Tag: ludwig von mises

An Introduction to Time Preference

Jack Parkos | United States

Suppose someone offers to pay you 20 dollars. You have the choice to receive the money today or tomorrow. In choosing the former, you are like everyone else. You would prefer wealth sooner rather than later. This economic concept is Time Preference. Time Preference affirms that current satisfaction is preferred over future satisfaction. People would prefer not to wait for wealth when it is easily achievable now. Wealth could be monetary, assets, experience, etc.

“Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods” – Ludwig Von Mises

However, the choice is not always equal and simple. Suppose someone offers you 20 dollars today, or 30 dollars tomorrow. The choice becomes a bit more complicated. We see a divide in people with high time preference and those with low time preference. Someone with high time preference puts their focus on their present well being. They would take the 20 dollars today. On the other hand, A person with low time preference puts emphasis on future satisfaction. This person would take 30 dollars tomorrow. A good example would be comparing savers and spenders. Those with low time preference tend to save their money and make wiser investments. Those with high time preference are more likely to blow through cash.

Real World Examples

Criminals tend to have extremely high time preferences. They are not willing to work to obtain wealth as that involves waiting for future wealth (paychecks). They would rather steal to achieve wealth in the present.

Another example of high vs. low time preference is in the context of college students. One who chooses to stay in and study over going out and partying has a lower time preference. The reasoning being, there will be a future benefit; a better chance at a higher grade, meaning better opportunities down the road. On the other hand, one who chooses to go out has a higher time preference; they prefer the instant short term gratification of partying.

Furthermore, different goods could be preferable in the future than in the present. During winter, ice has a low demand and is preferable in future (summer). However, it still is a general rule people value current wealth to future wealth.

Different groups of people tend to have different levels on time preference. Age is one of the biggest factors in determining one’s time preference. Young children tend to have high time preferences as they are not concerned with the future. A child would likely spend all of his money on ice cream. Adults tend to have lower time preference as they need to save for the future. However, The elderly tend to have higher time preference as they have less time for future consumption. Moreover, someone who has (or is planning to have) kids tends to have lower time preference as they need to save for the future.

Relation to Interest

In “Man, Economy, and State”, Murray Rothbard writes

“The time-market schedules of all individuals are aggregated on the market to form market-supply and market-demand schedules for present goods in terms of future goods. The supply schedule will increase with an increase in the rate of interest, and the demand schedule will fall with the higher rates of interest. A typical aggregate market diagram may be seen in Figure 44. Aggregating the supply and demand schedules on the time market for all individuals in the market, we obtain curves such as SS and DD. DD is the demand curve for present goods in terms of the supply of future goods; it slopes rightward as the rate of interest falls. SS is the supply curve of present goods in terms of the demand for future goods; it slopes rightward as the rate of interest increases. The intersection of the two curves determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor”.

The Time Preference Theory of Intrest explains how rates relate to one’s time preference. Demand for capital is driven by investment and the supply of capital is driven by savings. Interest rates fluctuate, eventually reaching a level at which the supply of capital meets the demand for capital.

Relationship to Civilization

In “Democracy the God That Failed”, Hans Hermann Hoppe notions that concern for future wealth is a key to the prosperity of civilization. If the majority holds a low enough time preference for the process of production, civilization would then be able to thrive. When one allows someone to use capital and resources, an economy forms with Division of Labor and private property. As previously mentioned, criminals have high time preference and will steal resources, slowing down production.

Hoppe describes that the state also has a high time preference. The state violates property rights and steals resources to give to others. The recipients in turn usually also have a high time preference. Hoppe describes this as “decivilizing”.

Time preference is arguably one of the most important parts of economic thought. It is the foundation of saving and interest. Furthermore, it distinguishes spending and saving.

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The Difference Between Austrian and Chicago Economics

By Jack Parkos | United States

When it comes to economics, libertarians tend to subscribe to one of two schools of thought: The Chicago School and Austrian School. Both of these ideologies are rooting in laissez-faire capitalism and believe in the power of the free market. Yet both have unique differences between them that can divide people who believe in free market capitalism. It is important to understand the differences between the two for one to decide which school they agree with.

“Mainstream” Recognition

The Chicago School, which is sometimes called the Monetarist School, belongs to the neoclassical school of thought. It tends to get more attention from “mainstream” economists and politicians. Milton Friedman, arguably the most famous and influential economist of the Chicago School, served as an unofficial advisor to President Ronald Reagan as well as winning many awards for his books. While many Austrians have won awards for their work, they are not nearly as “popular” as their Chicago counterparts. In a high school economics course, you’re more likely to learn about Milton Friedman and Chicago economics than Ludwig von Mises and Austrian economics. Austrians are seen as outside the mainstream, meaning it is “heterodox”. Perhaps someone may be asking why this occurs.

