Guide The Capitalist Alternative: Introduction to Neo-Austrian Economics

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Mises makes his argument in , but the socialist calculation debate really takes place, in the English language, in the s, in the middle of the Great Depression. For a lot of economists, socialism is an alternative to the capitalist order, which they see falling apart in front of them. Your ally is the Soviet Union, which has gone from a peasant economy to a military contributor — an amazing transformation of an economy — and because of that is able to help defeat Hitler.

But if only we could have democracy with it, it would be wonderful. He argues that human sciences are different from the natural sciences. Mises talks about methodological dualism. The way they reasoned was like a philosopher. His books look like engineering or chemistry books.

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There was a transformation of economics — it became a tool of social control. Hayek had a great phrase about this. He was going after the idea not only of socialism, but of large-scale macro models. Because in the midth century, and going up through the s, the economy was envisaged like a bathtub. Mises and Hayek stood in complete opposition to that view. What Mises and Hayek are saying is that that whole way of thinking about the economy reflects a pretence of knowledge — that we know what the full employment output level would be, that we know exactly how much water to let in, and how much to let out — whereas in reality, if we make a mistake with any of that, the water comes gushing out all over our bathroom floor, or it drains completely out and we have nothing.

Therefore you mischaracterise what the task of economics is — you send economics in a direction which is totally different from our heritage, of what we got from David Hume, Adam Smith, Jean-Baptiste Say and John Stuart Mill, and then Carl Menger, and then Mises, Hayek, and other people in the 20th century, like Jim Buchanan.

Personally, yes I do. But there were a lot of things going on leading to this, one of which was that Samuelson was the brightest boy on the block, and when the brightest boy on the block goes in one direction, everyone else follows him. People like John Stuart Mill were gentleman scholars. Keynesian economics, post-World War II, dominated the entire profession.

Everyone became a Keynesian and at the graduate, elite levels, it became a totally Samuelsonian project. Samuelson had the intellectual entrepreneurship to write both the Principles of Economics textbook — which became the standard textbook for freshmen — and the standard graduate textbook. He dominated both ends of the economics profession. I think Samuelson is worthy of intellectual attention, I just think he sent us in a wrong direction. What the position makes you have is not libertarianism, or anything like that, but humility. The economist is nothing more than a student of society, and any economist that tries to represent themselves as a saviour of society should be subject to ridicule.

Let me read to you from Adam Smith, the section with the invisible hand explanation. The statesman, who should attempt to direct private people in which manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

He writes:. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system that does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are now, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent, and more often stupid.

Now we get to a situation which goes haywire for a variety of reasons. They want to penalise the guys on the right as well. Mises stood against the tide of Keynesianism and animal spirits with his alternative theory about the manipulation of money and credit; he stood against the socialists.

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Who was against socialism and who was against Keynesianism? Those are our theorists. We really just want to understand the economy. But to me, libertarianism is a by-product, not an assumption going in. If you look at Mises and Hayek, neither of them are natural rights thinkers. Most libertarianism — if you think about Ayn Rand or even Robert Nozick — derives from an individualist rights perspective. Mises and Hayek are all about consequentialism. What he tries to argue is that the price system systematically communicates dispersed information that you and I hold.

We express those subjective preferences in trade-offs that we make when we buy some goods and not others. The subjective trade-offs that you and I make have become objective information for other people in making their trade-offs. The price system is a giant telecommunications system. It tells me about relative scarcities of goods. A classic example of this is gas prices over the last year. No, all we need to know is that the price of gasoline has fallen quite a bit since the summer.

This is all communicated through the price system without any of us having to know in detail what is going on. But Hayek has an influence far beyond his own writings. Hayek also influenced information economics in general. He was working on information processing. As a left-of-centre European, I was quite nervous about reading Hayek. But given the era he was writing in — the early to mid 20th century — when socialism was still considered a viable alternative to capitalism, the book seems pretty sensible. In fact there was nothing in it I particularly disagreed with.

Hayek is the antithesis of the idea of economics as control. Even those guys that went in directions different to Hayek are all trying to provide answers to him. We like to pick caricatures, and the debate in the US is not sophisticated. In Europe, Hayek is an old liberal, and he remains a European liberal throughout his whole life.

