. And then I went for the F-word. I raised my hand, “But professor, isn’t it fraud to lend out people’s money that they think is being held for safe-keeping at the bank? Why not have the bank separate the two activities, safe-keeping and loan-brokering?”

There was a pause and he looked kind of startled. His skin color rose and his face contorted into a mixture of anger and glee, because now he had “figured me out” and knew my true motive. He exploded: “So I guess if it were up to you the banks wouldn’t make any money, huh?!”

A little shocked at his outburst, I stammered, “Well, no, of course not, I don’t really see what their profitability has to do with my question…” but he cut me off. “Yeah, I see what you’re trying to do. You don’t want the banks to make any money, do ya?! Well, it’s a nice ideal but it doesn’t work in the real world and if banks didn’t make any money, we wouldn’t have any banks and you wouldn’t want to live in a world without banks!” he growled, signaling that question time was over and it was time to get back to his brilliant lecture on fraud-based banking economics.

The episode was so instructive for me. So THAT’S what he’s about– shilling for fraudulent reserve banking, not trying to explore the truth of the matter. He neatly dodged my very simple, very honest inquiry of how we might live in a world without systemic banking risk, a world which would still allow profit opportunities for banking operations. Instead, he constructed a false dichotomy — systemic risk due to fraud, and profit; or no profit and no banks — and then browbeat me and anyone else in the class who was listening to avoid serious discussion of the principle. It suddenly put things into perspective for me. He wasn’t there to impart any real knowledge about the economy to me, he was there to be a hatchet man and paid minion for the banking establishment as it stands today. Wouldn’t want any bright-eyed college kids getting uppity and questioning the scam now, would we?

I really thought that would be the tops. But then I got to my Labor Economics class in my fourth year.

You might be wondering at this point, “Labor economics? Are you mad? Why did you take that course as an elective?” It would be a reasonable question, but the truth is that it was the least horrible option amongst what I had to choose from at the time. To say I went into it with low expectations is an understatement.

Those low expectations were met admirably on two separate occasions, which were not the only examples to choose from but simply the most illustrative.

My professorista had spent her entire life after high school in academia and government bureaucracies like the Bureau of Labor Statistics. I would be surprised if she ever held a part time job as a youngster in the private sector. She demonstrated zero familiarity with the reality of markets. One day she provided the class her argument for government intervention in the economy, which was based on the “paradox of capitalism”, this being that capitalism is SO efficient and SO productive, that it drives things down to the cost of “near 0” (not actually zero, because that’d obviously imply superabundance and the end of scarcity for that good or service) and therefore these things become “uneconomic” to produce and won’t be provided for under the profit system, which means if we want them government must provide them as a public good.

One example she gave of this was childcare services. Now, let’s ignore the “empirical” fact that there are numerous for-profit childcare services out there, right here and now, which would seem to undermine her argument completely. Let’s just think about this logically for a second.

So long as a given good does not have a cost of 0, it is not superabundant and it is an economizable resource. For example, air is not an economic good because it is superabundant. You can breathe as much air as you need and don’t have to think about what you’d give up to ensure your supply of air, it’s just there. It has a cost of 0. But if it has a cost above 0, it must be economized, something must be given up to get it. And if at a particular point in time firms are so numerous and efficient at supplying a good, such as childcare services, that they can’t make a profit, what will happen is that the least efficient firms of the bunch will consume their capital (by earning losses over and over again) and exit the marketplace. And when they do this, the level of profitability for remaining firms will rise because the lowered supply will result in the ability to charge higher prices.

And this dynamic will play out forever over the life of the industry so long as people value childcare services. There will be a constant competitive dynamic tending toward the “right” supply of childcare services because the least efficient providers will exit with losses. And this is “good” from the standpoint of anyone interested in participating in the economy because it means that those extraneous resources will flood into other, underserved industries where profitability is much higher, indicating a relatively more important use for the resources versus childcare. At no point will the market stop providing childcare services entirely, requiring a timely government intervention and provision of this service to correct a “market failure.”

