Robber Baron Capitalism in Four Lessons – Part II: Hamilton’s Theory of the Business Cycle

Our series into Capitalism continues. In this, our purpose is in no small degree to wean you Libertarians of an Austrian bent away from Austrian economics and toward Alexander Hamilton’s superior vision of economics, Robber Baron Capitalism.

We now take aim at that pillar of Austrian economics, the Austrian theory of the business cycle, knock it down to size, and replace it with an explanatory model that builds on what you have learned in Part I.

We also expand on why in Part I we emphasized national policy makers should view their economy from the prism of sectors.

The Austrian take on the business cycle is an interesting, but ultimately unsatisfactory, explanation of boom and bust. At most, their theory explains why fractional reserve banking can in some cases reinforce poor economic decision making.

But, as you will see, its explanatory power falls short in other important areas.

Especially compared to the theory we now introduce to you.

Alexander Hamilton’s Theory of the Business Cycle – In Hamiltonian theory economic boom and bust cycles are driven by changes in consumer demand for a type, or types, of goods and/or services. These cycles are usually concentrated in specific economic sectors in both the upswing and downswing phases.

In Hamiltonian theory, economic activity is usually born from a type of customer demand.

In the value signalling triangle of consumer, producer, and economic environment, the consumer signals what type of demand they have to producers.

The producer interprets these customer value signals.

If the producer believes satisfying the customer’s demand is valuable enough to the producer within the producer’s business environment, the producer adjusts its operations and allocates resources towards satisfying demand.

As mentioned in Part I of our series, the act of satisfying particular types of demand in one sector requires the producer to establish processes and allocate resources that differ in type and kind from those used in other sectors:

Types of customer demand leads to the creation of different sectors because different types of consumer demand frequently require producers to design different types of processes in order satisfy different demands: The medical industry exists to satisfy medical needs; the financial sector exists to satisfy financial needs, the housing sector exists to satisfy housing needs. Each of these sectors have developed substantially different types of medical, financial, and housing processes to satisfy the demand in their respective sectors.

Because satisfying different types of desires requires different types of business processes, different sectors ultimately allocate different types of resources in their business operations that are often not needed in other sectors: Medical processes are allocated medical resources, financial processes are allocated financial resources, housing processes are allocated housing resources.

Because what consumers, producers, and the economic environment signal as valuable is constantly changing, producers must continuously reallocate resources and fine tune business operations to align with changes in demand and environment.

This reallocation of resources and process tuning by the producer never ceases.

Because time is required for producers to adjust to new value signals, there is always a time lag between the moment when value is signaled by the customer and the environment and when the producer can act on this new information.

Just as trains moving at top speed cannot stop on a dime, businesses cannot reallocate on a dime during a boom or downturn because it takes time to alter the course of their planned business operations.

In mathematical terms, how quickly and efficiently reallocation is performed is a function of how liquid a producer’s assets are and how quickly a producer can redirect other resources (land, labor, material…) dedicated to an old business action to new business actions. Sometimes resources in an old business action can be reallocated to new purposes. But usually at least some resources cannot be reallocated because they are not recoverable from the old business action.

Economic booms are usually concentrated within a particular sector that experiences a large upswing in consumer demand relative to demand in other sectors.

When a sector booms because of increasing demand, producers in that sector reallocate more and more resources and operations towards satisfying this increasingly valuable demand.

Sectors – such as raw material suppliers, financial services, marketing, staffing agencies, etc… – that are downstream or complementary to the producers in boom sectors also devote more of their resources and operations towards the boom sector.

The more demand there is and the more resources are allocated to the boom sector, the more sector momentum a sector has within a national economy.

Sector momentum naturally cascades through the rest of the economic system during rapid expansion.

Sector momentum also naturally cascades throughout the economy when previously booming sectors turn to bust.

Downturns occur whenever demand for a good or service, for whatever reason, reaches diminishing utility to the consumer. As utility is reached, demand falls below what producers projected demand would be. When demand misses expectations, producers must decide how to reallocate resources, if resources should be sold off, or if the producer can remain in business.

To Hamiltonians, economic downturns are inherently unavoidable. Over time, demand projections must consistently overshoot or undershoot because there are too many random and non-quantifiable factors for the producer to know in advance when and exactly to what degree a booming sector will see demand taper off.

Indeed, economic value itself is inherently non-quantifiable.

Because projections almost always miss their targets (when projections are precisely met, it is normally a fortunate statistical accident that is not repeated in future projections) some misallocation (malinvestment) of resources is inevitable. Especially when a bust starts.