You wanted to pick one of your own. The Elgar Companion is a big book with a lot of short essays about Austrian economics. My book Calculation and Coordination is the last one on that, all essays in post-socialist transition. The easiest way to understand that book is that in order for us to go someplace, we have to go from here to there. So we have to define, first and foremost, what the here and now is, what that system actually is like, and then where we want to go with it. Do we want to look like the US or Britain?

Do we want to look like Sweden or Western Europe? We also ill-defined the end-state, and as a consequence we got on the wrong bus for economic reforms. There are a whole bunch of people. Calculation and Coordination is an effort to take Austrian economics and apply it to a real world policy-relevant issue, which is the transition from communism to capitalism. You gave me two other examples as well. As I tell my students, economics is the sexiest subject you will ever study.

I think The Invisible Hook does a fascinating job of communicating to people the enjoyment of just thinking through a problem like an economist. Pete takes on the organisation of pirate ships and points out how pirates represented a community in and of themselves. Even in a world of thieves, they had to respect rights in order to be able to coordinate with one another.

Individualism and Economic Order

He goes through and explains the elaborate methods by which they organised their activities on a ship. Those ships were not as small as we might think, the ventures actually required people of diverse ethnic backgrounds and sexual preferences, and yet somehow they came to work together. They signed actual constitutions among themselves. What carries the weight for me is the fact that he is pursuing the rational choice model and I can see the logic of what he is saying. I loved his point about Blackbeard, probably the most fearsome pirate that ever lived.

According to this book, Blackbeard did such a good job of looking scary and promoting his reputation for bloodthirstiness, that he never actually had to kill a single person. Yes, there is a lot of stuff about signalling in the book — also why they show the Jolly Roger to protect their investment, the ship. This book is amazing. Coyne took on the topic of how successful the US can be at exporting democracy and the free market in after-war situations. This became a big venture in the 20th century, when the US became much more aggressive about this idea that we could intervene to try to help make other countries better off.

So then the question is, is that an effective strategy? Coyne takes the strategy as stated by the officials, and then assesses whether the means employed are successful. He uses a very low threshold, which is, after the US intervention, after the country is supposedly settled, does it meet the standard on the Polity Index of modern day Iran?

What he found was that in US-led efforts, basically somewhere between two-thirds and three-quarters of the efforts failed to meet even that minimum standard. Everybody points to Japan and Germany, but he points out that before the war, Japan and Germany had very high measures of civil society.

So I think Coyne really does show the futility of our efforts. All these efforts at war — the loss of lives, the billions of dollars spent — got us what? If only this book had been around before the invasion of Iraq. It could have saved more than , Iraqi lives.


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In Coyne, there is not a lightness to his pen, in the same way there is with Leeson. Leeson is dealing with an entertaining topic. Coyne is dealing with a deadly serious topic. Both of them are bringing to bear the kind of economics that comes out of Mises and Hayek, to address why it is people should care about economics and why it is that their caring should not lead them to be sombre and boring, but actually fun and enjoyable, while talking about very sad subjects sometimes. You have a piece and you have to find a piece that fits exactly in it. Chris is arguing that that bedrock of institutions is there prior to our intervention.

Because of this issue of underlying institutions, Japan and Germany were able to accept the puzzle pieces. All we can do is give them the opportunity to benefit from free exchange with other individuals. SNLT is a way in which the social level of productivity acts back upon the private labor of the individual, disciplining the individual to work at the social average. As many of us know, losing a job and having to find new work is a long, hard, painful process.

The market treats all labor like digits in a calculator, anonymous units to be moved around in the search of profit. The gap between private labor and social labor is the mechanism by which labor is moved around and reapportioned through the blind forces of the market, in the absence of a social plan. Now all this should sound familiar. But what does this have to do with the relation between demand changes and price? The same process of reapportioning labor happens with changes in demand.

If the supply of elevator music exceeds demand then some of this music will remain unsold and some of this private labor will not become social. Producers will be forced to move their labor elsewhere. This apportioning of labor happens through the fluctuation of price. It has merely indicated, through price signals, that labor needs to be reallocated. This is how demand effects the distribution of social labor in a society coordinated through the fluctuations of prices. This distribution is only possible because there is a relation between prices and labor time. So we can show that demand, rather than creating value, is part of the reallocation of labor that is implied in the gap between private and social labor.

