“If it ain’t Menger or his direct student Eugene [sic] Von BB, it ain’t Austrian. Sorry #Mises : respectfully, too many mistakes were made.”~ August 10 tweet by Sandeep Jaitly
Last week the Keiser Report, hosted by Max Keiser, featured a segment with Sandeep Jaitly, a follower of Antal Fekete and the author of the above tweet. Now, Jaitly doesn’t seem like the worst fellow in the world, so I don’t relish criticizing him, but saying Mises made too many deviations to be considered an Austrian economist is really too much.
On subjectivism, on reverse imputation, on “cost of production,” on method, on marginal utility, on the origin of money — on everything we remember Menger for, in other words — Mises was a Mengerian, and thus an Austrian. One would hardly suppose there could be any controversy in this at all.
Jaitly’s tweet evidently piqued Keiser’s curiosity. What, he asked, are these Misesian mistakes?
“His mistakes were too great to elaborate on on the show,” Jaitly replied, and proceeded to list a few (see below). But after saying Mises’s mistakes “were too great to elaborate on,” he went on to say,
It’s not insulting or denigrating what von Mises has done. He was certainly the greatest economist of the 20th century. It’s just that he made a slight few errors of observation. That’s all.
So were Mises’s alleged errors too great even to be able to discuss, or were they “a slight few errors of observation”? If the latter, how could such slight errors justify expelling Mises from the Austrian canon? And if, as Jaitly concedes, Mises really was “the greatest economist of the 20th century,” what does it say about the Austrian School to which Jaitly claims to belong that the century’s greatest economist didn’t qualify as an Austrian?
Keiser went ahead and promoted this episode as discussing the “real Austrian economics of Carl Menger versus the fake Austrian economics of Ludwig von Mises.”
According to Jaitly, Mises’s first error was that he “didn’t look back to Menger’s original axiom, which is that value is not outside your own consciousness [i.e., value is subjective].” Jaitly, then, is saying that Menger embraced the concept of subjective value, and that Mises rejected, or “didn’t look back to” it.
Exactly the opposite is true. If anything, so many times does Mises insist that value is subjective that he may have feared he was trying the reader’s patience. Robert Wenzel, in his own critique of Jaitly, chose an illustrative quotation from Mises perhaps at random: “Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.”
Quotations like this could be multiplied many times over. I cannot fathom what Jaitly could have had in mind.
In fact, while Jaitly claims Menger as the believer in subjective value as against the deviationist Mises, the truth is the very opposite: in chapter 5 of Epistemological Problems of Economics, Mises actually criticized Menger for being insufficiently subjectivist.
Jaitly further contends that “Mises didn’t like to admit that interest was a market phenomenon. He sort of wanted to imply that it’s a natural consequence of not having a present good.”
This claim is so at odds with Mises’s words that one is left breathless at its sheer daring. Mises never denied that interest is a market phenomenon. The whole point of his business-cycle theory is that deviation from market rates of interest by means of artificial credit expansion leads to malinvestments that culminate in a bust.
Mises does not say interest is “a natural consequence of not having a present good.” Merely not having something yields no natural consequence. Mises says people prefer a good in the present to the same good in the future, such that they would opt for the future good only at a premium. This premium reflects their time preference, or their discount of the future. Interest rates that arise on the market reflect these time preferences of individuals in society.
To say that Mises did not believe interest was a market phenomenon because its origins lay in individuals’ time preferences is like saying he didn’t believe prices were a market phenomenon because their origins lay in individuals’ subjective valuations. In each case, the market takes a subjective factor (individuals’ value scales in the case of prices, and individuals’ time preferences in the case of interest) and gives it objective expression — market prices in the former case, and the interest rate in the latter case.
Finally, Jaitly claims that Mises confuses “the thing that occupies an object with the object itself,” and gives as an example “Mises thinks that a promise to gold is the same as the object of a promise to gold.”
Finding this point rather opaque, I ran it by a friend, who came back to me with
As near as I can make out, Jaitly thinks that Mises believed that gold is valued intrinsically instead of as a means to an end. This appears to be what he has in mind by saying that a “promise to gold,” i.e., a commitment to provide gold, is the same as the object, or end, for which this commitment is made.
I find no evidence that Mises ever said or believed such a thing, and Keiser, doubtless as confused as his audience over this claim, doesn’t follow up on it either of the times Jaitly tries to raise it.
(There is some disagreement as to what Jaitly meant here; Bob Murphy takes a different view, while Bob Wenzel insists that readers and critics shouldn’t have to engage in textual somersaults to dig out nuggets of truth from one unclear and confusing statement after another.)
