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Where's the evidence that everyone at the L.S.E. was a Hayekian in 1931?

We have lots of evidence that many of them never understood it and most of them at a deep level never "got it". Hicks first among others says as much.

Everyone at the L.S.E. In 1931 came out of a non-Austrian tradition -- Hayek testifies that those thinking in a Marshallian frame found it almost impossible to think in Menger/Hayek terms.

Young provided the immediate intellectual background for some at the lse in 1931, others had a German background etc. It _was_ the lse and many came with a
an affinity for leftist economics and leftist economists.

Folks like Hicks and Lerner etc. were given new things to think about by Hayek -- then they placed these in the their own tradiions, e.g. Marshal and Walras.

Coase among others testifies that Hayek's P&P lectures were a sensation -- but left everyone bewildered.

Coase says he gave a talk on Hayek's macro in NY, but suggests it wasn't from a position of solid understanding.

Whenever Hayek engages Kaldor, the repeated complaint is that Kaldor is getting everything wrong.

Hayek's attack on Kaldor's claim that forced savings/malinvestment could produce permanent wealth without discoordination is that Kaldor must assume cordination on the order of fantasic magic.

At the bottom of Kaldor's magic Hayek sa Marshall and a false conception of capital (placed within a static model).

The big issue was the secondary deflation/ depression -- and already in Feb. 1932 Hayek at passed the buck to Keynes on this issue, saying Keynes has good ideas for idealing with it. Hayek never really took up the topic -- which turned out to be as important as anything in the 1930s.

Pete,

In my reading, the finer points of money velocity are not applied to ABCT. Thinking back to Garrison's model, which you have at the top of this post, I don't think there's much room in it for a refined and nuanced monetary theory; it's a blunt instrument. Yes, the monetary theory Garrison employs to make the model hang together has some richness insomuch as money actually matters, but I wouldn't go so far as to say it deals with that level of precision.

Going to Horwitz next, he treats ABCT and monetary disequilibrium theory in _Microfoundations_ but I don't recall there being an explicit attempt to enrich the former with all of the particular insights from the latter. For instance, I think ABCT is treated in one chapter [4, I think, but the number could be wrong] along with problems of inflation and the social order. But it's separate from his discussion of deflation and monetary stability. I think it would benefit ABCT to get a more serious dose of monetary theory.

You know my problems with the ordo-Mises/Hayek ABCT theory, namely the reliance on general competitive equilibrium, an appreciation--unsatisfactory application--of capital heterogeneity and the capital structure, the way interest rates are dealt with, etc. There are also some institutionally contingent problems (to be sure, less with Mises/Hayek and more with Rotbhard) on the role, powers, and influence of Federal Reserve banking. In addition to all of this, I do think ABCT could be beefed up on its monetary theory foundations, particularly given the highly empirical nature of all business cycle research. I'm trying to deal with this in Chapter 2.

Lastly, you asked if these issues have much to do with misunderstandings of ABCT in modern discourse. I think it does. I didn't address Selgin and White in my comments above because, unfortunately, I'm less familiar with their post 1995 work than I am with Garrison and Horwitz. If either of them has addressed the comments or points I made above, I would *very much* like to hear about it. That bring said, Selgin, back in November of last year dealt with the problems of velocity and monetary equilibrium with respect to the Hummel/Henderson claim that the Greenspan Fed was not as much at fault as many thought for the housing bubble/financial mess. Here's his piece:

http://mises.org/story/3200

I think in order to understand the housing bubble/financial mess, we need a sound theory of regulation and intervention, a theory of interest rates and business expectations, a theory of monetary institutions, and some over-arching way to bring those three together. The largest deficiency I see in the treatments of the bubble and bust is two-fold. First, I see an emphasis on one or two of these facets at the expense of the rest or last. A first example is the "mainstream" view that this was caused by greed and risky business prospects. This story emphasized interest rates and business expectations at the expense of regulation and intervention and sound monetary theory. At the other extreme is Tom Woods's account--which is quite good, by the way--that yes, there is regulation and intervention, but the worst intervention is the THE FED. This story neglects the remainder of the interventions, regulations, and the role of regular business expectations and adjustment. The second problem I see is in the way in which people talk about the monetary theory and institutions in question.

Long story made short, it would be a tremendous boon to Austrian business cycle theory to take its monetary theory foundations (we all remember where Mises first proposed the idea) more seriously and more critically.

Couple of comments on Geoffrey:

1. Woods' book DOES deal with the non-Fed factors. He has whole chapters on the regulatory factors. Yes, he places the major blame on the Fed, but he does not "neglect" the remainders. There are problems with that book (more than I mentioned in my Freeman review), but ignoring the other stuff isn't one of them. FWIW, I agree that the plurality of the blame lies with the Fed.

2. "Going to Horwitz next, he treats ABCT and monetary disequilibrium theory in _Microfoundations_ but I don't recall there being an explicit attempt to enrich the former with all of the particular insights from the latter."

