Robert Murphy defends the ABCT – even though he doesn’t accept the Wicksellian Natural Rate of Interest

When Austrians (metaphorically) shoot themselves in the foot, the results are usually amusing.

We are treated to just such a delightful spectacle here:

Robert P. Murphy, “Mises and the Market,” Dailycaller.com, 26th August, 2015.
http://dailycaller.com/2015/08/26/mises-and-the-market/

This is Robert Murphy’s defence of the Austrian business cycle theory (ABCT) as an explanation of recent global turmoil on stock markets and other economic problems.

The astute reader will notice that in the course of the article Murphy casually mentions the Wicksellian natural rate of interest as the foundation of the ABCT.

But wait a minute … Isn’t Robert Murphy the author of this paper called “Multiple Interest Rates and Austrian Business Cycle Theory”?

In particular, doesn’t Murphy in this paper accept that Sraffa was right about the natural rate of interest?:

“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

And now the crucial quotation from Murphy:

“In summary, Austrians should familiarize themselves with the construct of a dynamic equilibrium, in which spot prices and other data can evolve over time, but where entrepreneurs fully anticipate such changes and squeeze out all pure profit opportunities. In this setting, there is no such thing as an objective real or natural rate of interest, so the Austrians cannot cling to their prescription that the banks ought to set the market rate to ‘the’ natural rate. However, as our last scenario above hoped to convey, it still is true that an intertemporal, dynamic equilibrium can be disturbed if commercial banks inject new money into the credit markets. If a Misesian boom-bust cycle ensues, the reason is not that the banks charged a money right below ‘the’ natural rate, because there is no such thing.”
(Robert P. Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 23).

So in print before our eyes Murphy has rejected the Wicksellian natural rate of interest – a “natural” and market rate of interest that would equilibrate savings and investment. We can add to this the rather embarrassing point that Murphy also agrees with Keynes that interest rates are a monetary phenomenon and a great part of Murphy’s PhD is devoted to defending a monetary theory of interest (as opposed to the Wicksellian theory).

But his recent defence of the ABCT just assumes that such a single Wicksellian natural rate of interest exists and doesn’t even mention his own rejection of the concept.

Is Murphy capable of explaining to us why the classical Austrian business cycle theory doesn’t collapse to its foundations if the natural rate is untenable as argued in his paper “Multiple Interest Rates and Austrian Business Cycle Theory”? Isn’t this massive hypocrisy on his part?

There are also a couple of other points I can’t resist addressing. Murphy in his article states the following:

“Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.

Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis.”
Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/

This is of course a claim from the classical ABCT: that artificially low interest rates drive excessive investment and create massive malinvestment leading to real capital scarcity and shortages and in some cases actually lack of resources to finish projects.

Anyone can see that this is a bizarrely – if not insanely – inaccurate description of capitalist economies since 2008, where there was massive idle resources, huge unemployment and significant unused industrial capacity.

It is also especially laughable because right after the quotation above, Robert Murphy correctly remarks that QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment driving alleged malinvestment by industrial firms or in real capital projects.

All in all, the Austrian story on modern capitalism is refuted by the empirical evidence and in Murphy’s case refuted by his own previously expressed ideas on the non-existence of the natural rate of interest.

Further Reading
“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Daniel Kuehn on the Austrian Business Cycle Theory,” December 5, 2013.

“Why the Austrian Business Cycle Theory is Wrong (in a Nutshell),” August 3, 2013.

“How did Wicksell, the early Austrians and Keynes define the Natural Rate of Interest?,” October 4, 2014.

“Another Example of Wicksell’s Second Definition of the Natural Rate of Interest,” October 8, 2014.

“My Posts on the Natural Rate of Interest,” November 19, 2014.

BIBLIOGRAPHY
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
http://consultingbyrpm.com/uploads/Dissertation.pdf

Murphy, Robert P. 2011. “Is Keynes from Heaven or Hell,” 7 July.
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html

Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/

Mises answers Robert Murphy on War Debt: Was Mises a Secret Keynesian?!

And, yes, before I get absurd comments below: the last question is facetious.

The issue is as follows. The Austrian economist Robert Murphy asks Keynesians a question about war and government bonds:

Robert P. Murphy, “A Sincere Question for the ‘We Owe It to Ourselves’ Camp,” Free Advice, 14 February, 2015.

The crucial questions Murphy asks are these:

“Why do governments issue savings bonds to their own citizens during wars?

To be sure, a Krugmanite would totally understand why a government in a wartime crisis would issue bonds to foreign capitalists in order to suck outside real resources into the country. But why–using the “we owe it to ourselves” mentality–would a government decide to finance a war through bonds issued to its own citizens, rather than levying higher taxes? Either way, the people alive “pay for” the war effort, right? The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right?”
Robert P. Murphy, “A Sincere Question for the ‘We Owe It to Ourselves’ Camp,” Free Advice, 14 February, 2015.

Well, let that notorious socialist, statist, progressive fanatic Ludwig von Mises provide a provisional answer:

“A good case can be made out for short-term government debts under special conditions. Of course, the popular justification of war loans is nonsensical. All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).

I will come to the issue of why it is better to issue a certain amount of government debt in wartime below.

But, first of all, note how Mises clearly rejects the idea that government debt per se to finance war impoverishes future generations: “[f]inancing a war through loans does not shift the burden to the sons and grandsons.”

I suppose that sends chills down many Austrian spines, for Mises sounds like he was channelling Abba Lerner here (to least to some extent). As Abba Lerner said,

“A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.” (Lerner 1948: 256).

“In attempts to discredit the argument that we owe the national debt to ourselves it is often pointed out that the ‘we’ does not consist of the same people as the ‘ourselves’. The benefits from interest payments on the national debt do not accrue to every individual in exactly the same degree as the damage done to him by the additional taxes made necessary. That is why it is not possible to repudiate the whole national debt without hurting anybody. While this is undoubtedly true, all it means is that some people will be better off and some people will be worse off. Such a redistribution of wealth is involved in every significant happening in our closely interrelated economy, in every invention or discovery or act of enterprise. If there is some good general reason for incurring debt, the redistribution can be ignored because we have no more reason for supposing that the new distribution is worse than the old one than for assuming the opposite. That the distribution will be different is no more an argument against national debt than it is an argument in favor of it.

8. The growth of national debt may not only make some people richer and some people poorer, but may increase the inequality of distribution. This is because richer people can buy more government bonds and so get more of the interest payments without incurring a proportionately heavier burden of the taxes. Most people would agree that this is bad. But it is no necessary effect of an increasing national debt. If the additional taxes are more progressive — more concentrated on the rich — than the additional holdings of government bonds, the effect will be to diminish the inequality of income and wealth.” (Lerner 1948: 260–261).

But to return to Mises, on p. 96 of Robert P. Murphy and Amadeus Gabriel’s Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition (2008), they apparently were aware that Mises held a view like Lerner’s:

“On page 228, Mises critiques the popular claim that war bonds allow the costs of a war to be shunted onto future generations. This is silly because all of the tanks, bombers, etc. consumed by the war effort obviously come out of current production. Of course, a war impoverishes future generations, but only because they inherit a smaller stockpile of capital goods than they otherwise would have.” (Murphy and Gabriel 2008: 96).

Did Murphy forget what Mises also said in the same passage?

Mises also said this:

“Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).

The meaning is not immediately clear, but we have some very good clarification from Mises’s earlier writings during WWI (Mises 2012 [1918]) as examined by Richard M. Ebeling:

“To give one more indication of Mises’s thinking on specific policy alternatives and choices, there is a passage in Human Action in which he says, rather cryptically in passing, that there may be good reasons under certain circumstances to fund some government spending through short-term borrowing. One only understands what he meant by this by reading a lecture he delivered in 1916 on the problem of funding the costs of the government's war expenses.

In this lecture, which is included in the forthcoming volume 1 of the Selected Writings of Ludwig von Mises, he praises the military successes of the Austrian army and the industriousness of Austrian businessmen in providing the manufactured goods required to fight the war. Mises reminds his listeners that borrowing does not enable the current generation to shift any part of the costs of a war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by foregoing all that could have been produced and used if not for the war.

Then he explains to his audience what today often is referred to as the Ricardian equivalence theorem, named after the early 19th century British economist, David Ricardo. In his 1820 essay on the ‘Funding System,’ Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back plus interest at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.

But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. Many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizeable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and the need for ready cash to pay the tax obligation.