Keiser then wanders far from his comfort zone with what he believes to be a smackdown of libertarianism itself:
This idea of “value does not exist outside of mankind’s consciousness” — this is pretty much the opposite of Objectivism, which is Ayn Rand’s philosophy, to which many American libertarians adhere, and they cite von Mises as their justification. So this idea of Objectivism is diametrically opposed to the true Austrian School of economics. So that would be a fundamental flaw in any so-called libertarian’s philosophy.
Keiser evidently thinks that because Austrian economists use the word “subjective” a lot, while Randian philosophers call themselves “Objectivists,” there is a fatal contradiction at the heart of the whole libertarian project.
Before getting to the substantial reply to this particular piece of confusion, here are its most obvious difficulties:
Rand herself emphatically rejected the libertarian label.
Most libertarians are not Objectivists. (So if Objectivism were flawed, libertarianism would be left untouched.)
Libertarianism is committed at root to only one principle: nonaggression. Theories of value, important as they are, are extraneous to libertarianism. So again, no problem.
Rand was not speaking about technical economics, or about economics at all, when she called her philosophy Objectivism.
When economists say they believe in subjective value, they are not saying anything particularly controversial. If we are going to understand how the prices of classical music CDs are formed, for example, it is fruitless to engage in debates over whether Beethoven was objectively superior to Mozart. This would tell us nothing at all about why their recordings sell at the prices they do. What matters for price theory are people’s subjective preferences for one or the other; after all, it is individuals, not disembodied standards of musical quality, who actually buy the CDs and thereby contribute to making their prices what they are.
Likewise, someone may well believe that the Confessions of St. Augustine or Ayn Rand’s Introduction to Objectivist Epistemology would be more worthwhile reading than a book by Tom Clancy. But such a judgment does not help us understand the prices of these goods, unless the St. Augustine admirer thinks the quality of his book means its price deserves to be $1 million. Prices aren’t formed this way, thank goodness.
I cannot imagine a sensible Objectivist, understanding the sense in which economists mean the term “subjective value,” objecting to the idea.
Now returning to Jaitly: “Gold does not have intrinsic value per se. It has value because it satisfies human ends.… It doesn’t have value in and of itself.”
This is certainly true, but any knowledgeable libertarian, and certainly any Austrian economist one might name, already knows this.
Keiser then raises the subject of externalities, pollution in particular. The failure to incorporate such external costs of production into market prices, he says, is “a major failure by libertarianism.”
It isn’t a failure of libertarianism, actually. For one thing, “Mr. Libertarian,” Murray Rothbard, made quite an important contribution to our understanding of externalities of that sort. For another, one of the central themes of Austrian economics is economic calculation, which lies at the heart of Keiser’s objection.
Economic calculation is the means by which we attain higher-valued ends with lower-valued means, within the division of labor. Prices freely arrived at through market exchange help us, by means of profit-and-loss calculation, determine whether the value of our output exceeds the value of our input. More specifically, economic calculation makes it possible for our production activities to be carried out at the lowest cost in terms of opportunities foregone — i.e., all those other processes, producing a different pattern of consumer goods, in which the factors of production might otherwise have been employed.
Economic calculation is falsified to the extent that the state involves itself in the economy. Because the state acquires its resources through coercion rather than voluntary exchange, its expenditures and revenues lack the economizing feedback of profit and loss. As a result, its economic decisions — what to produce, in what amount, where, on what terms, using what inputs, etc. — are necessarily arbitrary.
The state can obscure economic calculation in other ways as well: when it owns and operates a business firm, when it owns a natural resource, or when it fails to enforce property rights and thereby falsifies costs. The latter two cases are examples of what Keiser has in mind.
But the problem here is the hampering of the market, not the alleged blindness of Austrian economists. Private ownership, which is precluded by state intervention, would encourage the preservation of the capital value of resources, as opposed to their immediate consumption or destruction. Furthermore, polluters in a genuine market economy would be held liable for their activity, not “regulated” according to some arbitrary level of acceptable emissions.
That does not mean a world of zero pollution, by the way, an outcome not even Keiser himself would favor: the ambulance rushing him to the hospital, heaven forbid, would be stopped in its tracks by the authorities. But it does mean a configuration of resources that takes all costs, including environmental ones, more explicitly into account. The Austrian literature is replete with discussion of the significance for human welfare of extending the unhampered market and its corollary, economic calculation, into as much of the world of exchange as possible. Austrians do not simply throw up their hands and claim that environmental damage ought to be ignored.
Quite satisfied with the segment, Keiser concludes: “I hope the so-called libertarians like Lew Rockwell watch and learn.”