Well, recognizing that as the hogwash it was, I raised my hand and began disputing the logic just as I did above. She was so dumbfounded that I had the temerity to question her transparently flawed reasoning that she began what could best be called “sputtering”, rolling her eyes and trying to form even one word in response as if she were having a seizure. Finally, she gave up and said, “Would anyone like to respond to that and explain why he is wrong?” About ten different hands shot up, eagerly, and she called on a young man who halfway turned around in his chair to straddle his view between me in the back and her approving glances in the front. He began, “Governments can and should correct market failures, which happen frequently. For example, while I was studying abroad in Ghana, the government provided public bus service to the village I was staying at because it wasn’t profitable for private businessmen…”

I stopped him right there and pointed out that the lack of profitability is part of the phenomenon I just described, and it suggests the wastefulness of bus service to a small African village. The class erupted with anger and indignation. This was so not politically correct to suggest some poor villagers in Africa didn’t merit a dedicated bus service just because it wasn’t profitable to provide it! This lecture hall had about one hundred students in it. Suddenly, they were a-chatter, half of them noisily discussing how outrageous my view was amongst themselves, the other half turned and shouting/arguing with me simultaneously while the young man with the bus service anecdote continued droning on. This went on for several minutes before the professorista tried to get control back over the class and insisted we finish up the lesson, but by then it was too late as class was over and everyone made for the exits.

It was at this point that as people filtered out a guy sitting a little in front and to the right of me turned around and said, “For what it’s worth, I agree with you,” and then grabbed his bag and walked out. I guess it was better than thinking the entire class was ready to lynch me, but he certainly didn’t feel the need to come to my rescue in the heat of the argument!

The other memorable moment from that class came right near the end of the semester. The Wall Street investment banks were beginning their meltdown and that particular morning Bear Stearns had failed, which was all over the news and which had greatly agitated the students as several had received offers of employment there at the conclusion of the semester which were now in jeopardy. The professorista sought to calm everyone’s nerves by saying that this was a limited event, contained to a specific firm with poor risk controls and the Fed and the regulatory agencies were all over it.

I raised my hand and pointed out that this was indicative of a systematic impending crisis, that the authorities were NOT in control as evidenced by the fact that it had happened, and that it would get a lot worse before it got any better. I suggested that this was the first of many failures to come.

“Would you like to bet on that?” she said, mischievously, expecting me to back down with the bravado.

“I already have!” I exclaimed, as I had taken a few minor positions in my brokerage account at the time (don’t worry, I didn’t make out like John Paulson).

“Well, we’ll see…” she said, trying to quiet me down.

Yes, we did, didn’t we? I never followed up with her to see what she thought of giving me a hard time about my prediction in class, or whether she was willing to confess she had had it all wrong, but I think it demonstrates again a clear blind spot in the mindset of mainstream academics who are responsible for instructing this country’s (and the world’s) future leaders and productive people about intellectual curiosity, academic honesty and the nature of reality.

How many parents are aware of this when they insist their children must go to college? How many have audited the value of their kid’s higher education and determined that the small fortune it takes to get them through a “better” private institution is worth it in the face of antics like what I’ve described above?

Notes – “Economics: The User’s Guide”

Economics: The User’s Guide

by Ha-Joon Chang, published 2014

Who is Ha-Joon Chang?

Born in South Korea in 1963, Ha-Joon Chang is currently a professor of economics at the UK’s University of Cambridge. He gained his PhD after successfully completing a thesis on “industrial policy” under British Marxist Robert Rowthorn, which advocated a “middle way” between central planning and free markets.

In a section on his personal website entitled “Economists Who Have Influenced Me“, Ha-Joon Chang states,

Many people find it difficult to place me in the intellectual universe of economics. This is not surprising, given that I have been influenced by many different economists, from Karl Marx on the left to Friedrich von Hayek on the right.

Of Austrian economist FA Hayek, Chang further states,

Hayek is very different from the Neoclassical school, even though many Neoclassical economists mention him in the same breath as Milton Friedman, on the basis that he was one of the most influential advocates of the free market. Unlike Neoclassical economists, however, Hayek does not take the socio-political order underlying the market relationship as given and emphasizes the ultimately political nature of our economic life. This is a big contrast to the Neoclassical view, which thinks that economics and politics can be, and should be, separated. Indeed, if you read Hayek’s book, Individualism and Economic Order, you will see that he is very critical –sometimes even abusive – of Neoclassical economics.

