The Ubiquitous Quiz

I might as well give my thoughts on the Austrian Quiz posted at the Mises Blog. I scored a 100% on the Quiz, and that is likely because Rothbard is probably the biggest influence on my views on economics and philosophy. The quiz itself was I thought well-written overall, and much better than the various political compass tests inhabiting the internet.

First an observation. While Charles Oliver says...

Actually, it should be how Rothbardian are you? Mises, Hayek, Kirzner and many other Austrians would have failed to get 100% if they took this quiz.

...implying a lack of consensus among Austrians, Arnold Kling makes the opposite observation by calling it a sect.

The future of Austrianism is uncertain. As a sect, insisting on adherence to all of its beliefs, the Austrian school will remain a committed but eccentric group.

So which is it? Are Austrians too fragmented in their views, or are they a sect?

Arnold describes some main characteristics of Austrianism in the section of his article called "The Features of Austrianism". Although what he says is true, I think he is giving less than a full description (which obviously is not his intent for that article) of the focus of the Mises.org website. The biggest point he leaves out is what sets the Austrian school apart more than anything else is methodology. Followers of Mises and Rothbard's methodology start from basic axioms of human action and use deduction to reach conclusions the consequences of human action - praxeology. This has implications for the nature of value, benefits of exchange, origin of money, banking, inflation, importance of private property, implications of monetary policy, source of the business cycle, etc.

Thus, it is no surprise that someone like Hayek would have disagreed with some of the answers. I could be wrong, but I don't think even Hayek thought of himself as a "Misesian" as far as methodology is concerned. From my point of view, Hayek made some astute observations about how societies and institutions evolve, and what role the free market plays in coordination of resources, but his economics was very different from Mises and Rothbard. His closest academic tie to Mises was his augmentation of Mises's Economic Calculation Problem which Hayek restated as a "Knowledge Problem". While Arnold describes much of Austrian economics as focused on lack of knowledge for central planners, there is debate within the Austrian community as to what Hayek's reformulation adds, if anything, to Mises's original thesis.

Likewise, to my eyes, most of Mises.org including its daily articles and most of the literature on the the website lies squarely within the Mises/Rothbard praxeological realm, and much less so in Hayek's philosophy.

From Arnold's article:

Given that Austrian economics focuses on The Knowledge Problem and Competition as a Discovery Procedure, which of the following would you guess would be a metaphor for an Austrian explanation of booms and busts in business investment?

(A) Imagine a restaurant in which the menu includes some items that can be cooked quickly, using stir-fry and microwave techniques, while other dishes such as stews and roasts require longer and more roundabout cooking methods. In a well-functioning restaurant, the extent to which consumers are hungry now or are willing to wait determines the mix of food that is prepared. The waiters deliver the right information to the chefs about how much of each type of meal to prepare. However, like a bad waiter, a central bank can enter the picture and deceive the chefs into thinking that people want more stews and roasts than they truly desire. This leads to a boom in long-term cooking, followed by a bust later on.

(B) Imagine a restaurant in which the chefs have many new recipes to try. Most of them will not be popular, but some will represent successful gastronomic progress. When the chefs become optimistic, they try many new recipes, which means a boom. When the chefs become risk-averse, there is a slump.

For reasons that baffle me, the Austrians prefer explanation (A). Explanation (B) is closer in spirit to Keynes, the arch-enemy of the Austrians.

I would restate (A) slightly as a central banker who believes that more business can be created for the restaurant from fake orders starts printing fake orders and sending them back to the cooks, so that with time, the cooks start making some dishes that nobody wants and must be thrown away, yet many of the customers end up without dishes that they do want.

Starting from the origin of money as the most marketable commodity in a society, and adding the conclusion from praxeology that production must precede consumption, (A) is a more satisfactory explanation to me than (B). It's baffling to me that optimism and pessimism would cause business cycles, or that printing money can end recessions.

Today, the Austrians believe that monetary policy has been too expansionary and that another crash is imminent. Instead, I believe that monetary policy could have been more expansionary, and a vibrant economic recovery is under way. Time will tell.

I'm no professional economist, but what I continue to see is more debt creation, and more distortion and malinvestment in the economy. Time will indeed tell.

In closing, I believe the criticism Arnold has received for that article has been excessive. In his own concluding remarks, he writes that, "I believe that information-age economics with many Austrian features will emerge." As a regular reader of his blog and TCS articles, I know that Arnold is a friend of individualism, free markets, and limited government. Although I am sympathetic to the Mises/Rothbard approach to economics, I learn from reading Arnold also.
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Update: more here and here.