I'm not sure what you mean here. The way I laid out my project in that book was to treat ABCT and MDT as part of a more over-arching "Wicksellian" approach to monetary disequilibria. More specifically, I set up the ABCT (which really takes up only part of the inflation chapter) by framing it as one example of monetary disequilibrium, with the Yeager type deflation story being the other. I'm not sure if that qualifies as "enriching ABCT" with MDT, but certainly that's how I saw it.

Of course, I also saw myself as "enriching MDT" with the Austrian theory of capital and other microfoundations. The whole book is built on the Yeagerian insight about the essential properties of money and trying to show how MDT and ABCT are more consistent that people think.

I'll add that one of my other goals was to argue that Austrian macro is broader than ABCT. Aside from claiming that the MDT deflation story and Hutt's work can be understood as Austrian in important ways, I was more concerned to show that Austrians have more things to say about inflation, for example, than just the ABCT story.

Finally, I'm not sure if you've read my two recent working papers that make use of ABCT, one to tell the story of the current crisis and the other with Gene Callahan to make the theory more subtle by explicitly incorporating ideal type thinking into it.

http://www.mercatus.org/PublicationDetails.aspx?id=27494

and

http://www.mercatus.org/PublicationDetails.aspx?id=27538

All that said, I certainly agree with your call for a more comprehensive set of tools to explain the current recession.

" my problems with the ordo-Mises/Hayek ABCT theory, namely the reliance on general competitive equilibrium"

Hayek's 1937 model does NOT assume general competitive equilibrium.

All interesting comments by Greg and Geoffrey.
It seems to me that the "mainstream" view that greed and poor risk management caused the boom/bust tends to view poor regulation (or even lack of regulation in some extreme accounts) as part of the problem, and overlooks or at least de-emphasizes the effects of interest rates and expectations (which are quintessentially Austrian concerns).
Tom Woods is correct that the Fed's regulation of money and banking is far more consequential than other interventions, such as regulation of the housing market. After all, money changes hands in every business transaction in a modern economy, so it could hardly be otherwise.
This too is the dominant Austrian view, although Jeff Hummel and David Henderson disagreed, I think, in analyzing the latest business cycle. George Selgin articulated the mainstream Austrian view against their revisionism.

One area in ABCT that I think could use improvement (or even something to start at the foundational level, given the paucity of discussion of this issue) is the way that uncertain cash flows are affected by changes in interest rates. Businesses (including publicly quoted stock prices) are valued based on their cash flows. When the Fed lowers interest rates, cash flows are more highly valued, asset prices increase (c.p.), and the capital structure of firms tends to shift to a higher debt/equity ratio. The weighted average cost of capital to firms declines. This is true for any asset that is valued this way, including houses and real estate. When the Fed raises rates, the values of cash flows tend to fall as do asset prices. Firms' cost of capital rises. These entail shifts in the temporal structure of production, and in investment in capital goods and real estate, and the labor market.

So when the Greenspan Fed lowered rates to about 1%, this accelerated a boom in houses, commodities, stocks and derivatives (and in the art market, as I'm guessing The Economist will point out in its special report in Nov.). The housing boom would have happened regardless of what the subprime mortgage purveyors were doing.
The boom was especially pronounced in the derivatives market because of the lower rates. The cash flows were harder to value in that market, indeed perhaps almost impossible in some cases, which is one reason banks got so overleveraged. I don't recall anyone in the mainstream media even mentioning this possibility. Krugman? Fuhgetaboutit.

There is a PhD dissertation waitng to be written on this subject by an Austrian. Anyone on this case could start with three books: Kenneth Hackel and Joshua Livnat, _Cash Flow and Securities Analysis_; Bennett Stewart, _The Quest for Value_; and Alfred Rappaport, _Creating Shareholder Value_, 2nd ed.
Stewart and Rappaport are at odds on how shareholder value is calculated, but that shouldn't detract from finding lessons for ABCT. There are some valuable points in this body of work to advance ABCT, IMO, as well as to inform the financial press. Well, I'm not holding my breath on the latter camp.

Interesting comment by Steve too, it wasn't yet up when I was composing mine.

Huh?

Seriously, am I the only one here who realizes that the whole Wicksellian framework underlying Mises' business cycle theory is in great conflict with his account of the impossibility of economic calculation under socialism (ie under the absence of prices of factors of production)?

I should have explicitly mentioned in my comment that the cash flow calculations of capitalists are distorted by the central monetary planners.
Mises and Hayek implicitly recognized this in some passages, I think, but the concept of cash flow wasn't invented by the accounting profession until the 1950s and 60s.
Business (and cash flow) calculation should be incorporated into basic economics 101. It's part of the "black box" of the theory of the firm, and is AWOL. It has a role in understanding business cycles.

"Of course, I also saw myself as "enriching MDT" with the Austrian theory of capital and other microfoundations. The whole book is built on the Yeagerian insight about the essential properties of money and trying to show how MDT and ABCT are more consistent that people think"

Steve, out of interest, what was Leland Yeager's response to your work? (I found Garrison's penultimate section in "Time & Money" is a really good complement "Microfoundations and Macroeconomics" in this regard).

