A Personal Exploration Of Income, Consumption, Savings and Taxation

I thought it’d be interesting to explore my personal budgeting efforts in broad terms to illustrate some of the problems with mainstream public thinking about personal incomes, taxation and “hoarding” of savings by the rich. Now, I am not rich, but I do alright and I think I am safely in the “productively contributing to society and paying more than my fair share” so I think my example can be illustrative for the principles involved.

I took a look at my budget sheet for the full year, 2015, and in terms of percentages it broke down like this:

  • Personal consumption, 35%
  • Savings, 33%
  • Taxes, 32%

A few things should be noted right away. The first is that these taxes are directly levied on my income at the time I get my paycheck, this doesn’t serve as a comprehensive register of all taxes I paid, such as sales tax, gasoline consumption taxes, etc. The second is that I included my tax refund for 2014 in my income for 2015, which makes my income higher than it would be and raises my savings rate while lowering my tax rate. I’m not going to make a big deal about it, but it is there and it actually makes my tax rate and my savings rate closer to even, if not swinging more toward taxation.

Taking my percentage rates as above, the way to think about it simply is that for every $100 I earn in income, I enjoy personally, in the present, $35 worth of it; I pay $33 to the government; and then I save/”hoard” $32 of it, which we will get into more detail below. But the immediate idea is that I earn $100, but I actually only get immediate benefit from $35– you might already think that is too much and I shouldn’t get to enjoy so much of my own money, but it’s worth belaboring the obvious point that I don’t spend $100 if I earn $100, I spend a fraction of it and for me, that fraction is about 1/3rd, meaning that a majority of my income is not something I personally, immediately benefit from. This principle would extend to any other person based on their rates of consumption, savings and taxation, including “the rich”, and I would imagine for “the rich” their consumption percentage would actually be much lower than mine (because it gets really difficult to spend large amounts of money on personal consumption), while their rates of taxation (assuming they don’t have a sophisticated tax sheltering scheme) and savings are higher than mine.

Let’s look at that tax portion of my income at 32%. One way to look at what I pay in taxes is to say that I derive valuable use of goods and services provided by the government — roads, police and firefighter services, public utilities — and my taxes are a user’s fee for these items. Of course, virtually no government services (not even roads and highways via the gasoline tax!) are 100% funded by direct charge of fees on a pro rata basis, so this is a strange argument. In addition, most governments at the state level, and certainly this is true of my current state, and the federal government, run consistent budget deficits, which means they spend more than they take in on tax revenue. So if we want to look at it as “user’s fees”, it’d be a weird situation where you are charged only part of the cost of your use, and then some financier makes up the difference by lending it to the service provider who plans to charge you for the rest of your use at some date in the future.

Another thing to consider is that some people make use of government goods and services without paying anything for them. In cases of direct welfare subsidy, this is obvious and purposeful, they’re never meant to. In other cases, people simply make more use because of their behavior than they pay into the system, because of their income generation efforts. For example, someone might call the cops all the time, or have ambulances summoned on their behalf with greater frequency, or be a much bigger user of Medicare, than what they pay in to the system. Without making a moral commentary on this, it’s clear that looking at taxation as a “user fee” is not really a reasonable way to considering things because some users aren’t paying anything and using it a lot, and other people are paying a lot and not using much (hint: I’d skew more toward that end of the spectrum, I can’t remember the last time I made use of or was the “victim” of emergency services, I drive on the roads less than most people because I work close to home, hate traffic and spend a lot of time reading on my couch, and I generally pose a lower risk/cost to other members of my community while being more productive than average — based on income).

The point of all of this is to support the idea that, of my annual tax contribution, I do not get 100% of the benefit but only some fraction. It’s not easy to calculate what that fraction is (is it greater than 50%? Less than 50%?) so of the 1/3rd of my income that I pay in taxes, some portion of it doesn’t benefit me but other people.

Now let’s look at the savings portion. This is the part that always trips up the income-worrier crowd. Savings are interesting because clearly, for savings to be accumulated, one must abstain from direct personal consumption in the present, right? To have $1 of savings, that must mean I had the opportunity to spend $1 on my personal enjoyment but chose not to do that. It’s possible that at some future date I will make use of that $1 of savings, and so my savings are a form of “time-delayed enjoyment”– but it’s also possible I never get to, either because I die, or I lose them through increased taxation or inflation, or I simply choose not to do so either to maintain my optionality in perpetuity, or because I want to deploy my savings in an investment.

If I decide to invest my savings, I do so because I have the expectation of earning a return over time. One could argue that earning myself more resources is a benefit to me and thus my savings are providing me personal enjoyment, but again, unless I directly consume the return as future income, it will just end up funding taxes or funding my growing savings (and investment) in which case I get no direct personal benefit from the resources. But if I don’t get any direct personal benefit during this process, who does benefit?

An investment of savings is a method by which an individual or group of individuals with a profitable social project can make use of the saved resources to fund their project. I might make a loan to a company, or buy some of their equity, which they then use to buy supplies, pay workers, cover rent, etc., in the course of providing valuable goods and services to other people. For example, all “public companies” that can be bought and sold in the stock market are funded by the investment of savings provided by people like me, who choose not to spend all their income and instead turn over some of their resources to these companies who use them to: serve people coffee (Starbucks) or hamburgers (McDonald’s) or build housing (Lennar) or provide mobile telecom networks (Verizon), etc. I might be a customer of one or many of these companies myself and thereby earn a small incremental benefit from their existence, but the point is that these companies are primarily serving other people than myself and so my savings, in so far as they are invested, are not being used for my benefit but for other people’s.

So what if we go back to my rates of “spending” (consumption, savings and tax) and start adjusting them. My consumption is lower than it appears, because part of what is baked into my spending is sales taxes I’ve paid on purchases which fund local governments. Although the average sales tax rate is higher than this, some of my spending is comprised of things like rent which do not have an explicit tax component I pay (that is paid as property taxes by the property owner) so it might average out to about 4% of my total income. My consumption is now 31% and my taxation component is closer to 36%. However, some portion of what I pay in taxes I personally benefit from as well. This is really hard to estimate but I think I could conservatively say that I don’t benefit directly from at least 25% of what I pay in taxes. So let’s add back 27% to my personal consumption, so I am at 58% personal consumption and 9% taxation on my income spending. We’ll leave my savings rate alone at 33%, and we’ll simplify our analysis by saying that I invest my entire savings in each period, which is very nearly true. I have good cash management practices so I don’t generally need to fund my personal consumption from my accumulated savings, and while I do keep a balance of cash for emergencies, it’s not under my mattress but in a bank account so it’s being loaned out (for essentially 0 interest!).