After a boom, a high proportion of resources are lost because the demand they were meant to satisfy is less than anticipated. Operations at this point were near completion and had assumed robust demand. In mathematical terms, reallocation is easiest to perform when the old business action is at its earliest stage, hardest when the old action was closer to completion before cancellation.

For cancelled activities, a business actor may be able to rollback some resources invested in the cancelled activity to other activities, but some capital is usually not recoverable.

Economic recovery happens, and the boom cycle reestablishes itself, when a new demand emerges that is valuable for producer’s to serve.

Growth in Capitalistic economies is ultimately superior to Socialist economies because producers in Capitalism are ultimately reflecting the true desires signaled by the customer. Because customer desires are best reflected in Capitalism, Capitalistic systems ultimately enjoy lasting benefits in processes after economic boom and bust cycles have ended. The internet bubble and the industrial expansion of the 1920s all had positive impacts that long survived their respective crashes.

We note here that our theory holding that demand is the true driver controlling boom & bust is similar to Schumpeter’s theory that technological innovation drives market cycles. We generalize Schumpeter’s point to argue that demand of any kind – whether driven by demand for technology, cultural preferences, or any other customer motivation – is the key explanatory factor.

The traditional Austrian counter to Schumpeter is to argue fractional reserve banking causes boom and bust because central banks hold interest rates at artificially low levels. These low interest rates then encourage malinvestment in technological innovation, such as malinvestment in the green energy sector.

The Austrian argument against Schumpeter is weak because low interest rates are not by themselves sufficient to determine what specific technology investors decide to malinvest in. The number of possible investments in technology are essentially infinite, but not all of these possibilities attract malinvestment when interest rates are excessively low.

In the case of green energy malinvestment, Austrian theory does not explain why the green energy sector was favored over traditional energy sectors. The easy credit directed towards green energy would have been just as easily directed towards more profitable oil and gas companies.

Hamiltonian theory explains why. In Hamiltonian Capitalism investor actions are primarily explained by demand.

From a Hamiltonian viewpoint (as well as Schumpeter’s), malinvestment in green energy is the result of Liberal governments distorting normal consumer demand for energy towards politically favored green energy. Under normal market signalling conditions, “green” energy would not have enjoyed so much investment because that sector has not technologically matured to the point where it can substitute for classic energy industries.

Progressives substituting their perception of value for the customer’s normal preferences is the real culprit, not fractional reserve banking.

The Limits of Austrian Market Cycle Theory

As for the remedy to boom and bust so often proposed by Austrian economists, the gold standard, this too must be rejected as a cure.

It is at best just another economic tradeoff with disadvantages that do not obviously outweigh the flaws in fractional reserve banking.

The first error in Austrian affection for the gold standard is that the price of gold itself carries no inherent information about what interest rates should be.

Value, and associated prices, are inherently subjective for all goods and services. Gold is no different. The price of gold at any given moment reflects the preferences of its many customers. Those preferences include customers who value it in industrial applications and those who value it for aesthetic reasons. Neither gold’s industrial uses nor its aesthetic appeal hold advice about what a “correct” interest rate is.

Second, interest rates are also not quantifiable as “correct” or “wrong” because what qualifies as correct varies from the preferences of each individual economic actor. A very cash rich business such as Apple can tolerate much higher interest rates than a cash poor startup.

If interest rates are subjective, and the price of gold is like all other prices subjective, gold cannot indicate a “correct” interest rate of any kind. If there is no correct interest rate, a gold standard is not inherently better than fractional reserve banking.

No matter how interest rates are set, a given rate at a given point of time will always be too high and too low in the opinion of many economic actors.

What Austrians have misidentified as a flaw in fractional reserve banking is actually a side effect of Progressive economic policy.

Interest rates have been kept artificially low because economic growth across the West has been artificially suppressed by Progressive economics. Progressive policy, and any kind of Socialist economics, depresses economic growth because the network of value signalling between the consumer, producer, and economic environment is distorted by Leftist interference in the economy – usually by Liberals substituting their own subjective value preferences for the natural preferences of the consumer.

To compensate for lower growth, Progressive central bankers set interest rates low to make borrowing cheaper for business operations. This strategy reaches diminishing returns because low interest rates cannot compensate for the distortion of consumer demand signals.

Under Capitalism, interest rates would be less politicized (and therefore higher) because economic growth would be consistently higher. Hence, there would be no need for a gold standard to hold interest rates at traditionally healthier levels.

The Policy Implications of Hamiltonian Theory of the Business Cycle

For Capitalists, Hamiltonian analysis brings important implications for policy.

If the government cannot eliminate bust cycles for the reasons already discussed, then government policy should be to nurture the business environment in preparation for new demand to emerge and lead the next upswing in the economy.