Difference in Methods

One reason that Austrians tend to be seen as economic “outcasts” is that they tend to use different methods to come to conclusions. As stated before, Austrians are not seen in the mainstream, unlike their Chicago counterparts.

This is mainly due to the fact that Chicago economists tend to use similar methods as most other economists. Monetarists tend to use mathematics to test their theories. Chicago economists believe economics is like a science with rules that cannot be broken. Meanwhile, the Austrians believe that since the economy is based on the actions of individuals, no mathematical formulas can accurately predict how people would act. Thus, Austrians base their work on philosophy, logic, and reasoning. Praxeology, the study of human nature, is an important part of the Austrian School of economics.

Monetary Policy

While both schools criticize the Federal Reserve, they have different reasoning for it. The Chicago school calls out the Federal Reserve’s failures but still believe it should exist and be used in the right way. Monetary policy is a big part of Chicago economics, hence sometimes being called the Monetarist School. For example, Milton Friedman criticized the federal reserve for not printing enough money during the Great Depression.  Friedman also believed the monetary supply should be increased by about 2.5-3.5% each year.

Meanwhile, the Austrians do not believe the government should print more money ever. They tend to believe in a fixed supply, typically a standard based off of precious metals. The Austrians do not want the government inflating the currency at all. They blame many economic problems on government creating inflation through printing money.

 

Famous Economists

Here are some famous economists from the Austrian and Chicago schools.

Austrians

Ludvig Von Mises- Big leader and teacher of the Austrian school of thought.

Murray Rothbard- A leading pioneer of both Anarcho-Capitalism and Paleo-Libertarianism.

Frédéric Bastiat- Developed the concept of opportunity cost.

Chicago

Milton Friedman- Won Presidential Award for Freedom, possibly most famous Chicago economist.

Thomas Sowell- National Humanities Award winner, theorist on welfare economics.

Gary Becker- Awarded Nobel Memorial Prize in Economic Sciences.

Friedrich Hayek (who also belonged to the Austrian School) – Award-winning economist who contributed to the Business Cycle Theory and The Economic Calculation Problem.


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Libertarianism is not Self-Destructive or Unsustainable

By Mason Mohon | @mohonofficial

A recent article by an unknown guest contributor on the Bilan Report suggested that a libertarian society is unsustainable for various reasons. Among these are the ideas that all personal freedom leads to libertinism, individualism is incompatible with the NAP (non-aggression principle), and the supposed libertarian assumption that all governance is bad. The author makes many misconceptions about libertarianism in their article. In response, this piece attempts to set the record straight on libertarian philosophy.

Christianity

The author of this piece starts off the article with an explanation that “there is some level of inherent worth within the individual” from a Biblical perspective. The author then attempts to immediately downplay this importance. They say that a philosophy based entirely on individualism would not work very well.

There is no exact definition of individualism made. From later parts of the article, we can assume the author means that individualism is independence from any organization. The Biblical definition of individualism clearly does not coincide with the latter definition, though. This is because the Bible clearly outlines the importance of being a member of the Body of Christ (1 Corinthians 12:27) and part of the Church community.

Because the Bible also emphasizes the importance of community along with individualism, Biblically deduced individualism as a core of a philosophy would not lead to the disastrous consequences that the author suggests.

Individualism is not the full extent of the Biblical relationship to libertarianism either. In the first part of Bastiat’s The Law, natural rights stemming from life as a gift from God are clearly deduced. I have written on this subject before:

These gifts from God preclude any human legislation and any political leader that has ever existed. This is the core of what exists. These are human rights. Legislation does not define these – nature and nature’s God has. In the garden in Genesis, there was no government. It was anarchy in the truest sense there has ever been, no coercive governing entity. There was only a loving and gift giving God. Clearly there was no legislator dictating how Adam and Eve live their lives through the coercive stroke of a pen. Human legislation cannot ever get underneath this core, but it can restrict it. Restricting it has no benefit though, for any restriction of freedom will stifle economic growth. God set it up this way, to make it the most beneficial for everyone to be free to use their faculties as they wish.