But we can also take the analysis further and show how demand itself is produced in capitalism. From the perspective of subjectivist island it seems like demand is the product of free, independent minds, viewing reality from some distant, objective standpoint. But in reality our subjectivity is a part of a mode of production.

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This is nowhere more apparent than in the capitalist mode of production. Consumer demand comes from wages paid to workers. The products which consumers buy with this money are not just the random result of psychological preferences. In fact, most of our money goes to the purchase of very basic things we need in order to keep us alive as workers so that we can produce more value for capitalism each day: rent, food, clothes. But the bulk of the demand in society comes not from consumers but from capitalists.

You and I buy toothbrushes and pay rent. Capitalists buy factories, assembly lines, natural resources, and private armies. This demand has nothing to do with the personal preferences of capitalists.

Austrian Alternatives to Conventional Economic Statistics - Jonathan Newman

Some people think that capitalists enter production only in order to meet the demands of consumers. This is a myth. The advertising industry is the best refutation of this myth. Capitalists produce in order to make a profit. Then they go looking for markets. Most of the time they have to create the market by convincing people there is a need for their product.

But capitalist firms also sell to each other, totally bypassing the need to find consumer markets. This all gives us a very different picture of the subject-object relation than we get in bourgeois economics. The sorts of superficial freedoms they have to choose between coke and pepsi pale in comparison to the disciplining of our lives to SNLT and the pursuit of profit. The problem with this demand is that the legal status of corporate personhood is just the icing on the cake.

In a capitalist society corporations are much more like people than people are. Capital is the active subject and people its object. Blind economic laws rule and people obey. Money becomes more powerful than life. Corporations become people and exert more power in society than individuals or even social movements. While people run around in the street with signs begging the system to take notice of them, the cold-logic of capital becomes the active agent in society, using the body of the worker like a passive expendable commodity, subordinating societies, governments and even nature itself to the impersonal motives of profit.

We actively reproduce it everyday. But in order to exercise such collective power we must break with the capitalist mode of production.


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They are abstractions. Now every theory needs abstractions- we must sift through a world of data and identify the broad contours and important categories that define reality. A real abstraction is not made by philosophers arbitrarily leaving out parts of social reality. A real abstractions is made by reality itself. In a capitalist society human labor becomes abstract. In the caste system of feudalism where people were born into certain types of work and there were strict divisions between castes there was no such thing as labor in general, or a worker in general.

But in a capitalist society labor loses all of these specific features. Capital treats us like anonymous digits in a profit-calculator, moving us from place to place in the search for profit. Our labor becomes abstract labor. We become, not peasants, knights, or artisans, but workers in general. Marginalism comes from a real existing standpoint within capitalism, the standpoint of the atomized individual contemplating commodities. This standpoint is real. We experience it everyday at the grocery store. But it is an incomplete perspective because it leaves out the entire world of social production that puts commodities on the shelves and money in our pockets.

This perspective is the perspective of commodity fetishism, in which the social power of our own labor takes the form of inherent properties of objects. But in times of economic crisis we see cracks in the walls of this reality. Old ways of thinking lose their relevance. Crises are a time when the economic laws of capitalism are exposed not as eternal, universal laws as the bourgeois economists would want us to think, but as the particular laws of this time, laws that we might be able to overthrow.

As the law of value breaks down, as people start to question the order of things, the capitalist state must enter the picture, replacing the failing law of value with the brutal law of the state. The charming, freedom-loving world of the market apologists is revealed for what it really is, an exploitative order based on violence.

Like a schoolyard bully, a system is always the most violent when its weakness is exposed. When the law of value breaks down the politics begin. Subjects must become active. This can be the politics of the ruling class as it scrambles to reassert the status quo or it can be the politics of radical movements that posit the possibility for new social orders. Footnotes: 1. Undoubtedly I will raise the ire of both neoclassicals and Austrians by treating the two camps as one for much of this video.

Both schools of thought have their historic origin in the theory of marginal utility, though the way this theory has been treated and evolved in the two camps has diverged over time. This video deals with marginal utility on a very basic level, analyzing the types of abstractions needed to sustain a theory of marginal utility namely extracting away production relations and thus should serve as an appropriate starting point for a critique of either school of thought.