Using me as an example, then, we can see that in an annual period, I personally and directly consume about 58% of my income (via my own spending and benefits I derive from government-provided goods and services which I paid for via taxation) while I do not make use of 42% of my income in each period (via savings deployed as investment, and money that is taxed to fund government services for other people). For every $100 I earn, $42 is being consumed by other people.

What’s the problem with “hoarding” in this case? If my savings “hoard” increases, it just pushes the proportion of my income which benefits other people higher.

Also, what is the problem with me earning a higher income? I can only enjoy so much of it myself. As I earn more and more, it is harder and harder to spend it on my own enjoyment and I tend to use less and less government services as a percentage of what I pay in taxes, so the benefits are accruing largely to the rest of society. You might say, “Well, if you’re not using the money anyway, why not have the government tax more of it away from you, or legally restrict your income to a certain cap so others can be paid more?” but that misses the point that, assuming we’re talking about a free and competitive market, I created the value I earn as an income as evidenced by the fact that other people voluntarily give it to me in exchange. If you stop me from earning it, then I stop producing it and it doesn’t simply shift to other people in society to enhance their income, the real value of it disappears altogether!

As I said, I am not rich, though I do alright. But if I was rich, these numbers would just keep skewing further and further toward providing value to other people than myself. If I was earning a billion dollars a year (which is different from saying I am a billionaire based on asset value), would it be reasonable to believe I enjoy even $10M of (1%) my income as direct personal consumption each year? That is A LOT of government services, fine meals, first class air travel, fancy cars, etc. when we’re talking about pure, after-tax dollars. At that point, fully 99% of my annual income is providing benefit to persons other than myself. What is greedy about that?

This isn’t meant to be a defense of any specific wealthy or high-income individual. There might be a lot of people engaged in illicit or corrupt personal gain. I am trying to provide some logic about the general principle of personal incomes and who actually benefits from them. If anyone is “selfish” with their spending, it’s probably lower income people who pay zero to negative taxes and don’t manage to save much if any of their income. People with higher incomes and high propensity for savings are largely funding the enjoyment and well-being of people other than themselves.

The Nationalization of Commerce

To have production goods in the economic sense, ie, to make them serve one’s own economic purposes, it is not necessary to have them physically in the way that one must have consumption goods if one is to use them up or use them lastingly. To drink coffee I do not need to own a coffee plantation in Brazil, an ocean steamer, and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table. Sufficient that others own these means of production and employ them for me. In the society which divides labor no one is exclusive owner of the means of production, either of the material things or of the personal element, capacity to work. All means of production render services to everyone who buys and sells on the market.

~Ludwig von Mises, [amazon text=Socialism&asin=0913966630] [PDF], pg. 41

We often hear international events described in an economic context, such as a “war for oil.” So I often used to wonder why people thought it was important which country’s government controlled various resources around the globe. As the quote from Mises above demonstrates, one need not own or control a resource for one’s self to make economic benefit of it. Just like I can make beneficial use of the capital of Amazon by purchasing goods and services from it without owning Amazon’s capital myself, a country of people, like the US, can benefit from the oil “belonging” to another country, Iraq, without militarily dominating or conquering them.

In fact, the oil in Iraq isn’t of much value to the people in Iraq if they don’t sell it to other people outside of Iraq.  A place like Iraq is so rich in oil resources that there is far more oil there than the people of Iraq will ever conceivably need or use. Meanwhile, they’re relatively poor in other valuable goods, such as foodstuffs which can’t be grown in their arid landscapes, or manufactured computer electronics, which they might lack the local expertise or even capital structure to produce on their own. By trading their oil for these goods, they’re better off, their trading partners are better off, and each gets the benefit of the other’s “means of production” without politically controlling them.

So how can we make sense of things like a “war for oil”? If not the economics of the market, where do these claims for the need for national governments to control resources and commercial transactions stem from?

I can think of three related phenomena:

  • the need for tax revenues by States
  • the need for war material by States
  • the need for direct revenues by States

The first idea is probably the primary driver of the argument for control. Except in special cases, most States at most times are only capable of levying taxes on the assets and incomes of their own citizens. For example, the government of Spain can not tax the citizens of France. Now, they may attempt to enforce laws which allow them to tax the citizens or companies of France operating within their own political boundaries, ie, a French citizen working in Madrid, or a French company operating a factory in Valencia. But the Spanish government is unable to tax a French citizen working in Paris, or a French company operating in Singapore.

But all governments, all the time, desire more tax revenues rather than less. So how to generate tax revenue on economic activity occurring outside a State’s political boundaries? By affecting a change of control of the assets or income streams of “foreign” entities, either by treaty or by war, a State can come to mulct a greater sphere of economic activity than simply that which exists within its outstanding political boundaries.

An Iraqi oil company operating wells in Iraq does not generate tax revenues for the US Treasury. But a US oil company operating wells in Iraq does generate tax revenues for the US Treasury. While in a broad economic sense it doesn’t matter to a US citizen (or an Iraqi citizen) which company controls the oil well, in a political sense it matters a great deal because it means a difference in where the tax revenues go (we’re simplifying our analysis here by assuming a similar level of technical competence, reinvestment rate, tax rate, corruption/wastage rate, etc., regardless of which national operates the well). The need for greater tax revenues incentivizes all states to prefer economic assets and trade flows to be controlled by their own citizenry and companies.

The second idea is reserved for the specific instance of war and highlights the strategic value of the national identity of an entity exploiting a resource. For example, most civil aeronautics legislation in most countries of the world contains a clause which restricts the foreign ownership of “local” commercial airlines operating large passenger aircraft inside the country. An airline like Virgin America, whose routes are primarily between locations in the US, might be restricted from being majority owned by a foreign national entity. The reason for this is that in the event of war, it is of strategic value to the United States government to be able to “mobilize” commercial passenger aircraft and commandeer them for transporting troops, supplies, etc. If these aircraft were majority owned by a foreign national, they might be able to legally escape them from the United States, or bring suit by their government for an act of theft. It could even lead to a declaration of war by the foreign national government. The need for war material, then, means it is extremely important for a State to have these assets owned by their own nationals to avoid strategic complications during a war. Otherwise, what would it matter what percent of an aircraft is owned by a foreigner?