Also, Pete, you always preface your comments on monetary theory by deferring to Steve or Selgin. Do you know this stuff, or not? If you don't, then maybe you shouldn't be teaching it.

Steve:

Thanks for the pointers to the new work. I'll get to those a little later this week.

I'm not trying to be uncharitable to Woods; I know his book talks about all the other regulation. If it didn't, it wouldn't be worth reading at all, and as I said I think it's quite good. I think you and I agree that perhaps a plurality of the blame lies with the Fed, but I do not know whether we blame the Fed for the same things. (BTW, it's coming; it should be you soon.) But I think Woods is claiming that a *majority* of the blame lies with the Fed, and I disagree with that. I am not convinced that the the Federal Reserve was either necessary or sufficient for the mess. Perhaps it was necessary, but it was certainly not sufficient (I don't think Tom Woods thinks so, either).

On the comment I made about your book, I would like to clarify. I'm quite sympathetic to the broad research program you're undertaking; where I was trying to go is that I think there is more beyond what you did. So I retract my rather strident comment about not seeing an attempt to enrich ABCT with MDT. What I should have said is that the treatment of ABCT was limited to inflation. While this is the ordo-story, I think we need to take *all* monetary disequilibria as potentially generative of a cycle or massive discoordination. I'm sure you agree, but you might say that's not ABCT. I would agree it's not ordo-ABCT, but I think there are problems with the formulation of orthodox ABCT.

I realize, as well, that that's the purpose of your book, to look at MDT as central to macroeconomics. Your next chapter on using Austrian capital theory and market process analysis to enrich monetary disequilibrium theory is definitely a step in the right direction. All I was trying to say is that I think we can make ABCT better still by being more thorough about the monetary theory (both pure logic and institutional analysis) underlying it.

Greg Ransom:

I wasn't picking any specific Hayek piece in particular, but if you argue [as most do] that the only direction for expansion of firms is into temporally longer production, you've said a lot about how equilibrated you think the economy is at the outset.

What worries me is the difference between capital goods and other goods.

When talking about the demand for money we really should mean all of the demand for money. Not just the portion of it for NGDP products. To use only that portion is a monetarist mistake.

But, if that is the approach taken then I think things become much more difficult. I'm not sure Selgin's "Less than Zero" argument really works.

Lord B:

We have evicted folks in the past for both insulting your hosts and for sock puppetry. You have done both in this thread. Consider this a warning.

Dear Lord,

I am sorry that you never heard of learning through mutual inquiry -- dialogue not monologue. But then again it explains a lot --- including why you hide behind an online persona, and why you admitted in the previous exchange with Greg that you troll for fun.

I am willing to defer to George, Larry, Roger and Steve (and many more) on monetary issues because I have not published in the professional peer reviewed journals in these areas. I can learn from them who have been so professionally engaged. I want to learn from them.

I have my views -- which I have expressed here on multiple occasions, including those that disagree with many of the stated positions of those who I respect. But I don't have the same level of confidence that I have a worked out position. So I am hoping to constantly check myself from the arrogance that is often born out of ignorance of subtle points in theory that only those deep in the subject mater might study.

I am writing this not in the hope that you will understand my point --- not that you are not smart, you are, but you are not serious (by your own admission) and thus just looking for another opportunity to "troll" it and derail learning by others. No, I am writing this for others and to make an appeal for mutual learning as a model of discourse.

Giles,

In the acknowledgments of the book, I explicitly note that it was my goal in the book to convince Yeager that Austrian macro was both more than ABCT and was more consistent with his own work than he thought. Somewhere, perhaps on the old Hayek-L email list, Yeager reviewed the book or was discussing it and essentially admitted that I had more or less convinced him. I can't find where he said that in a quick Google search, but if I do, I'll post it.

Geoffrey,

I think that Fed monetary expansion is sufficient *to produce an Austrian cycle of some sort*. I think it was necessary but not sufficient to produce the specific boom-bust, with the emphasis on housing, that we're living through. And I agree that Woods would not say it was sufficient for the latter either.

I'm not sure if I think the Fed deserves more than 50% of the blame. Perhaps blame is the wrong word. If the question is "how much of the particular boom-bust that we had is explained by the Fed's expansionary policy?" then I might agree it's less than 50% because you really do need all of those other regulatory and policy factors to explain the particular set of events that unfolded.

Steve,

Thanks, if you can find it please do! I'd be interest to know what he said. I can imagine it being very satisfactory to influence that you (presumably) have a lot of respect for. Ultimately you'll have to balance that off against not convincing Lord thought!

Steve,

While regulation and subsidies of housing and real estate might cause resources to shift into these sectors that would have been invested elsewhere, I'm not convinced they have business cycle effects. (I don't think government spending on public housing causes a business cycle either.)