There are many more critiques to be made of both camps. Prior to his preference scale Eugene used utils to measure all the objects of his desire. These were basically little bits of his subjectivity that he kept in his pocket like gold coins.

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He exchanged them with himself every time he made a decision. These look sort of like a combination of a bar graph and an abacus and all of us carry them with us at all times and consult them before we engage in any human action. They are the primary instrument of our freedom but the government wants to take them away from us and make us slaves. He argued that since money was originally a commodity like gold that originally, in barter, people did have a subjective value for the particular uses of gold.

Thus the original exchange value of gold was a result of these subjective valuations. Once gold became money, of course, its exchange value was altered by its role in the circulation of commodities. The value of money is not created or altered by subjective preferences for money. The neo-Austrian response to this problem is to distance themselves from the neo-classical idea of the rational consumer and to stress the imperfect information of the consumer. Rather than consumers being super-rational beings that can calculate the relations between the objects of desire, the fallibility of human understanding is stressed and the market is seen as the ultimate informational clearing house which adjusts the imperfect desires of the multitude, smoothing them out, allocating resources in the most efficient and democratic way.

Their language often takes on religious overtones here, stressing the inherent insufficiency of human judgement against the omnipotent, mysterious power of the market. The problem is that these magic moves of the hidden hand of the market are just asserted and never proven.

Rather than actually proving that the market can do this Austrians prefer to stress that the only alternative is the State-Communist BogeyMan. For Marx the subject-object relation is not just a matter of personal psychology, of people thinking about objects in the abstract. Instead it is based in the real, concrete working activity of people actively transforming the world.

He wants us to understand the specific ways in which subjects and objects relate through the real activity of social groups in their day-to-day activity, in their mode of production. The first thing to note is that, just as the commodity passes through many different hands and fulfills different functions as it moves through the vast network of capitalist social relations, so too value takes many different forms. Different aspects of the value relation come in and out of focus depending on where we turn our gaze.

Value can take the form of private labor, social labor, and market price. These three forms of value all act back upon each other, co-determining each other, just as all the various moments of production and exchange influence each other. Market prices can fluctuate from day to day due the seemingly chaotic way information about prices is transmitted through markets.

But through these fluctuations we can observe law-like regularities. The amount of resources a large firm has at its disposal make it quite difficult for the self-employed to work at a competitive socially necessary labor time. A timely tangent: The consumption habits of the unemployed and underemployed are also largely dictated by capital.

Being unemployed is expensive and time-consuming. One must drive to interviews, have a clean suit to look good for those interviews, send out tons of resumes, etc. This is why we need a theory of distribution before a theory of price. The theory of marginal utility tries to explain price first, and then explain the distribution of the social product between classes afterwards.

The most extreme version of this would be the price theory of Mises who argues that not even the cost of production enters into the formation of prices. For Mises, consumers determine prices through their valuations, then the revenue from the sale of the commodity is distributed amongst the factors of production according to the competitive bidding of capitalists.

On the contrary, the classical economists before Marx formed their theory of price only after the distribution of the social product between classes… Thus the price of the commodity would be the wages paid to workers plus the profit of the capitalists plus the price of inputs which go to other capitalists plus any interest or rent owed to other parts of the capitalist class. Obviously a class analysis of society is only possible with the classical approach. Please, Occupy Wall Street, stop using this ridiculous term.

There is no such thing as corporate greed. Capitalism is the problem, not the subjectivities of capitalists. Underconsumption theory, one of the more prominent radical theories of the current crisis, is based on idea that production is for consumption. Underconsumption theory argues that since all production is eventually for consumer consumption that a shortage of demand or purchasing power from consumers can cause an economic crisis.

This neglects the role of capitalists in creating their own demand for products, not for the personal leisure of capitalists, but for productive consumption, as inputs in the production process. Block appeared that day in the Spokane newspaper Industrial They were killed because they defy the fundamental politics of the state regarding education and social issues. In the end all of Mexico knows The libcom library contains nearly 20, articles. If it's your first time on the site, or you're looking for something specific, it can be difficult to know where to start.

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