The final idea is simply a reframing of the first. In some countries, the tradition or institution of direct taxation is weak or non-existent, and the State funds itself by actively controlling economic assets and using the revenues to fund its general budget. For example, Venezuela has a national oil company, as does Saudi Arabia– a large part of the State’s budget comes from the oil revenues generated by direct control of these companies. In that case, the State has a strong incentive to try to directly control economic assets to fund its operations; instead of being concerned about its national companies exploring and operating oil wells in “foreign” jurisdictions, then, it itself is concerned with such activity.

I call these ideas the “nationalization of commerce”, because it helps to explain the political reasons why the national identity of various commercial entities is important, when clearly there is no economic reason. I believe the nationalization of commerce also helps us understand why it is so rare for a State to participate in a true free trade arrangement– agreeing to free trade means letting the market dictate which national commercial entities are most successful at owning and operating assets and determining trade flows, which means the States involved have to adjust to accepting whatever tax revenue might come of such patterns which might develop within their political boundaries, and nothing more.

Review – The School Revolution

The School Revolution: A New Answer for Our Broken Education System

by Ron Paul, published 2013

I got a lot of ideas from this book, so it will be difficult to rate it poorly but ultimately I believe that is what it deserves. The book is repetitious, poorly organized and lacks flow, which is exacerbated by the suggestion to send emails to various “@aweber.com” email addresses for more information about the Ron Paul Curriculum– it’s almost like reading a poorly-done web marketing pitch page as a book.

Also, I am pretty confident this book was ghostwritten by Gary North. Gary North is one of the people behind the Ron Paul Curriculum, the RPC website looks identical in layout and voice to Gary North’s website (right down to the weird bursting red orb icon that displays in the title tab of each site on my browser) and the repetition and constant reference to “the principle of X is: italicized principle for effect“, which is a Gary North trade mark. That’s disappointing for two reasons: first, Ron Paul, if he’s actually written most of the other books of his I’ve read, is a decent author in his own right and certainly his way of making a point is unique, so it’s a shame to not really hear from him in a book with his byline; second, Gary North is actually a great writer himself (his Mises on Money is a great summary/intro of Mises’s voluminous writings on the subject, and his web essays on economic subjects are thoughtful and methodically argued) but it just doesn’t show up in this book, which makes him seem like a poor communicator because he is constantly repeating himself.

So that’s what’s primarily wrong with the book and that’s why it’s going to get a low score from me. But as I said, it gave me a lot of ideas, so I still felt the need to record my thoughts more extensively and what better place than this review?

Paul/North have not provided us with a well-researched book on the history of the “rise and decline” of the US public school system. Nor have they provided us with a careful logical demolition of the philosophy behind our current compulsory public education policy (or shown us its Prussian heritage, or how it is designed to serve special interests and not local communities), or investigated the collapse of urban school districts into chaos, violence and low test scores. They mostly take it as given that if you’re reading the book, you understand the public education system could be improved upon in one way or another and you’re sympathetic to cutting ties with it in the meantime.

This book is not a recipe or handbook for reforming or revolutionizing the educational system in this country as it stands. It offers no panacea for the system itself. Instead, it suggests something simple: go around it.

The author(s) believe that, much like UPS and FedEx carry the truly valuable mail while the USPS schleps around coupon books, catalogs and other junk mail marketing offers no one asked for or intended to receive, the advent of the Internet as an even-lower-cost mass communication medium will allow people who want to have a great education from a top-tier provider get one, and no local district admin or state bureaucrat or federal educational gestapo can say nay or get in the way, devil take the whole system.

And surely there is something to this. As the author(s) points out, Harvard, MIT, etc. have already put their imprimatur on the movement by giving free access to their best lecturers on the web. Coursera is one of many other providers competing to provide similar access at similar prices to not-quite-top-tier but pretty close lecturers and content, and then there is the Khan Academy which is seeking to address K-12. While quality, format and specific content may differ, what is similar about all of these services is that they are voluntarily provided and are competing for their audiences, whereas government schooling is a monopoly.

The other key piece of the puzzle is who is financing these education systems. With the government, it is tax-financed. You’d think this means tax payers thereby control the system, but that’s the funny thing about government and anyone who isn’t totally naive understands it doesn’t work like that– the tax payers donate, the government does the honors. With these other systems, investors, entrepreneurs and nominally-private (ie, the major research universities) teaching institutions are the financiers and, to the extent that the consumer is paying for it in some way (ads, prestige, subscription fees), they get to call the tune. Without changing the funding method of education, it will be impossible to change the values reflected in it nor the structure by which it is conducted.

There is no need to critique the argument too tightly here because I think it’s very sloppily made, even though it could be done in an airtight, holistic fashion. The point is simply that there are ways to get around the public education system if one wants to, and I want to, and utilizing free or low-cost curricula offered on the web is likely going to be part of the tool kit for me and many others. The point is to be the change and not wait for permission or for someone else to make a horrible monopoly better.

There are a lot of forceful ethical claims in the book that I think are worth noting:

  • As individuals mature, they must accept greater responsibility for their actions
  • If we want people to believe we are serious (about reforming the world), they must see the consistency in our own lives
  • The statist educators are committed to this principle: parents are not trained nor competent enough to make decisions about their children’s education
  • If parents understood that they are responsible for their children’s education in the same way that they are responsible for their feeding, housing and clothing, we would see far more attention given to the content and structure of educational programs

These are claims I agree with. I think it’s impossible to resolve these things with public education. So we are going to opt out.

One thing I wondered about was starting an alternative (privately funded) school. One problem revealed to me by this book is that in so far as it’s an “institution”, it’s going to get tangled up in a lot of the same problems that plague the public education system controlled by bureaucrats and regulators. Another problem (besides making the economics of it affordable) is that schools and lecture-based education cater to the least common denominator in the class (that is, the slowest student). The other students who are picking up the material quickly are left frustrated by the process. I was one of those students growing up, and it was miserable.