This environmental nurturing should include creating a favorable environment for as many economic sectors to prosper so that dependence on one booming sector – a sector that must eventually experience a decline – is minimized. If one growth sector fails, others will be able to make up at least partially for this missing growth. This diversification in economic portfolios will alleviate risk from becoming too dependent on one sector of expansion.

The government should treat its overall economy like a basket of investments that, because of compound growth, increases over time despite periodic downturns. Occasional downturns should not alter long term economic strategy.

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21 thoughts on “Robber Baron Capitalism in Four Lessons – Part II: Hamilton’s Theory of the Business Cycle”

  1. Some general questions.

    Do you agree with the Austrians about the synthetic apriori nature of economics?

    Why is the rewards v risks concerning FRB greater than FRB?

    With FRB, you have ethical, pragmatic and economic problems, what is your reply? (Embezzlement and bank runs for instance.)

    Do you support fiat currency in general, or is that only “pragmatic”?

    How do you defend against the charge that fiat currency is a key weapon in the progressive’s arsenal?

    You claim that (correctly in my view) the value of gold is subjective; however, is it not the case that ones subjective judgement of the value of gold is constrained by inter-subjective and objective facts concerning other’s judgement and impersonal facts? For example, the value of gold is the price set by supply and demand and If, say, gold was or was going to be the global reserve currency and your a central bank which uses a fiat currency.

    Do the benefits of gold outweigh the risks, and for whom? (government v citizen, one government v another (USG v China or UK v Portugal.)

    Hamilton supported central banks, because he supported strong government. However, there is strong government and then there is disciplined and constrained government. Can a government be both strong and disciplined and constrained by the citizens? (Which the gold standard helps).

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  2. The standard Austrian response:

    “It is sometimes held, that innovations cause the ups and downs of the business cycle. The most prominent defender of that view was probably Joseph Schumpeter. He stated that booms are due to technological or other innovations whose implementations at first seem to promise high profits. After a while, more and more entrepreneurs copy the strategy of the pioneer firms until competitive behavior forces profits to go down again and a depression begins, in which the market is cleaned of unprofitable firms. This is a brief description of the well-known process of “creative destruction” — a term made famous by Schumpeter himself. The new state of equilibrium is only maintained until a new innovation creates the foundation for another boom.

    The industrial revolution, the appearance of railway tracks, or the rise of cheap automobiles can be interpreted as examples. Furthermore, the dotcom bubble at the end of the last decade could have been due to innovations like the internet. Even the current crisis can be regarded as the result of financial innovations.[18]

    However, it is not technological innovation that generates the boom, but the general boom that makes it possible for more and more firms to implement their innovative ideas. In every moment there exist many ideas for possible innovations and improvements. The latest innovation has not yet been implemented in every business. If there are always many ideas whose only problem is to get enough funds, then it is not technology, but savings that limit development. To implement them, the companies need capital. Society has to save first and then grant credit.

    There is, of course, nothing wrong with using credit for an innovative project. The problem only appears when these credits are created out of thin air, thus inducing malinvestments. In an environment of monetary expansion, many innovative projects can be started that are in fact not sustainable. The clusters of innovative activities that seem to be the cause of inevitable depressions are in fact a symptom of the distortion of the market process that is introduced by fractional-reserve banks”

    https://wiki.mises.org/wiki/Austrian_business_cycle_theory

    Key passage:

    ” In every moment there exist many ideas for possible innovations and improvements. The latest innovation has not yet been implemented in every business. If there are always many ideas whose only problem is to get enough funds, then it is not technology, but savings that limit development.”

    The Austrians, then, claim that it is the central banks “pumping” which is the ultimate cause of the boom and bust.

    Thoughts?

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  3. The Austrians, then, claim that it is the central banks “pumping” which is the ultimate cause of the boom and bust.

    Their explanation falls far short of adequate because of these broad problems –

    1) Savings are still finite under FRB.

    2) Time and resources are still finite under FRB.

    3) The number of potential economic actions businesses may take is essentially limitless. But even with very easy credit it is impossible for the wealthiest corporations to act on all, or even a fraction, of these opportunities due to constraints #1 and #2.

    Excessive lending is only one of many complex factor in the business cycle. But why businesses in loose monetary environments choose certain types of activities and not others is left largely unexplained by the Austrian cycle.

    A demand based theory of the business cycle answers this question more completely.

    The potential problem with FRB is that it may encourage a boom to continue when a downturn that will (under free market systems) reallocate resources away from the old boom sector may be more appropriate. By extending the boom, the crash becomes potentially more violent when it finally happens.

