The Intuitive Qualitative Model of Austrian Theory

This entry ties all the previous post on this subject together, it is rather long and wordy for a blog but the diligent reader will get sa feel for the argument I am making here. If this can be understood the exact mathematical representation will be much easier to understand. Occam's razor says the solution to a problem will always go towards the simplest explanation. So it is with this argument. The only advanced principal beyond sixth grade new math is the concept of a Dirac Delta function which can be used easily even if the exact mathematical basis is unclear, that can be left to the experts.

History has shown that dogma is most strident as it is on the verge of overthrow. The history of science is a prime example of this assertion. Near the end of the 19th century many physicists lamented the end of physics. A generation later Relativity and Quantum Theory rewrote all the dogma. By the end of the 20th century dark matter, and the accelerating expansion of the universe are doing it again. Math tells us what could be true, but physics tells us which of these possibilities are actually true. A good physicist knows when it is time to put the math down. Math and Physics have been the dogma from which the modern world was engineered from the medieval fabric that it inherited. Ever since Isaac Newton published his Principia modern science has taken the river of time as an axiom. Space-time is the Cartesian product of the river of time and the three dimensional world that we live in, observe and measure. Albert Einstein used the Lorentz Transformation from Special Relativity to create a General Relativity in which space and time merge into a curved space-time. What if this were wrong? What if time is a creation of man to put order into sensory data so that the mind can comprehend the environment? It is not is not a river at all. It does not exist; animal senses have fooled us into creating something from nothing. Could time's role be that of a parameter, not as a basis coordinate degree of freedom in the physical world? Could there be no space-time only timeless space? This may not be as bizarre as it sounds. There are no physical measurements of time (of which the author is aware) that are not actually measures of distance. Thus there are no experiments that measure time directly, as it may not be possible. Quantum Theory has shown the impossibility of stopping motion, even at absolute zero. We mislabel time when we convert a large distance into a small number by inversion. Einstein used the speed of light as the conversion constant. The constant is the speed of light which if measured in angstroms of light is a very large number. Instead we invert that number and call it a second and then fool ourselves into thinking it is real by watching clocks and think that the invisible river of time is flowing by when it is just the hands making circles, i.e. motion. Isaac Newton invented the Calculus in order to understand gravitation. His equations became the basis of Potential Theory from which much of mathematical physics is derived. Schrödinger’s Equation, one of the basis of modern Quantum Mechanics is just a perturbation of the heat equation derived from a potential. Still this is not the place to go into many of the myriad ways popular theories fail us like string theory, QCD with the ultraviolet cut-off, dark matter, and the acceleration of the Hubble constant, etc. Physical theory is now measured at the edges of knowledge, at the extremes where understanding through mathematics breaks down: just after the Big Bang, near the singularity of a black hole, between entangled qubits. Here the answers from the equations go astray as the mathematics fails. The physics does not fail, because we had a Big Bang, Black Holes with singularities exist, and the Einstein-Podolsky-Rosen paradox of entangled information is measurable. Perhaps time itself is the problem. Using time as a metric perturbs our equation in to error. If time does not exist then what does the differential 'dt' become? That's easy, it is zero. No point in trying to integrate that. The problem occurs with all the many differential equations with time as an independent variable. They need to be restructured to reflect time’s new role as a parameter and not as a basis. Julian Barbour is a theoretical physicist trained at the University of Cologne. Unlike the majority of his peers he has been self-employed since graduation. This means he does not have to write peer reviewed papers as a condition of employment. He enjoys the luxury of real academic freedom. It also means that he does not have to adhere to dogma of his peers when publishing. He can write without fear or suppression or repercussion. He is independent of establishment dogma with regard to physical theory. In this respect he is unique. Dr. Barbour is an expert in translating Russian technical material into English thanks to his fluency in the Russian language. This provides two benefits, the first being that absorption of knowledge during translation from a different cultural and technical organizational background (the old Soviet Empire), the other being academic freedom; both of which may essential to his work. The first thing that I thought about when I read Barbour's book The End of Time was not physics but economics. If there is no time then there are no differentials with respect to time. This causes problems for a lot of mathematical econometrics. I have been very critical of the results of econometric modeling by the central bank here