Dave,
While you cast light on some semantical issues, I don't think that you've answered the primary question, which is the way that what Wood's is talking about the matter (a lack of complementary goods). I don't understand why you think that resources are all used up as such? What occurs in booms is exactly the opposite, people want relative capital consumption, but the rate of interest supports capital accumulation. It is the bust and the rise in interest rates that eventually turns what would have been accumulated capital into uncompletable and wasteful projects. These projects should never have been invested in, but nonetheless it doesn't seem like the willingness of the public to consume more is really at the heart of the issue except insofar as it makes the boom unsustainable.
As for the matter of the crack up boom, here's a very famous quote from Mises that Wood's actually quoted not to far back from where I currently am in the book:
The increase in the money supply brings about the tendency for prices to adjust back to their previous and "natural" ratios. As inflationary expectations are built into the system itself wages and prices start to increase at an increasing rate. This necessitates not only increasing large amounts of credit expansion, but increasingly large rates of credit injection relative to the size of the money supply itself. As inflation speeds out of control the government must either stop increasing the money supply, or people lose faith in the system of currency itself and the flight to real values begins. The gaps in what Mises wrote were filled in by De Soto with the above explanation.
Edit
About f***ing time this thread gets a page break. I don't understand why some threads have a large number of massive messages and they don't get a page break for dozens of posts, while others get breaks after about 15 posts.
I don't think that you've answered the primary question, which is the way that what Wood's is talking about the matter (a lack of complementary goods).
From HA, Chap 20
The erroneous belief that the essential feature of the boom is overinvestment and not malinvestment is due to the habit of judging conditions merely according to what is perceptible and tangible. The observer notices only the malinvestments which are visible and fails to recognize that these establishments are malinvestments only because of the fact that other plants — those required for the production of the complementary factors of production and those required for the production of consumers' goods more urgently demanded by the public — are lacking.
Technological conditions make it necessary to start an expansion of production by expanding first the size of the plants producing the goods of those orders which are farthest removed from the finished consumers' goods. In order to expand the production of shoes, clothes, motorcars, furniture, and houses, one must begin with increasing the production of iron, steel, copper, and other such goods.…
The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.
I don't understand why you think that resources are all used up as such? What occurs in booms is exactly the opposite, people want relative capital consumption, but the rate of interest supports capital accumulation.
If a person wants a hot dog, he doesn't first look in the bank window to see what the rate of interest is. He eats his hot dog. So the consumption is happening, and with it the lack of capital accumulation, which can only come from underconsumption, aka saving, which is not happening. In fact it is discouraged by the low interest rate, if anything. Why put my money in the bank if they offer me no interest?
An entrepreneur, on the other hand, looks at the interest rate before embarking on a project. He doesn't use his own money, because he doesn't have enough. He sees the bank is offering a low interest rate, and takes the loan. Little does he know that the paper money and checks may be there, but he and others are competing for a limited pool of resources, one much smaller than that low interest rate signals exists.
The size of the pool of resources available is not caused by the interest rate. It is caused by the degree of time preference.
Put another way, the rate of interest encourages capital acc., in the sense that entreps. are encouraged by it to start their long term projects, but it does not support capital acc., in the sense that the underlying resources are not there. After all, the low interest rate is a symptom, not a cause, of low time preference, and low time preference is ultimately what causes and supports cap. acc. And here it is a false symptom.
So it's not the bust that ruins things. It's the initial conditions at the start of the boom. Given those, the whole thing will play out like a Greek tragedy.
An analogy. Guy wants to bake twenty pizzas for a party. He looks in the fridge, sees it is well stocked, starts making dough. Little does he realize that half the stuff he saw in the fridge is fake cheese made out of paper that his room mate, a banker, put there as a prank. He bakes the first few pizzas, the boom. People come, eat the pizzas, everyone is happy. More people come, he starts to bake more, and lo and behold, the cheese is gone. The bust.