    But if demand is the true starting point of the business cycle, gold does nothing to eliminate the inevitable downturn. At some point whatever demand created the boom cycle reaches diminishing returns for the customer. When the customer ramps down demand, meeting this demand becomes less valuable to businesses. Businesses must then reallocate resources from processes that were dedicated to satisfying a booming demand to other economic opportunities.

    It is this reallocation of resources that occurs when booming demand begins to plateau that leads to layoffs, facility closures, downstream impacts on supply chains, and, in some cases, business failure that is the true cause of the bust.

    Take the 90s technology bubble.

    Customer demand for computer services would have been great even if a gold standard had been in place because the value of the computers to consumers would have warranted using credit with high interest rates.

    Resources would still be allocated to satisfying technology demand under a gold standard.

    Under a gold standard there would also have been a point where the value of computers to the customer would have hit diminishing utility. The tech industry would have found itself over-allocated in the boom sector, and the bust phase would have been triggered, all despite gold.

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  4. Do the benefits of gold outweigh the risks, and for whom? (government v citizen, one government v another (USG v China or UK v Portugal.)

    The benefits of gold are offset by negative aspects.

    The Austrians haven’t really shown why gold would uniformly be the panacea they claim, only that gold might be helpful in certain circumstances.

    Go back to the circumstances of the 90s tech boom to see what the tradeoffs might entail.

    If America’s monetary system in the 1990s was designed exactly to the Austrian’s specifications, the tech boom would in all likelihood have occurred under very tight credit conditions.

    Tight credit would mean the rate at which computer technology was adopted would have been considerably slower.

    If technology adoption was integrated at a slower rate, the risk with gold would be that America’s economy would be less competitive relative to economies using FRB.

    Gold would also have led to diminished expansion for more traditional economic sectors because they did not enjoy the booming profitability the tech sector did. Smaller businesses would have been disadvantaged compared to larger competitors that could afford to borrow at much higher interest rates.

    What actually happened in the 1990s was that America got away with speedy technology innovation and adoption and suffered what was only a mild recession in 2000.

    The real negative consequences of the 1990s tech boom were less negative than they would have been under a gold standard.

    Like small companies, for smaller nations it is arguably better for them to retain FRB so their economic growth isn’t artificially depressed relative to larger powers that can, on average, afford much higher credit rates.

    An Austrian gold standard would be suicide for a country like Portugal for the same reason it has been suicide for them to stay in a euro that is much too strong for what their economy can handle.

    I personally prefer FRB, despite its flaws, over gold because central banking is more flexible across multiple economic situations.

    Gold simply exchanges one set of negatives associated with FRB for the many disadvantages that come with gold. The Austrians have no explanation why the tradeoffs work out to gold’s advantage if they have mistakenly theorized the market cycle is driven by credit instead of demand.

    A demand driven business cycle coupled with economic value being inherently subjective means the problems they’ve associated with FRB are not solvable.

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  5. How do you defend against the charge that fiat currency is a key weapon in the progressive’s arsenal?

    The progressive’s key economic weapon is their ability to distort demand, not fiat currency, since the economic cycle is driven by subjective demand.

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  6. Hamilton supported central banks, because he supported strong government. However, there is strong government and then there is disciplined and constrained government. Can a government be both strong and disciplined and constrained by the citizens? (Which the gold standard helps).

    Yes, if Progressives aren’t distorting demand in demand driven economic cycles.

    Hamilton’s support for central banking and a strong government is not relevant to Progressivism because Progressive manipulation of market demand was not introduced by Hamilton. By a “strong government” Hamilton simply wanted a Federal government that was capable of essential functions of government – national defense, trade policy, legislative power – that was no more extreme in its centralization than any 18th century European Empire or Monarchy.

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  7. Thanks for the response. Not completely sold on either your or the Austrian position.

    To begin with, there is much agreement between us, we are both reasoning from the point of view of the state and we both want a strong government.

    With that out of the way, there are two questions.

    The first question is: Who is right? You or the Austrians? This is simply a causal, value free question.

    The second question is what are the advantages and disadvantages of Full Reserve Banking, gold and letting the market set interest rates v stimulating the economy and a central bank that can set interest rates.

    Now, you might be wrong on the first question, but right in the second.

    The Austrians may be correct in the first because they have a true understanding of how the economy works.

    However, the Austrians may be “wrong” in the second, or rather not applicable because the Austrians are reasoning as an individual in the market.

    Indeed, the Austrians are reasoning, sometimes perhaps implicitly, as “entrepreneurs” or citizens.

    What is good for the government is not what is good for the people.

    Your system, clearly, is much better for a government, as opposed to the Austrians (assuming everything in their system).

    With that out of the way, let’s address the first question.

    A possible Austrian response to your argument might go as follows:

    Your explanation is proximate, particular and empirical; “our” explanation is ultimate, general and necessarily true.