It may be that creating an alternative school is not a practical solution to the problem. It could also be that the alternative school would need to greatly rethink the method of schooling in general to be successful. One thing the author(s) suggest which is a novel idea for me is that the purpose of education is to promote the capability of self-learning. I say this is novel in that I have hovered around this belief for some time and even see it as core to my philosophy of parenting, summarized as follows: parents bring children into the world, without their permission, in a state of total dependence; the process of maturation and growth is a process of increasing independence; the parents’ obligation is to aid the child in the process of learning and self-discovery that will allow them to incrementally gain their complete independence; ideally, the parents’ could provide such an appealing moral example that they could also instill in their child the primary socialization value of interdependence, as well. Therefore, this idea of the purpose of a formal educational program aiming at teaching children how to learn whatever it is they want to learn, makes total sense to me.

If the early part of one’s education is centered on meta-learning (how to read and take in new information, how to think about it analytically, how to synthesize new information and understanding from it, and how to communicate it to others), then there is a point in the curriculum of the student where they can take the initiative in their learning and become self-guided and autodidactic. This principle dovetails with the idea of education as an act of self-discovery. Self-discovery can not occur when the self is incapable of thinking and learning on their own.

The book has some specific suggestions about important elements of such a curriculum:

  • Reading
  • Writing
  • Public speaking
  • Digital media
  • Academic research
  • Time management
  • Goal-setting
  • Job vs. calling
  • Study habits
  • Mathematics
  • Self-pacing
  • Tutorials

You can see quite clearly that this curriculum is aimed much more at the tools of self-learning, rather than specific values or content within categories like “Art, History, Science” etc. (although the author(s) does suggest that part of the advanced curriculum he offers for older students includes specific content tracks that explore these categories in integrated ways based on the student’s interest). So one idea I got from the book in this regard is that I need to do some research and thinking about the curriculum I will follow with my children, at least early on in their education, to try to best prepare them to become self-learners.

Another interesting idea for an improved school is as a gathering place for tutorial groups of exceptionally talented and motivated students to pursue a kind of “Socratic dialog” based study of a subject, or as a place to be introduced to new or important ideas. The author(s) suggest that the method of lecturing to students to teach them material is outmoded and ineffective (only 10% of the lecture is retained, on average, 3 weeks after it is received, and which 10% varies per pupil). But they suggest that lectures if short and interesting CAN be useful for informing people of a subject they didn’t know existed or for exciting an interest in the usefulness of studying a particular subject, which they could then engage in a course of self-directed learning on their own.

One way to think of how this might apply at an alternative school is that rather than fixed courses with fixed classes and the same teachers droning on, students might pay for individual intro lectures for subjects they’re considering studying, performer by visiting scholars or experts who are actively trying to promote the topic as worthy of study. The school might also have classes which apply a particular methodology for a particular purpose (ie, a Montessori seminar for young students). Finally, as suggested, the school might be a common forum for tutorial groups of excellent students to meet, discuss and coordinate study on a focused topic of inquiry.

There were specific things in the book I also really liked. The author(s) is a big proponent of essay writing as a way of practicing the understanding of specific content one is learning about. The suggestion was for the student to start a blog and write essays or blog posts about what they’re learning, not necessarily a journal but more as a kind of conversation or demonstration of what they think the meaning or import is of what they’ve learned. They also recommend the use of YouTube and other social media to practice these skills, practice conveying ideas, and to interact with others with similar interests. Their specific approach is based around creating “leadership”, which is another important value for me that gives me ideas about how I would want to approach this with my own kids.

I also like that the book emphasizes individuality and reminds the reader that every student is different and part of designing a good educational program means paying attention to their individual needs– again, not an idea that gets much attention in the public system, nor can it.

One thing I thought was bizarre about the book (and the values of most parents in general) is its suggestions on how to make the acquisition of a college degree by homeschooled children affordable and achievable in an accelerated fashion, ie, around age 18. Higher education is largely a scam that wastes time and money and leads to enormous confusion of values and purpose. If you could successfully help a child to gain mastery over their own learning at a young age and watch them develop their own interests and knowledge for an extended period of time, I don’t understand why college (either the acquisition of a degree, or the social experience itself) would be beneficial or interesting for them at that point. What can they get from college that they can’t get on their own pursuing a career, starting a business, etc.? That seemed like a sop suggestion to the parents reading who want to do something radical but aren’t ready to completely intellectually flip out.

With any luck, my children will be holding down part-time jobs and/or entrepreneurially making money WHILE they’re pursuing their youthful education. They’ll come to my business and see and learn what I do and be a part of it or do something else they fancy. There won’t be a sudden point at which they stop being a student and start being a self-paying adult; ideally, they’ll incrementally gain both capabilities at once and continuing their life immersed in self-directed learning, growth and productive gain.

This approach might not be right for everybody, but then, I don’t think public education is right for anybody, so you could certainly do worse.

Notes – The 2014 Rothbard Graduate Seminar

In 2014 I attended the Rothbard Graduate Seminar at the Ludwig von Mises Institute in Auburn, AL as an observer. The following are notes I typed while listening to lectures and discussions between faculty and graduate students. They have been edited for clarity, organization and in some cases privacy.

Lecture 1, Praxeology, David Gordon
  • Praxeology is the science of human action, uses deductive methodology, begins with axiom of man acting, deduced with supplementary postulates (Rothbard uses action axiom, Mises never refers to “Man acts”, he refers to the concept of action)
  • Supplementary postulates: leisure is desired over work, there are a variety of economic resources
  • Economics is the best-developed branch of praxeology: Crusoe economics (isolated human action), catallactics (economics of exchange) including barter and money
  • The study of violent intervention in the market, socialism and interventionism, are also part of praxeological analysis, as well as “games”, but these have not been well-developed (no systematic treatises?)
  • Examples of praxeological reasoning— every action uses means to achieve an end; every action is a choice between alternatives; the actor always chooses his highest valued alternative
  • Methodological individualism— only individuals act, not groups or societies or nations or classes, however this doesn’t imply that nations and classes don’t exist
  • On Austrian Methodology” by Robert Nozick, an interesting article
  • Methodological Individualism has been used to deflate various ideologies such as nationalism, statism, etc.
  • Why should we do economics this way (praxeology)?
    • Popular objection: principles of praxeology are supposed to be synthetic (truth about the world) and a priori (knowable by simply thinking about them), but you can’t learn about the world just by thinking about it, the meaning of concepts is conventional, people just decide to use words a certain way, you can’t make something true about the world just by defining words, other a priori truths are logical and tautological that say nothing new about the world
    • Rothbard’s answer: concepts come from experience, action isn’t an arbitrary construction but rather an abstraction from experience, if we get the concept from experience we know action exists, then anything we deduce from that applies to the world, deduction transmits truth from premises to the conclusion, if the premises are true the conclusion is true
    • Tautology objection: rests on an equivocation
    • Rothbard’s objections to the mainstream: they construct mathematical models and then test predictions derived from the models; math substitutes functional relations for causation, also introduces the false assumption of continuity but human action occurs in discrete steps, he objects to the testing because there is no way to perform controlled experiments as all phenomena are occurring simultaneously, and there are no quantitative laws of human action, human action is the product of choice