and elsewhere. It has been my opinion for a long time that econometrics is voodoo, a phony act, a sideshow perpetrated by the central bank and their paid shills to make economics have the appearance of an exact science, which it is not! This sideshow masquerades the underlying reality where the body politic and the public fisc suffer from it egregiously. If econometrics worked then we would never have a recession, depressions would thus be impossible, houses would always rise in value, retirement funds would allow the masses to retire early. Gold as a quaint acronym would have zero value and would be free; we might pave roads with it or build dogs houses out of it. Roast ducks would fly into the mouths of the proletariat who would just have to open their mouths from the comfort of the recliner in front of the big screen flat panel HD television braying Fox News Fair and Balanced. Wait a minute have I lost my mind? Based on the past couple of years econometrics clearly does not work. State central planning fails everywhere it is tried. The Soviet Union certainly failed as a model of social organization. The central bank and the fiat currency cause every country that adopt it into a race to bankruptcy. The Soviet Union showed how a very sophisticated technological warfare/welfare state can have a first world military machine and a third world social structure. This lesson should be attended to by all policy planners. The United States is nearly bankrupt, the stock market has tanked, and multiple major banks have failed and in the process have become explicit vassals of the state. Clearly by any responsible metric of predictive power econometrics as a science fails miserably. There is no factor in the stochastic equation for something like the Madoff fraud, our current liquidity trap, housing bubble or the outright failure of major industrial concerns. These are human nature injections into the system that mathematics will never be able to describe. Beyond all the stupidity, the criminal, the liars, scams and cheats are misbehaviors of governmental administration. Who would have imagined in the campaign of 2000 that a "conservative administration" with a Republican Congress would go on the largest and most irresponsible spending spree in all of the world's history?You might guess at it and get lucky, but you cannot model it from principles a priori. Beyond that who would imagine all of the privileged and wealthy aristocrats falling for one of the oldest financial scams around, the Ponzi scheme. These are "stochastic" reasons for the failure of econometrics, beyond Barbour's timeless space. Banks, Finance Companies, Mortgage Lenders and Insurance companies have not been the only victims here. Malinvestment the major product of the central bank distorts the economy in many additional ways. General Motors, and Chrysler are on life support with their life blood, and cash pouring out. Maybe the econometrics of building more SUV plant’s was not a good idea, nor was agreeing to pay unskilled labor $73/hour? Call it mal-investment a folly driven by econometrics. Much of the problems distorting the business climate are from central bank induced shenanigans that perturb the normal economic activity. Housing prices have evaporated along with their equity and the 401K's that many of us (mistakenly) thought made us rich. You may also have to forget about retirement. Don’t forget to thank your bi-partisan elected officials for that. Econometrics and the monotonic increase in money supply (liquidity injection) created the illusion was that much of the aforementioned was ever real. The stock market has not lost value; the illusion was that the value was actually there to begin with. The trillions of dollars of wealth lost never existed to begin with because it was an inflationary chimera courtesy of the Federal Reserve Bank. What we have now is the normal market reaction to malinvestment: liquidation and retrenchment. This is the market working, correcting the inflationary orgy courtesy of Alan Greenspan, Congress, the central bank, the loyal vassals and sycophants. The fiat currency has done what the Austrian Economists always said it would, asymptotically approach zero. To me it appears that all the econometrics were not worth the paper they were printed on (no pun intended). Economics had gotten silly when it started using Riemannian manifolds and such. The proponents of this technology are blindly applying it to real problems and hoping an answer would pop out. Based on the results I would have to say it is not looking very good. Why is this? For starters there is no continuity in economic theory! All economic transactions are discrete; there are no fractional transactions, no time coordinate to integrate differential equations along. I can imagine a world with 1 spatial direction and 3 time directions, I just cannot live there, as a model it would only be good for mathematical analysis, it is not physical in the way our world is physical. The math is good but the physics is not! Econometrics as practiced by the Central Bank has been a disastrous failure. The current chairman of the Fed Ben Bernanke has written volumes on this crap. So far during his tenure we (US) have raced passed a socialist, negative population growth, decaying European in the race to decimating our economy and evaporating all equity. Greece is now sprinting to catch up. Sure you can take a whole bunch of discrete data points and fit a curve to it and fool undergrads in macroeconomics, but what has that got to do with the economy? It has no value as