    Their epistemology assumes that economic laws are like logical laws. In fact, they seem to claim that economic laws are what philosophers call “synthetic a priori” truths.

    Assuming you know what this means, then if the Austrians are right, then if a central bank inflates the economy then necessarily there will be booms and busts.

    A necessary truth is a truth that cannot possibly be false.

    A necessary truth would be the following:

    You cannot be in two places at once.

    All criminals have broken the law.

    2+2=4.

    Necessary truths are truths that you can come to know via the exercise of pure reason.

    Next, there are two kinds of truth or propositions:

    A: Analytic.

    An analytic proposition, that is necessarily true, is the claim that “all bachelors are unmarried males.”

    B: Synthetic.

    A synthetic truth or proposition is a truth about matters of fact or existence such as John is a criminal, Donald Trump is President, McDonalds sell hamburgers; The Soviet Union collapsed; A caused B which resulted in C etc.

    Usually, synthetic claims can only be discovered via experience – observation, testimony or experiment (facts and causal reasoning).

    You appear to be saying that Boom and Busts are synthetic a posteriori truths.

    Austrians, on the contrary, claim (so it seems) that Booms and Busts are synthetic a priori truths.

    As someone who has spent quite a bit of time reading up on this issue as it pertains to the Enlightenment debate between rationalists and empiricists, this is a huge topic and the gulf is wide and deep between these two epistemologies.

    In short, the Austrians are saying that their theory is necessarily true. The point is not about explanation, as you appeal to abductive reasoning. They would say that that is irrelevant as their claims are truths of reason.

    This is similar to someone who says:

    It does not matter if God does not explain X, Y or Z because the existence of God is necessarily true due to the ontological argument.

    In any case, what the Austrians are saying seems to be following:

    1: If you inflate the economy artificially, prices will eventually rise.

    2: The more you inflate, the more spending occurs.

    3: If spending increases, so do prices.

    4:Spending cannot continue forever.

    5: Since spending cannot continue forever, prices will not rise forever.

    6: Thus, at some point, spending will fall and prices will drop.

    7: If prices fall because of falling spending, then there is no longer the same demand for goods and services.

    8: With falling demand for goods and services, the entrepreneur or the firms must either cut production or accept losses.

    9: If production is cut, then men and materials are no longer needed.

    10: If men are no longer needed they will be fired. If materials are no longer needed, then the producer of those materials are no longer needed; thus the entrepreneur who produces the materials must then lay off his men.

    11: Men without jobs, must either find new jobs or cut their spending.

    12: If these men cut their spending, then the goods and services that they would normally buy are no longer demanded. Which means that the seller must cut prices, and cut back on supplies.

    13: Repeat.

    14: Repeat.

    15: Repeat.

    16: Bust.

    17: Panic.

    18: Political turmoil.

    So, the whole process is like letting one little domino hit another little, but still bigger domino which hits a Bigger Domino WHICH HITS A BIGGER DOMINO………..

    What goes up, must come down.

    Is this true? Well, it appears to be logical. The problem is is that no empirical evidence can either prove or refute it.

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  8. Now, the question as to whether your system is superior.

    Superior in what?

    In competitiveness, production, inventiveness and innovation.

    To use an analogy, the Austrians are sober, tea drinkers. They neither smoke, drink or snort. They go on from one day to the next.

    Your system is a bit like the man in this film:

    “With this, you can conquer the world and eviscerate your enemies.”

    Lions and Tigers and Bears!

    The problem with taking drugs, is that if you get high, then you will get low.

    To get high next time, you must take more. This means you get lower. Eventually, if you keep taking drugs, then you become addicted and you take drugs just to keep “an even kneel”.

    So, the question then is it possible to have a different system, without the disadvantages but with all or even better advantages?

    It would probably require a very different political and economic system.

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  9. They would say that that is irrelevant as their claims are truths of reason.

    This is similar to someone who says:

    It does not matter if God does not explain X, Y or Z because the existence of God is necessarily true due to the ontological argument.

    WTF? (excuse my French)

    Was I transported into an alternate universe where Mises, Rothbard and Rockwell are the Holy Trinity?

    The debate between a believer in some sort of god and an atheist is unresolvable because any alleged actions of a supernatural origin pointed out by the believer, probably, cannot be proven to be either supernatural or some sort of odd quirk with a materialistic explanation.

    Alleged supernatural phenomena remains unresolvable because a supernatural action, by definition, cannot be proven through scientific methods – if a Buddhist monk prays over a man who drowned and stopped breathing an hour ago, and if the man rises back to life once the monk finishes, was it actually the prayer that resuscitated the man or an unusually robust vascular system?