Secondly, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than that of the government’s. As a consequence, the rates of interest these private individual's would have to pay would be noticeably higher than the rate at which the government could finance its borrowing. Thus, the interest burden from government borrowing that would have to be paid for out of future taxes would be less for the citizenry than the financial cost from them having to borrow the money in the present to cover all the costs of war through current taxation. Hence, it was both patriotic and cost-efficient, Mises said to those listening to his lecture, to buy war bonds in support of the war effort.

Thus, we find Ludwig von Mises explaining why, given the reality of government spending, under certain circumstances government deficit spending may be more desirable (from the taxpayers’ perspective) than a fully tax-funded balanced budget!”
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
http://mises.org/library/other-ludwig-von-mises-economic-policy-advocate-interventionist-world

So that was Mises’ view, and most of it seems quite reasonable to me, and one can refer to Mises’ essay “On Paying For the Costs of War and War Loans” (Mises 2012 [1918]) to see his views on this in full.

Post Keynesians would go much further than Mises, of course.

I suppose they would say the following:

(1) pure taxation has severe disadvantages for the reasons Mises notes, but also because the rich and ultra-rich will still be left with a lot of income and ability to consume goods. Given the problems of war, a mixture of taxation, bond issues, direct central bank purchasing of Treasury debts, rationing and wage and price controls is a better, fairer and more effective way to control consumption, finance deficits and to ensure that there is a just distribution of scarce wartime goods. In fact, this is what Western nations, by and large, did in WWII, and it worked well.

(2) Murphy asks:

“The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right?”

Perhaps the next generation might be indifferent, but the current generation who live during the war are not indifferent.

Taxation takes spending power and reduces it permanently: bond issues allow repayment of spending power at a future date and offer a very safe asset in return for current abstinence from consumption. Obviously, wartime would require a very high and punishing level of pure taxation (if there were no bond issues at all), but the more bond issues a government can make, the less it needs to rely on excessive taxation. A policy of bond issues to current domestic citizens is a fairer and better method than pure taxation.

(3) following from (2), wartime bond issues – especially to the middle class and poor (via their bank and savings accounts) – have the great benefit of providing an asset that can provide spending power after a war: more spending on goods and services will create more aggregate demand and more investment and higher employment in the peacetime years that follow war. This is important since there may well be a danger of a collapse in aggregate demand. And in fact this is what happened after WWII in the US: when expectations had become optimistic, there was a private investment and consumption boom, which was in part fuelled by the drawing down of savings as corporations and businesses liquidated their bonds.

Even in WWI, Mises noted that a great deal of Austro-Hungarian state debt was held by poor classes:

“The war loans [sc. of Austria-Hungary] are in the hands of domestic creditors, and so are most of the older Austrian and Hungarian government loans. It is erroneous to assume that only rich capitalists own state obligations. Our government securities were not issued solely to the rich and wealthy segments of the population. Directly or indirectly, their owners are largely the poor and poorest. The assets of savings banks and cooperatives are mainly invested in government securities, so that even the smallest savers have a stake, via the savings banks, in the continued servicing of the government’s debts.” (Mises 2012 [1918]: 224)

So it is better to offer government bonds to banks and other financial institutions, at which the middle classes and poor hold their money, than hitting them all with punishing taxes. That is correct.

(4) Murphy asks:

“The level of the debt they inherit just affects the volume of the transfer payments among them, but can’t make the next generation poorer, right?”

It does not necessarily make them poorer in terms of real resources, unless, as Lerner notes (Lerner 1948: 256), foreigners own a lot of the debt and use their spending power to buy real resources in the future that reduce the domestic consumption of those resources.

Further Reading
“The Post-1945 Boom in America,” July 15, 2011.

“Why Did WWII Lift America Out of Depression?,” August 21, 2013.

“Mises on War Debt: Not What you would Expect,” May 9, 2013.

“Lerner on ‘The Burden of the National Debt,’” October 23, 2012.

BIBLIOGRAPHY
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
http://mises.org/library/other-ludwig-von-mises-economic-policy-advocate-interventionist-world

Lerner, A. P. 1948. “The Burden of the National Debt,” in Lloyd A. Metzler et al. (eds.), Income, Employment and Public Policy, Essays in Honour of Alvin Hanson. W. W. Norton, New York. 255–275.

Mises, Ludwig von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Mises, Ludwig von. 2012 [1918]. “On Paying For the Costs of War and War Loans,” in Richard M. Ebeling (ed.), Selected Writings of Ludwig von Mises: Monetary and Economic Problems Before, During, and After the Great War (vol. 1). Liberty Fund, Indianapolis. 216–226.

Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Robert Murphy on Japan

Robert Murphy and Tom Woods discuss Japan in the video below.



At the beginning from 1.17–1.37 minutes of the video Woods makes an extraordinary claim:

“[sc Japan has been] … engaged in Keynesian policy for [sc. a] quarter century now, and, just recently, figures came out for, I guess, GDP growth there, and they were expecting, well, a couple of percentage points positive, and it turns out they keep sinking ever lower.”

This statement (admittedly poorly worded and probably confused) implies that Japanese real GDP has been contracting or falling for 25 years. That is pure nonsense.

Look at the graph below of real Japanese GDP from 1970 to 2011.

Despite its “lost decade,” real GDP continued a long-run rise even in the 1990s (despite a serious austerity-induced recession from 1997 to 1998), and has continued a longer long-run upwards trend for the last 24 years, although the global recession of 2008 to 2009 really hit Japan hard because of its reliance on export-led growth.

But it is nonsense to say that Japan has been either “mired” in recession or experienced a long run contraction in GDP growth since 1991, or that Japanese GDP has been “sinking ever lower” in that time. Even the recent GDP figures for the second and third quarters of 2014 aren’t that bad, speaking comparatively: they show a mild recession, but nothing like the bad recession of 2008–2009. And it seems quite likely that the new recession in 2014 has been caused by Japanese contractionary fiscal policy in the form of an ill-advised sales tax increase, a policy of fiscal contraction similar to the equally disastrous austerity of 1997 (more on that below).

Robert Murphy also makes this absurd error and asserts that Japan has “never recovered” from the collapse of its bubble and has been “mired in this rut” – presumably meaning suffering recession or stagnation – for over two decades. Murphy is just ignorant.

Of course, nobody denies that Japan did have serious economic problems in the 1990s and early 2000s in what has been dubbed the “lost decade.” But it recovered from this “lost decade” around 2003–2006. Admittedly, there is also some dispute about when the lost decade ended. Some argue it ended around 2003, while others that it ended about 2006, when positive credit growth returned and deleveraging in Japan’s private sector ended (especially by corporations). That was clearly a sign of much healthier economy and long-run recovery, and it is clearly absurd to claim, as Austrian economists like Murphy do, that Japan has “never recovered” from its 1990s crisis. Of course, Japan also has special problems because it is highly reliant on export-led growth and has a falling population. But these are not directly related to the issue of the asset bubble collapse and crisis of the 1990s.

If we wish to properly understand the “lost decade,” let us look at the history.

In the 1980s, Japan engaged in ill-conceived financial deregulation (Fukao 2003: 134–135), which was one major cause of the asset bubble in these years (although poorly designed tax policies and monetary policy were clearly involved too). The collapse of the asset bubble and the balance sheet recession (a form of debt deflationary crisis) caused the “lost decade.”

Japan’s lost decade involved lower real GDP growth arising from

(1) property price deflation after the collapse of the enormous asset bubble of the 1980s and stock market deflation;

(2) a debt deflation from (1) and from high levels of private debt, and continuing problems as the private sector was overloaded with debt and was weighed down by deleveraging, and

(3) banking problems in which banks were saddled with bad assets and non-performing loans (a crisis that became acute from late 1997).

But the “lost decade” of the 1990s was really an era of low growth, not continuous negative growth.

Many myths have arisen about the lost decade, and one of them is that Keynesianism somehow “failed” to work in this era, as repeated by Murphy and Woods. That is nonsense. If anything, Keynesianism saved Japan from a terrible depression. In fact, when fiscal stimulus was abandoned for austerity in 1997, the economy plunged into a recession.

Japan had mild to moderate Keynesian stimulus packages from about 1993 to 1997 (although the actual fiscal impact of some of the early ones is grossly exaggerated [Posen 1998: 41]), but the result was mild to moderate growth from 1993–1995. In 1996, expansionary policy produced an impressive 3.49% growth rate – much higher than anyone predicted (Posen 1998: 41). (As an aside, I highly recommend Adam S. Posen’s Restoring Japan’s Economic Growth [Washington, D.C. 1998], p. 41f. for analysis of the extent of fiscal stimulus in the 1990s.)