predictive science.The economic Humpty Dumpty, fractional reserve banking, central planning, and fiat currency, has fallen off the wall (shoved actually by Greenspan et al). We should not waste any time putting it back together as some kind of Frankenstein patchwork of Federal Programs, public-private ventures, and liquidity injection so that it can stumble around creating more carnage. Ludwig Von Mises the Dean of the Austrian School of Economics had no use for mathematics in economic theory. He knew it was specious, a facade, not real. Mises knew that economics is a qualitative theory that tells us what will happen, not when. He also knew that social engineers (politicians, judges, bureaucrats) also strive to solve problems by codifying their models into public policy and law. Resources are finite; policy makers desire a maximum return to benefit the citizenry, with a minimum of input (taxation). These variation problems as they are called are alluring models for economists to transpose into their domain. It works for the physicists, why not the economists as well? Thus attempts torigorize economics via mathematics has been a popular approach for well over a century. Mathematical models are built to represent the problems and variational approaches are crafted to find the solutions. The calculus of variations has been used and abused by economists over the years trying to find extremal solutions ineconometrics. Carl Menger along with many others have gone down this road unsuccessfully. Ludwig Von Mises set the gold standard for rigorous deductive logic in the field of economic thought. He recognized the problem of mathematical modeling in economics when he wrote about math in the Epistemological Problems of Economics: "Mathematics has significance in the natural sciences altogether different from what it has in sociology and economics. This is because physics is able to discover empirically constant relationships, which it describes in its equations. The scientific technology based on physics is thereby rendered capable of solving given problems with quantitative definiteness. The engineer is able to calculate how a bridge must be constructed in order to bear a given load. These constant relationships cannot be demonstrated in economics. The quantity theory of money, for example, shows that, ceteris paribus, an increase in the quantity of money leads to a decrease in the purchasing power of the monetary unit, but the doubling of the quantity of money does not bring about a fifty percent decline in its purchasing power. The relationship between the quantity of money and its purchasing power is not constant. It is a mistake to think that, from statistical investigations concerning the relationship of the supply of and the demand for definite commodities, quantitative conclusions can be drawn that would be applicable to the future configuration of this relationship." He also said: "As soon as we introduce a concrete datum in our deliberation on human action, such as the price of a commodity expressed in terms of money, we leave the field of economics and enter that of economic history, even if it be the history of this very last moment." Many techniques are available for discrete problems. Economic transactions can be modeled as a network using graph theory. A graph consists of nodes and vertices. The vertices link nodes in a temporal fashion, it orders the past (as long as we use directed graphs). There are no present and future economic transactions since there are no nodes for them. Any economic transaction will always be in the past. Negotiations for a transaction, the pricing relationship, the terms and conditions may occur in the present. When completed the transaction itself is always in the past, even if delivery and payment are in the future. One can plan for the future, and execute that plan when the time comes, but the transaction itself is always history. Time is no longer a basis, it becomes an ordered graph using lattice theory. Every society that has tried to put mathematical economic theory into practice with the Central Bank, fractional reserve banking and the fiat currency has wound up in the same boat as us: broke, deeply in debt, with a parasitic central state sucking the life out of the body politic, along with staggering deficits. We are all together in this ongoing failed experiment in econometric management of the discrete economy of uncounted billions of discrete transaction. There is a way out. Listen to Von Mises! Embrace the free market, abolish central banks everywhere and the fiat currency. Privatize everything and gradually lay most federal government workers off and as the economy expands their precious labor will be in short supply, high demand, and thus high wage. They can get jobs like the former auto workers all eventually will. Call all the troops back from overseas and let peace and freedom ring! Things will change for the better and soon. The current disaster can soon be just a bad memory, a hangover of a youthful cultural indulgence in financial promiscuity, and wanton profligacy in silliness. We are out of time, and that is a good thing, as we wash all econometrics, central planning, social engineering, and federated government away. Individuals can and will plan for the future. Business will sprout up to employ everybody once the parasite of the federated state is laid to rest, R.I.P.! Let's vote it out, shut it down and adhere to the Constitution (no differentials with respect to time there). I have known many entrepreneurs and venture capitalists. I have worked in multiple