    Whether it was divine intervention or some unknown type of physiological “system restore” response, the man’s revival could not conclusively be proven to be supernatural because if it WAS supernatural then the “system restore” mechanism transcends science. And since humans can only test scientific phenomena, the question of whether prayer or biology is the key factor remains unprovable.

    Austrian economics is not a divine doctrine. It is a scientific one and therefore must be judged by empirical results.

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  10. For full disclosure in this very informative flame war, Kant has always made my head ache.

    I prefer statistics.

    But if you are looking for a propositional argument instead of analytics…

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  11. 12: If these men cut their spending, then the goods and services that they would normally buy are no longer demanded. Which means that the seller must cut prices, and cut back on supplies.

    13: Repeat.

    14: Repeat.

    No.

    13. Demand in some other sector begins to increase.

    14. Booming demand then leads to a new boom cycle.

    15. Repeat.

    Proposition: If the boom always reappears in FRB sytems, then there is no need to eliminate the bust since booms last for longer stretches of time than busts (this is historically true for modern economies and probably most pre-Industrial ones – bust is always followed by a boom and the booms last longer).

    Over time compound interest of national GDP more than mitigates downturns just like a stock portfolio compounds.

    In the long run we Capitalists are rich while the Austrians are dead before they profit from gold.

    So why should Capitalists care about linking currency to the value of gold?

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  12. To use an analogy, the Austrians are sober, tea drinkers. They neither smoke, drink or snort. They go on from one day to the next.

    Your system is a bit like the man in this film:

    That man is clearly a Progressive if I’ve ever seen one, not a Hamiltonian.

    Robber Baron Capitalists do not need excessive credit to keep the economy booming.

    Credit is just an economic tool, one of many.

    Hamiltonians use so many other numerous devices to nurture a boom – tax cuts, infrastructure, military spending, light regulation, trade policy – that our GDP growth is robust enough not to compel us (either for reasons of political expediency or economic necessity) to keep credit at excessively low rates.

    The Progressives are the ones who abuse FRB because they smother economic growth with their other policies. Easy lending is their only tool (because it makes economic activity somewhat cheaper to offset the burdens of higher regulations, taxes, etc).

    We Capitalists are alcoholics, not crack addicts – we keep a good credit buzz going, accept the hangover as punishment, but shake it off to go on to another binge.

    Progressives are the crackheads: the high is fucking spectacular as every last dendrite is lit up like a Christmas tree, but they may not live to see the next high.

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  13. I was looking to partially rewrite this article because, when I originally published it, it felt more like a draft that I was evenly conflicted whether to publish or give more time.

    But thanks to this discussion I have a much better feel for what the final version will look like.

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  14. “I was looking to partially rewrite this article because, when I originally published it, it felt more like a draft that I was evenly conflicted whether to publish or give more time.

    But thanks to this discussion I have a much better feel for what the final version will look like.”

    No problem, I find our discussions to be very helpful.

    I don’t have a strong commitment to defend the Austrians, my goal is to first get at what is true.

    I have never read a single thing by the Austrians until a year ago. Before that time, I was a convinced empiricist who had spent quite a bit of time reading about epistemology. When I read up on their praxology I was shocked because I thought that such a thing was impossible – now I’m not so sure.

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  15. “WTF? (excuse my French)

    Was I transported into an alternate universe where Mises, Rothbard and Rockwell are the Holy Trinity?

    The debate between a believer in some sort of god and an atheist is unresolvable because any alleged actions of a supernatural origin pointed out by the believer, probably, cannot be proven to be either supernatural or some sort of odd quirk with a materialistic explanation.”

    Ha ha!

    Perhaps I confused things with breaking up God. Perhaps best to leave that debate out of this. However, if you want to grasp the background of what I mean, the following is an easy to grasp outline:

    https://www.hoddereducation.co.uk/media/Documents/RS/1-2_Arguments_for_the_existence_of_God_The_ontological_argument.pdf

    “Austrian economics is not a divine doctrine. It is a scientific one and therefore must be judged by empirical results.”

    That is exactly what is being challenged here. Again, I’m not an Austrian, I have only read a very, very small output from them, but I can tell you if you have a full-blown Austrian here they would be taking you to task for this claim.

    This does not mean that they are right, of course. It does, however, mean that the first-order argument about FRB etc must be solved only by solving a second-order question about epistemology and methodology.

    One of my maxims is the following:

    Anything you can do I can do meta.

    That’s the move the Austrians are the going to make here.

    In reading around on this topic, I came across the following material, which I will patch in.