But then from 1997 Prime Minister Ryutaro Hashimoto imposed sharp fiscal contraction and a recession resulted.

A major consequence of the recession induced by fiscal contraction was that the Japanese budget deficit soared by 68% as tax revenue collapsed. This must be counted as one fundamental reason why Japanese public debt soared so badly. When fiscal expansion was applied again on a large enough scale in 1998 the recession ended and growth resumed.

All this is well known in the Japanese press:

“Japan’s first experiment in austerity policies began under Prime Minister Ryutaro Hashimoto (1996–98). Severe spending cuts were seen as needed to rein in budget deficits caused by previous efforts to recover from the 1991 Bubble collapse. Recession followed quickly. Tax revenues collapsed. The national debt increased.

Under Prime Ministers Keizo Obuchi (1998–2000) and then Yoshiro Mori (2000–2001), Japan returned to fiscal expansion policies and the economy recovered rapidly, with the Nikkei Dow share index reaching almost 20,000. But with tax revenues still only in the recovery stage the deficit hawks were able to swoop in once again under Prime Minister Junichiro Koizumi (2001-2006). Austerity in the name of ‘structural reform’ became the order of the day. The Nikkei Dow promptly collapsed to the 7,000 level, tax revenues fell again and the national debt increased by ¥200 trillion in just five years despite the boost to the economy from expanded exports to China and the United States.”
Gregory Clark, “Economics of Austerity Don’t Add up,” The Japan Times Online, August 15, 2012.

Japan in the 1990s was somewhat like America in the 1930s. However, Japan differed from the US in that it averted an actual depression, though as in the US its fiscal policy was not applied properly and was then reversed in 1997 in a disastrous error. In the US, Roosevelt reversed his moderate fiscal expansion in 1937, and the US relapsed into depression in 1938. Both 1938 (in the US) and 1998 (in Japan) serve as warnings of the dangers of austerity in a weak economy.

Above all, there was also flawed belief that monetary policy in the form of an experiment with quantitative easing would bring Japan out of deflation, when what was needed was increased fiscal policy.

It is a pity that the lessons of the Japan’s lost decade is forgotten.

On a purely practical note, what should Japan do? First, it should reject contractionary fiscal policy, including tax hikes. A first practical policy is that the Bank of Japan should engage in an aggressive bond-buying program to reduce its government-debt-to-GDP ratio. Further fiscal stimulus should be conducted in a way that stabilises and ideally reduces the government-debt-to-GDP ratio. Banking and financial regulation should be used to stop any further disastrous asset bubbles. Japan’s economy is heavily dependent on export-led growth, and so it should carefully manage its exchange rate to ensure demand for its exports is maintained. In the long-run, Japan needs to encourage more consumption and increase productivity growth. Finally, the 21st century will probably see a revolution as increasingly sophisticated machines such as computers with AI and robots are used in production. Japan is already a high-tech economy and will probably be at the forefront of this revolution. Japan is thus in a good position to increase its productivity growth and address the problems from its aging and falling population. All in all, Japan has reasons for optimism, despite its problems.

Further Reading
“Japanese Real per capita GDP and Population Decline,” September 16, 2014.

“James Galbraith on the Causes of Japan’s Lost Decade,” April 22, 2013.

“Japanese Real GDP Growth, 1925–2001,” January 22, 2013.

“Average Annual GDP in Japan 1980–2009,” May 22, 2012.

“Richard Koo on Europe, the US, and Japan,” February 8, 2012.

“Richard Koo on the Current State of the Japanese Economy,” September 3, 2011.

“Richard Koo on the Lessons from Japan’s Lost Decade,” July 4, 2011.

External Links
Over the years Bill Mitchell has written some excellent MMT analysis of Japan:

Bill Mitchell, “Japan thinks it is Greece but cannot remember 1997,” Billy Blog, August 13, 2012.

Bill Mitchell, “Japan returns to 1997 – Idiocy rules!,” Billy Blog, November 18, 2014.

Bill Mitchell, “Japan demonstrates the Real Limits on Government Spending,” Billy Blog, November 4, 2014.

Bill Mitchell, “Japan’s growth slows under tax hikes but the OECD want more,” Billy Blog, September 16, 2014.

BIBLIOGRAPHY
Clark, Gregory, 2012. “Economics of Austerity Don’t Add up,” The Japan Times Online, August 15.

Fukao, M. 2003. “Japanese Financial Deregulation and Market Discipline,” in Edgardo Demaestri, Pietro Masci (eds.), Financial Crises in Japan and Latin America. Inter-American Development Bank, Washington, D.C. 129–162.

Posen, Adam S. 1998. Restoring Japan’s Economic Growth. Institute for International Economics, Washington, D.C.

Watch as Robert Murphy’s Analysis of Martin Wolf Implodes before Your Very Eyes

Robert P. Murphy makes a curious set of assertions here:

Robert P. Murphy, “Martin Wolf, Closet Austrian,” Free Advice, 11 November, 2014.

Robert P. Murphy, “Martin Wolf Unwittingly Confirms Austrian Business Cycle Theory,” Mises Canada, November 11th, 2014.

In essence, Robert Murphy reproduces a quotation from a column by Martin Wolf, the British journalist and chief economics commentator at the Financial Times.

In his Mises Canada post, Murphy makes the astonishing claim that Martin Wolf is using an analysis of the causes of business cycles that is “thoroughly Austrian”:

“Now to be sure, Wolf is still a Keynesian in his prescriptions: he wants more monetary and fiscal stimulus. But my point with this post is to show that his diagnosis is thoroughly Austrian. Guys like Larry Summers and (yikes!) Paul Krugman, with their “secular stagnation” hypothesis, are also coming around to the view that Western economies have been bouncing from bubble to bubble, fueled by central bank policies.

At this point, more and more economists and analysts agree on the causes of our problems. Now we’re just disagreeing on the solutions. This is actually progress.”
Robert P. Murphy, “Martin Wolf Unwittingly Confirms Austrian Business Cycle Theory,” Free Advice, November 11th, 2014.

Unfortunately, Martin Wolf’s analysis is not “thoroughly Austrian,” nor are “more and more economists and analysts” agreeing with the Austrians about the causes of the current crisis or business cycles in general. The very idea is absurd. You can see for yourself how the whole substance of Murphy’s post unravels in the comments section of his blog as I point out various inconvenient facts, which I elaborate on below.

Neither in the article in question nor in the rest of his writings does Wolf endorse the Austrian business cycle theory (ABCT). The most positive thing that Wolf has ever said about the ABCT (to my knowledge) was on his Financial Times blog, where he stated that he had “sympathy with” some of the ideas in the ABCT but ultimately rejected it (see Wolf 2010). Clearly, Wolf is not saying banks or a central bank are driving a money rate below the natural rate of interest, and thereby inducing an “unsustainable” lengthening of the capital structure. Wolf is pointing to poorly regulated financial markets and asset bubbles as a driving, destabilising force of modern business cycles, as well as debt deflation and debt overhang in the bust and aftermath, but these things never had a fundamental role in the classic ABCT writings of Mises, Hayek or Rothbard.

Martin Wolf actually takes a maverick heterodox Keynesian/Post Keynesian explanation of the crisis, and even invokes Hyman Minsky’s theories in his writings. In fact, in Martin Wolf’s recent book The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – from the Financial Crisis (Wolf 2014) Wolf commits himself partly to a Post Keynesian analysis, and explicitly endorses Hyman Minsky’s theories (unfortunately he also endorses the global savings glut thesis, which is not generally endorsed by Post Keynesians).

Right in the preface of his book, Wolf notes that there is a superficial similarity between Austrian and Post Keynesian analyses, but profound differences in their explanations of both the causes of and solutions to the crisis (Wolf 2014: xvii).

It didn’t take long for “Major_Freedom” – the most stupid and ignorant commentator on Murphy’s blog – to defend him with a typically desperate and absurd explanation:

“Murphy’s only argument, which is valid and you have not at all refuted or even challenged in your accusations, retractions and rescues, is that the section Murphy quoted, which is a largely self-contained argument, is indistinguishable from textbook, traditional ABCT.”
http://consultingbyrpm.com/blog/2014/11/martin-wolf-closet-austrian.html#comment-1260131

At first I didn’t think Murphy would actually sink so low as to defend himself in these terms, but – lo and behold! – it seems I overestimated him.