startup companies and I have never heard anyone say that if we integrate this or take a derivative of that using econometrics as a basis for a business plan. Of course not, because it would be meaningless and would lose money, which is death to the entrepreneur. They cannot afford to dally with frivolity when time is short, and profits are to be made, this is the manna of Human Action and the indication that correct decisions are being made. Profits are the information theory of Human Action. Yet losses are important as well, they tell you something almost as valuable; that what you are doing is wrong and to stop it before you go broke: a lesson that Federated Governments never learn. I believe any form of knowledge tools should be available to the private sector. Differential and Stochastic Equations, risk management, field theories, divining entrails and Magic 8 Balls are all tools that have validity in some domains, privately. Time Series econometrics in the public sector has proven its worthlessness so let us discard it as a paradigm. What humans call time is like a metronome it; keeps the pace of the activity, but like the metronome it is not intrinsic to that activity. I prefer Beethoven when the metronome is not clicking away, it is the motion of the instruments that makes the music, and the metronome is superfluous. So it may be with public sector econometrics. What I am proposing here is bold. Modern econometrics does not work, the proof is in failed policies of all central banks, Unless we consider bankruptcy as strategy worth emulating. Time will be gone as a degree of freedom in the economic world to be replaced by graph theory, functional equations and integration, delta functions, lattice theory and path integration. These things work, and do not require time, but that is a story for another day. In closing let's remember what George Washington said in 1796 in his farewell address for he is admonishing the future and we are in that future, one and all. "As a very important source of strength and security, cherish public credit." Do not destroy the public credit as the trillions of fresh debt are in the process of doing. This article was originally posted on Lew Rockwell's excellent web site. I post it here in the hope of stimulating some dialog with Austrian Economists. I plan adding more content on this topic here two flesh out what I believe to be a proof that Austrian Economics is both correct and to show why it must remain a quantitative science. Human Action is designed to alleviate that state of mental tension that exists when one is dissatisfied. Somewhere losts in the mists of time sat a human being cold, wet and hungry and tried to do something about it. This was the first Human Action and we do not know when, or who performed it. What we do know is that over the intervening 5,000 years of written history and 25,000 years of anthropological history that man beyond all other animals has used Human Action to alleviate human misery and suffering which is the default condition of the natural world. Economic cooperation in a market economy has provided the standard of living that is necessary to keep six billion plus human being alive on this small rock. Humans like all animals can be modelled on some level as a state machine, we have input, we have outputs, and states mental and physical locale. All animals must observe the 3 basic patterns of reproduction, input (eating), and output (excretion). Inputs are nutrients that are essential for maintaining homeostasis, and caloric fuel fior muscular and cognitive processing. What an input is varies by speices, each to their niche so that economy of utliity is maximized in the ecosystem. Outputs also vary by species but all have enteropic waste products which are inputs with the species specific nutrients removed. Reproduction being the third most basic pattern if it is not observed than an individual genes have zero probability of propagating into the future. These are the fundamental activities. Somewhere someone realized that food if in abundance could be stored for future consumption. This is the most primitive feedforward control element in the human economy. Economists call this a low time preference behavior. The consumption is delayed to some future time rather than in the current moment. Most animals cannot do this, when food ios available it is consumed until satiation. A simple model of subsistence would be a graph of the simplest transaction a human being (actor) follows a path to acquire food or some other good that has utility. At the most basic level there is caloric expenditure of search and acquisition. When the acquisition is complete the actor has three choices: 1. 1. Immediate consumption for satiation (high time preference) 2. Storage for future consumption (low time preference) 3. Trade with another actor (could be either high or low time preference) If choice #1 is made the actor has traded effort for gratification and the corresponding decrease in the state of mental tension that motviated the path. If #2 a profit has been made which provides capital for the future and is the basic feedforward operation. The last choice #3 can either be high or low time preference depending upon subsequent transactional behavior. In the previous posting I discussed the basic operations of the action of a subsistence human culture. Since we are considering the ramificiations of Human Action we will ignore other species. While it can be argued that other species show some of the behavior (eg squirrels store nuts for their own future