None of that was caused by low interest rates [=insertion of fake cheese in the fridge] except for the initial mistake he made.
Crude way of putting it. The entrepreneur does not need money for his projects. He needs what money can buy. And there is not enough of the latter around, [because high time preference did not put it there], even though he thinks there is [because of low interest rate fooling him].
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
From the first quote what I still don't understand is this: is what prevents the production of the complementary goods the fact that there is something in the nature of the boom that prevented them from being produced, or is it just because the the low interest rate that would have spurred their production did not persist, and therefore there is not enough money to continue stimulating the production of capital goods.
This is what I don't understand, why is it that low interest rates caused by fiat currency lead to this miscalculation and low interest rates caused by private investment do not? My answer right now is that it's not any particular characteristics of the boom, but rather the fact that that level of interest is unsustainable, and therefore some projects will not be able to be completed.
"So the consumption is happening, and with it the lack of capital accumulation, which can only come from underconsumption, aka saving, which is not happening"
I don't agree with this. In the free market this is perfectly true, but as Mises said there is the doctrine of "forced savings". By lowering the interest rate the government bids away those resources that would have been used in consumption into investment. Because the interest rate is so much lower, firms farther away can increase their demand for goods and bid them away from the first stages of production. If this didn't happen then I don't understand how the boom/bust would occur in the first place, or why it would be centered in capital goods industries
...is what prevents the production of the complementary goods the fact that there is something in the nature of the boom that prevented them from being produced, or is it just because the the low interest rate that would have spurred their production did not persist, and therefore there is not enough money to continue stimulating the production of capital goods.
The former. And what is it in the nature of the boom that prevents them from being produced? That they, or the resources needed for their production were being consumed.
This is what I don't understand, why is it that low interest rates caused by fiat currency lead to this miscalculation and low interest rates caused by private investment do not?
Low interest rates caused by private investment means
1. there is a lot of money going into investment,
2. meaning it is not being spent on consumption,
3. meaning there is less being consumed,
4. meaning the unconsumed is there waiting to be used as fodder for making those higher order goods.
Low interest rates caused by fiat currency does not imply 2., and thus all that follows from 2.
...as Mises said there is the doctrine of "forced savings".
Mises pooh-poohs the effects of forced savings in HA, Chap 20, section 5. [pps 548-550, or 572-574 in pdf file]
If this didn't happen then I don't understand how the boom/bust would occur in the first place, or why it would be centered in capital goods industries
Simplified numerical example. The country has 10 tons of Resource X. Consumers use up a ton a year. Low interest rates make the entrepreneur think they have stopped consuming X. He plans to use a ton per year for ten years to finish his high order project, paying as he goes.
Little does he know that consumers are still using up a ton a year. After five years, with him having consumed 5 tons and consumers also 5 tons, all of resource X is gone. What's he going to do now? All the low interest rates in the world won't help him.
What I don't understand about what you're saying is why these resources aren't drawn directly into investment and away from consumption. If the money supply fell by 50% then eventually all prices would just fall by this amount too. The reason why savings that comes from consumption, whether this goes into investment or plain savings, leads to unconsumed resources is that there is now more being invested in real terms in the higher order stages. If all prices dropped proportionally then real consumption wouldn't change. The same thing is happening when credit expansion occurs; the higher order industries suddenly have a much higher real income (although this eventually evaporates) as the interest rate falls, therefore goods are bid away from the lower stages and into the higher stages. The same general process as occurs during the free market case: a rise in the real value of investment and a fall in the real value of consumption, occurs. Therefore why don't resources gravitate away from consumption and over to investment where they can get a higher return?
Also, just throwing this out there that even though Mises states that it is unlikely, forced savings is possible and has occurred in the past. I shouldn't have brought it up in the first place though, looking back at it Mises isn't talking about forced savings in the same way that I've seen it talked about elsewhere.