In his subsequent explanation of his purpose in the post in the comments on his blog, Murphy uses that defence:

“You’re right ... [Major_Freedom], my point was that Wolf was indistinguishable from Austrians in his diagnosis, in that column.”
http://consultingbyrpm.com/blog/2014/11/martin-wolf-closet-austrian.html#comment-1260153

Actually, Martin Wolf’s analysis in his original column is not “indistinguishable from Austrians” at all: it is mostly concerned with the macroeconomic effects of deleveraging and the debt overhang since 2008, and argues that many nations need to bring down private debt levels, reform and recapitalise banks, and implement strong fiscal stimulus.

All one can say to defend Murphy’s position is that only if we

(1) cite a selective quotation from Wolf, and

(2) take the quotation out of context, and

(3) ignore Wolf’s actual beliefs and all his other writings on the causes of business cycles,

then we can just pretend that Martin Wolf’s explanation of the current crisis is “thoroughly Austrian.”

This just stinks of a lazy unwillingness to actually engage with what Wolf or heterodox Keynesians actually think. If you can selectively quote your opponents and ignore what your opponents actually think, then you can pretend that your opponents agree with you. But it is a tactic that is profoundly intellectually dishonest.

BIBLIOGRAPHY
Wolf, Martin. “Does Austrian Economics understand Financial Crises better than other Schools of Thought?,” Martin Wolf’s Exchange, April 1, 2010
http://blogs.ft.com/martin-wolf-exchange/2010/04/01/hello-world/

Wolf, Martin. 2014. The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – from the Financial Crisis. Penguin Press, New York.

Robert Murphy on Progressive Taxation and Subjective Utility

The Austrian argument against progressive taxation, from Robert P. Murphy’s Lessons for the Young Economist (2010), is as follows:

“If preferences are subjective to each individual, and cannot even be measured or quantified for each individual, then obviously it would make no sense at all to try to combine or aggregate individual preferences into ‘social’ preferences. Unfortunately, even professional economists often engage in just this type of reasoning. Many people (try to) justify progressive income taxation, for example, by claiming that ‘a dollar means more to a poor man than to a rich man.’ The idea is that taking $1 million from Bill Gates won’t lower his utility very much, whereas handing out $1,000 to a thousand different homeless people will greatly boost each of their utilities. Therefore, the typical argument goes, total or “social” utility has been increased by the redistribution of some of Bill Gates’s wealth.

… For now, we point out that the typical justification for it is absurd. You can’t add up different amounts of utility from various people. In fact, if you use the alternate term preferences it will be more apparent why combining them from different people is an impossible task.” (Murphy 2010: 42).

The trouble with this is that, just because it is impossible to aggregate the subjective utilities of different people or find some objective unit of measurement with which to make objective interpersonal utility comparisons, it does not follow that an economic argument for progressive income taxes, on basis of diminishing marginal subjective utility, has failed.

Of course, there are problems with the so-called “law” of diminishing marginal subjective utility, as I have shown here, but there is reason to think it is true as a generalised statement.

If any Austrian economist accepts the “law” of diminishing marginal utility (or accepts it merely as a general principle), it follows that a very rich person should, generally speaking, derive less utility from an extra dollar than a person who is very poor, even if one cannot measure the utility in some objective quantity like “utils.”

If indeed there is good reason to think that the value of an additional unit of income to a person who is already very rich is considerably less than the value of an additional unit to someone who is poor, then redistribution of income to promote happiness and reduce hardship has sound economic justification.

And indeed empirical evidence seems to show that as wealth rises, the happiness that one derives from additional income falls or levels off after about $70,000 (US) (e.g., a fascinating discussion of this topic here).

Curiously, it was none other than the Austrian economist Friedrich von Wieser who prided himself on having provided a solid economic justification for progressive taxation on the basis of diminishing marginal utility. Modern Austrians apparently choose to forget this embarrassing fact.

The argument against progressive taxation that we cannot objectively “measure” the utility lost by the rich man as compared with that gained by the poor man does not necessarily refute the argument from diminishing marginal utility: for it requires a highly unrealistic assumption, as we shall now see.

If we were to take two poor people both with the same income, and imagine one becoming extremely rich while the other remains poor, the argument against progressive income tax could only work if the utility the rich man derived from a unit of money while poor was vastly – and indeed unrealistically and extremely – greater than that of his fellow, so that as each additional unit of money the man received – even to very high levels like millions or billions of dollars – the diminished utility still remained so high that it exceeded that of his fellow who still remained poor.

Now of course individuals display variation and can and do have different degrees of subjective utility in terms of the satisfaction that they derive from any good x (and even from a unit of money), but to believe that all or most rich people derive greater utility from one unit of their money than a poor person from one extra unit again requires the ridiculous assumption that, if (hypothetically) or when (in reality) they were poor, all or most of these rich people derived a degree if utility vastly – and indeed unrealistically and extremely – greater than that of other poor people.

This, quite frankly, violates everything we know about human psychology, neuroscience and evolution. Human beings are all products of Darwinian evolution; they have the same fundamental biochemistry and neural processes in the brain; the mind and all its emotions, like happiness, satisfaction and pleasure, are causally dependent on brain processes. People do display individual variation in many traits – such as height, eye colour, and no doubt in what economists call utility – but not to the extent that average people have such a vast difference between them as would be required in the case we have imagined above.

But we need only think of height here. Most human beings have a height between 5 feet and 6 feet, and even exceptions (apart from highly usually things like dwarfism and gigantism) do not deviate too far from this range. Height is a product of genetics and environmental influences. There is every reason to think that the propensity to feel emotions like happiness, satisfaction and pleasure – the emotions that the word “utility” in an economic sense describes – are a product of genetics and environmental influences too, with individual variation, but not so vast that the utility felt by two average people while poor is so vastly different that one million dollars or $100 million – under the principle of diminishing marginal utility – given to one man would still not reduce his utility from one extra dollar to a level below that experienced by the other poor man from one extra dollar.

In short, Austrians, like neoclassicals, if they really accept the “law” of diminishing marginal utility without the ridiculous assumption we have identified above, then the economic argument for progressive taxation from diminishing marginal utility is hard to refute.

Of course, they might make a moral argument from Rothbardian natural rights or Hoppe’s argumentation ethics, but this is clearly a different type of argument from the one based on subjective utility.

BIBLIOGRAPHY
Murphy, Robert P. 2010. Lessons for the Young Economist. Ludwig von Mises Institute, Auburn, Ala.

US and Canadian Private Investment 1929–1939

To continue another point from my last post.

Was the US recovery hindered by Roosevelt’s New Deal after 1933 to such an extent that America’s recovery was inferior to Canada’s?

Robert Murphy thought that it was on the basis of the unemployment data, but, as we have seen, that argument collapses under close scrutiny.

Let us look at another good indicator: private investment in both Canada and the US from 1929–1939.

We can see it in the graph below with 1929 as the index base year = 100 (with data from Amaral and MacGee 2002: 48, Table I).

The data can also be seen in Appendix 1 and 2 below.

It is obvious that US private investment recovered to a greater extent than Canada’s did after 1933: by 1937 it had risen to 59.5, while Canada’s was still at 44.

US private investment fell in 1938 when Roosevelt induced a recession by contractionary fiscal policy, but rose at the same basic rate as Canada’s even if it was still slightly below it in 1939.

Nevertheless, the trend from 1933 to 1937 is quite clear: it does not support Murphy’s case at all. The US had superior private sector investment growth.

Appendix 1

US Private Investment 1929–1939
Year | Index
1929 | 100
1930 | 69.2
1931 | 46.1
1932 | 22.2
1933 | 21.8
1934 | 27.9
1935 | 41.7
1936 | 52.6
1937 | 59.5
1938 | 38.6
1939 | 49

Appendix 2

Canadian Private Investment 1929–1939
Year | Index
1929 | 100
1930 | 85
1931 | 50.5
1932 | 24.8
1933 | 15.2
1934 | 28.5
1935 | 32.9
1936 | 28.2
1937 | 44
1938 | 42.8
1939 | 52

BIBLIOGRAPHY
Amaral, P. and J. MacGee. 2002. “The Great Depression in Canada and the United States: A Neoclassical Perspective,” Review of Economic Dynamics 5.1: 45–72.