(Ditto for taxes. Jeff Hummel commented on the L&P blog that a change in the tax treatment of housing helped fuel the boom. But in my view, the tax change simply moved some housing prices towards their free market level. If the government repealed all capital gains taxes, asset prices subject to such taxes would have a one-time increase to their free market--well, if we got rid of the Fed!--level, but this wouldn't cause a boom-and-bust cycle.)
In the most recent cycle, both subprime and prime mortgages boomed, then declined. (So did the prices of other assets, like commodities, so it wasn't just a real estate boom and bust. The boom/bust in commodities wasn't caused by tinkering with mortgages.)

The Fed was the prime mover in the mess IMO.

I apologize to Pete for my nasty comment, it was uncalled for.

Lord B,

You had to go and spoil it, just when you were making me look civilized.

In any case, Steve, you don't have to do anything about people like that. Nobody pays any attention to them.

I know.

Current,

You said, "When talking about the demand for money we really should mean all of the demand for money. Not just the portion of it for NGDP products. To use only that portion is a monetarist mistake."

I keep thinking the same thing. Until now I have assumed that I must just not understand, but your comment has deepened my suspicion that something is wrong.

Current, and you too, Kelly,

Why are you carrying on your discussion in English rather than mathematics?

After what you've said about it, I expected nothing but xs and ys from you.

Come to think of it, that's probably why I'm having such a hard time following this discussion.

Too many words and not enough xs and ys.

What are you trying to do, freeze us common folks out with your plain English?

Steve,

"you really do need all of those other regulatory and policy factors to explain the particular set of events that unfolded."

You need them to know HOW it unfolded (specifically, in what sector of the economy). You don't need them to know WHY it unfolded. Even in the absence of regulations, there would have been a boom period. We just cannot say how it would have manifested itself.

Observing that the dollar is inconvertible, (Austrian) economists conclude that it is unbacked. The most remarkable thing about this simple non-sequitur is that it has survived virtually unquestioned for centuries. If we want to show that the dollar is not just inconvertible, but unbacked, it is not enough to say that the Federal Reserve does not pay out gold on demand. Yet economists' belief in fiat money, and in fact the better part of monetary theory, is founded on nothing but this obviously flawed premise. Add to this the facts that the Federal Reserve (like all central banks) does in fact hold assets against the money it issues, that no dollar is ever issued except in exchange for valuable assets, and that the Federal Reserve's own balance sheet plainly identifies those assets as "Collateral Held Against Federal Reserve Notes", and we have good reason to wonder if fiat money is no more real than the phlogiston, ether, and caloric of early physical sciences.

Lee Kelly: "I keep thinking the same thing. Until now I have assumed that I must just not understand, but your comment has deepened my suspicion that something is wrong."

DG Lesvic: "Why are you carrying on your discussion in English rather than mathematics?"

Actually, a little mathematics may be useful here ;) ....

There are two components to the demand for money. The "exchange demand for money" that is the demand for money to use and the "reservation demand for money". As Selgin says the exchange demand for money is really a pseudo-demand since an agent only demands it in order to demand something else.

So we have:

Money demand = exchange demand for money + reservation demand for money

(Salerno calls this Rothbard's equation)

Now, nowhere here are components of NGDP mentioned. When I demand money to hold that doesn't mean I will spend it on NGDP products. I may judge that I need 200 euros for the next week's purchases but I won't work out any breakdown between NGDP good and second hand goods or capital goods. Agents don't differentiate between these things like economists do.

Now, consider the money quantity equation. This is best expressed by the Cambridge equation:

Money Supply = k1 * Prices * Total goods exchanged

Here we are considering all transactions. In this case k1 is related to demand for money to hold. As that demand increases k1 increases.

Now, the Monetarists use the equation:

Money Supply = k2 * Prices * GDP goods exchanged

Here they only consider GDP transactions. In this case k2 is not really directly related to demand for money to hold, as it is in the equation that concerns totals.

It is this k2 that folks like Scott Sumner want to deal with. And it's this k2 that is used when folks argue for a CPI target of a percent of so of steady deflation. (Selgin only advocates that as a second-best to free-banking though).

The problem is though, what if there is a change in the attractiveness of capital-intensive and labour-intensive investment. It seems to me that could cause k1 and k2 to diverge in practice.

I haven't read Steve Horwitz's book though, he may sort this out.

Pete:

Your discussion, quoting Hayek, used the term "velocity." Think instead of the demand for money.

Does the fact that Hayek looked at a change in the quantity of money, given the demand for money, make a difference? Changes in the quantity of money are assumed to be excess supplies of money.

What happens when there is a change in the demand for money? Suppose it is matched by an increase in the quantity of money? What happens if the demand for money falls, and the quantity of money doesn't? How does that impact the analysis?

By the way, why does the bending arrow of disequilibrium in the Garrison diagram go out and then bend down towards investment before heading into the interior? Why not out and up towards consumption? And then, maybe into the interior?

Market clearing implies that outside the ppf is unfeasible. Prices of both consumer goods and capital goods rise. The interest rate down below rises becaues the real credit supply falls. And we end up at the initial allocation of resources which is both feasible and consistent with everyone's plans.