Neo,
You are assuming people only decide to consume less because of price changes. No. They may decide to consume less because of something that is going on their heads, a change in time preference.
The same thing is happening when credit expansion occurs; the higher order industries suddenly have a much higher real income (although this eventually evaporates) as the interest rate falls, therefore goods are bid away from the lower stages and into the higher stages.
Isn't this a restatement of the forced savings idea, what Mises called forced savings? I referenced where Mises explained why he dismisses this.
Hmmm... Well it certainly seems that Woods agrees with Dave:
"The artificially low interest rates stimulate venture capital (long term investment) and consumer good production (short term investment), stretching the economy at both ends at the expense of the middle (capital maintenance, or medium-term investment )"
This certainly would shore up any remaining problems I have with the bust portion of ABCT, but nonetheless I don't see why the above should really be the case for the reasons I specify above. In particular I don't see why the center stages of production should really suffer. Let's say that the booms been going for a while and we see higher investment and higher consumption, both brought on through inflation. Well the middle stages of production receive more of a boon from lower interest rates than the later stages do, and the middle stages see a greater benefit from an increase in consumption than the first stages do, so all things considered it would seem as though these factors would balance one another out.
The one explanation I really see here is that the bust doesn't occur all at once. Because consumption increases resources are continually drawn to the back and the front of the production structure. If consumption remained constant, or at very least didn't rise with inflation, then this would not have occurred. Because you have the forces that bring the market back into long run equilibrium (an increase in prices) along with a temporary increase in real consumption caused by both inflation and a lower "activated" time preference (this would be a one shot thing if the initially lowered interest rate didn't fall any lower, assuming static time preferences). Therefore in the beginning the increase in capital goods production would be sustainable if prices didn't rise, but as income increases through inflation the productive structure is spread thin... This would seem to violate another premise of ABCT, which is that malinvestments occur primarily in producers goods industries, since we are saying that it is occurring in consumers and producers good industries.
"You are assuming people only decide to consume less because of price changes. No. They may decide to consume less because of something that is going on their heads, a change in time preference."
I'm not sure what you mean here. What implications does this have on consumption during the boom?
"Isn't this a restatement of the forced savings idea, what Mises called forced savings? I referenced where Mises explained why he dismisses this."
It's kind of a different version of what is called forced savings, nonetheless it is the absolute crux of the issue at hand. This needs to be directly dealt with since it would appear to fully adhere to basic laws of the market, namely that resources are drawn to where they can receive the highest payoff.
Mises' idea of forced savings this is presented in HA is that, because entrepreneurs and capitalists get first dibs on the inflated money, that they will save/invest this, and therefore that their increase in income will change the market rate of interest so as to fully align with the inflated interest rate, or perhaps even fall below that rate. Mises says that this is possible. I'm implying the exact opposite in that I'm saying that the decrease in the interest rate cannot continue.
"You are assuming people only decide to consume less because of price changes. No. They may decide to consume less because of something that is going on their heads, a change in time preference." I'm not sure what you mean here. What implications does this have on consumption during the boom?
I will explain all, but let me begin with an illustration from Crusoe economics. He can catch two fish a day by hand. Then he gets the idea of ctaching one fish a day, going a bit hungry, and using the time left to build a net. I'm sure you've seen this story before. There are no prices involved. What happened is he made a decision in his head, a change in time preference, to consume less today so he will have more in the future, when his net is finished.
We can make the story a bit more detailed and say there are two people on the island. Both catch and eat two fish a day. Then a change in time preference hits one of them. He fears he won't be able to catch fish in his old age, so he salts away a fish a day in some freezing cave, planning to defrost and eat them when he is an old man. Underconsumption has begun. Still no prices, nothing, just a change in time preference. His clever buddy sees an opportunity here. Knowing that if he eats three fish a day he will have more energy and can work on making a net at night, he borrows the frozen fish, one a day from the first guy, every day for a year, uses his new energy to make the net, and then catches ten fish a day. The point of the story is that the prime mover, the first cause that got this whole ball rolling, was a change in time preference.
