Saturday, June 06, 2009

Human Action: Chapters 8-11

Summaries for chapters 8, 9, 10, and 11 are available from the Mises Institute.
From page 182:
It is true that these programs are often recommended by reference to divine institutions, to the eternal laws of the universe, to the natural order, to the inevitable trend of historical evolution, and to other objects of transcendent knowledge. But such statements are merely incidental adornment.

From page 193 (and one of my favorite quotes thus far):
In calling a rise in the masses’ standard of living progress and improvement, economists do not espouse a mean materialism. They simply establish the fact that people are motivated by the urge to improve the material conditions of their existence. They judge policies from the point of view of the aims men want to attain. He who disdains the fall in infant mortality and the gradual disappearance of famines and plagues may cast the first stone upon the materialism of the economists. (emphasis added)

From page 202:
A serious blunder that owes its origin and its tenacity to a misinterpretation of this imaginary construction was the assumption that the medium of exchange is a neutral factor only. According to this opinion the only difference between direct and indirect exchange was that only in the latter was a medium of exchange used. The interpolation of money into the transaction, it was asserted, did not affect the main features of the business. One did not ignore the fact that in the course of history tremendous alterations in the purchasing power of money have occurred and that these fluctuations often convulsed the whole system of exchange. But it was believed that such events were exceptional facts caused by inappropriate policies. Only “bad” money, it was said, can bring about such disarrangements. In addition people misunderstood the causes and effects of these disturbances. They tacitly assumed that changes in purchasing power occur with regard to all goods and services at the same time and to the same extent. This is, of course, what the fable of money’s neutrality implies. The whole theory of catallactics, it was held, can be elaborated under the assumption that there is direct exchange only. If this is once achieved, the only thing to be added is the “simple” insertion of money terms into the complex of theorems concerning direct exchange. However, this final completion of the catallactic system was considered of minor importance only. It was not believed that it could alter anything essential in the structure of economic teachings. The main task of economics was conceived as the study of direct exchange. What remained to be done besides this was at best only a scrutiny of the problems of “bad” money.
I really like how Mises sets this up. In my opinion, the Austrian Business Cycle Theory is one of the strongest contributions made by Austrian scholars. Here, Mises explains why what the Austrians find so obvious has been largely overlooked by economists. I wonder if this is a bit of a straw man, however. Mises, writing in 1949, knows that money matters to a whole host of economists. In the traditional Keynesian framework, for example, monetary policy has a real effect on the economy. Of course, it might be fair to read Mises as saying money has been overlooked for so long and only recently--as in the last few decades--have economists started to question the real effects of money.

Maybe the more important question, though, is whether economists TODAY believe money matters. Money certainly mattered in the original Lucas Island model, where individuals (dubbed island dwellers) only observe nominal changes. However, Lucas eventually rejected this idea when rational expectations were incorporated. Similarly, money matters for New Keynesians who point to menu costs. I am sure we will talk more about the ABCT in the future. My question for now is this: If a random sample of economists were surveyed, what percent would say that money is neutral?


David said...

I'm definitely not an expert on macro, but my guess is that economists who assume the neutrality of money (certain models in RBC for example) don't really believe it. Instead, they want to assume that in order to make the strongest claim they can about the impact of other factors. Its a much bolder argument to say that productivity shocks alone - without the influence of money - explain business fluctuations.

Perhaps related, in the first class of the PHD macro sequence, Cowen said that monetary economics has been understood the most well for the longest time compared to all other areas of economics. He said that he could teach monetarist theories out of Hume and not have to change much at all.

Justin M Ross said...

I'm not a macroeconomist either, but I think that most economists agree that money is non-neutral.

Depending on the subject, we wear one of two shirts, though. One is "Money is a veil" and the other is "Money is important." Money is a veil when we think about things like trade, but is important when we are thinking about the process in which money moves through the system.

Justin M Ross said...

I found much to think about in Chapter 8, which is by far the most Smithian chapter so far in the book. The chapter is primarily about methodological individualism and what it means for utilitarianism. First, let me quote from what I think is one of the more fascinating idea's in the book:

In a hypothetical world in which the division of labor would not increase productivity, there would not be any society. There would not be any sentiments of benevolence and good will.

That is truly powerful stuff because it is so contrary to the typical idea of isolation that DOL is often accused of creating. I never bought that story, but to actually think of DOL as the root cause of society is truly a novel idea to me. However, I have to think DOL is at least endogenous to society via norms. Is man a social being? Or is man a social being because our ancestors were dividers of labor?

Justin M Ross said...

One more comment on Chapter 8, and then I'll post in a day or two about 9...

The section on Ricado was brilliant (p. 159-164). The law of comparative advantage has long been one of my favorite counterarguments to those who accuse me of being a social Darwinist (not that I entirely understand what that should mean). The accusation is often that capitalism will kill off the weak so that only the strong survive, and usually by that they mean those who have some kind of mental or physical disability. Comparative advantage nullifies this claim, since by definition everyone has one.

The more sophisticated detractor will then argue that comparative advantage theory will only ensure each region will benefit if there is some factor of production that is fixed. This fits nicely with a chapter that largely revolves around methodological individualism, because it reminds us that it is not regions that matter, but people. If all factors are freely mobile, then they will gravitate to the best area for them. I have a nice allegory about souls in heaven trading with souls in hell for this point, which maybe I'll save for a future blog post.

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