consumption but do not trade) of Human Action that do not show the complete range of the behaviors and for future arguments will not be discussed. This is not a discsussion on biological altruism. The feedforward control demonstrated the basic principles involved in Human Action. Dissatiafaction exists which motivates action deisgned toward satiation of the dissatisifed mental state. A path is followed in order to achieve this goal. A transaction occurs and after the transaction anothre path is followed. This is correctly modeled using a branch of mathematics called Graph Theory. Graph Theory belongs in the domain of mathamtics called Combinatorics. A basic graph consists of vertices and edges. A directed graph the vertices have arrows. The arrow determine the before and after relationship which can be correlated with time. A cyclic graph is not allowed in this theory, but all graphs must be directed. A transaction is always history even if it is history of the very last moment. The transaction has two values 0 and 1. A value of zero means that no transaction occurs, and a value of 1 means that a transaction did occur. There no indeterminate state of a transaction. The mathematical representation of a transaction is the Dirac Delta functional. A transaction is always voluntary it represents an agreement between a producer and a consumer to have a transaction. The transaction represents the change in state between producer and consumer, even if the source/producer and the sink/consumer are the same actor. A transaction is the fundamental operation of the Free Market Economy. All human beings motivated by unsatisified desire give reification of their Human Action by participating in the market. The market is nothing more than the set of all transactions. The Free Market is the set of all voluntary transaction between supplier and consumer as represented by the set of all transactions.Transactions are always postivie and integral. The set of all transaction can be put into one to one correspondence with the set of natural numbers and are this denumerable in principle. Profits and satisfied desire are the expected, but not guaranteed outcomes of a transaction.. The producer/seller seeks a profit and the consumer seeks satisifaction. The profit is feed forward into the future as is the satisfaction, even if it is the satisfaction of the next moment. References: 1. Brief Introduction: http://mathworld.wolfram.com/Graph.html 2. Rigorous Introduction: http://diestel-graph-theory.com/GrTh.html (much thanks for Dr. Diestel's Human Action in making this book, the product of thousand of hours of labor available for free) 3. Human Action: http://www.mises.org/books/humanaction.pdf 4. Money and Credit: http://mises.org/books/moneyandcredit.pdf 5. Man is an animal and can move around as he sees fit. Animals can follow their objects of desire whereas plants have to just sit and hope the environment supplies what is required. A man can follow whatever path he chooses in order to secure objects of desire. Primitive man would walk to the stream to drink fresh water, he would follow animal herds in order to hunt and secure game. All of these paths at a minimum required metabolic and caloric expenditure. In physical science thermodynamics account for energy flow and it tells us that in all activity a certain amount of energy is dissipated and lost from the reservoir available for useful work. Thus part of the metabolic expenditure and part of the caloric expenditure will be unusable and lost irretrievably to the environment. Fortunately the earth is an open system and the sun pumps massive amounts of energy from which all living things derive their reservoirs of energy available to do work to pursue the satisfaction from eliminating, even if temporarily, the mental tension from dissatisfaction. 6. Man can follow whatever path he desires as the surface of the earth is unbounded. However using his brain man will soon discover some paths are better than others. If thirsty going towards water has a better chance of success than going away from it. Stalking game when hungry has a better outcome than laying on the ground and waiting for food to arrive. Over time man builds up knowledge about which paths have better success than others. 7. A model of a subsistence behavior would be for a solitary man to follow paths in his environment in order to secure what is necessary for his survival. It is also possible that a clever might secure more than was necessary and decide to save the extra for the future. The excess between what he needed and consumed would form the first instance of a capital reserve. The path had yielded a profit. This profit would motivate him to follow that path out of an infinite choice of paths. This path might prove time and again to yield a continual surplus as compared against others paths. Who followed this path and when is lost in the mists of time, but it certainly did occur. The first capitalist was found. Capitalism is a behavior the focused drive using information about the environment to perform useful work to a surplus. Not immediately consuming the first surplus was the first instance of a low time preference behavior. The basic behavior that civilization was built upon. Human Action is implemented by actors behaving as their desires drive them. As Ludwig Von Mises said human desire can never be the subject of quantitative mathematics. I propose to say that Human Action can be modeled quite accurately using a branch of mathematics called Combinatorics. Those of us that went to grade school in the sixties were