And that is exactly how investment happens normally. There is a change in time preference, underconsumption, an entrepreneur making clever use of the unconsumed resources to make higher order goods. [The role of the interest rate is that of a symptom and a signal and a result of the change in time preference].
When there is no change in time preference, but an artificially caused change in interest rate due to increase of money and credit, the changed rate may cause some slight opportunity to force away consumer goods from the consumers. Hence the name forced savings. Mises says it doesn't amount to much. There being no other reason for less consumption [= there being no change in time preference], there is little to no change in consumption. Thus the numerical example above, with the ten tons of Resource X, starts happening.
I'm going to keep this brief.
I'm afraid that I just don't find that explanation compelling. Time preference only works through very definite market processes; namely the profit motive. I think that your error comes from your failure to distinguish between the effects of plain savings and direct investment.
Resources go where the money is. When interest rates fall, regardless of how this occurs, then resources will flow to the areas further away from consumption because this is exactly where the money is. Time preference, on the free market, must be what drives this, but introducing fiat credit into the economy increases the amount these people have to spend. Land, labor, and capital will be bid to those areas because that is where these factors can receive a higher income. If resources can be bid away, then they don't need to be idle in the first place. Lower real interest rates are caused either by an increase in the amount of loanable funds with constant consumption (credit expansion and plain savings to investment), a decrease in consumption spending with constant investment (plain savings), or a combination of both (investment to savings or any combination of these factors)
This is a concise objection to what you are saying. Please point to every single hole that you find in this and explain why the postulate is incorrect.
I found this paragraph in HA:
Of course, in order to continue production on the enlarged scale brought about by the expansion of credit, all entrepreneurs, those who did expand their activities no less than those who produce only within the limits in which they produced previously, need additional funds as the costs of production are now higher. If the credit expansion consists merely in a single, not repeated injection of a definite amount of fiduciary media into the loan
market and then ceases altogether, the boom must very soon stop. The entrepreneurs cannot procure the funds they need for the further conduct of their ventures.
And this:
The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.
Bottom line, he seems to be saying what you are, that as long as the interest rate is kept constantly low, things can keep on going.
What I was describing was what he describe in these words: "...the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."
He talks about so much money around it loses all value. I was looking at it from the other end, so few resources left their price shoots sky high.
OK, so I have to say you are right. He's saying that the end comes before what I was talking about, when the interest rates go up.
I think that historically we have seen both ends. There have been recessions and there have been hyperinflations.
That said, he also writes that demand for consumer goods goes up:
The additional demand on the part of the expanding entrepreneurs tends to raise the prices of producers’ goods and wage rates. With the rise in wage rates, the prices of consumers’ goods rise too. Besides, the entrepreneurs are contributing a share to the rise in the prices of consumers’ goods as they too, deluded by the illusory gains which their business accounts show, are ready to consume more. The general upswing in prices spreads optimism. If only the prices of producers’ goods had risen and those of consumers’ goods had not been affected, the entrepreneurs would have become embarrassed. They would have had doubts concerning the soundness of their plans, as the rise in costs of production would have upset their calculations. But they are reassured by the fact that the demand for consumers’ goods is intensified and makes it possible to expand sales in spite of rising prices. Thus they are confident that production will pay, notwithstanding the higher costs it involves. They are resolved to go on.
Putting it all together, then, what does he mean by a lack of complementary goods being the problem?
I'd say what he means is that the original loan was not enough to get everything done. There have to be more and more, to keep going and complete all projects. But at some point the loans will stop, meaning there won't be funds available to buy what is needed to finish. What is needed to finish is what he calls the complementary goods. It's also what he means with his parable of the house that is too large.
"Does all of the "human" participate in each "action"?" What do you mean by this?
What do you mean by this?