And with regard to Marx, Ha-Joon Chang claims,

With the collapse of communism, people have come to dismiss Marx as an irrelevance, but this is wrong. I don’t have much time for Marx’s utopian vision of socialism nor his labour theory of value, but his understanding of capitalism was superior in many ways to those of the self-appointed advocates of capitalism. For example, when free-market economists were mostly against limited liability companies, Marx saw it as an institution that will take capitalism on to another plane (to take it eventually to socialism, in his mistaken view). In my view, 150 years after he wrote it, his analysis of the evolution of labour regulation in Britain in Capital vol. 1 still remains one of the best on the subject. Marx also understood the centrality of the interaction between technologies (or what he called the forces of production) and institutions (or what he called the relations of production), which other economic schools have only recently started to grapple with.

On the dreaded Keynes, Chang admits,

Despite having been educated and taught in Cambridge, I have not been very ‘Keynesian’ in my approach to economics. This is not because I disagree with Keynesian thinking, but because I have mainly done my research on ‘micro’ issues, such as trade and industrial policy. However, I have come to be drawn more into ‘macro’ issues in the process of thinking about the recent financial crises, especially the 1997 Asian crisis and the 2008 world crisis. In thinking about these issues, John Maynard Keynes, Hyman Minsky, and Charles Kindleberger have been big influences.

According to biographical information in his book “Bad Samaritans”, Chang grew up in relative poverty as the son of a South Korean finance minister. He has written a number of books on the subject of economics, specifically with regard to economic history, global economic development and global trade patterns. Henceforth in my book blogs I will refer to him as “HJC” to save myself time.

Because of HJC’s intellectual background, pre-eminent social and intellectual position and large and established bibliography of thought, his ideas are worth studying and critiquing as a representative of a popular strand of “economic” thinking supported across countries and institutions.

Introduction

My purpose in this book blog is to apply my own understanding of economics (informed, to date, by a mainstream US college education in the subject as well as intense and ongoing self-study in a variety of alternative theories) to the methods and arguments provided by HJC in this introductory economic work of his and in so doing arrive at conclusions about the soundness of his thought. In particular, because HJC represents a strain of “new thinking within the mainstream” and my personal convictions lie with what is known as the “Austrian school”, I want to empathetically highlight the areas where the two schools are in agreement, as well as try to explain wherein the differences lie.

Let’s get started!

“Why Are People Not Very Interested In Economics?”

HJC wonders why economics is an unpopular subject:

95 per cent of economics is common sense – made to look difficult, with the use of jargons and mathematics.

This is actually a point the Austrians make– that good economics involves simple logical deductions within the grasp of any reasonably intelligent person and that the introduction of jargon and higher math is used to keep laypeople out and make the discipline unintelligible to the uninitiated. HJC says that economics doesn’t appear to be relevant to most people’s lives and that the issues that they believe economics deal with, such as international currency movements, government budgets and foreign aid debates, are not things people believe they can comment on or think about competently without economic training.

On the other hand, HJC laments the “megalomania” of many economists who would just as soon argue that economics is the most relevant intellectual discipline in that it seems to explain everything, and more. HJC critically cites the success of titles like “Freakonomics” and the humblebrag quality of many economic book titles that purport to show how economics is behind anything that can be imagined.

HJC sees a more limited role for economics in human thought, though still an important and useful one, which raises two specific issues: is economics a science and, to the extent it is, what is economics actually about?

Is economics a science?

HJC is pretty clear on the matter:

economics can never be a science in the sense that physics or chemistry is [because] human beings have their own free will, unlike chemical molecules or physical objects.

He also adds that,

people have been led to believe that, like physics or chemistry, economics is a ‘science’, in which there is only one correct answer to everything

Instead, HJC argues that

What is needed is to learn economics in such a way that one becomes aware of different types of economic arguments and develops the critical faculty to judge which argument makes most sense in a given economic circumstance and in light of which moral values and political goals (note that I am not saying ‘which argument is correct’).

Let’s consider these claims one by one.