subject to a bizarre ideal of mathematical education called 'new math'. While it had little impact then we will use some elementary set theory in the arguments that I am proposing. An 'Actor' is a human being, sex being immaterial, because we are discussing Human Action only Homo Sapiens can implement it! An Actor has a few simple properties. An Actor can move along a graph edge from graph theory. The graph will be ordered so Lattice Theory will come into play as well. An Actor moves along a graph edge. Between vertices the Actor has no transactional Human Action. Action will be implemented at vertices as transactions.The Actor has a bag. The Actor's bag is the set of their private property. In the case of our subsistence actor the set might be quite small, in the case of Bill Gates very large, but the contents of the bag are the result of Human Action and Human Action only. An Actor can perform a limited number of operations in a transaction: 1. 1. add an element to the bag 2. remove an element from the bag 3. count/enumerate the elements of the bag 4. do nothing with the bag Elements and sets are axioms (a use for new math at last). Those with a mathematical background must bear patiently while I paint the tableau of human action qualitatively; rigorous proof will come after the verbage is fleshed out which will make it easier to understand by those with less of a taste for abstraction and reification. "Every formula in a book cuts its sales in half." Dr. Steven Hawking Albert Einstein is widely regarded as the twentieth centuries greatest genius. I would like to posit that this is not true but that title really belongs Richard Phillips Feynman. Dr. Feynman was certainly a curious character. He did not like quantum mechanics and said "No one understands Quantum Mechanics" pithily. Becuase of his dislike he set about trying to find a new and imporved tool. Quantum Mechanics is a tool that gives answer of limited accuracy about things that are very small: electrons, protons, atoms, etc. It is a framework for answering certain, but not all questions. Dr. Feynman invented the technique called Path Integration. He was studying the interaction of photons of light and electrons as they move (they never stand still). As he was working his way through this work he had an epiphany: "the electron can go where ever it wants", meaning it can follow any path. What the math was saying was that all paths must be accounted for which is where the probabilistic nature of Quantum Field Theory comes from. Path Integration has been found to be deeply connected with all accurate physical theories: General Relativity, Quantum Field Theory, Quantum Chromodynamics, Lattice Quantum Gravity and String Theory. He was awarded the Nobel Prize for this work. When I first read about Path Integration in Quantum Field Theory I thought of economics and not physics. Dr. Feynman's miracle tool has application here as well. In a market economy the consumer can go anywhere they want and choose to buy or not buy any good or service subject to a single limitation that because we have a free market economy the exchange of goods and services forms a voluntary transaction. The Free Market does not admit an invountary transaction becuase by definition it is then not free. H(A) = P(x) - Sum(Costs) Action = price - cost where positive action is profit, and negative cction is a loss. What sets this representation apart from simple accounting is that we will develop this equation using graph, lattice and functional integration theories. In a previous age market transactions were made by exchanging goods between producers. The cobbler gave the baker shoes and in return received bread. The division of labor allowed those to produce what they were best at, and in this division of labor everyone profited even if they did not know that they did. It did not make sense for everyone to know how to bake bread, or cobble shoes or farm fields or husband animals. Instead money was created to make these transactions more efficient between producer expwerts. The money itself was not particularly useful in and of itself, it was just a way to concentrate capital and move it around unambiguously. Who would want to carry a sack of shoes around when shopping for bread, clothing or automobiles? No one can eat money it cannot be turned into bread only exchanged for it. In order to define price we will have to define money. In order to define money we will have to define the intrinsic quantity of exchange ratio which is a covariant density. Keeping Hawking’s maxim in mind on formulas we will just take this term as something mathematical with a useful property. The particular material chosen as money will have many qualities it must be durable, it must be portable, it must measureable to prevent fraud. Historically gold and silver were chosen for this function being noble medals. The exchange rate of gold in 1932 was 1 ounce of gold was 20 dollars USD. If you did not want to carry around a pocket full of heavy clanging coins you could carry a dollar which was nothing more than a receipt for the gold you could redeem somewhere for the ‘money’. The dollars were not the important thing, the gold was. The exchange ratio was important to facilitate storage and transport. The covariant density of the gold was where the value was stored. The covariant density was a ratio, an intrinsic quantity. In order to get an amount from a covariant density it had to be multiplied by a scalar. Price is the result of the scalar (natural number ie 1, 2, 3 …) multiplication with the intrinsic or