People tend to speak in idioms and figures of speach, which is fine for basic communication. What I'm trying to do is unveil what exactly you mean, in no uncertain terms, once we shed the figures of speach that you may not even be aware you're using.
Most of a body's (including the brain's) activities are not made known to the conscious, and are not open to being controlled by the conscious, and input from the conscious is never even requested or required. You acknowledged the importance of consciousness in regards to whatever it is you're considering "action" when you mentioned your dog. So it works in every day communication to say "Bob acted out purposeful behavior" when you mean to convey "Bob's body coordinated several activities, a fraction of which he was consciously aware of, the sum of which appeared from my perspective to be in line with what I think Bob's consciousness didn't seem to be opposed to", but obviously you don't literally mean his entire body was under his conscious control.
So can you lay out what is meant literally when you say "human action is purposeful behavior"? Which part of the human is doing the acting? What role does consciousness play here in light of the fact that most of the body isn't under the control of the conscious and doesn't require conscious input and so forth? What part(s) of the body contribute toward the intent and purpose, and how much of that—and to what extent—has anything to do with whatever is consciously aware?
hashem,
At one point or another, Mises has addressed most, if not all, of your points. If you don't want to read Human Action, Theory and History is a concise book that explains a lot of Mises' views on methodology. Even reading just the introduction will answer many of your questions, though reading the entire book will give you a more in depth understanding of Mises' thought process.
If you still have questions after reading part of or the entirety of this work, so be it. But at least read it so that you can update your arguments to address Mises' points. There is little point to you raising issues that Mises has already addressed, that is, if you are interested in truth and understanding. You've been here long enough, so it's about time you get to doing some reading.
There are limits to characterizing Austrian economics in terms of methodology or microfoundations. Ludwig Lachmann, for example, says Keynesians use the same methodology:
AEN: How do you see the relationship of the Keynesians to the Austrians? Lachmann: Now, this is a bit more difficult because the question arises, "Who now are the Keynesians?" I did notice that a certain economist whom I always thought was a Keynesian has described himself as a nonmonetarist. So, it seems to me, that Austrians and Keynesians have certain things in common. They have a common methodology, which in the case of the Austrians is laid down of course in Mises Human Action. And which I would say so far as Keynes was concerned is expressed as you know succinctly in the famous letter to Roy Harrod of July 16, 1938, that I have quoted several times: "Economics is not a natural science. It has to deal with human purposes." That as it were unites us with the Keynesians as against certain other economists, this kind of subjectivism. What also I take it we have in common is a general interest in the facts. After all, we are living in the same world, and it is assumed we accept that facts matter, a proposition which in Chicago doesn't seem to be so readily accepted. But if we admit that facts matter, then we should be able to establish those facts. AEN: You mentioned the comment by Keynes in which he made a methodological statement. In fact most Keynesians, at least in the United States, follow a methodology that limits itself to a study of averages and aggregates. Is it possible to see this relationship when, in fact, they for the most part operate with a methodological holism? Lachmann: I don't know what you have in mind, and then of course the question again arises who is a Keynesian? I would point out, for instance, that in a book like Paul Davidson's Money and the Real World, subjectivism is after all present. I wouldn't know any good examples of what you call methodological holism. The mere fact that someone deals with macroaggregates does not necessarily mean that he is not methodologically an individualist. This was, I think, brought out quite well by Frank Hahn, in his famous critique of Friedman. I would say the mere fact that some economists are interested in macroaggregates does not necessarily impair their methodological subjectivism. It still leaves the avenue open for explaining the phenomena pertaining to macroaggregates ultimately in terms of human motives, as, for instance, Keynes did himself when he tried to split up the demand for money (money as a macroaggregate) into the famous motives. That was an attempt at subjectivism, at least.
AEN: How do you see the relationship of the Keynesians to the Austrians?