Murphy on US and Canadian Unemployment during the 1930s: A Critique

Updated

Robert Murphy argues in the post below that, given that Canada had a lower unemployment rate than the US did after 1933 (according to the official US BLS unemployment data), this suggests that Canada had a much better recovery without government intervention (until 1935) because the unemployment gap between the US and Canada widened after Roosevelt entered office (the unemployment rates for Canada can be seen in Appendix 1 below):

Robert P. Murphy, “Why U.S. Economists Should Love Canada,” December 8th, 2013.

Murphy argues that “one could fairly argue that Canada was improving much more rapidly than the U.S., until Canadian policymakers tried to copy FDR’s disastrous approach.” This argument appears to be based partly on Murphy’s discussion in his book The Politically Incorrect Guide to the Great Depression and the New Deal (Murphy 2009: 103–104)*.

Unfortunately, Murphy’s unemployment data for the US – the official Bureau of Labor Statistics (BLS) unemployment data – are overestimates of unemployment because they fail to exclude and remove people working in US federal relief programs, such as the Civilian Conservation Corps, the National Youth Administration, the Civil Works Administration, the Emergency Work-Relief Program of the Federal Emergency Relief Administration, and the Works Progress Administration, where most people were actually employed in full-time jobs in construction projects and public works, as shown by Darby (1976: 4).

Why does this matter? The reason is very important: Murphy’s unemployment data for Canada does not include those people who were employed by different levels of the Canadian government on public works relief programs (Zagorsky 1998: 129). These Canadian relief programs are surveyed by Bryce (1985).

The unemployment estimates for Canada were compiled by the Dominion Bureau of Statistics (DBS). As Jay L. Zagorsky (1998) has established through his research work on this very topic,

“Exactly how the Dominion Bureau of Statistics, or DBS, classified relief workers was only found by searching through the original notes that preface the annual employment index reports (DBS, 1932, 1933). These reports contain the data used by Canada in the second step of its unemployment rate calculations. The preface notes reveal that relief workers are counted as employed. For example, the 1932 report (DBS, 1933) states, ‘much work was afforded by the Dominion, Provincial, and local governments in an effort to combat the prevailing depression, and this was reflected (although not wholly) in the monthly record of employment.’

Since, during the Depression, Canada took the opposite classification approach and labeled all workers on relief projects as employed, the unemployment data of one of the two countries must be adjusted before comparing the two series. The simplest reclassification method replaces U.S. unemployment rates from 1929 to 1943 with Darby’s adjusted data (Darby, 1976, Table 3 Column 17).” (Zagorsky 1998: 129).

Therefore, unless Murphy wants to adjust the Canadian figures to include those employed on Canadian relief works programs, a proper comparison between the 1930s unemployment series data for both the US and Canada must use Darby’s figures, not the conventional US BLS unemployment data.

Once we adjust the US figures we get these better estimates:

US Unemployment Rates: Adjusted Figures from Darby (1976)
Year | Unemployment Rate
1929 | 3.2%
1930 | 8.7%
1931 | 15.3%
1932 | 22.5%
1933 | 20.6%
1934 | 16.0%
1935 | 14.2%
1936 | 9.9%
1937 | 9.1%
1938 | 12.5%
1939 | 11.3%
1940 | 9.5%
1941 | 6.0%
1942 | 3.1%
1943 | 1.8%
(Darby 1976: 8).

And now we can plot both the US and Canadian unemployment rates in a table and then the graph below.

As we can see, if we exclude the years after 1939 when Canada entered the Second World War, the US unemployment data is either the same or better and lower than Canada’s for all years after 1933 except 1934 and 1938, and even then the difference is not great.

Moreover, in 1938, US unemployment rose because of Roosevelt’s monetary and fiscal contraction. Roosevelt’s austerity induced another US recession, so the rise in US unemployment in this year does not support Murphy’s case, because it was caused by austerity.

Now this data by itself is enough to utterly damn and destroy Murphy’s original thesis, but there are other serious holes in his argument.

If we assume that from 1929 Canada “did not see an expansion in its government comparable to the US New Deal, and what analogous programs it did have, were not implemented until 1935,” then why did the Canadian economy collapse so badly from 1929–1933?

We can see the real GDP data here:

Real GDP in Canada
millions 1990 international Geary-Khamis $
Year | GDP | Growth Rate
1928 | 52 269 |
1929 | 52 199 | -0.13%
1930 | 50 454 | -3.34%
1931 | 42 667 | -15.43%
1932 | 39 630 | -7.11%
1933 | 36 801 | -7.13%
1934 | 40 712 | 10.62%
1935 | 43 994 | 8.06%
1936 | 46 368 | 5.39%
1937 | 50 733 | 9.41%
1938 | 52 060 | 2.61%
1939 | 55 167 | 5.96%
1940 | 62 744 | 13.73%
1941 | 71 508 | 13.96%
1942 | 84 182 | 17.72%
1943 | 87 988 | 4.52%
1944 | 91 305 | 3.76%
1945 | 88 477 | -3.09%
1946 | 87 569 | -1.02%.

Canada suffered a severe depression with a real GDP loss of 29.59% from 1929 to 1933.

Despite Murphy’s argument, the alleged Canadian non-intervention did not lead to rapid self-equilibrating markets and recovery in Canada. When recovery came, it did not quickly restore real GDP to its 1928 level. That did not happen until 1939.

In fact, of all Western nations ranked by the scale of GDP collapse from 1929 onwards during the contractionary phase of the Great Depression, Canada actually comes out as the worst by a small margin:

Nation | Real GDP loss | Years of Contraction
(1) Canada | -29.59% | 1929–1933
(2) US | -28.52% | 1929–1933
(3) Austria | -22.45% | 1929–1933
(4) Poland | -20.70% | 1930–1933
(5) Czechoslovakia | -18.19% | 1930–1935
(6) Germany | -16.11% | 1929–1932
(7) France | -14.65% | 1930–1932
(8) New Zealand | -14.63% | 1930–1932
(9) Yugoslavia | -13.69% | 1930–1932
(10) Bulgaria | -12.72% | 1934–1935

Canada’s real GDP loss was marginally worse than that of the US. This does not fit Murphy’s argument.

Murphy also claims that Canada did not have programs “comparable to the US New Deal” until 1935. But that is highly debatable.

In 1930, the laissez-faire Canadian prime minister was thrown out of office precisely because of his unwillingness to do anything about the depression. He was replaced with a Conservative government under Richard B. Bennett who switched to federal funding of the relief programs of Canadian municipalities. About $200 million was spent over the next 5 years on public works and relief programs (Finkel 2006: 110), but by 1932 Bennett decided he could no longer afford the cost of public works projects, and they were curtailed and the emphasis was shifted to direct relief (Finkel 2006: 110), with Canadian provincial and municipal governments following suit.

I suppose libertarians might seize upon this and argue that it was a major cause of the depression, but that is equally unconvincing.

The relief programs – which were characterised by remarkably harsh and punitive measures (Finkel 2006: 110–111) – were not a Keynesian stimulus designed to close the output gap in Canada. They were highly inadequate even for the relief of poverty and distress, and they paid mere subsistence wages or relief (Finkel 2006: 110–111). Only if one wants to argue that the market clearing wage in Canada in the 1930s was a starvation wage could these programs possibly have prevented some people from taking private sector employment.

But, fundamentally, Amaral and MacGee (2002: 50, citing Amaral and MacGee 2001) show that the United States used public works programs much more heavily than Canada did. About 7% of US employed workers in the late 1930s were in relief projects, but in Canada such relief projects never employed more than 1.5% of the employed (Amaral and MacGee 2002: 50; Amaral and MacGee 2001) – a small percentage indeed which shows how minimal the Canadian projects were, but a drop in the ocean compared to the US efforts.

What, then, was the cause of Canada’s Great Depression? Canada was a small open economy. Exports accounted for about 25% of real output (Amaral and MacGee 2002: 66). When trade with the US and other nations collapsed, Canada had a severe fall in export industry output and domestic investment and consumption as well. The shock to business expectations further reduced investment and demand for credit, and price deflation and debt deflation would have done their familiar disastrous work.