Questions:

  1. In property rights theory, how can joint ownership (or government ownership) of a resource be explained if “only individuals act”?
  2. How do we know the experience of action is true? Don’t we need a prior theory to interpret the empirical experience of action as action?
  3. Can Austrian economics be translated into math? If not, does this suggest it is not rigorous or coherent?
  4. Why is the Austrian ERE a useful abstract tool for studying elements of reality in isolation, but the “equilibrium” economy of mainstream thought is not?

Discussion session:

Rothbard’s book (Economic Controversies) had great depth, not just covering epistemology and economic theory but historical commentary, etc., this book is also digestible, repetitive so you get the same concept dissected from different angles, straight to the point, challenges the mainstream orthodoxy, accessible to the layperson, Rothbard starts with realistic premises and deduces from there which makes this approach even more empirical (econometric models falsify the real world), his criticisms are very thorough and you want to smile after you read them which is unique in reading academic papers. Rothbard isn’t ashamed to say there is meaning and truth.

Methodological individualism applies only to the concept of action, it does not exclude the idea of something like a “cosmic consciousness”, there is a difference between ontological and methodological claims; praxeology is not a metaphysical system, it simply takes the world as we find it

Mathematical annotation is more precise than verbal logic, but one problem is how do you convert initial premises into mathematical annotation (and back when a conclusion is reached)?

“Academic choice”, public choice analysis applied to the incentive structure of academia and how this influences their search for truth

Lecture 2, Methodological Debates, Jeff Herbner
  • Every academic discipline is defined by its method and scope (boundaries).
  • Rothbard— Each subject matter has a proper method; neoclassical approach— there is only one scientific method.
  • Praxeology’s divisions:
    • Theory of Isolated Person (autistic exchange)
    • Theory of Voluntary Exchange
      •  barter
      • medium of exchange (catallactics)
        • unhampered market
        • violent intervention
        • violent abolition of market
    • Theory of Games
    • Theory of War
    • Unknown
  • Neoclassical divisions:
    • Rational choice model
      • Market participants
      • Political participants
      • Social participants
    • Behavioral economics
  • Categories of the social sciences
    • Economics— voluntary associations w/ economic calculation (UME, HME)
    • Sociology— voluntary associations w/o economic calculation (family, church)
    • History— contingent, concrete conditions of action blended w/ theory
    • Ethics— personal action, interpersonal action, voluntary and involuntary
    • Politics— involuntary associations (gangs, states)
  • Praxeology— logic of action, economizing, underneath all 5
  • Praxeology and Ethics— public policy (economic science is value free, but economic policy is value laden and requires assumptions or principles about ethics and what is desirable to make conclusions), critique of ethics, political philosophy, welfare economics
  • Misesian Economics— a.) economic theory b.) economic history (understanding economic action in the past) c.) applied economics (predicting economic effect in the future based on proposed economic cause, i.e., policy)
  • Neoclassical Economics— economic model and empirical testing

Questions:

  1. Is the division in economics between calculating and non-calculating, or financial calculation and non-financial calculation? How are non-calculating actors choosing if not by some form of calculus?
  2. Who has best developed Games and War theories of praxeology?
  3. Why aren’t Austrians trying to develop comprehensive treatises in these fields
  4. What is the application of game theory?
  5. How do you know when a circumstance is new and requires an extension of the existing theory, or when it is “unoriginal” and can be explained by the previous body of theory? How do we know when existing theory can’t explain a new phenomenon or historical incident? How is this explanation different from the pragmatist argument about a lack of common principles?
  6. Who, if anyone, is worth reading right now outside of the Austrian tradition, and why?
  7. How can “proportionality” be administered in a judicial punishment setting without treading into utilitarianism or other non-subjectivist value systems?
Lecture 3, Austrian Microeconomics, Peter Klein
  • Price theory, production theory, the theory of the firm, some parts of capital theory, etc., constitute “Austrian micro”
  • It is not mainstream micro minus calculus and some graphs plus “spontaneous order” and “radical subjectivism”, etc.; this is a misconception of the contribution of Austrian econ
  • Mengerian economics— focused on mundane topics, not esoterica; shares subjective utility and marginal analysis of Walras and Jevons; not simply verbal version of neoclassicism, emphasized cause and effect real market behaviors and thus “causal-realist”
  • Fundamentals of Austrian micro— economics as the analysis of action (praxeology); teleology, means and ends; economic goods which are concrete (real prices of real goods, not abstract prices of conceptual entities) and are limited and desirable, split into consumer and producer goods (direct and indirect serving of human needs); time, implied by action, itself a scare means and the notion of time preference; production is rearrangement, not creation ex nihilo, takes time and uses stages
  • General insights on valuation include emphasis on discrete, marginal units, not abstract categories, as well as attention to demonstrated preference
  • Menger’s utility theory— the value of particular means, marginal utility being the value of the highest-ranked end that cannot be achieved if a unit is lost, law of diminishing marginal utility (not a psychological concept, a logical concept focused on individual use of each unit not the benefit)
  • Contrasts with neoclassical utility theory— consumers in NCM are choosing among heterogeneous bundles, choosing between total utility of each bundle; marginal rate of substitution is rate at which consumer substitutes unit of good X for unit of good Y (slope of indifference curve) vs. causal-realist where substitution occurs at the margin and demonstrates that the marginal utility of X is greater than the marginal utility of Y w/ no separate income or substitution effects; indifference can not be demonstrated in action and is therefore not a scientific concept (focus is on explaining actions, not states of being)
  • Price determination— analysis of the marginal pairs (see Greaves, paper by Egger) states that prices are set by pairs of buyers and sellers; characteristics of the equilibrium price, determined exclusively by individuals’ subjective valuations, subjective valuations of buyers and sellers matter, not set unilaterally by sellers, the real prices actually paid in market transactions
  • Prices and knowledge— buyer and seller valuations can include speculative demands (they don’t need to know in advance what equilibrium price will be), prices as signals (Hayek)
  • Factor pricing— Austrian theory of imputation, rental prices imputed backwards to the ???
  • Applications and extensions— no distinction between production and “distribution” (Piketty), wealth is “distributed” in the act of production, it is not produced and then arbitrarily distributed by capitalists, government, etc.; rent = unit price of services of any good (Fetter); production functions, but no cost curves; firm as an organization, not a productive unit