The first claim, that economics can never be an (empirical) science like physics or chemistry is something that Austrians would again agree with. The Austrian view of the epistemology of economic science strictly prohibits the use of inductive logic derived from empirical observation and research. The reason for this is that in “hard” sciences like physics, the effect is known but the cause is unknown. Physics, as an example, is a study of effects in search of causes. Various factors deemed to be the significant causal agent dictating a particular result can be tried in a series of controlled experiments and then conclusions can be arrived at by the experimenter based on the manipulation of the variable factor and the observed changes in the experimental data.

Economics, by contrast, is a science whose causes are known (human action) but whose effects are often mysterious, because multiple causal factors can occur simultaneously in the lead up to an observed result. For example, the price of two pounds of chuck roast at the supermarket involves a negotiation between a group of suppliers of chuck roast and a group of buyers of chuck roast and these suppliers and buyers are unique and uniquely motivated at a given time and location. The method of the economic sciences, then, must be the “gedanken experiment” (thought experiment) in which a conceptual reality is held in mind and the logical implications of changes in one factor at a time are deductively explored. This is impossible when studying human action, that is, economic activity, because it is never that one thing only changes and it is never guaranteed that the same reaction will occur by the people observed because of the nature of free will.

It is in fact curious that HJC makes this specific point because later on he seems to contradict himself when he says,

we need to look at history because we have the moral duty to avoid ‘live experiments’ with people as much as possible.

The questionable moral claim of having a duty to avoid human experimentation in economic matters “as much as possible” aside, this quote suggests that HJC believes economic theory can be derived from historical (experimental, empirical) data and observations despite earlier claims to the contrary. This is one of many confusions and muddled writing/thinking that the book suffers from. It also begs the question, well-known to Austrians, of what interpretations of the significance of various historical data could tell us on their own without any kind of intermediating and pre-selected theory applied to them.

History, as a discipline, is a process of careful selection of particular facts for a particular purpose. The past provides us with a nearly infinite quantity and quality of data to choose from. It is the task of the historian to pick from this quantity only the data that is relevant to examining a particular historical question. To do this, the historian must already be versed in valid theories from the applicable branches of science to which his question belongs. For example, a historian studying the incidence, severity and consequences of disease would need to understand human biology and epidemiology. Or a historian studying the history of money in France circa 1750-1850 would need to already understand monetary theory (a branch of economics) as well as other theoretical knowledge pertaining to the historical episode (for example, a theory of the State in general and a theory of post-Medieval French statism in particular).

We can not validate an economic theory by looking at the historical record. All we’d manage to do is to assume that which we’re trying to prove and thereby fool ourselves.

This gets us to the second claim. To reiterate, while it is true that economics is not a science “like” physics or chemistry (pertaining to the necessary differences in methodology), it is NOT true that economics is not a science in that it offers one right answer to a given question. If economics can not offer objective truths about universal causal relationships, then it would not be a science, it would be a canon of opinion and not worth studying any more than studying people’s opinions on the superiority of vanilla versus chocolate ice cream is worth studying. It would not be productive to write books about economics, it would be pointless to try to explain economics to other people and ultimately, any arguments or claims about one economic phenomenon or another would be arbitrary. This would be the position of philosophical nihilism in the realm of economics.

It’s hard to believe that this is what HJC personally believes or is advocating because it would then make most of the rest of what he has to say about economics empty of content and meaning. It would also make puzzling comments such as “95% of economics is common sense” as nihilism in any realm is typically not the common sense position, not to mention that the concept of “making sense” implies rationalizeable facts about reality. Yet, this is what this man, who is an economics PhD and responsible for instructing others in the philosophy, claims is the “state of the art.”

And thus we arrive at the third claim about economics which is almost the most puzzling of all. We’re admittedly early on in the book so I hope HJC is going to spend some time explaining the meta-epistemology of how one can know which circumstances call for the application of which economic arguments but it is already seeming like a muddled concept because we’ve rejected the idea that we can look at history as a source of theory about economics, and we’ve rejected the idea that economics is devoid of any content and meaning whatsoever and thus “non-scientific.” This would only leave one alternative to mind, that of logical deduction from axiomatic assumptions to arrive at conclusions which must be true.