covariant density of money, in this case gold. The covariant density of the medium of exchange is what allows both sides of a transaction to assess the value of the exchange to them and to proceed according to their desires. When a buyer and a seller agree on a price for exchange then a market transaction occurs free and voluntarily. What facilitates commerce is real money that has the property of covariant density. This is a tangible thing; it can be measured in a laboratory and the measurements using the scientific method will be the same for anyone anywhere. This means that Americans, Iranians and North Koreans can all have a common framework for peaceful commerce by just agreeing on a covariant density based medium of exchange. No central banks are required, no currency markets, no middle men, no fraud, no shenanigans. This is how commerce was in America prior to 1913. What does the Federal Reserve Note have as a covariant density, where is the intrinsic value, where is the exchange ratio? Nothing and nowhere, it has no intrinsic value beyond the fact that hundreds of millions of people have been fooled into exchanging their labor, goods and services for these notes without a density. How does one assay a Federal Reserve Note? One cannot because the Federal Reserve Note has no covariant density it always, slowly but surely declines in value. The miracle of action at a distance occurs. The Federal Reserve Bank ‘prints’ a new dollar and inexorably this act causes a tiny diminuition in the ‘value’ of the ones held by everyone else in the world. Because there is no covariant density in the medium of exchange they can get away with this because no one has a frame of reference to value a dollar with when their oare so many of them and in a short time. Yet millions of us do qualitatively over the longhaul, our salaries/wages/investments never grow as fast as prices. Slowly but surely budgets tighten and individuals make the inevitable adjustments to reflect changing reality. Paychecks do not go as far as they used to and the consumer purchases less and less, contracting the economy. This does not happen to those at the Federal Reserve they get a dollar for free, what magic! In order to achieve this first they had to separate Americans from their backward ways of clinging to a gold standard. FDR did this in 1932 when he made gold bullion and gold coins illegal for Americans to own. Incredible in the land of the free how could this happen? FDR was in on the scam, he was gladly stealing from the household budget of everyone for all the funds he deemed necessary at the time, which is a trait that all tyrants have in common. In the tyrant handbook item number one is to get a central bank to eliminate commodity based money, ie that with covariant density. Now you have the populace right where you want them. Price is a scalar multiplied by the covariant density of the medium of exchange. A good field horse might be a pound of gold which would be 16 ounces of gold per pound times 20 dollars per ounce of gold, so the price is 320 dollars. No economists, econometrics , and central banks required. A Federal Reserve Note is not money, nowhere does it say that it is money! It has no covariant density so how do we value it? The mathematically inclined will have to wait a little while before we rigosrously define the covariant density. I want to impart an intuitive feel for these concepts before rigorize them later on it will make the math a little easier to understand Equality as a state of existence has been much sought after. We seek equal pay, equal protection before the law, equality of opportunity, equality between the races and equality among nations. Keynesian Economists use equations to justify under the facade of science a foregone conclusion: socialism brought to you courtesy of central banks . Econometrics is where the rubber meets the road between this philosophy and reality. The current Federal Reserve Bank Chairman Ben (printing press) Bernanke made his bones so to speak in writing books that no one has read, or ever will read, unless of course they are coerced to, like graduate students in Keynesian economics. I am unaware of any single field whose results have been as poor as econometrics, except perhaps phrenology and magic carpet riding. At any rate Austrian Economics denies quantitative exposition of econommic theory using mathematics straight from the lips of the master 'Ludwig Von' to paraphrase my good droog Alex. Nevertheless we will find that path integration techniques being exposited herein that we can make mathematically sound statements about inequalities. The inequalities that we find will give extremal information about limit points, infimum and supremum quantities. These are the old less-than (<) and greater-than (>) that bedeviled so many of us in eighth grade algebra class. They will now come back to us dressed up as old friends. Hopefully in tight mini-skirts like the girls in my 8th grade algebra class wore; transfixing your humble narrator when the subject matter was unable to. Cindy Geyer this one's for you, babe your blue-hair was light year's ahead of its time in 1969. These extremal results will not have kind things to say about central banks in general and our central bank in particular. The best I can hope for is that Bernanke and Greenspan roast in the same sulphurous pit in eternal peninence for what they have done. Finance is what you and I do with our own money, economics is what the government does with everybody's money. Alan (not smart enough slink away and go peacefully into the