Why not? (I don't mean to say I think that is what happens. I mean, why doesn't it work out that way--the way it "should?")

Current:

Geez! The demand for money--how much money people want to hold. One of the problems with the concept of velocity is that it gets involved with distinctions betweeen money that is circulating or not and issues about whether it is income velocity or transactions velocity or something else. Why try to import all of those problems back into the concept of the demand for money?

If money is a normal good, then an increase in income will raise money demand (really, the demand for money services.) Aggregate income and the production of final goods and services are equal, and so that is the connection. Intermediate products generate income for the sellers, but their values are costs for the buyers. Value-added is what makes up income. You know...sum of the incomes = sum of the value added = sum of the final goods and services.

That doesn't mean that nothing else impacts money demand. That would include trade in intermediate products or else financial transactions. Why would one expect the demand for money to be any more unchanging than the demand for bread, cars, drill press machines, IBM 30 year bonds, or Microsoft equities?

The fact that we cannot distinguish between an excess supply of money that has yet to be spent, and a change in the demand for money matched by an increase in the quantity of money (the amount of money actually held) is one reason money is such a problem.

Bill, I see what you mean. I don't see how this squares with your support for an NGDP+3% rule though.

I think Lord Buzungulus should use his real name. The same rules for all!

Ludwig,

As much as it bothers Pete, collectively we're okay with people using pseudonyms, but one to a customer. It was your sock puppetry that got you banned. Lord B got his warning, so did you. If he engages in sock puppetry again, he'll be banned, just as you were. In the meantime, if he prefers to go by Lord B, so, uh, be it.

Current,

Why just a little math, if it's a superior language? Why not all math?

And I still don't see any. Just definitions, and symbolic shorthand.

Your analysis is still all logical, implying constant relations between cause and effect, but not between any magnitudes of the causes and effects.

If there are any such constant numerical relations, what are they? What are the actual magnitudes themselves, the quantities, the numbers?

Allusions to them, abstractions from them, symbolic representations of them are no substitute for the actual numbers themselves.

If you really have any, why hide them, why not bring them right out into the open, and settle this whole dispute, once and for all.

And I would also admonish others here that it doesn't do to sit on the sidelines, and when the discussions are all over, beg the questions.

Ludwig was having discussions between his different aliases, I clearly was not, and it was pretty clear I was the same poster with slightly different names.

Anyway, Current: glad to see someone here has finally identified the real point of contention between Rothbardians and Free Banker, namely over the two components of monetary demand. It's not clear from your post, however, where you stand on the issue.

DG Lesvic,

I don't think our positions are really that far apart...

DGL: "Why just a little math, if it's a superior language? Why not all math?"

It depends on what we are discussing. I never said mathematics was always a superior language, I said that it is sometimes superior for some purposes.

DGL: "And I still don't see any. Just definitions, and symbolic shorthand."

Well yes. But, that is still mathematics, at least it is to me.

I come from a physical sciences background. We are taught that mathematics encompasses this sort of thing, as well as numerical work. I think that's the general way that mathematicians look at it too.

DGL: "Your analysis is still all logical, implying constant relations between cause and effect, but not between any magnitudes of the causes and effects."

Yes. Any observed magnitudes would be economic history.

DGL: "If there are any such constant numerical relations, what are they? What are the actual magnitudes themselves, the quantities, the numbers?

Allusions to them, abstractions from them, symbolic representations of them are no substitute for the actual numbers themselves.

If you really have any, why hide them, why not bring them right out into the open, and settle this whole dispute, once and for all."

I'm not arguing for the existence of constant numerical relationships between particular quantities.

Purple one: "Current: glad to see someone here has finally identified the real point of contention between Rothbardians and Free Banker, namely over the two components of monetary demand. It's not clear from your post, however, where you stand on the issue."

I don't think that really is the main point of contention. I think both sides fairly much agree on it.

Why do you think it's contentious?

Is anyone else concerned about the Chinese Government's exchange rate controls? It is my understanding that demand for U.S. Dollars is being subsidised. The Federal Government seems to have capitalised on this situation to expand the budget deficit beyond what would otherwise be possible. But what is going to happen when the Chinese decide to change policy?

Current, I don't think Rothbardians would agree with Selgin that the exchange demand for money is a "pseudo-demand."

I still don't have an opinion on velocity so I will ask a question on the first part: ratex and abc. :-)

I think that it is easy to dismiss ratex as extremely unlikely, but the lemons story of why entrepreneurs don't discount information that is known to be unreliable is more difficult to address in my opinion.

Maybe a rational entrepeneur could think "I need prices to guide my actions, I can't rely on them, I don't act", like a lemons market disappearing because of adverse selection.

Why are entrepreneurs incentivized to invest in production processes that sooner or later will fail? An externality story can explain this, and I believe that the Carilli/Dempster paper (the first one) on RAE is very important to complete the Austrian argument. In the present economy it's easy to see why entrepreneurs seem fool: when the central bank steps in it causes moral hazard and decisionmakers don't bother (or bother less) about risk and sustainability. The story without a central bank is more difficult (and economic distortions, I guess, much milder).