Lachmann: Now, this is a bit more difficult because the question arises, "Who now are the Keynesians?" I did notice that a certain economist whom I always thought was a Keynesian has described himself as a nonmonetarist. So, it seems to me, that Austrians and Keynesians have certain things in common. They have a common methodology, which in the case of the Austrians is laid down of course in Mises Human Action. And which I would say so far as Keynes was concerned is expressed as you know succinctly in the famous letter to Roy Harrod of July 16, 1938, that I have quoted several times: "Economics is not a natural science. It has to deal with human purposes." That as it were unites us with the Keynesians as against certain other economists, this kind of subjectivism. What also I take it we have in common is a general interest in the facts. After all, we are living in the same world, and it is assumed we accept that facts matter, a proposition which in Chicago doesn't seem to be so readily accepted. But if we admit that facts matter, then we should be able to establish those facts.
AEN: You mentioned the comment by Keynes in which he made a methodological statement. In fact most Keynesians, at least in the United States, follow a methodology that limits itself to a study of averages and aggregates. Is it possible to see this relationship when, in fact, they for the most part operate with a methodological holism?
Lachmann: I don't know what you have in mind, and then of course the question again arises who is a Keynesian? I would point out, for instance, that in a book like Paul Davidson's Money and the Real World, subjectivism is after all present. I wouldn't know any good examples of what you call methodological holism. The mere fact that someone deals with macroaggregates does not necessarily mean that he is not methodologically an individualist. This was, I think, brought out quite well by Frank Hahn, in his famous critique of Friedman. I would say the mere fact that some economists are interested in macroaggregates does not necessarily impair their methodological subjectivism. It still leaves the avenue open for explaining the phenomena pertaining to macroaggregates ultimately in terms of human motives, as, for instance, Keynes did himself when he tried to split up the demand for money (money as a macroaggregate) into the famous motives. That was an attempt at subjectivism, at least.
We might instead look at the conclusions that Austrians draw. I'm beginning to think that the most succinct characterization of Austrian economics might be the following proposition:
The length of the production process is determined by the rate of interest.
Do any other schools of economics draw this conclusion? Do any Austrians reject it?
"We might instead look at the conclusions that Austrians draw. I'm beginning to think that the most succinct characterization of Austrian economics might be the following proposition: The length of the production process is determined by the rate of interest."
I can't speak for Austrians in general, but I believe that a more accurate characterization of Mises's position would be something like:
"It is not possible to make society more wealthy by manipulating the market rate of interest."
or:
"The boom created by interest rate manipulation must result in a slump."
Opposed schools of economics believe either that the economy can be grown by lowering the market rate of interest, or, that the boom created by lowering the market rate of interest does not necessarily lead to a slum.
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
I'm sure you're all excited to know that I am diligently working on my business cycle problem. My current theory as to the difficulty is a misreprentation by Woods and awkward phrasing by Mises. Thusfar I have seen no evidence to back up Wood's claim that ther is overinvestment in the latest stages of production. Indeed, Rothbard claims over and over that there is an underinvestment in this field. In particular I think that his analogy of the master builder is very dangerous when misunderstood, although implicitly quite important. This will become a thread topic that two people will read when I'm done.
@Hamesh
I support Gotlucky's advice because I don't have time for a full answer
@FOTH
1. Keynesians have long since abandoned any pretext of apriorism and are now the most diligent of empiricists.
2. The way that AE uses its a priori reasoning is generally much mores stringent and much more microeconomic in its focus. The things it focuses on as important is very different
3. The time/production structure analysis of the economy is wholly Austrian and is very important, but with that said there is more to AE. I don't think that it can all be summed up in a single sentence. If I had to point out the most unique parts of Austrianism
Production structure analysis
Time analysis
Strict analysis of ordinal preferences and praxeological choice (including marginalism as an important byproduct)
Understanding of capital specificity
Economic calculation
Emergentism and spontaneous order
Limits of human knowledge
From these I think you can accurately label all parts of the Austrian paradigm.