It is foolish to downplay the relationship between the Bible and libertarianism as a few verses alluding to individualism. It goes much deeper and is much stronger. Regardless the author dismisses all discussion on Christian libertarianism by says that “it remains somewhat outside the scope of this discussion of libertarianism as a whole.” This is untrue. Ron Paul is probably the second most convert-gaining libertarian in human history (directly behind Ayn Rand). Bastiat, John Locke, and many of the founding fathers had a faith-based perspective on liberty. But such a statement by the author allows them to get rid of an opposition to their argument. They construct a libertarian strawman that is much easier to attack.

Human Action

The author of this piece also seems to get praxeological insight confused with a moral code as to how man ought to or should act. They mention the action based framework for economics loosely twice in the article:

Taken to its logical conclusion, libertarianism holds that there are no wrong choices, but simply the right to make that choice.

Drawing on heavy Kantian influences they view human action as fundamentally rational, or purposeful.

In Human Action Ludwig von Mises describes that man acts. From this action axiom, along with other synthetic apriori truths (irrefutable statements we learn and know simply from being human), we can deduce the entire science of economics as a subset of praxeology. These other apriori ideas are things such as the law of returns, the law of diminishing marginal utility, time preference, the existence of opportunity costs, etc. These come from the epistemology put forth by Kant which the author alludes to.

The culmination of all of this truth gives us a value-free economics that allows us to understand how the world is and how it works. Praxeological reasoning does not tell us how the world ought to be. It is value-free. It does not aim to. Because of this, the propositions that man faces various choices does not mean that any choice a human chooses is good or moral. The author clearly does not understand that praxeological value free truths do not intersect with libertarian ethical standards from a Misesian perspective.

From a Rothbardian/Hoppean perspective, they eventually do, especially when it comes to the Hoppean argumentation ethics. The author does not address these at all, though, and simply takes the proposition that “man makes choices” to mean that “all choices a man makes are good.” Once again, this is a strawman of libertarian philosophy brought about most likely by lack of understanding of the philosophy.

The NAP

The author then attempts to argue that the non-aggression principle, or NAP, is incompatible with libertarianism:

The principle of limiting coercion is a fundamental aspect of libertarianism but taken in context with the other principles of maximal autonomy and the ability for the individual to reason towards moral and ethical principles, it becomes contradictory. If moral principles are something that can be determined through an individual’s own use of reason how can there be an objective universal principle against coercion?

This reasoning is once again based on a false conception of what libertarianism is. Not a single serious libertarian theorist has ever argued that “an individual’s own use of reason” allows them to come up with their own moral principles. I have no idea where the author got this idea. Libertarianism does not make the slightest attempt to justify any moral standard any individual just dreams up.

If libertarianism did justify such a proposition, it would be extremely flawed. A psychopath could reason their way to a moral standard of murder being ok because it makes them feel good. The reason this is not ok is that the non-aggression principle supersedes individual standards of morality. Libertarian theorist Robert Nozick described the non-aggression principle as a “side constraint” on action. This means that we cannot do things that violate this side constraint.

Think of the rules of soccer: there is the side constraint that you cannot pick up the ball. If you could pick up the ball, it would be helpful for you, because you could through the ball into the goal. This is not allowed in soccer though because it breaks the game. The side constraint of the non-aggression principle breaks the game of reality.

Governance

The author of this piece eventually gets to the point of arguing that libertarian individualism means a complete lack of any sort of social structure. They seem to think that lack of government (a territorial monopoly based on the threat of force) means a lack of governance (an authority based on societal norms or culture). They say the following:

Libertarianism taken to its logical conclusions promotes complete autonomy. This moves beyond simply being unconstrained by positive law and a strict use of only negative law, but liberation from associations and relationships. This includes fundamental institutions such as, “the family, church, and schools to the village and neighborhood and the community broadly defined—that exert strong control over behavior largely through informal and habituated expectations and norms.”14  Ironically, the rejection of institutions and concepts that have traditionally reigned in human behavior creates a further need and additional calls for the state to intervene to regulate bad behavior. This contradiction can play out as legislation mandating acceptance of, or at least association with, behaviors that would be rejected by natural law.

While the radical individualism of Objectivists does reject the idea of any sort of cultural governance, most libertarians (often right-libertarians) see it as an important staple as a free society. Families, churches, and cultural communities are important modes of organization that can exist outside of the state. Jeff Deist expertly explains the importance of such social institutions in this video:

A libertarian society does not reject these complex social institutions. Rather, it upholds these institutions, while a society with a growing state tears these down in favor of itself. The author seems to think that liberty leads to lack of organization, causing a need for the state. The situation is constructed in an entirely backward manner, though. The state seeks to grow in power. It would rather the people become reliant on it rather than their families or churches.