So, I think that while points (2) and (3) are not critical, (1) should be rephrased as "why money is non-neutral in that way? (unsustainable investment instead of flight from the market because of 'information discounting')".

PS Without a clear udnerstanding of point (1), which we may call "the austrian channel of monetary transmission", I think that to reason about whether it's M or MV which cause troubles is difficult. As I don't know what exactly are the channels by which intertemporal coordination is fostered, I cannot formulate a theory of which monetary policy / monetary system is optimal. Ok, I shout up and keep on reading Horwitz (I'm only at ch 3)...

Current,

You wrote,

"I never said mathematics was always a superior language, I said that it is sometimes superior for some purposes."

I’m still waiting for just one example, in economics.

You wrote that "mathematics encompasses" non-numerical along with "numerical work."

That is to deprive mathematics of its meaning, and admit that you don't have any.

You wrote,

"Any observed magnitudes would be economic history."

That’s right, history, not economics. And, without actual magnitudes, the essential raw material of mathematical operations, there are none in economics.

You wrote,

"I'm not arguing for the existence of constant numerical relationships between particular quantities."

Then what are you arguing for, other than blurring the distinction between mathematics and logic?

Current: "I never said mathematics was always a superior language, I said that it is sometimes superior for some purposes."

DGL: "I’m still waiting for just one example, in economics."

What about the examples I gave earlier? I think that the money quantity equation (M = k p T) is much easier to understand as an equation than in words. I think Mises' equations for describing stages of inflation are useful too.

DGL: "You wrote that 'mathematics encompasses' non-numerical along with 'numerical work.'

That is to deprive mathematics of its meaning, and admit that you don't have any."

No it isn't. Mathematics has always included this non-numerical part I'm discussing here. Large parts of topology, geometry and number theory do not involve numerical computation of anything. But they are traditionally called mathematics.

Mathematics applies when the quantities under discussion can be conceptualised and linked to other quantities. It is not particularly important that any of the quantities can be measured.

I don't think there is really much substance in our disagreement, I think we just disagree about language.

Purple: "Current, I don't think Rothbardians would agree with Selgin that the exchange demand for money is a 'pseudo-demand.'"

Ah, I didn't know that. I'm not sure it's a big difference though.

Let's say you have an Orange and want a Pear. However, you find the seller of the Pear doesn't want an Orange. So, you exchange the Orange for an Apple and exchange the Apple for a Pear. In some Austrian Jargon the demand you have shown for the Apple is called "pseudo-demand" because it is demand for an intermediary good for indirect exchange. The same applies to money.

Current,

You wrote,

“What about the examples I gave earlier? I think that the money quantity equation (M = k p T) is much easier to understand as an equation than in words. I think Mises' equations for describing stages of inflation are useful too.”

M, k, p, T are not numbers, but literary symbols. And I sure hope words are easier to understand than symbols, because I don’t understand yours at all.

As for Mises, he was the greatest ever, by far, but even he had his good days and his bad days.

You wrote,

“Mathematics has always included this non-numerical part I'm discussing here. Large parts of topology, geometry and number theory do not involve numerical computation of anything. But they are traditionally called mathematics.”

For example? Yes, that one example I am still waiting for.

I suspect that you are separating the theory of mathematics from its application.

The theory must be verbal, for you cannot explain, say, the calculation of the circumference of a circle by means of the actual numbers involved in the calculation. But neither can you carry out the actual calculation without them.

The theory and the application of it are not two kinds of mathematics, but two different stages in all mathematics. You cannot have the application without the theory, and the theory without the application is pointless.

What was the point of your “number theory” that did not “involve numerical computation of anything?”

DGL: "M, k, p, T are not numbers, but literary symbols. And I sure hope words are easier to understand than symbols, because I don’t understand yours at all."

They are variable names. They represent a quantity, but not necessarily a quantity that can be measured. The advantage in using single letters is that it is often more concise than using whole words. Especially if that single letter can be used many times.

Current: "Mathematics has always included this non-numerical part I'm discussing here. Large parts of topology, geometry and number theory do not involve numerical computation of anything. But they are traditionally called mathematics."

DGL: "For example? Yes, that one example I am still waiting for.

I suspect that you are separating the theory of mathematics from its application.

The theory must be verbal, for you cannot explain, say, the calculation of the circumference of a circle by means of the actual numbers involved in the calculation. But neither can you carry out the actual calculation without them.

The theory and the application of it are not two kinds of mathematics, but two different stages in all mathematics. You cannot have the application without the theory, and the theory without the application is pointless."

Though I see your point you are not using the word "mathematics" as it is used by mathematicians or scientists or engineers.

When you say "the theory must be verbal" you mean it must be symbolic. Certainly. However, that formula or theory is a part of mathematics.

What you are claiming is that it's "not mathematics" if it is never evaluated and used for arithmetic. This isn't how mathematicians or others define things.

There are many cases, even in applied mathematics where finding that a particular equation is fulfilled is useful. Doing so may even solve a major problem. A good example of this would be James Watt's various linkages and valve systems from his steam engines.