Of course the notion of exact laws or a priori propositions can be ignored or left out in discussing the essential aspects of Austrian economics. But the underlying epistemological problem doesn't therefore disappear.
The statements that economics makes are not simply of the kind "the structure of production is" or "economic calculation is."
Instead, the economist wants to make statements of the form "doing X effects the structure of production resulting in Y" or "doing X effects economic calculation resulting in Y" or "doing X requires or assumes a,b,c knowledge which it is not possible for A to posses, and thus doing X will not lead to planned result Y."
In other words, ultimately economic study comes down to regularities: the relationship between some planned action X, and the asserted result of that action Y.
The starting point of experimental knowledge is the cognition that an A is uniformly followed by a B. The utilization of this knowledge either for the production of B or for the avoidance of the emergence of B is called action. The primary objective of action is either to bring about B or to prevent its emergence. (Mises, The Ultimate Foundation of Economic Science, p. 20)
Menger writes: The purpose of the theoretical sciences is understanding of the real world, knowledge of it extending beyond immediate experience, and control of it. We understand phenomena by means of theories as we become aware of them in each concrete case merely as exemplifications of a general regularity. We attain a knowledge of phenomena extending beyond immediate experience by drawing conclusions, in the concrete case, from certain observed facts (A) about other facts (B) not immediately perceived. We do this on the basis of the laws of coexistence and of the succession of phenomena. We control the real world in that, on the basis of our theoretical knowledge, we set the conditions of a phenomenon (A) which are within our control, and are able in such a way to produce the phenomenon (B) itself. (Investigations Into the Method of the Social Sciences, 55/56)(A's and B's added by AK)
Then, there are fundamentally only two kinds of regularities: empirical and exact.
The types and typical relationships (the laws) of the world of phenomena are not equally strict in all cases. A glance at the theoretical sciences teaches us rather that the regularities in the coexistence and in the succession of phenomena are in part without exception: indeed they are such that the possibility of an exception seems quite out of the question. However, some are such that they do indeed exhibit exceptions, or that in their case exceptions seem possible. The first are called laws of nature, the latter empirical laws. (Investigations into the Method of the Social Sciences, 1985, p.50)
(note that Menger refers to laws of nature as "exact laws.")
Mises's reasoning in this respect, or at least the implications of his reasoning, is largely overlooked. If we speak only of empirical regularities (those regularities for which we agree that it is not absolutely necessary that Y follows or is copresent with X), then what is the epistemological basis for our assertion that doing X will bring about Y or our assertion that doing X cannot result in Y? Mises argues that no numerical constants can be found in the social realm. If this is true, it means that propositions about regularities in the social realm cannot be based on a historical statistical correlations between X and Y. Historical correlations are ruled out. This situation is obviously not solved if we replace historical correlation with a survey of opinions, such as "most economists surveyed believe that doing X will result in Y." Doing so may be politically expedient but is obviously unsatisfactory from the point of view of science. If we consider only empirical regularities, and if we rule out historical correlation and opinion surveys as insufficient scientifically, then where does this leave us regarding our propositions about regularities? I believe it leaves us with the ability to say "if we do X, Y might happen" and "if we do X, Y might not happen." That is where we stand strictly scientifically.
However, in justifying a given policy proposal, we know it is not sufficient to make weak statements such as these. We have to find a way to make the link between X and Y stronger, or else abstain from advocating the particular policy. In cases where we do not want to abstain from making the policy proposal, we are then left with no choice but to strengthen the link between X and Y with historical correlation and opinion survey evidence.
The underlying scientific/epistemological problem is not solved, but we feel the practical need to make propositions extending beyond what our scientific framework warrants.
I believe Menger and Mises both recognize this situation, and realize that the solution is to be found in the notion of exact laws and a priori knowledge.
Strictly speaking, we cannot predict whether or not I will arrive at the location toward which I am walking. This is an empirical question. But I can be absolutely certain (as much as I can be certain of anything) that if I walk toward some location X, I will walk away from a different location Y.