The wearing away of a traditional reliance on such institutions and customs, Deneen argues, will lead to a breakdown of functioning society. Instead of creating a society based on non-aggression and free transaction, best fulfilling the desires of its people, libertarianism tends to isolate the individual and break down the institutions that maintain a proper society.

The author of this piece does not understand what being a freely acting individual means. They seem to think it means being a freely acting individual outside of the influence of anyone else. But society does exist. And it is made up of individual people. The only alternative to this radical independent individualism in the eyes of the author is the state. But as we have explained the state is the true cause of the denigration of these important social institutions.

Liberty and Responsibility

Now we will move onto the final question of libertarian libertinism. The author makes the proposition that the non-Christian libertarianism spirals into responsibility free left-libertarian hedonism. Yet at the same time, the author quotes Ayn Rand and Murray Rothbard as major representatives of the libertarian philosophy. Neither of these individuals was for hedonism. Both of them were against libertinism.

Ayn Rand’s philosophy is based completely around being responsible for yourself. Murray Rothbard and libertarians in the Rothbardian tradition recognize the importance of responsibility on a society. I have written recently on this matter of responsibility and how it is very important to combat libertine libertarianism.

Freedom means we do not have the right to encroach on the actions of someone else. But freedom also means you need to be responsible for your own actions. It means you need to better yourself without the force of the government. Christian libertarianism is not the only political framework that promotes responsibility. And the answer to libertinism sure as hell is not more state power. It is the promotion of a culture of responsibility.

Libertarian theory is not self-destructive. A libertarian social order is not as unsustainable as this author believes. They think that their strawman version of libertarianism would be horrendous. But it is a strawman and not an accurate representation of libertarian belief.

Throw Out Milton Friedman

By Mason Mohon | @mohonofficial

I think it’s pretty clear that Friedman is a statist. -Murray Rothbard

Milton Friedman is popular, and not just “libertarian popular” (although he is) but mainstream popular. His book Capitalism and Freedom has over half a million sales and Free to Choose has also had its fair share of economic and political influence. I have spoken to many fellow lovers of the free market and many have stated he was their primary influence in pushing people towards libertarian ideology.

While more proponents of the free market is a great thing, Friedman’s worldview of classical liberalism is inconsistent and his economic methods are needlessly faulty. The Friedmanite economic worldview is lacking and has multiple barriers if we ever wish to proceed towards our goal of reaching a free society.

The first issue with Friedman and his intellectual influence is the method he goes about economics. To quote from his Essays in Positive Economics:

The ultimate goal of positive science is the development of a “theory” or “hypothesis” that yields valid and meaningful (i.e. not truistic) predictions about phenomena not yet observed.

What this basically means is that economic science should act like the hard sciences, in that we should make a hypothesis and go out into the world and test it. To Friedman, economics seems to be analogous to Chemistry or Physics.

At the same time, this small statement seems to have a bit of a call back to the positivist claim that only empirically verifiable statements are meaningful. Hence, statements that have purely logical backing, rather than empirical backing, are meaningless. This poses an obvious issue to adherents to the Austrian School of economics, for reasons that I will get into shortly.

He goes on:

Tautologies have an extremely important place in economics and other sciences as a specialized language or “analytical filing system.” Beyond this, formal logic and mathematics, which are both tautologies, are essentially aids in checking the correctness of reasoning.

But economic theory must be more than a structure of tautologies if it is able to predict and not merely describe the consequences of action; if it is to be something different than disguised mathematics.

Let us tackle the original claim that merely logically backed claims cannot be meaningful. Mathematics is a logically backed field of study, full of theorems that are not true because we went out and tested a hypothesis, but rather because we can think them through and based on logical thinking we can work through the issue and know it to be true.

The adherent to praxeology understands that the law of diminishing marginal utility is a valid theorem, not because we go out in the world and watch as people value each additional unit of a good less. We don’t start to count the percentage loss in psychic utils that people begin to attain. No! That wouldn’t make any sense!

We know the law of diminishing marginal utility to be true because it is a logically consistent theorem. It is why people will pay more for diamonds than they will for water. Because there is so much water that nobody cares if they sell a bottle for a dollar fifty. But there are so few diamonds that they can be sold for extreme prices, even though water is so much more critical to human life.

If praxeological reasoning doesn’t back this up, then what does? Why is this economic theorem valid if not for the reasons of praxeology? Friedman surely didn’t have an answer.  As Robert Murphy says in Choice:

He hasn’t demonstrated why economic theory must “be able to predict” in a way that is different than merely describing “the consequences of action.”