goodnight) Greenspan has the stones to deny that his central bank had anything to do with the current meltdown. It must have been those Trotskyite capitalist revanchist roaders, see p. 82 The Economist March 20, 2010. As Shakespeare said, "Me think the lady doth protest too much," or as they say in the hood 'if you're talking about it you're thinking about it.' Austrian Economics is all about property rights and individual liberty. While these concepts are clear in the mind of any devotee of Ludwig Von Mises work they have been more difficult quantify in a rigorous mathematical sense. The model being developed in this blog will make an easy to understand yet rigorous definition. An Actor has a bag, the contents of the bag are the Actor's private property. Property rights are defined as the voluntary action to either add elements to the bag or remove elements from the bag. The corollary to this is that theft is defined as any other Actor removing elements from another Actor's bag. If it is voluntary than the owning Actor removes the element from his bag, if it is involuntary than another Actor performs the removal. The final piece of the private property puzzle would be the involuntary addition of an element to some other Actor's bag that would cause a change to the elements in the bag. The bag is a logical consrtuct not a physical one. I can put my groceries in a bag, but my house would be more difficult. The Owner of the bag and its contents is the Actor whose bag it is. Human beings use action to implement a perceived extremal solution for possible outcomes. At the heart all of us want to maximize our profit and minmize the costs required for the same. Entrepeneurs, corporation and politicians all apply the same logic: minimum in, maximum out. Unfortunately their are no well prescribed laws for this extremal action like there is in physics. This is the core of Ludwig Von Mises disbelief in the usage of mathematics for quantitative economics. What I have laid out here so far, albeit quantitatively, is that this criticism can be addressed by using combinatorics. We deny the existence of time so differential equations using time (dt) as the independent variable have no meaning here. Human Action is the desire to seek a profit for any item(s) or service that is created as one of the infinite number of possible paths to be followed. The length of the path is the thermodynamic cost. As will be shown any path followed has a thermodynamic cost, even if it is only the calories consumed by the actors metabolism. This will form a lower bound as other costs like the fixed cost of an investment in a physical plant and the marginal costs of raw materials. The higher the caloric expenditure the longer the path. It has been shown elsewhere that energy density per citizen is the hallmark of an advanced civilization. SInce it is difficult to get exact thermodynamic costs on any particular path this component will be a least upper bound which means that more expensive criteria can be found. Since time does not exist in this formalism another method must be found. In this case we use graph theory in place of time. States/Items use a left lattice connection as before and a right lattice as after. The vertex in between is instantaneous and represents a state transition where inputs generate ouputs. What happens after input and before output is the Dirac (step) Delta Functional and is where probability shows up in our previously continuous model world. Since input graphs have different thermodynamic lengths it is not possible synchronize exactly when something occurred. Thus this theory dovetails nicely with the concept of general covariance and simultaneity per Albert Einstein, since economics does inhabit the physical world. What matters in transaction is before (left lattice) as the cost and right lattice (after) is the profit or loss. The most important component in the modern world is profit. Profit means something correct has occured a particular path has led to an outcome in which there is more order in the physical world. A loss means that something incorrect occurred and that there is less order in the world. Price and cost are the most important piece of information possible as they, and they alone determine the state of the future when it arrives (and it always does). Politics always seeks to alter possible outcomes in denial of the combinatoric reality. Governments use politics to take from the producer and give to the consumer in denial of the objective reality in which it occurs. Government are only rationing systems and they perform rationing in ways that the market combnatorics would never do. Governments have a tendency to pay too much for objects in the market (think the F-22 as an example), and to provide to low quality of a service (social security) than free markets are capable of. The logic of the combinatorics shows that this is true and provides are rigorous model for Austrian Theory, just as Ludwig Von Mises said. An excellent example of this would be the logistics system that Wal-Mart has, it delivers a cornucopia of consumer goods always striving for the costs to get lower. Their marvelous logisitics system provides value for consumers, it is a miracle of the twenty-first century. It provides far more than Defense Departments, Moon Landings, and Departments of State. It requires no coercion it operates dynamically, spotnaneously with profits and satisifed customers which as the logic of this extrema demonstrates are the two most important characteristics of a free and prosperous future oriented society.