Thus, both Menger and Mises see "exact" or "a priori" knowledge of this sort as the ultimate basis of economic propositions:
The aim of this orientation, which in the future we will call the exact one, an aim which research pursues in the same way in all realms of the world of phenomena, is the determination of strict laws of phenomena, of regularities in the succession of phenomena which do not present themselves to us as absolute, but which in respect to the approaches to cognition by which we attain to them simply bear within themselves the guarantee of absoluteness. It is the determination of laws of phenomena which commonly are called “laws of nature,” but more correctly should be designated by the expression “exact laws.” (Investigations, p. 59)
Much of Mises's epistemological work is devoted to his theory that the logical necessity entailed in social regularities derives from the logical structure of the human mind (from the structure of consciousness).
When Mises writes about socialist economic calculation or about attempts to manipulate interest rates, he's not saying that doing these things (X) might have Y consequences. He's saying that doing X must necessarily result in Y. (or that doing X cannot possibly result in Y)
Why is there a tendency to avoid discussion of exact laws and a priori knowledge? I believe the reason is that the attainment of exact knowledge requires a complimentary diminishment in normative theorizing. As exact knowledge increases, the epistemological basis of normative theorizing is eroded. Conversely, maintaining a normative-friendly realm of social theorizing requires that exact laws not be allowed to enter. I may want and prefer that government decrease regulation and taxation and that they allow market-made money to emerge. But it is unlikely that I can provide a theoretical explanation of how doing these things (X) will have the results I claim it will (Y), which explanation does not rely (implicitly or explicitly) on an account of regularity that is scientifically insufficient. (that does not rely on historical or statistical correlations or surveys of opinion)
When we ignore mention or study of exact laws, this problem doesn't go away. It simply means that our statements about social regularity can only be as strong as their underlying epistemology will warrant. If our statements about social regularity are not exact ones, and if statistical correlations and opinion surveys are deficient scientifically, then what is the basis for Austrian statements about social regularity?
I don't think any important discussion about the essentials of Austrian theory can afford to ignore this question.
I don't mean to dismiss the micro aspects of Austrian economics but rather highlight a perspective that seems to get marginalized, at least here. I'm kind of reminded of fundamentalist Christians who when asked what distinguishes them from other sects of Christianity say something like, "our beliefs and practices are based on the Bible." But don't Catholics and Lutherans also base their beliefs and practices on the Bible? "No, they add stuff. No, they don't follow what the Bible really says. No, not anymore." But the question I want to ask is, what are those beliefs and practices?
What I've been contemplating is something of a Nietzschean revolution in the way we look at economics. A large part of Nietzsche's project was to displace metaphysics as the foundation of ethics. Nietzsche thought most (all?) of western metaphysics was actually the expression of the same ethics--"slave morality." Applied to economics, this would mean displacing micro as the foundation of macro. This re-prioritization of macro, as the unstable realm of crisis and "strife" (Heraclitus), could offer an anti-foundationalist mode of economic analysis.
And I don't mean to highlight Austrian economics alone. I think Marxian economics also suffers from the same over-emphasis. Many seem to interpret the "labor theory of value" and "exploitation" as somehow the foundation of Marxian economics. In doing so, they neglect Marx's treatment of crisis, of the "tendency of the rate of profit to fall." Bohm-Bawerk not once mentions the latter, but rejects Marx solely on the former. The debates end up looking like Kant's metaphysical antinomies.
I've also been intrigued by Nietzsche's critique of the concept of natural laws. This of course applies to economic laws. He says it doesn't make sense to speak of laws when the things being considered are just behaving the way they naturally are. There's only a law when there is some coercive external force. Thus, Nietzsche applies this argument to the law of non-contradiction, which is not how things are but how we judge that they should be. It's not that we should base our values on logic but that logic is based on our values.
If anyone is interested in exploring this novel approach to economics, I highly recommend Joseph Belbruno's blog.