See the animation of Watt's double-acting steam engine here:
http://en.wikipedia.org/wiki/File:Steam_engine_in_action.gif

In the 19th century it was impossible to assess the movement of such a device numerically. He could not ensure that valve X opened at time T. Watt didn't do that, he setup a system of equations to describe the linkages and then found what conditions had to be fulfilled for valve X to open at the right time in relation to everything else. The equations were the answer to the problem, they didn't need to be evaluated.

This sort of thing is very common in engineering.

Current,

You wrote,

“They are variable names. They represent a quantity, but not necessarily a quantity that can be measured.”

Again, an example, please, of a quantity that can’t be measured, and not the representation of it, but the quantity itself.

You wrote,

“The advantage in using single letters is that it is often more concise than using whole words. Especially if that single letter can be used many times.”

I have nothing against shorthand, per se. I use it myself. But that isn’t the issue. The issue is mathematics.

You wrote,

“…you are not using the word "mathematics" as it is used by mathematicians or scientists or engineers.”

Or sophists.

You wrote,

“What you are claiming is that it's ‘not mathematics’ if it is never evaluated and used for arithmetic. This isn't how mathematicians or others define things.”

I asked what was the point of a theory without an application.

You wrote,

“There are many cases, even in applied mathematics where finding that a particular equation is fulfilled is useful.”

But you were telling me that it needn’t be useful.

Then you gave me an example in which they were useful in engineering.

But I’m still waiting for an example in economics.

Current, in your example, why does the fact that demand for the apple is indirect make it false demand (pseudo-demand)? It is clearly valued in it's own right due to it's purchasing power. This is what enables the usual machinery of marginal analysis to be applied to monetary economics. Rothbard discusses this very well, esp. Ch 11 of MES.

Current, Kelly, Boettke, Anybody,

If, after all this, none of you can give me an example of mathematical economics, isn't it time to acknowledge that there is no such thing?

Or, to put it another way, you can't have your Mises and eat him too.

D.G.,

Let it rest. What you describe as "mathematical economics" is unlike anything that anyone else is concerned with. You're just distracting yourself and others from more interesting discussion. I have no authority on this blog, but as a regular vistor and commenter, I ask you to please stop with this fruitless "debate".

Mr Kelly, who has heretofore shown great interest in this subject, finds it uninteresting when he finds that he no longer has a leg to stand on.

Very bad form.

Let Let me try to sum it all up.

Since the mathematical economists cannot point to any examples of constant numerical relations in economics, they must insist that mathematics consists of non-numerical as well as numerical relations. And since the term “mathematics” then refers to non-numerical as well as numerical relations, and there is no longer any term by which to differentiate between them, they must insist that there is nothing to differentiate, that they are substantively the same thing, and that the only difference between them is between one mode of expression and another, and that the numerical is superior to the non-numerical. But since they can’t give us any examples of that either, they give us literary symbols in their place, xs and ys in place of numbers. And when we cannot understand that shorthand, they explain it with words in regular sentences. And so we’re right back to logical and literary economics, except that we call it mathematical economics.

My question is: why?

DGL: "Again, an example, please, of a quantity that can’t be measured, and not the representation of it, but the quantity itself."

As I said above I think the money quantity equation is the best example of this:

M = k P T

Where M is money supply, P is price level and T is total goods sold for the money in question.

Now of course such a thing can be expressed in words too. In fact, such mathematical shorthand is quite a modern invention.

However, whenever we are discussing a relationship like this we are dealing with mathematics. Only according to your own peculiar definitions are we not doing so.

The point of my example from engineering was to show why scientists use the word "mathematics" as I do. If we described things the way you do then the algebra and geometry used to make steam engines would be "not mathematics" because it doesn't result in numerical answers. We engineers and scientists aren't going to adopt this strange definition of what mathematics is and isn't.

Purple: "Current, in your example, why does the fact that demand for the apple is indirect make it false demand (pseudo-demand)? It is clearly valued in it's own right due to it's purchasing power. This is what enables the usual machinery of marginal analysis to be applied to monetary economics. Rothbard discusses this very well, esp. Ch 11 of MES."

Yes, such a demand is certainly subject to marginal analysis. As I understand it the point of the term pseudo-demand is to highlight that the demand is *for indirect exchange*.

Again, I don't see how this is a contentious point.

Current,

You gave me exactly what I said I wasn’t looking for, and then told me that it was the best example of what I had been looking for.

I had asked for an example of a quantity that couldn’t be measured, and not the representation of it, but the quantity itself, and, again, all you gave me were representations of them rather than any actual quantities, and then told me that it was the best example of what I had asked for.

It was the best example of your utter failure to give me what I had asked for, an actual example of what you have been talking about, a quantity that can’t be measured.

What would it be: one pint of beer that can’t be measured, or two pints, one mile, or two, or the time it’s going to take to get a straight answer out of you?

You wrote,

“The point of my example from engineering was to show why scientists use the word ‘mathematics’ as I do.”