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Great comments. I have found

Great comments. I have found no satisfactory justification for counterfeiting money as a means for economic stimulus and so have sided with the Rothbard/Mises axis. On principle it violates basic tenets of liberty (state power to the detriment of individual action). I find the Mises.org site too strident (unrealistic) on national defense issues and the quiz positions statements on unions excessive. I scored a 92, with the balance going to Friedmanism. I saw where each answer was leading and was comfortable with the result. That makes for a great quiz in that it hones one in on the points of contention for further debate or consideration. It seemed the Mises.org folks fairly represented opposing camps, a rare feat these days.

What would you have offered as answers from the Hayek camp?

My email to Mises.org on the

My email to Mises.org on the quiz:

I didn't even get past the third question. None of the statements about interest was acceptable to me.

I fully accept that time preference, as Bohm-Bawerk expounded it, exists as a phenomenon. I just don't think it's the dominant influence on interest rates in "actually existing capitalism."

Too bad there wasn't an answer along the lines of: "Interest is primarily a monopoly charge on access to credit, made possible by government interventions like legal tender laws, capitalisation requirements and licensing for banks, and other entry barriers. To the extent that interest reflects the secondary factor of time-preference, its steepness is affected by historical factors like the distribution of property and the extent of labor's independent access to the means of subsistence and production."

I'm with kevin- the first

I'm with kevin- the first question didn't have a satisfactory answer so I stopped.

Kevin: How are you defining

Kevin:
How are you defining "credit" and how does that definition vary from "money"? To place the question in context of "actually exisiting capitalism" do you require assumption of a central bank, fiat currency, fractional-reserve banking? Those are important questions because the whole ABCT is based on central-bank-determined interest rates undermining "natural" interest rates, which consequently begs the question of what is the "natural" interest rate. Since everyone has access to "money" in the Austrian sense and most people have capital in the sense of money beyond immediate needs, most people have factors that determine what they would demand in return for giving up that excess for a period of time. What factors they consider in setting that price has nothing to do with "monopoly charges on access to credit" because there is no monopoly, no limitations on access, and no credit beyond excess capital. How would you determine the return you demand to give up $1,000 for one year?

mike, What would you have

mike,

What would you have offered as answers from the Hayek camp?

Just as an example, to question number 9, "How viable is socialism?", I believe Hayek's answer would have been something along the lines of:

"Socialism cannot be successful because "the knowledge of the particular circumstances of time and place" exists at the periphery, dispersed into society in the minds of millions of individuals, and thus, no central planner could have access the knowledge to rationally plan society."

In other words, Hayek's critique of socialism dealt with lack of knowledge, whereas Mises's critique of socialism dealt with lack of private property.

Mike, To put it in

Mike,

To put it in perspective, imagine a society in which there were no legal restrictions on any group voluntarily associating to form a mutual bank and issue mutual banknotes against any form of property the membership was willing to accept as collateral. Under such an arrangement, a homeowner could receive banknotes equal to, say, 50% or 75% the value of his house, at the overhead cost of administering the "loan"--probably less than 1%. The condition of receiving such a "loan" would be accepting mutual banknotes as tender from the rest of the membership.

I use the term "loan" in quotes because it really is not a loan; it is a monetization of property. It is essentially the same function performed by capitalist banks in issuing a second mortgage or other secured "loan"--but because of the State's licensing system, capitalization requirements, and other market entry barriers, banks can charge a monopoly price for performing the service. William B. Greene and Benjamin Tucker argued that if market entry were free, and no regulatory restrictions existed, competition in the service of monetizing property would drive the price down to administration cost. That is what I mean by "monopoly" and "limitation of access."

Bohm-Bawerk himself was aware that time preference varied from person to person, based on their financial circumstances, their degree of economic security, and their independent access to means of subsistence. And those factors vary heavily with the distribution of property, which is a historical effect of past statist robbery of the producing classes (primitive accumulation). Had not the overwhelming majority of the English population been robbed of their rights in the land in early modern times, and had not State regulations artificially limited alternative mutualist means of organizing credit, worker ownership of the means of production would be much more prevalent today, and alternative means of organizing a "labor fund" for long-term production processes would be available. As a result, the average time-preference would be much less steep for the average worker.