I’m not sure why Keiser considers himself qualified to evaluate people’s claims to be libertarians, but I am sure that Lew wouldn’t have a whole lot to learn from this muddle of confusion. In the meantime, rest assured that Mises really was an Austrian economist after all, and immerse yourself in his work by visiting the Mises Institute and my self-study program at LearnAustrianEconomics.com.
The above was originally posted on LewRockwell.com. Keiser responded to it with a post called “Tom Woods’ Blunders.” For a split second I wondered if maybe I had overlooked or misstated something. Then I saw his post.
It begins,
Tom Woods ramblings are lengthy …
Translation: I haven’t the foggiest idea how to answer Woods. If I say his reply to me is “lengthy” and “rambles,” that will cover for the fact that I can’t reply to 95 percent of it. Oh, and 15 minutes of bashing Mises and libertarians on the most uncomprehending grounds is not rambling or lengthy.
but I wanted to zero in on this bit:
In the following passage, taken from Tom Woods response to Sandeep Jaitly’s interview on “Keiser Report,” Tom Woods rationalizes the failure of his fundamentalist ideology and ‘economic calculation’ by wedging a lot of intellectual dishonesty into this quote: “Private ownership, which is precluded by state intervention, would encourage the preservation of the capital value of resources.”
The idea that private interests preserve the capital value of resources (’unless they are interfered with by the state’) produces a superior economic outcome over the public interests preservation of capital value of resources is the type of pseudoscience, faux-Austrian claptrap that gives rise to economic dictatorialism, completely blind to the actual consequences of its actions. What Woods is advocating here is in effect central planning, but the ‘right kind’ of central planning by the ‘right people’; the complete opposite of what Austrians say they are supposedly in favor of and a complete contradiction of what Menger was trying to elucidate before the Mises crowd came along and poisoned the water.
I’ll be a sport and overlook the lack of any argument or analysis here; we are evidently expected to accept Keiser’s ex cathedra pronouncement without demanding such coarse elements as reason or evidence.
Here are Keiser’s points, stripped of the viciousness that was absent from the tone of my own piece, along with my replies:
(1) It is silly and “fundamentalist” to think private owners might take better care of resources than the state.
Evidently the whole tragedy-of-the-commons problem has been solved by Max Keiser; with such contributions to the human race, it almost seems petty of me to continue the exchange.
I think, though, he hasn’t really solved this problem. Max would have to believe that people who rent cars treat those cars just as well as they treat their own cars. In Keiserland, people take rental cars for oil changes and maintenance, and repair dings and scratches.
On my planet, people do not take the same care of things they do not own as they do of goods they do own. The same goes for any resource: what private owner would want to destroy the long-term capital value of a mine, or a herd of animals, in order to enjoy one fleeting year of profits? Who would kill all the animals this year, leaving none for next year? What incentive exists to do such a thing?
(2) He thinks private ownership is a form of “central planning.”
(This guy has his own show?)
Central planning involves
- the direction of resources in the absence of property rights, or
- orders handed down to resource owners by non-owners.
Neither applies in the case of the ownership and use of a resource owned by someone with legitimate property title.
It of course is not a question of having the “right people” in charge. I am not saying that my people would do a better job of managing resources than Max’s people; that Max even thinks in these terms makes him appear juvenile and uncomprehending.
The issue is that only private owners can operate within the realm of economic calculation, and only private owners have an interest in keeping the resource generating a stream of returns over time. Why would a politician, serving a two-year term, care at all about such a thing? You’ll note how politicians, having no particular reason to care about future prosperity and interested only in immediate electoral returns, have looted a certain resource called the population of the United States. Keiser wants these people in charge of more resources.
(3) Without acknowledging that on every point I overturned his guest’s bizarre and unsupportable claim that Mises was a non-Austrian deviationist from the plumb-line Menger, he closes with further reference to this alleged difference between the two.
Max, here’s my challenge to you. Where does Menger say the state, with its politicians’ limited time horizons, is better able to preserve the capital value of resources than legitimate property owners? Where does Menger say that economic calculation within the division of labor is not a good way for society to economize?
You are saying Mises has deviated from Menger in holding the position he does. You have no idea what you are talking about. Give me chapter and verse from Menger.
If you can’t, then admit you’re in over your head, and apologize to your viewers for that ridiculous segment and for this crazy claim about Menger and Mises.
So far, Keiser has refused to answer my challenge. Not even one reference from Menger (whom I have a funny feeling Keiser may not have read, believe it or not) has been forthcoming. Instead it’s been a barrage of insults delivered via Twitter. These are intended to distract people from his failure to answer me. And although Keiser will no doubt continue on with his ungentlemanly language — hardly dignified for a man his age — I’ve posted my final word on the whole matter here.