But why would you give an example from engineering rather than economics, if you had any from economics?

As I predicted at the outset, you would never give us an example of mathematics, my kind of it, your kind of it, anybody's kind of it, in economics, and you never have, and never will, for the simple and obvious reason that there is no kind of mathematics in economics.

For the last time, I hope, if there is, show us. Give us an example of mathematics, any kind of it, in economics, not in engineering nor astro-physics, but economics.

Not representations of actual quantities, but actual quantities, not astro-physics, but economics.

And, to any impartial observors here: isn't it obvious by now that the advocates of mathematical economics cannot give us an example of it, and that there simply is no such thing?


DGL: "You gave me exactly what I said I wasn’t looking for, and then told me that it was the best example of what I had been looking for.

I had asked for an example of a quantity that couldn’t be measured, and not the representation of it, but the quantity itself, and, again, all you gave me were representations of them rather than any actual quantities, and then told me that it was the best example of what I had asked for.

It was the best example of your utter failure to give me what I had asked for, an actual example of what you have been talking about, a quantity that can’t be measured.

What would it be: one pint of beer that can’t be measured, or two pints, one mile, or two, or the time it’s going to take to get a straight answer out of you?"

Let's go back a bit. You are trying to show that economics does not involve mathematics. My point is that it does.

I pointed to the Quantity Equation

M = k P Q

This equation is mathematics by the conventional definition of the word "mathematics". It is mathematics when phrased in words too.

The symbols M, k, P and Q are symbols that represent quantities that cannot be measured. Of course I cannot give "the quantity itself", that would be impossible.

But, once I begin talking about the conceptual relationships between these quantities I am doing mathematics. Once you say "this adds to this" in words you are really dealing with mathematics because addition is a mathematical operation.

DGL: "But why would you give an example from engineering rather than economics, if you had any from economics?"

I've given you an example from Engineering and I've given you one from Economics too.

I don't understand what more you want.

The point of my example from engineering was to show how science and engineering define the word "mathematics".

In this thread you are trying to define mathematics in a way unique and peculiar to yourself. As I understand it according to your definition mathematics is only involved when equations are evaluated into actual numbers and arithmetic is done. The rest of mathematics and sciences do not accept this definition. The point of my engineering example was to show why they don't accept it. They define mathematics more generally because it become useful in some cases before any numerical evaluation takes place.

Current and Lesvic,

Might I kindly suggest that you take this discussion to email? It's quite clear from the sidelines that you are just talking past each other. Lesvic is adopting a highly idiosyncratic definition of mathematics that no working mathematician would accept and will continue to define all reasonable responses as unresponsive as a result. This "debate" will go nowhere in the meantime and will only serve to annoy fellow commenters.

Current, the point is, the whole notion of "sticky prices" (concern for which animates so much of the debate between the two camps) makes no sense from Rothbards monetary framework.

Purple: "Current, the point is, the whole notion of "sticky prices" (concern for which animates so much of the debate between the two camps) makes no sense from Rothbards monetary framework."

I understand that they think that.

How is that related to transactional demand for money though?

I trust that Prof Horwitz will allow Mises the last word.

"The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogisms are not only sterile; they divert the mind from the study of the real problems and distort the relations between the various phenomena."

If you want to continue talking about this by email then can you point to a place where your email address is?

I don't want to write my email address on a public forum, when I do so I get spam.

I'd gladly point you to his website, which you can usually find by clicking his link above, but it looks like he forgot to pay the bills for his domain name.

If you were referring to me, as the one who forgot to pay his bills for his domain name, I don't know what you're talking about.

In any case, I would not want to engage in a private discussion with Current.

OK. As a last note, read something like "What is Mathematics?" by Courant, Robbins and Stewart. Then you'll see what I mean.

Current, it means that for Rothbardians, an increase in the reservation demand for money not accompanied by a decrease in the exchange demand for money *must* lead to an increase in the purchasing power of money. The ME framework of equilibrium at the prevailing price level makes no sense in Rothbards framework, because what matters there is total monetary demand, which has two distinct components.

The professional who manages my web site told me that what you are seeing now is just a routine and temporary systemic matter and will all be cleared up within an hour or so.

Purple: "it means that for Rothbardians, an increase in the reservation demand for money not accompanied by a decrease in the exchange demand for money *must* lead to an increase in the purchasing power of money."

Yes. I still don't think anyone's disagreeing with this.

But, it still takes entrepreneurial effort, and other sorts of effort to effect that change of the purchasing power. Such a process is of-course always taking place anyway, but not on the scale that it must if there is a large change in the reservation demand for money.

Current,

I'm sure that Profs Horwitz and Boettke would join me in recommending a book for you, too.

Human Action by Ludwig von Mises

I don't know about the one you recommended, but I can assure you that you will find a few examples of economics without mathematics in the one we recommend.

I am completely updating the book, to be called "Cash Flow, Cost of Capital, and Security Valuation,", to be published next fall by McGraw Hill

Kenneth S. Hackel

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