It’s worth noting at this time that the Austrian school provides a special comment to this concept that economic arguments must be chosen and applied based on a specific moral or value-based perspective. The Austrians argue that to be scientific (“objective”), economics must be wertfrei, or value-free. That is, the knowledge of economics is not dependent upon the economist’s class, creed, race, nationality, personal preferences or other personal identifications. It is dependent upon logic which universally belongs to all mature human beings and is necessarily embedded in the biological structure of the mind.

Economics is not a tool for furthering a particular interest group’s agenda. It describes causal relationships between specific phenomena, ie, “If X, then Y” and it comments on whether specific ends aimed at can be achieved with specific means employed– NOT whether the ends aimed at are “good”, “right”, “holy”, “moral”, “desirable”, “valuable,” etc. For example, economics can help us understand the consequences of certain actions undertaken by human beings, but it can not tell us if those consequences are good, bad, etc. It simply tells us, “If you do this action, it will lead to this consequence, all else equal.”

I think this is a very different position than the one taken by HJC in the text and I look forward to exploring this idea and its implications in contrast to HJC’s claims further on as it seems inevitable he’s going to have to come back and explain this more eventually.

So what is economics?

From HJC’s comments so far, it’s unclear if he believes economics is a science. But because the book doesn’t end here, we’ll operate from the assumption for now that he believes it is a science. The question then becomes, what is the proper scope of economics as a science?

Here HJC levels his criticism mostly at popular, mainstream and “neoliberal” economists following what is termed neoclassical economics. Citing a contemporary (and former critic) of Keynes, Lionel Robbins, HJC says,

Robbins defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’

He claims that most economists

define their subject in terms of its theoretical approach, rather than its subject matter

based off of Robbins’ logic. In other words, economics is a study of “rational choice” and focuses on the calculations entertained by people choosing between specific means to achieve specific goals in a variety of circumstances (choosing a spouse, choosing what to eat, choosing where to work, choosing what to invest in).

In contrast, HJC offers his definition of economics:

My belief is that economics should be defined not in terms of its methodology, or theoretical approach, but in terms of its subject matter, as is the case with all other disciplines. The subject matter of economics should be the economy – which involves money, work, technology, international trade, taxes and other things that have to do with the ways in which we produce goods and services, distribute the incomes generated in the process and consume the things thus produced – rather than ‘Life, the Universe and Everything’ (or ‘almost everything’), as many economists think.

In other words,

what we want from economics is the best possible explanation of various economic phenomena

It’s hard to argue with the idea that economics should be defined by its subject matter like any other science. Of course, the preceding paragraphs in the book up to this point are a litany of potential subject matter according to HJC versus those he criticizes in the neoclassical mainstream, which seems to beg the question.

And HJC even makes a point about subject matter that Austrians would sympathize with, namely that

The economics profession, and the rest of us whose views of the economy are informed by it, need to pay far more attention to production than currently [because] production is the ultimate foundation of any economy

This is a criticism leveled by Austrians at Keynesians with regards to macroeconomics, namely that there is an undue focus on consumption patterns and an incorrect emphasis on consumption (“aggregate demand”) as the driving energy of an economy without study or consideration of the productive activity necessary to enable it.

As a matter of comparison, it’s worth considering the thoughts of Austrian economics patriarch Ludwig von Mises on the questions of whether economics is a science and, if so, how to define it. The following passages are from Mises’ 1949 “Human Action“:

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.

Thoughts so far– economics is a science, it is the youngest of sciences, it revealed new knowledge about observed market phenomena and this knowledge was separate and distinct from existing sciences (that is, economics is not a branch of a then-existing science, such as psychology). Mises continues,

Philosophers had long since been eager to ascertain the ends which God or Nature was trying to realize in the course of human history. They searched for the law of mankind’s destiny and evolution. But even those thinkers whose inquiry was free from any theological tendency failed utterly in these endeavors because they were committed to a faulty method. They dealt with humanity as a whole or with other holistic concepts like nation, race, or church. They set up quite arbitrarily the ends to which the behavior of such wholes is bound to lead. But they could not satisfactorily answer the question regarding what factors compelled the various acting individuals to behave in such a way that the goal aimed at by the whole’s inexorable evolution was attained.