Although most people have access to some money beyond immediate subsistence needs, the amount varies a great deal. Only a small portion of society has a large enough reserve to fund subsistence needs during "roundabout" production processes, or to procure means of production for such processes. And I contend that this is not the result of past free market processes, but past State robbery and intervention on behalf of the privileged.

The Mises and Hayek

The Mises and Hayek formulations are 2 sides of the same coin.

Without property, individuals cannot value economic goods; without property there cannot be exchange and without exchange, there cannot be information revealed such that a third party could make a rational calculation. If I don't know that people are willing to give up X amount of Y for Z, then I can't know that I have an opportunity to provide Z which costs me X-A of Y (and thus satisfy a need)- there is no way to reveal the potential for profit which is the essence of economic calculation (profit means you're satisfying existing need and you should continue in this line of production).

Without property, knowledge to perform economic calculation doesn't exist and cannot exist.

But if you keep private property but still want to centrally plan (interventionism), it still won't work because the knowledge about what people want to produce and consume is dispersed and not available to the central planner... and worse, the act of intervening destroys knowledge (since intervention by design alters economic signals & outcomes). The greater the intervention, the greater the discoordination until ultimately it is as though there is no property (Mises' starting point).

Knowledge comes from exchange which is possible only with private property.

Jonathan & Brian: I have a

Jonathan & Brian:
I have a hard time distinguishing Mises and Hayek from the summaries your provide, as it appears Hayek contends the defect is inadequate/inaccurate information generally and Mises contends the same, but specifically in lack of free market prices as information communicating needs. Perhaps I have not read enough of each of them.

Kevin:
When a bank loans me money in return for my promise to pay and a pledge of property as security, I am not monetizing my property, I am monetizing my future income stream. No bank I know of wants anything to do with the collateral securing the loan. From further experience, there are infinitessimally few banks that will loan money based solely on the value of the collateral, even at a steep discount of a conservative appraisal of value. Although in a Keynesian world it appears money is merely a claim on property, in the real world money is itself property and in a free world anyone with a skill or ability can obtain money and then lend it at an interest rate of his choice. Perhaps we are working in incompatible paradigms.

The distinction is that

The distinction is that Hayek moved from economics (in his earlier years) and dedicated the latter part of his career to psychology and similar pursuits. His "knowledge problem" is thus more psychological in terms of explaining why central planning cannot work. Its also not praxeological in that it starts from the top and goes downward, explaining the structure of knowledge in an economy and the system in general.

Mises' argument stays close to economics in particular, by starting from the socialists' premise of the abolition of private property and control of the economy by planning. Mises knew that all economic activity is done at the individual level, and proceeded from there- if individuals do not have control over property, they cannot properly value it, and thus cannot establish rational exchange, and thus without rational exchange there is no information available for producers to calculate what good or service to provide, and what good or service is no longer wanted/desired. Its a cascade effect from the individual that has systemic effects, and thus from Mises' point of view, socialist economics is impossible because everyone (not just central planners) is unable to rationally determine what is needed and therefore what to produce (and, further, what mix of resources to use to produce something, what resources are useful in the first place, etc etc). All of production becomes irrational and arbitrary and thus cannot be maintained.

So Mises and Hayek, while 2 sides of the same coin, go after the problem from opposite ends.

Hayek's usefulness in this debate is to show systemic and institutional reasons why socialism cannot work. I think it has extended use by pointing out the importance of recognizing information structure in general, and is a useful criticism of government intervention in the economy in general (since his formulation works regardless of the legal state of private property).

Mises is useful because the methodological individualism shows how knowledge is gained and why private property is non-negotiable for economic rationality. Mises speaks specifically about interventionism by proving that every intervention causes another problem (due to the increasing irrationality of the system) which, pursued to its logical end, will result in full-fledged socialism which he'd already debunked prior.

Knowledge structure vs. Economic Calculation.

I wrote the socialism entry.

I wrote the socialism entry. I am in the Hayek camp. I wrote a Hayekian/Misesian entry. Property, profit and loss and knowledge (I mentioned signals) are all a part of the same critique of socialism. Mises and Hayek phrased things differently, but were saying the same thing. You are all overblowing the differences between Hayek and Mises. I know where this is coming from, and I strongly disagree with the dehomoginization lit. Mises was talking about knowledge when he wrote about "groping about in the dark" and the absurdity of an "omniscient state".

DWM