Discussion section:

Kirzner and Schumpeter restrict entrepreneur to nothing but alertness, the Misesian approach is more expansive and includes everyone in some capacity acting as an entrepreneur

Mises in Human Action talks about the entrepreneur as a leader, who is far-seeing, comes from Weiser, who also mentored Schumpeter; Mises was uncharacteristically fuzzy and unclear on his writings on the entrepreneur, occasionally he refers to the “promoter” (ideal type) involving leadership, having a quicker eye than the crowd, etc., but typically he refers to the function of entrepreneurship

Kirzner is talking about alertness to opportunities for profit, but entrepreneurs create goods, capital, companies, etc., not “opportunities for profit”, opportunity implies objective configurations of resources that allow for a decision or action or take place, but is this analogous in the business world? Or is “opportunity” a metaphor? Do we need the construct of “opportunity” to explain what entrepreneurs do?

Salerno, “The Entrepreneur, Real and Imagined” [PDF]

Kirzner’s equilibrium is the condition under which no unfound profit opportunities exist

Mises vs. Knight on judgement— Mises never refers to Knight in this context, judgement is more of a black box for Mises than for Knight

Klein, “The Capitalist and The Entrepreneur” [PDF]

Questions:

  1. If Austrian econ is not distinct, why do mainstream thinkers argue so violently with Austrians?
  2. Did the anglo-American Austrians, etc., self-consciously identify with the “Austrian school” or did we lump them in post hoc? If so, what did they refer to themselves as?
  3. When challenging Keynesianians and other mainstream opponents, Austrian critics often accuse them of “not understanding economic calculation”. Is this criticism accurate? Why or why not?
  4. Would it be better to distinguish between “offers” and “prices”, where “offers” are ratios of exchange advertised but not consummated, hypothetical, whereas “prices” represent historical data of consummated exchanges between buyers and sellers?
  5. Is Kirzner’s “capital-less entrepreneur” really a description of professional managers, and if it is, is it a legitimate analysis or does it still lack connection to reality?
  6. Is “public choice” an analysis of entrepreneurship in socialism, or in privatization within socialism?
Lecture 4, Taxation and Public Finance, Mark Thornton
  • Rothbard’s approach: nature of taxation; technical corrections to mainstream analysis; theories of “just” taxation; neutrality of taxation; approaches to tax reform
  • Interventionism: autistic (ruler tells the ruled what to do); binary (e.g., taxation, transfer of property from owner to intervener); triangular (ruler tells two ruled how they can interact with each other, e.g., prohibitions and regulations)
  • Impoverishment caused by taxation is in proportion to the amount of taxation, not the form the taxes take
  • Taxes can not be passed on to consumers because of competitive pricing of supply and demand
  • Taxation distorts market outcomes in two ways: the withdrawing of resources from the economy, and the redistribution of those resources across the economy
  • “Benefit principle”— pay taxes in accord with the benefits you receive
  • “Ability to pay principle”— pay taxes in accord with your relative wealth
  • There are no scientifically valid principles of taxation, there is no conceptually possible neutral tax

Discussion section:

How to explain countries where majority of taxes are paid by a minority of people, as Calhoun’s analysis suggests the majority bear the costs for a small minority to benefit from? The answer could be additional implicit subsidies such as protections from the State in terms of liability or regulation that they see taxation as payment for

Can the State make investments? Rothbard is writing against the idea of “social investment” such as infrastructure spending, and he is writing in terms of capital structure— they’re not integrated into economic calculation, they’re not part of the capital structure; counter-example, State-owned oil production

Questions:

  1. Why doesn’t taxation create business cycles due to mass misallocation of resources
  2. When taxes are “shifted backward” to suppliers through lowered net revenue, aren’t consumers STILL paying the tax due to lower supply and lower quality of remaining supply versus free market outcome?
  3. Why can employers shift taxes to employees if businesses can’t shift taxes to consumers?
  4. In the marketplace, how is price discrimination explained in reference to the benefit principle?
  5. Does the lack of scientificness of taxation principles imply the irrationality and injustice of government in general?
  6. “Over” and “under” exploitation of a government owned resource… relative to what? How do we know how much the free market would exploit it?
Lecture 5, Monetary Theory, Joe Salerno 
  • Money as a medium of exchange— trade requires barter in the absence of money, creating high search costs due to the double coincidence of wants
  • Money as unit of account— used to express prices and record debts, simplifies relative price comparisons
  • The value of money— measured as the inverse of the price level measured against an arbitrary basket of goods (i.e., 1/P), what does one unit of money buy?
  • The (neo-)classical dichotomy— the theoretical separation of nominal and real variables; Hume and classical economists suggested monetary developments affect nominal variables but not real variables; if money supply doubles, for example, all nominal variables, such as prices, will double; in the short run, supply and demand determine the value of money, in the long run cost of production determines the value of money
  • The neutrality of money— proposition that changes in the money supply do not affect real variables
  • Purchasing Power Parity (PPP)— relies on the “law of one price” which establishes that arbitrage opportunities eliminate differences in value of common goods in different markets; exchange rates are supposed to be ratios of price levels between two economies

Discussion section:

What Has Government Done To Our Money?” is Rothbard’s explanation of how an economy “progresses” from commodity to fiat money, because Mises said that a true fiat money is a historical question given that every episode in the past has been a form of “credit money” based on expectations about an eventual return to a commodity money that predated it

Questions:

  1. For a relative price to be a useful data, wouldn’t it have to be collected from a real exchange (i.e., barter exchange)?
  2. Do mainstream models explaining fiat money violate Occam’s Razor?
  3. If velocity of money is increasing, isn’t the “velocity of hoarding” increasing at the same rate because all money balances must be held by somebody at some time?
  4. If IEOR policy is causing banks to “hoard” bank balances and this is non-expansive, is this money “neutral” to the economy or what effect is it having? What role does it serve? (Compare to Jingjing’s question on corrupt Chinese official cash balances)

Lecture 6, Professional Strategies, Career Advice and Current Research Topics, Peter Klein

[I did not take any notes during this discussion.]