The government response to this depression was grossly inadequate. Some implicit promises by the government seem to have prevented a banking sector collapse in Canada (perhaps aided by a stronger banking system with branch banking too), but government fiscal and monetary policy was insufficient to induce a return to high employment. It was, in actual fact, not even until 1938 that government fiscal policy under William Lyon Mackenzie King shifted to an overtly Keynesian stimulus (Neatby 2003: 85–86), and even then the level of that stimulus was not necessarily very high.


Note
* Note that Murphy’s assertion in his book The Politically Incorrect Guide to the Great Depression and the New Deal that “Canadians did not institute a ‘Northern New Deal’ during the 1930s” (Murphy 2009: 104) is wrong. The Canadian conservative government under R. B. Bennett established a central bank in 1935 and adopted price fixing policies, social insurance and other interventions after 1935 modelled on Roosevelt’s New Deal (Gough 2011: 283–284; Finkel 2006: 110–114), and public works projects had been funded since 1930 (although admittedly they appear to have been reduced after 1932). Even though the conservatives under Bennett lost office in 1935, the new Liberal Prime Minister William Lyon Mackenzie King, after a constitutional amendment, passed a similar host of “New Deal”-style legislation in the late 1930s (Gough 2011: 284).

Appendix 1

Canadian Unemployment Rates
Year | Unemployment Rate
1929 |
1930 | 9.1%
1931 | 11.6%
1932 | 17.6%
1933 | 19.3%
1934 | 14.5%
1935 | 14.2%
1936 | 12.8%
1937 | 9.1%
1938 | 11.4%
1939 | 11.4%
1940 | 9.2%
1941 | 4.4%

Further Reading
“The Great Depression in Western Offshoots: Real GDP Data for 4 Nations,” March 1, 2013.

“The Great Depression in 22 Western Nations: Real GDP Data,” March 1, 2013.

“US Unemployment in the 1930s,” July 3, 2013.

“Why Did Canada Have no Mass Banking Failures in the Great Depression?,” September 12, 2012.

BIBLIOGRAPHY
Amaral, P. and J. MacGee. 2001. “Canadian Government Policy during the Great Depression,” University of Minnesota, mimeo.

Amaral, P. and J. MacGee. 2002. “The Great Depression in Canada and the United States: A Neoclassical Perspective,” Review of Economic Dynamics 5.1: 45–72.

Bryce, R. B. 1985. “The Canadian Economy in the 1930s: Unemployment Relief under Bennett and McKenzie King,” in D. Cameron (ed.), Explorations in Canadian Economic History. University of Ottawa Press, Ottawa. 7–26.

Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.

Finkel, Alvin. 2006. Social Policy and Practice in Canada: A History. Wilfrid Laurier University Press, Waterloo, Ont.

Gough, Barry M. 2011. Historical Dictionary of Canada (2nd edn.). Scarecrow Press, Lanham, Md.

Murphy, Robert. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal. Regnery Publishing, Inc. Washington, DC.

Neatby, H. Blair. 2003. The Politics of Chaos: Canada in the Thirties. Golden Dog Press, Kemptville, Ontario, Canada.

Zagorsky, Jay L. 1998. “Was Depression Era Unemployment Really Less in Canada than the U.S.?,” Economics Letters 61.1: 125–131.

Robert Murphy at Sea on MMT

The Austrian economist Robert Murphy was recently interviewed on MMT:

“Tom Woods Talks MMT With Me,” Free Advice, 14 November, 2013. (You can access interview from this post).

Like most of his other efforts, it ends in disaster.

Murphy tells us that he understands the point of MMTers that the government is not revenue constrained, yet his major attempt to refute MMT is an analogy (from 14.05) where he just assumes that the government is like a private household. The analogy also bizarrely assumes that government deficit spending is not just immoral but criminal, in a totally absurd example of begging the question by assuming the truth of libertarian ethics.

Murphy is also committed to the flawed and unrealistic Austrian theory of price inflation. He seems oblivious of any of the empirical evidence on administered prices and the way that demand drives private sector output and employment.

Murphy is also guilty of astonishing intellectual inconsistency. At 22.43 onwards, Murphy’s explanation of recessions and idle resources invokes the Austrian business cycle theory (ABCT) that he himself says is grossly flawed by its reliance on the Wicksellian natural rate of interest (see Murphy 2003). But both the arguments of Murphy’s PhD and this paper are conveniently forgotten as he preaches to the choir and invokes the ABCT – and blames the lowering of the rate of interest below its natural rate – as the explanation of recessions.

Here is a man who tells us that he agrees with John Maynard Keynes that interest rates are a monetary phenomenon, but then in this interview throws that to the wind and requires that the interest rate is a real phenomenon caused by loanable funds and the real forces of productivity and thrift, despite the fact that his other published writings logically require a rejection of both ideas.

Further evidence of Murphy’s hapless inability to understand MMT – or even Keynesianism – is Murphy’s implied belief (from 24.58) that he thinks that MMTers or Keynesians wish to stop or abolish all frictional or seasonal unemployment. That is just rubbish.

One can note that the interviewer – one Tom Woods – is even more ignorant and incapable of understanding MMT or the theories underlying it.

BIBLIOGRAPHY
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest. PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.” http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Robert Murphy Should have Read his Mises

Robert Murphy attacks Obamacare and implies that the US is headed for nationalised healthcare system, but then states:

“Ludwig von Mises argued that the “mixed economy” was an unstable system, because each new government intervention would lead to undesirable consequences that would then invite further interventions.”
Robert Murphy, “ObamaCare Is Just a Stepping Stone to Nationalized Health Care,” Free Advice, 26 September.

Yet, in Human Action: A Treatise on Economics. The Scholar's Edition, Mises explicitly denies there is any such thing as a “mixed economy,” in a remarkable passage:

“The market economy must be strictly differentiated from the second thinkable—although not realizable—system of social cooperation under the division of labor: the system of social or governmental ownership of the means of production. This second system is commonly called socialism, communism, planned economy, or state capitalism. The market economy or capitalism, as it is usually called, and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed by the market or by the decrees of a production tsar or a committee of production tsars.

If within a society based on private ownership by the means of production some of these means are publicly owned and operated—that is, owned and operated by the government or one of its agencies—this does not make for a mixed system which would combine socialism and capitalism. The fact that the state or municipalities own and operate some plants does not alter the characteristic features of the market economy. These publicly owned and operated enterprises are subject to the sovereignty of the market. They must fit themselves, as buyers of raw materials, equipment, and labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws of the market and thereby depend on the consumers who may or may not patronize them. They must strive for profits or, at least, to avoid losses. The government may cover losses of its plants or shops by drawing on public funds. But this neither eliminates nor mitigates the supremacy of the market; it merely shifts it to another sector. For the means for covering the losses must be raised by the imposition of taxes. But this taxation has its effects on the market and influences the economic structure according to the laws of the market. It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption. Thus the market, not a government bureau, determines the working of these publicly operated enterprises.

Nothing that is in any way connected with the operation of a market is in the praxeological or economic sense to be called socialism. The notion of socialism as conceived and defined by all socialists implies the absence of a market for factors of production and of prices of such factors.” (Mises 2008: 259–260).

According to the logic of this passage, a nationalised healthcare system would not even cause the US to have a “mixed economy” or cease to have a market economy, even if it were a non-profit system and subsidised from taxes.

Of course, maybe Murphy was thinking of Mises’s theory of the “hampered market economy” (Mises 2008: 712–857). Here Mises says that certain oppressive types of taxation, restriction of production, price distortions (such as price controls or minimum wage laws), central banking and credit expansion, confiscation and redistribution of income and total war hamper the market economy.

But even in these chapters Mises is often vague in the details: for example, Mises says that government taxes are appropriate when they take a “modest” amount of people’s income, but when they “grow beyond a moderate limit, they cease to be taxes and turn into devices for the destruction of the market economy” (Mises 2008: 733–734). But at what level of taxes does the transition occur?

In reality, the “hampered market” section of Human Action is one of the most incoherent and stupid set of arguments Mises ever made.

The overwhelming proof of this was given to us in the remarkable success of command economies in the West during both World War I and World War II. In these wars, Western nations like the UK, the US, Canada, Australia and New Zealand had moderate command economies with massive government planning of production, price controls, high taxes, and even monetisation of budget deficits. According to the logic of Mises, all Western command economies should have quickly simply descended into utter chaos and collapsed in WWI or WWII. The allied governments should have been incapable of planning production and winning the war. Needless to say, Mises’s theory of the “hampered market economy” and its inevitable collapse is totally and completely refuted by history. (And, notably, even the losing sides such as Germany and Japan had considerable success with command economies during the time when they had early military victories and access to resources.)