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  16. This is a good a book as any to start with:

    https://mises.org/system/tdf/Economic%20Science%20and%20the%20Austrian%20Method_3.pdf?file=1&type=document

    Some selections:

    p.19

    “The characteristic mark of Kantian philosophy is the
    claim that true a priori synthetic propositions exist-and it
    is because Mises subscribes to this claim that he can be called
    a Kantian. Synthetic a priori propositions are those whose
    truth-value can be definitely established, even though in order
    to do so the means offormal logic are not sufficient (while,
    of course, necessary) and observations are unnecessary:
    According to Kant, mathematics and geometry provide
    examples of true a priori synthetic propositions. Yet he also
    thinks that a proposition such as the general principle of
    causality-i.e., the statement that there are time-invariantly
    operating causes, and every event is embedded into a network
    ofsuch causes-is a true synthetic a priori proposition.
    I cannot go into great detail here to explain how Kant
    justifies this vie”,-12 A few remarks will have to suffice.

    First, how is the truth ofsuch propositions derived, ifformal logic is
    not sufficient and observations are unnecessary? Kant’s answer
    is that the truth follows from self-evident material axioms.
    What makes these axioms self-evident? Kant answers, it
    is not because they are evident in a psychological sense, in
    which case we would be immediately aware ofthem. On the
    contrar~Kant insists, it is usually much more painstaking
    to discover such axioms than it is to discover some empirical
    truth such as that the leaves of trees are green. They are
    self-evident because one cannot deny their truth without
    self-contradiction; that is, in attempting to deny them one
    would actuall~ implicitl~ admit their truth.

    How do we find such axioms? Kant answers, by reflecting
    upon ourselves, by understanding ourselves as knowing
    subjects. And this fact-that the truth of a priori synthetic
    propositions derives ultimately from inner, reflectively produced
    experience-also explains why such propositions can
    possibly have the status of being understood as necessarily
    true. Observational experience can only reveal things as they
    happen to be; there is nothing in it that indicates why things
    must be the way they are. Contrary to this, however, writes
    Kant, our reason can understand such things as being necessarily
    the way they are, “which it has itself produced
    according to its own design.”

    In all this Mises follows Kant. Yet, as I said earlier, Mises
    adds one more extremely important insight that Kant had
    only vaguely glimpsed. It has been a common quarrel with
    Kantianism that this philosophy seemed to imply some sort
    of idealism. For if, as Kant sees it, true synthetic a priori
    propositions are propositions about how our mind works
    and must of necessity work, how can it be explained that
    such mental categories fit reality? How can it be explained,
    for instance, that reality conforms to the principIe
    of causality ifthis principle has to be understood as one
    to which the operation of our mind must conform? Don’t
    we have to make the absurd idealistic assumption that this
    is possible only because reality was actually created by the
    mind? So that I am not misunderstood, I do not think that
    such a charge against Kantianism is justified.

    And yet,through parts of his formulations Kant has no doubt given
    this charge some plausibility:
    Consider, for example, this programmatic statement of
    his: “So far it has been assumed that our knowledge had to
    conform·to observational reality”; instead it should be assumed”that
    observational reality conform to our knowledge.”15
    Mises provides the solution to this challenge. It is true,
    as Kant says, that true synthetic a priori propositions are
    grounded in self-evident axioms and that these axioms have
    to be understood by reflection upon ourselves rather than
    being in any meaningful sense “observable.’)

    Yet we have to go one step further. We must recognize that such necessary
    truths are not simply categories of our mind, but that our
    mind is one of acting persons. Our mental categories have
    to be understood as ultimately grounded in categories of
    action. And as soon as this is recognized, all idealistic
    suggestions immediately disappear.

    Instead, an epistemology claiming the existence oftrue synthetic a priori propositions
    becomes a realistic epistemolog)T. Since it is understood
    as ultimately grounded in categories of action, the gulf
    between the mental and the real, outside, physical world is
    bridged. As categories of action, they must be mental things
    as much as they are characteristics ofreality: For it is through
    actions that the mind and reality make contact.

    Kant had hinted at this solution. He thought mathematics,
    for instance, had to be grounded in our knowledge of
    the meaning of repetition, of repetitive operations. And he
    also realized, if only somewhat vaguel~ that the principle of
    causality is implied in our understanding of what it is and
    means to act.

    Yet it is Mises who brings this insight to the foreground:
    Causality; he realizes, is a category of action. To act means
    to interfere at some earlier point in time in order to produce
    some later result, and thus every actor must presuppose the
    existence of constantly operating causes. Causality is a prerequisite
    of acting, as Mises puts it.