Discussion section:

[I did not take any notes during this discussion.]

Questions:

  1. What about pursuing a career as a “private lecturer” by establishing yourself as an authority on Austrian economics with a crisp website?
  2. How can Austrian economist career hopefuls improve their career by thinking in terms of their “personal brand”?
Lecture 7, Monetary Policy, Jeff Herbener
  • Monetarists— micro efficiency, but macro instability caused by monetary regime; optimal monetary regime would create stability in the price level; requires an elastic money supply to offset forces causing price inflation or deflation to keep price level roughly stable; avoid trade imbalances w/ flexible exchange rates
  • Monetary Disequilibrium Theory (MDT)— micro efficiency, macro inefficiency; means of payment must accommodate changes in money demand; avoid price deflation from excess demand for money; separate unit of account from general medium of exchange, supplant general medium of exchange with means of payment; competitive issue of means of payment adjust to accommodate changes in money demand;
  • Banking school FB— micro efficiency, macro inefficiency; money stock and credit supply must accommodate the needs of trade; avoid price deflation from excess demand for money; competitive issue of fiduciary media adjust to accommodate changes in money demand
  • Currency school FB— micro efficiency, macro efficiency; production of money and money substitutes should be integrated into the social economizing process of economic calculation by entrepreneurs
  • “Free banking” in Scotland— Rothbard suggests using Vera Smith’s schema of 4 groups (free vs. central banking Banking School, free vs. central banking Currency School) rather than Larry White’s 3 groups; there was no Banking School free banking in Scotland, and the system didn’t work well, numerous bailouts, pyramiding credit on top of Bank of England notes;
  • Free Market Monetary reform— separate money from the State; abolish fFed, dollar redeemable in gold, legal enforcement of 100 percent reserve on money substitutes;
  • Ancillary roles for the State— Hayek (Sennholz), abolish all legal disabilities on private enterprise production of money and money substitutes; Yeagar (Timberlake), state defines the unit of account in terms of market-basket of goods, the general medium of exchange is eliminated, private enterprise provides means of payment
  • Central role for the State— Fisher, state defines a market-basket of goods for the unit of base money, currency is redemption claim for base money, supply of currency managed to keep price level stable; Friedman, Fed conducts non-discretionary monetary policy to keep the price level stable

Discussion section:

[I did not take any notes during this discussion.]

Questions:

  1. What “problem” did the MDT respond to? Similarly, did the Monetarist framework develop in response to existing statist monetary regimes or was it to address perceived problems with a theoretical free market monetary regime?
  2. Does the existence of taxation in general complicate or prevent the possibility of private production of the money supply?
  3. Is “balance of payments” thinking by mainstream economists an anachronistic way of thinking in a non-commodity standard money world?
  4. Why do socialist countries have money? How does money function in these economies?
  5. How can the crash and then explosion in the price of gold since ~2000 be explained in Austrian monetary theory?
Lecture 8, Mark Thornton, Comparative Economic Systems
  • Hoppe’s A Theory of Socialism and Capitalism (1988)— systematic, offers a theory of comparative economic systems, based on the concept of private party
  • Capitalism— based on property rights; property is the result of scarcity; provides non-violent mechanism for resource allocation; Garden of Eden, property right to your body; original appropriation; contractual exchanges; wealth; absence of systematic aggression; no unemployment (idle resources) problems
  • Russian-style socialism— socialism par excellence; State owns the means of production; equality vs. anarchy of production; aggression and democracy; less investment, appropriation (black market); calculate the structure of production = waste; Mises (1920) complete vs. relative; East vs. West Germany
  • Social democratic socialism— “reform”, taking steps at the ballot box; “commanding heights” (the sectors deemed essential by socialist planners for control such as education, utilities, transportation networks, etc.); owners remain caretakers with partial ownership; property owners taxes for redistribution; dominant form in Europe; Sweden
  • SDS vs. Russian-Style and Capitalism— solves the calculation problem; compared to Russian, less impoverishment, less over utilization of resources, more leisure, more incentive to work, save and invest; but it’s still poor compared to capitalism; both reduce production of talent and skills, increase the production of aggressive and political skills, both increase barter and black market activities
  • Conservative-style socialism— supports status quo, old order; private property, commanding heights; sin taxes, not income taxes; price controls, unions, prohibitions, not redistribution; regulations and cartels; Nazi Germany, Fascist Italy, Imperial Japan (Prussian social monarchy?)
  • Similarities between conservative and social-democratic socialism— both have private property and commanding heights; both infringe on private property; both have negative effects on labor, savings, investment, innovation; SDS stresses egalitarianism, CS stresses nationalism; both underperform capitalism
  • Socialism of social engineering— American pragmatism, technocracy; positivism and empiricism; reality must be verifiable or falsifiable by experience, “socialism might work”; however, empiricists must implicitly assume the existence of non-empirical as knowledge of reality, i.e., logic, math, geometry
  • Empiricism— must assume some sort of existence of cause and effect; must presume the constancy principle in order to proceed in its investigation, but the constancy principle (there are relationships to be found empirically) is not established, confirmed or falsified empirically, it is a given a priori; life proceeds on the basis of cause and effect; social engineering via empiricism is a giant contradiction

Discussion section:

Crony capitalism is the modern day equivalent of mercantilism

Old wine in new bottles, people can intellectually reject an idea like mercantilism as an historical phenomenon but if it is repackaged in a new brand they might adopt it as sensible

Are many of the distinctions of totalitarian regimes explained by the path to power? IE, Hitler came to power through the ballot box, Mao led a peasant rebellion, Lenin was elected by the army

Democracy is one of the most stable forms of the State; democracy involves participation of the population, and has a process for slowly implementing policies vs. unitary or limited participation and the ability to make drastic, sudden changes via emperor or dictatorship; democracy tends to hand out favors to large groups of people so it is hard to create an opposition coalition to overturn it

Mises’s three pre-conditions of the division of labor and economic specialization: private property in the means of production, free exchange (for price formation) and ???