Yet, according to Mises, even moderate interventions that create a “hampered market” outside of wartime are unstable and will lead to chaos from which either socialism or capitalism will emerge. Mises’s whole theory sounds like a libertarian version of vulgar Marxism, where history is governed by “iron laws” and “historical necessity,” and in which historical contingency is thrown to the wind.

But history also shows us many examples in peacetime of what Mises called “hampered market” economies that never descended into totalitarian socialism and chaos, and either were stable (e.g., the UK in the 19th century even thought it had a central bank and credit expansion, post-WWII mixed economies, the high interventionists states of South Korea, Taiwan, Singapore, etc.) or even changed in ways that made them more laissez faire (e.g., the transition from mercantilist economies to those with free trade, the transition from mixed economies of the 1940s-1970s to neoliberalism).

And, above all, we can only notice how Mises’s comments in original passage above denying that there is any such thing as a “mixed economy” bizarrely contradict his comments on the “hampered market” economy.

How is it that nationalised industries run for profit or subsidised with taxes do “alter the characteristic features of the market economy,” but other interventions lead inevitably to socialism or chaos?

BIBLIOGRAPHY
Mises, L. 2008. Human Action: A Treatise on Economics. The Scholar's Edition. Mises Institute, Auburn, Ala.

Robert Murphy gets Mises’s Epistemology Wrong

Over at his blog, Robert Murphy is involved in a new Methodenstreit, and selectively quotes a passage from Mises that demonstrates that Murphy himself does not properly understand Mises’s epistemology:

Robert Murphy, “Mises on A Priori Reasoning,” Free Advice, 12 September.

That is underscored by this comment of his later in the post:

“I was going to be snotty about it, but that would be unfair since many Misesians thought Mises was making synthetic a priori propositions. But, look at literally the sentence right before the one you quoted. Mises wrote:

‘This theorem is a tautology, its deduction results in an analytic judgment. Nonetheless nobody would contend that geometry in general and the theorem of Pythagoras in particular do not enlarge our knowledge.’

So Mises is here saying that the Pythagorean theorem is an analytic a priori statement.”
http://consultingbyrpm.com/blog/2013/09/mises-on-a-priori-reasoning.html#comment-73618

First, let us imagine (for the sake of argument) that Mises was really saying that praxeology and Euclidean geometry are analytic a priori. What are the consequences of that?

As analytic a priori systems, neither praxeology nor Euclidean geometry can provide us with any necessarily true knowledge of the real world known a priori. The instant either is asserted as true of the real world, both become synthetic a posteriori and must be judged true or false empirically.

But, if that were true, this has destroyed praxeology as the system imagined by Mises as providing necessarily true knowledge of the real world known a priori:

“Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events” (Mises 2008: 32).

Mises is saying here that praxeology is not just an analytic a priori system. First, he is saying that it is not open to verification and falsification on the grounds of experience (or a posteriori), but can be known a priori. Secondly, it also provides necessarily true knowledge of the real world that cannot be refuted by empirical evidence (“It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences”).

The only way it can do this is if the theorems of praxeology are synthetic a priori.

Murphy has badly misinterpreted Mises. If Mises really thought that praxeology was merely analytic a priori, then the Mises quote I have just cited above makes no sense. Mises’s epistemology would be hopelessly contradictory and self-refuting.

Secondly, let us return to the original passage Murphy quotes in his post.

But let us quote it in its entirety and with full context:

“Aprioristic reasoning is purely conceptual and deductive. It cannot produce anything else but tautologies and analytic judgments. All its implications are logically derived from the premises and were already contained in them. Hence, according to a popular objection, it cannot add anything to our knowledge.

All geometrical theorems are already implied in the axioms. The concept of a rectangular triangle already implies the theorem of Pythagoras. This theorem is a tautology, its deduction results in an analytic judgment. Nonetheless nobody would contend that geometry in general and the theorem of Pythagoras in particular do not enlarge our knowledge. Cognition from purely deductive reasoning is also creative and opens for our mind access to previously barred spheres. The significant task of aprioristic reasoning is on the one hand to bring into relief all that is implied in the categories, concepts, and premises and, on the other hand, to show what they do not imply. It is its vocation to render manifest and obvious what was hidden and unknown before.

In the concept of money all the theorems of monetary theory are already implied. The quantity theory does not add to our knowledge anything which is not virtually contained in the concept of money. It transforms, develops, and unfolds; it only analyzes and is therefore tautological like the theorem of Pythagoras in relation to the concept of the rectangular triangle. However, nobody would deny the cognitive value of the quantity theory. To a mind not enlightened by economic reasoning it remains unknown. A long line of abortive attempts to solve the problems concerned shows that it was certainly not easy to attain the present state of knowledge.

It is not a deficiency of the system of aprioristic science that it does not convey to us full cognition of reality. Its concepts and theorems are mental tools opening the approach to a complete grasp of reality; they are, to be sure, not in themselves already the totality of factual knowledge about all things. Theory and the comprehension of living and changing reality are not in opposition to one another. Without theory, the general aprioristic science of human action, there is no comprehension of the reality of human action.

The relation between reason and experience has long been one of the fundamental philosophical problems. Like all other problems of the critique of knowledge, philosophers have approached it only with reference to the natural sciences. They have ignored the sciences of human action. Their contributions have been useless for praxeology.

It is customary in the treatment of the epistemological problems of economics to adopt one of the solutions suggested for the natural sciences. Some authors recommend Poincaré’s conventionalism. They regard the premises of economic reasoning as a matter of linguistic or postulational convention. Others prefer to acquiesce in ideas advanced by Einstein. Einstein raises the question: ‘How can mathematics, a product of human reason that does not depend on any experience, so exquisitely fit the objects of reality? Is human reason able to discover, unaided by experience through pure reasoning the features of real things?’ And his answer is: ‘As far as the theorems of mathematics refer to reality, they are not certain, and as far as they are certain, they do not refer to reality.’

However, the sciences of human action differ radically from the natural sciences. All authors eager to construct an epistemological system of the sciences of human action according to the pattern of the natural sciences err lamentably.

The real thing which is the subject matter of praxeology, human action, stems from the same source as human reasoning. Action and reason are congeneric and homogeneous; they may even be called two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason. The theorems attained by correct praxeological reasoning are not only perfectly certain and incontestable, like the correct mathematical theorems. They refer, moreover, with the full rigidity of their apodictic certainty and incontestability to the reality of action as it appears in life and history. Praxeology conveys exact and precise knowledge of real things.” (Mises 2008: 38–39).

First, it is quite clear here that Mises is rejecting the “popular objection” he refers to in paragraph 1. Mises is saying that Euclidean geometry provides real knowledge about the external world, despite being a system of tautologies derived by deduction from the axioms. He is implying that Euclidean geometry is Kantian synthetic a priori knowledge (because Mises cannot properly distinguish between (1) analytic a priori pure geometry and (2) synthetic a posteriori applied geometry).

Secondly, although it is poorly expressed, Mises appears to be thinking of synthetic a priori knowledge when he says that:

“In the concept of money all the theorems of monetary theory are already implied. The quantity theory does not add to our knowledge anything which is not virtually contained in the concept of money. It transforms, develops, and unfolds; it only analyzes and is therefore tautological like the theorem of Pythagoras in relation to the concept of the rectangular triangle. However, nobody would deny the cognitive value of the quantity theory.”

Mises cannot seriously believe that his monetary theory provides no necessary knowledge of reality, and it seems that he is referring to the synthetic character of these theories by his reference above to “the cognitive value of the quantity theory.”

Next, Mises is very clear in rejecting the analytic a priori character of praxeology when he rejects (1) Poincaré’s conventionalism and (2) Einstein’s view of mathematics as being divided into (a) pure mathematics (which is necessarily true) and (b) applied mathematics (which is only true of the real world contingently).

The final paragraph of Mises clinches my argument:

The theorems attained by correct praxeological reasoning are not only perfectly certain and incontestable, like the correct mathematical theorems. They refer, moreover, with the full rigidity of their apodictic certainty and incontestability to the reality of action as it appears in life and history. Praxeology conveys exact and precise knowledge of real things.” (Mises 2008: 39).

This entails that praxeological theorems are necessarily and absolutely true, and are known a priori, but also yield necessary knowledge of the real world. That is nothing but Kantian synthetic a priori knowledge.