Milton Friedman really had no backing for his attacks on the arguments on praxeology. But he couldn’t change positions, because how would he keep his blessed government ties if he didn’t remain in the field of mainstream economics.

This ties into the second issue with Milton Friedman. Milton and his Friedmanites have no real theory of justice or the state or what its limits should be. Sure, he talks about classical liberalism at the beginning of Capitalism and Freedom, but he makes no efforts to define the ethical bounds of such a belief system and how far it should hold back the government.

Therefore, the state then becomes a sort of deus ex machina of his economic world. When an issue isn’t worth thinking through, boom, just let the state take care of it. His son, David, did a much better job of this, thinking through every aspect of statist policy and realizing the private market could do so much of a better job.

As Murray Rothbard said in his interview with The New Banner:

I mean, if you are in favor of the state having control of the money supply, control of the education system, and a guaranteed annual income, that’s it. There is not much more that can be said. The fact that the Friedmanites are against price control is all very well, and I hail that, but the fundamental aspects of the state remain. The state still commands the highposts of the economy.

This is one of the problems with Friedmanites — they have no political theory of the nature of the state. They think of the state, and this is true of Milton and the whole gang as far as I can see, as another social instrument. In other words, there is the market out here and then there is the state, which is another friendly neighborhood organization. You decide on which thing, which activity, should be private and which should be state on the basis of an ad hoc, utilitarian kind of approach. “Well, let’s see, we’ll feed the thing through the computer. We find that the market usually wins out, that the market is usually better.” So, most of the time they come out in favor of the market on things like price control or government regulations, but they really think of the state as just another social instrument. And so when they come out in favor of the state, they go all out.

There is really no limit in the eyes of Friedman and his followers as to how far the state should actually end up going. A strong proponent of the free market should always make the assumption that the market is going to do better and there should be a steep burden of proof for the government to take control of any system.

Milton contributed quite a few things to economics. But he should not be praised, and his everyone word should not be followed. His classical liberalism is hollow and his economic methods are weak. Read his works, there’s some good stuff in there. But nobody should consider themselves a “Friedmanite.”


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Socialism Fails Due to the Lack of Economic Calculation

By Andrew Lepore | United States

In 1920, an article first appeared In the German Archive for social sciences which decimated the socialist economic model and laid the foundation for the Austrian price theory. Economist Ludwig Von Mises’s article, “Economic Calculation in the Socialist Commonwealth”, demonstrates the impossibility of a successful socialist economy. For this reason, it is one of the world’s most important economic articles.

At the time Mises published it, those in academia were debating the problem with incentive under socialism. The incentive to work as much as others, to work your hardest, to provide the best services, to do the jobs nobody wants to do, etc. Scholars and left-wing economists were attempting to solve the problem of incentive under socialism, and once they did so, they thought, they would have a system just as productive as capitalism.

By publishing this article, Mises answered their question by proving it is an impossible problem to solve. Mises demonstrated that the incentive which drives economic actions, both on the supply and demand side, comes from monetary reward. The cost-benefit analysis of the individual ultimately is how a person decides what they will do and how much they will work.

Similarly with what a person decides to buy, an individual will use their capital to purchase the object of most value to them at the least opportunity cost, or the least amount of money spent. The medium for all of this; for how we represent economic calculation that takes place in the market, how we determine profits and losses, and how we measure the cost and compare it to benefit, is through prices.

Prices emerge when there are many private owners of the means of production competing in the marketplace to convince consumers to spend their hard-earned capital on their product or service. Or in other words, prices emerge when many companies compete for the business of many customers by convincing them they can get the best product at the lowest cost ( The lowest opportunity cost for the greatest benefit, economic calculation).

Mises proved that socialism wouldn’t work because It cannot distinguish more or less valuable uses of resources. Nevertheless, with leftists being as hard headed as they are, the debate over the socialist calculation problem still rages on.

I recommend to all readers who want a deeper economic understanding of the failure after failure of government programs. It’s a short read, yet is full of information. It will arm you with economic facts to counter argument for statist programs, both on the left and the right.

“The significance of Mises’s 1920 article extends far beyond its devastating demonstration of the impossibility of socialist economy and society. It provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money. Its thesis will continue to be relevant as long as economists and policy-makers want to understand why even minor government economic interventions consistently fail to achieve socially beneficial results. “Economic Calculation in the Socialist Commonwealth” surely ranks among the most important economic articles written this century.” – Joe Salerno


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