Questions:

  1. There seem to be an endless variety of “socialisms” reflecting the unique cultural and historical factors of each society that has suffered them; what are some UNIVERSAL elements of socialism that must be or always are present to be declared a socialist system?
  2. Does technological innovation and economic “evolution” allow for political change or does it work in the opposite order?
Lecture 9, Property Rights and the Public Sector, David Gordon
  • Ethics and economists— one of Rothbard’s most original contributions is his criticism of the way mainstream economists deal with normative issues; economists want economics to be value free, economics is a science, normative judgments are mere subjective preferences; Rothbard agrees that economics is value free, but he doesn’t think that ethical judgments are mere subjective preferences; mainstream economists are caught in a dilemma, they want to make normative judgments that do more than express their preferences, how can they do so?
  • Concealed value judgments— some economists think that they can escape the dilemma by endorsing a value-free statement that still leads to normative recommendations; if everybody prefers something, then it should be done (strong Pareto criterion), if at least one person favors something and it makes no one worse off, it should be done (weak Pareto criterion), these principles still involve value judgments; what if everyone has wrong views about what is desirable, or the starting point involves violating someone’s rights?
  • Unanimity principle— Rothbard thinks that the unanimity principle has had bad results in practice; because unanimous agreement can’t in practice be reached, Buchanan and Tullock settle for less than full unanimity
  • Rothbard on the State— it is a fundamental mistake to view the state as a voluntary organization; it is a parasitic, predatory gang that seizes resources from the productive; Rothbard follows Oppenheimer and Nock
  • Public sector— if the State is predatory, then the productivity of the public sector is problematic; the State takes resources by force, thus, its activities cannot be considered productive; government expenditures should be subtracted from, not added to, production statistics; Rothbard’s definition of productivity is intertwined with an understanding of demonstrated consumer preference on the market
  • Statistics— Rothbard is suspicious of statistics collection; they are not value neutral but are essential to government control
  • Utilitarianism and property rights— many economists take some version of utilitarianism for granted; it’s argued that recognition of property rights makes nearly everybody better off; this isn’t a value-free claim, but it’s defended as non-controversial; Rothbard objects that this position doesn’t consider the justice of property rights, any stable system of property rights is accepted;
  • Escape from the dilemma— Rothbard believes the dilemma of the economists can be escaped by developing an objective ethics based on natural law; self-ownership, Rothbard defends the concept by rejecting alternatives, slavery and a system where everyone owns part of everyone else; if you own yourself, then by mixing your labor with unowned resources you own them as well; once you own something you can exchange it and give it to anyone you want, including the right of bequest;
  • Externalities

Discussion section:

[I did not take any notes during this section.]

Questions:

  1. Can any philosophical principle be established simply by rejecting alternatives? (Last man standing philosophy?)
  2. What criteria are sufficient for “mixing labor” and taking ownership? If mixing labor with factors of production, why doesn’t this mean workers own them? What makes “mixing labor” effective in one circumstance and not effective in another?
  3. Walter Block claims that it’s okay for libertarians to take from the State, but no one else. Is there any logic to this?
  4. Maybe there is a Coaseian solution for the dismantling of the State— it doesn’t really matter HOW it is privatized, it just matters that it IS privatized?
  5. When your money is taxed, it is stolen, and your money is fungible and spent, so what legitimate claim do you have to fungible, disposed assets that can not be traced?
  6. What about when government functionaries in “marketable” positions are part of unions or agitate for State privilege?

Lecture 10, Current Debates and Critiques, Joe Salerno

[I did not take any notes during this section.]

Discussion section:

Is the term “Austrian” valuable as a marketing concept? “Capital Based Macro”, “Causal Realism”

You don’t want to be the kid at camp who picked their own nickname, names come from the outside

Is there rhetorical value in labeling opponents in sensational ways (“Friedman is a socialist”) or does that hurt your cause more than it communicates information?

Questions:

  1. What might have happened to the Austrian school’s influence if WW2 had never occurred?
  2. What critical lessons have we learned (as a “movement”) from the Salerno/Hulsmann theory of the decline and rebirth of Austrian economics?
  3. Why aren’t there more applied economic works in the Austrian tradition? What would be some priority applications?
  4. What is “Austrian economics in a nutshell” or the Austrian elevator pitch? Why Austrian?

Ron Paul’s Ten Principles Of A Free Society

I thought this deserved a separate post from my recent review of Ron Paul’s Liberty Defined.

At the end of the book, Ron Paul listed “ten principles of a free society” and I have slightly edited them below:

  1. Rights belong to individuals, not groups; they’re derived from nature, not political agreements
  2. Consent is the basis of social order; any arrangements built on voluntary consent are permissible
  3. Private property is owned by individuals and their voluntary organizations; it is not rented or permitted by political organizations
  4. Government is not a tool for redistributing wealth or granting special social privileges to certain individuals or groups
  5. Individuals are responsible for their own actions and can not be protected from their consequences without shifting the cost to others
  6. Money should be determined by the market and not monopolized and counterfeited by government fiat
  7. Aggressive and preventive wars are incompatible with the voluntary social order of the free society; embargoes are a form of warfare
  8. Juries may nullify (judge the laws, not just the facts) at will
  9. Involuntary servitude is not permissible, this includes: slavery, conscription, forced association, and forced welfare distribution (ie, taxation and “deputizing” private businesses and their resources to perform regulatory functions such as tax collection, immigration enforcement, etc.)
  10. Government agents must obey the same laws and moral codes as private citizens

I think this is a pretty good list. It definitely could get a conversation going. However, I wonder about some of the items on this list being redundant. I think the list might be able to be further circumscribed. I also think that the list goes back and forth between prohibitions, and declarations of principles or conditions or reality (thankfully, it doesn’t contain any positive obligations!) While the list seems fairly complete, I wonder if it captures all essential issues of a free society.

Exercises In Imagination

A friend sends along the following video: http://www.youtube.com/watch?v=XKfuS6gfxPY

Ignoring the pitch for Ron Paul’s political campaign at the end of it, that’s about as good as a libertarian video comes. The key is the identification of one moral standard for all people. It is hypocritical to expect any other person or persons to appreciate a “foreign policy” that you yourself would not appreciate if applied to you.

Here’s another good video about libertarian philosophy from Stefan Molyneux: http://www.youtube.com/watch?v=Cd-SLRyuRq0&w=560&h=315

The reality of government financing is exploitation of its citizens. The people are not fully and fairly compensated for their labor as the exchange being made (via taxation) is not voluntary and deemed to be mutually beneficial.

I’d like to help produce more videos like these. I think YouTube is a powerful medium for spreading the message of individual liberty through the use of economies of scale.