And, finally, if Mises did not think that praxeological theorems were synthetic a priori, why is Mises desperate to defend the existence of synthetic a priori in The Ultimate Foundation of Economic Science: An Essay on Method (1962)?:

“The essence of logical positivism is to deny the cognitive value of a priori knowledge by pointing out that all a priori propositions are merely analytic. They do not provide new information, but are merely verbal or tautological, asserting what has already been implied in the definitions and premises. Only experience can lead to synthetic propositions. There is an obvious objection against this doctrine, viz., that this proposition that there are no synthetic a priori propositions is in itself a — as the present writer thinks, false — synthetic a priori proposition, for it can manifestly not be established by experience.

The whole controversy is, however, meaningless when applied to praxeology. It refers essentially to geometry. Its present state, especially its treatment by logical positivism, has been deeply influenced by the shock that Western philosophy received from the discovery of non-Euclidian geometries. Before Bolyai and Lobachevsky, geometry was, in the eyes of the philosophers, the paragon of perfect science; it was assumed that it provided unshakable certainty forever and for everybody. To proceed also in other branches of knowledge more geometrico was the great ideal of truth-seekers. All traditional epistemological concepts began to totter when the attempts to construct non-Euclidian geometries succeeded.

Yet praxeology is not geometry. It is the worst of all superstitions to assume that the epistemological characteristics of one branch of knowledge must necessarily be applicable to any other branch. In dealing with the epistemology of the sciences of human action, one must not take one’s cue from geometry, mechanics, or any other science.

The assumptions of Euclid were once considered as self-evidently true. Present-day epistemology looks upon them as freely chosen postulates, the starting point of a hypothetical chain of reasoning. Whatever this may mean, it has no reference at all to the problems of praxeology.” (Mises 1962: 5).

In other words, the collapse of Euclidian geometry as synthetic a priori knowledge does not apply to the synthetic a priori status of praxeology!

This, if nothing else, is breathtaking in its pig-headed unwillingness to reconsider the epistemology status of praxeology given the fall of Euclidian geometry as the paradigmatic case of synthetic a priori knowledge.

I will just end by noting that part of the problem we face in interpreting Mises is that Mises hismelf was not always clear, and was probably confused about basic epistemological concepts, as his critic Hans Albert has noted:

“Mises gives a Kantian answer to the question of how the a priori character of praxeological knowledge and its apodictic certainty is to be explained. This knowledge apparently can be reduced to the logical structure of the human mind which is supposed to be the basis for thought and action. ... On the one hand he seems to suggest that he is introducing with his principle of action a synthetic a priori proposition, as he ascribes informational content to the principle. On the other hand, he declares the question of whether the respective propositions are synthetic or analytic to be purely verbal and therefore uninteresting. This seems to show that he was not aware of the connection between analyticity and informational vacuity. He permanently compares his allegedly a priori knowledge with logical and mathematical knowledge and gives such a description of the respective propositions and their mode of derivation that one comes to suspect them to be analytic. He confounds the analytical character of propositions with the logical character of the relationships between propositions in a deduction. But the fact that particular propositions are deducible from particular sets of premises does not render them analytic. For instance, in physics propositions from geometry get an empirical interpretation, and, interpreted in this way, they are synthetic. But propositions which are the result of the ‘logical unfolding’ of certain concepts contain no information. They are analytic not because they are derived, but because they follow from definitions which do not carry information themselves. When Mises tells us that the concept of money already implies all theorems of the theory of money, the alleged certainty of the basis of this derivation does not help him to establish a nonvacuous economic theory. The theory of money as he envisages it here would be without informational content and could not be used to explain anything.” (Albert 1999: 131–132).

BIBLIOGRAPHY
Albert, H. 1999. Between Social Science, Religion and Politics: Essays in Critical Rationalism. Rodopi, Amsterdam.

Mises, Ludwig von. 1962. The Ultimate Foundation of Economic Science: An Essay on Method. Van Nostrand, Princeton, N.J.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Bob Murphy All At Sea on Geometry and Economic Epistemology

A beautiful illustration of the continuing errors of Austrians who support Misesian praxeology can be seen in Robert Murphy’s comments in this video on geometry, and in his debate with David Friedman.*



Robert Murphy, like Mises, cannot properly distinguish between (1) pure geometry and (2) applied geometry (on which, see Salmon 1967: 38). When Euclidean geometry is considered as a pure mathematical theory, it can be regarded as analytic a priori knowledge, and asserts nothing necessarily true of the external, real world, since it is tautologous and non-informative. (An alternative view derived from the theory called “conditionalism” or “if-thenism” holds that pure geometry is merely a set of conditional statements from axioms to theorems, derivable by logic, and asserting nothing about the real world [Musgrave 1977: 109–110], but this is just as devastating to Misesians.)

When Euclidean geometry is applied to the world, it is judged as making synthetic a posteriori statements (Ward 2006: 25), which can only be verified or falsified by experience or empirical evidence. That means that applied Euclidean geometrical statements can be refuted empirically, and we know that Euclidean geometry – understood as a universally true theory of space – is a false theory (Putnam 1975: 46; Hausman 1994: 386; Musgrave 2006: 329).

Murphy’s confusion is also confirmed in these remarks below.



The fact that the refutation of Euclidean geometry understood as an empirical theory leaves pure geometry untouched does not help Murphy, because pure geometry per se says nothing necessarily true about the real-world universe, and is an elegant but non-informative system.

Albert Einstein was expressing this idea in the following remarks about mathematics in an address called “Geometry and Experience” on 27 January 1921 at the Prussian Academy of Sciences:

“One reason why mathematics enjoys special esteem ... is that its laws are absolutely certain and indisputable, while those of all other sciences are to some extent debatable and in constant danger of being overthrown by newly discovered facts. In spite of this, the investigator in another department of science would not need to envy the mathematician if the laws of mathematics referred to objects of our mere imagination, and not to objects of reality. For it cannot occasion surprise that different persons should arrive at the same logical conclusions when they have already agreed upon the fundamental laws (axioms), as well as the methods by which other laws are to be deduced therefrom. But there is another reason for the high repute of mathematics, in that it is mathematics which affords the exact natural sciences a certain measure of security, to which without mathematics they could not attain. At this point an enigma presents itself which in all ages has agitated inquiring minds. How can it be that mathematics, being after all a product of human thought which is independent of experience, is so admirably appropriate to the objects of reality? Is human reason, then, without experience, merely by taking thought, able to fathom the properties of real things. In my opinion the answer to this question is, briefly, this:- As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.”
http://www-history.mcs.st-and.ac.uk/Extras/Einstein_geometry.html

If we were to pursue this analysis further as applied to economic methodology, it would follow that praxeology – if it is conceived as deduced from analytic a priori axioms – is also an empty, tautologous, and vacuous theory that says nothing necessarily true of the real world. And the instant any Austrian asserts that praxeology is making real assertions about the world, it must be judged as synthetic a posteriori, and so is to be verified or falsified by experience or empirical evidence.

What Murphy fails to mention is that the only way to sustain his whole praxeological program is to defend the truth of Kant’s synthetic a priori knowledge, which, as we have seen from the last post, is a category of knowledge that must be judged as non-existent.

Note
* Murphy also conflates (1) the logical positivists’ verifiability criterion for meaningfulness with (2) Popper’s falsifiability criterion for scientific knowledge, but this is an issue I will not bother to pursue here.

BIBLIOGRAPHY
Hausman, Daniel M. 1994. “If Economics Isn’t Science, What Is It?,” in Daniel M. Hausman (ed.), The Philosophy of Economics: An Anthology (2nd edn.). Cambridge University Press, Cambridge. 376–394.

Musgrave, Alan. 1977. “Logicism Revisited,” British Journal for the Philosophy of Science 28: 99–127.

Musgrave, Alan. 2006. “Responses,” in Colin Cheyne and John Worrall (eds.), Rationality and Reality: Conversations with Alan Musgrave. Springer, Dordrecht. 293–334.

Putnam, Hilary. 1975. “The Analytic and the Synthetic,” in Hilary Putnam, Mind, Language and Reality. Philosophical Papers. Volume 2. Cambridge University Press, Cambridge. 33–69.

Salmon, Wesley C. 1967. The Foundations of Scientific Inference. University of Pittsburgh Press, Pittsburgh.

Ward, Andrew. 2006. Kant: The Three Critiques. Polity, Cambridge.