Whether or not we define economics by its methodology, it is clear that in Mises’ mind, the discovery of a valid method for economics was one of the critical pillars of its emergence as a science. Prior observers witnessed mass phenomena, but had no method for explaining how component behavior led to the mass phenomena. Again, Mises continues,

Other philosophers were more realistic. They did not try to guess the designs of Nature or God. They looked at human things from the viewpoint of government. They were intent upon establishing rules of political action, a technique, as it were, of government and statesmanship. Speculative minds drew ambitious plans for a thorough reform and reconstruction of society. The more modest were satisfied with a collection and systematization of the data of historical experience. But all were fully convinced that there was in the course of social events no such regularity and invariance of phenomena as had already been found in the operation of human reasoning and in the sequence of natural phenomena. They did not search for the laws of social cooperation because they thought that man could organize society as he pleased.

If there are no “regularities in the sequence and interdependence of market phenomena”, that is, no universal scientific laws of cause and effect, then any social schemer’s vision for reforming society should be possible. The only thing that could get in the way of such a scheme would be purposeful obstruction or moral flaws in the individuals in society with whom the scheme is concerned. Instead, says Mises,

The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be–this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.

Now we’re getting into the juicy part of the epistemological differences of the Austrians and an economist like HJC. First, Mises is describing the history of philosophy here. He is talking about the historical emergence of economics as a scientific discipline a couple hundred years ago (writing in 1949, he would be relating events that took place from approximately 1749 onward, and he is purposefully glossing over the proto-economic thought of groups like the Spanish scholastics as well as various contributions made by those in the Eastern philosophical traditions) and the impact on social thought and social events that followed. Consider, for example, HJC’s reference to Adam Smith’s “The Wealth of Nations”, which put forth one of the first serious philosophical challenges to the then predominant “mercantilist” thought of contemporary political economy, a “technique of government and statesmanship” as Mises termed it.

Second, consider how radical this emergence was then, and how radical it is in the face of what HJC is saying now. As we will see very shortly, HJC provides a revisionist “history of capitalism” and spends most of his effort trying to make the claim that much or most of what is historically appreciated as the capitalist industrial development of the Western world did not occur via free markets and free trade, but rather through a series of calculated tariff and other regulatory structures, “techniques of government and statesmanship.” The Misesian/Austrian argument, then, is not that Western capitalism was developed through state intervention but that the remarkable economic development of the West took place in spite of these “techniques of government and statesmanship” which were implemented in ignorance or disregard for the existence of “regularities in the sequence and interdependence of market phenomena”.

Finally, then, note that Mises is directly supporting the claim that economics is a science with discoverable, constant laws of cause and effect (like physics) and therefore “one truth” in answer to a given question, but that the methodology of economics is not based on empirical experimentation (unlike physics) and that it was the radical departure from “ought” and the new focus on “is” that allowed economics to emerge as an objective and true science. This is somewhere close to the polar opposite claim HJC is making when he argues that economics involves learning to figure out which of many competing intellectual school’s claims should be applied as an explanation to a given set of observed economic phenomena based on their pre-existing moral or value systems (“oughts”).

And Mises does HJC one better:

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action,praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.

Now this is powerful stuff and, based on HJC’s lampooning earlier in the chapter of “Economics: A User’s Guide”, the author would likely find this perspective quite challenging at first. As HJC laments, economists seem to think that economics explains “life, the universe and everything.” To this point, Mises replies, “No, economics does not explain this– but praxeology comes close.”

Now is probably a good time to refer to my notes from “Lecture 1” of the 2014 Rothbard Graduate Seminar. For Austrians, praxeology is the broader science studying all human choice (“rational choice” from earlier?), of which economics is a dependent part and probably best developed. Political economy would also be a branch of praxeology, or as Austrians refer to it, the theory of violent intervention in the market (although it’s questionable whether war is a subset of praxeology, or of violent intervention in the market). And within economics, the area best developed and most relevant for the purposes of most people on planet earth, yesterday, today and tomorrow (sorry, Zeitgeisters/Singularityists/Post-Scarcity Societyists) is the branch of economics known as catallactics, or the theory of exchange and especially money exchange.

In future book blogs, these particular issues of methodology and epistemology will undoubtedly be returned to as they form the core disagreement between most economic schools of thought, including HJC, neoclassicalism and the Austrian school. In the next installment, we’ll move on to HJC’s revisionist treatment of the “history of capitalism.”