    But Mises is not, as is Kant, interested in epistemology
    as such. With his recognition ofaction as the bridge between
    the mind and the outside reality; he has found a solution to
    the Kantian problem of how true synthetic a priori propositions
    can be possible. And he has offered some extremely
    valuable insights regarding the ultimate foundation ofother
    central epistemological propositions besides the principle of
    causality; such as the law ofcontradiction as the cornerstone of
    logic. And he has therebyopened a path for future philosophical
    research that, to my knowledge, has hardly been traveled.
    Yet Mises’s subject matter is economics, and so I will
    have to lay to rest the problem ofexplaining in more detail the
    causality principle as an a priori true proposition.

    Mises not only recognizes that epistemology indirectly
    rests on our reflective knowledge of action and can thereby
    claim to state something a priori true about reality but that
    economics does so too and does so in a much more direct
    way; Economic propositions flow directly from our reflectively
    gained knowledge of action; and the status of these
    propositions as a priori true statements about something
    real is derived from our understanding ofwhat Mises terms
    “the axiom of action.”

    This axiom, the proposition that humans act, fulfills the
    requirements precisely for a true synthetic a priori proposition.
    It cannot be denied that this proposition is true, since the
    denial would have to be categorized as an action-and so the
    truth of the statement literally cannot be undone. And the
    axiom is also not derived from observation-there are only
    bodily movements to be observed but no such things as
    actions-but stems instead from reflective understanding.
    Moreover, as something that has to be understood rather
    than observed, it is still knowledge about reality; This is
    because the conceptual distinctions involved in this understanding
    are nothing less than the categories employed in
    the mind’s interaction with the physical world by means of
    its own physical bodr And the axiom of action in all its
    implications is certainly not self-evident in a psychological
    sense, although once made explicit it can be understood as
    an undeniably true proposition about something real and
    existent.

    Certainl~ it is not psychologically evident nor is it
    observable that with every action an actor pursues a goal;
    and that whatever the goal may be, the fact that it is pursued
    180n this and the following see

    by an actor reveals that he places a relatively higher value on
    it than on any other goal of action he could conceive of at
    the start of his action.

    It is neither evident nor observable that in order to
    achieve his most highly valued goal an action must interfere
    or decide not to interfere (which, of course, is also an
    interference) at an earlier point in time to produce some
    later result; nor that such interferences invariably imply the
    employment of some scarce means (at least those of the
    actor’s bod); its standing room and the time absorbed by the
    interference).

    It is neither self-evident nor can it be observed that these
    means must also have value for an actor-a value derived
    from that of the goal-because the actor must regard their
    employment as necessary in order to effectively achieve the
    goal; and that actions can only be performed sequentiall);
    always involving the making of a choice, i.e., taking up that
    one course of action which at some given point in time
    promises the most highly valued result to the actor and
    excluding at the same time the pursuit of other, less highly
    valued goals.

    It is not automatically clear or observable that as a
    consequence ofhaving to choose and give preference to one
    goal over another-of not being able to realize all goals
    simultaneously-each and every action implies the incurrence
    of costs. For example, forsaking the value attached to
    the most highly valued alternative goal that cannot be
    realized or whose realization must be deferred because the
    means necessary to effect it are bound up in the production
    of another, even more highly valued goal.

    And last!); it is not plainly evident or observable that at
    its starting point every goal of action must be considered

    worth more to the actor than its cost and capable of yielding
    a profit, i.e., a result whose value is ranked higher than that
    of the foregone opportunities. And yet, every action is also
    invariably threatened by the possibility of a loss if an actor
    finds, in retrospect, that the result actually achieved-contrary
    to previous expectations-has a lower value than the
    relinquished alternative would have had.

    All of these categories-values, ends, means, choice,
    preference, cost, profit and loss, as well as time and causality-are
    implied in the axiom of action. Yet, that one is able
    to interpret observations in such categories requires that one
    already knows what it means to act. No one who is not an
    actor could ever understand them. They are not “given,” ready
    to be observed, but observational experience is cast in these
    terms as it is construed by an actor. Nor is their reflective
    reconstruction a simple, psychologically self-evident intellectual
    task, as proved by a long line ofabortive attempts along
    the way to the just-outlined insights into the nature of
    action.

    It took painstaking intellectual effort to recognize explicitly
    what, once made explicit, everybody recognizes
    immediately as true and can understand as true synthetic a
    priori statements, i.e., propositions that can be validated
    independently of observations and thus cannot possibly be
    falsified by any observation whatsoever.

    The attempt to disprove the action-axiom would itself
    be an action aimed at a goal, requiring means, excluding
    other courses of action, incurring costs, subjecting the actor
    to the possibility of achieving or not achieving the desired
    goal and so leading to a profit or a loss.

    And the very possession of such knowledge then can
    never be disputed, and the validity of these concepts can
    never be falsified by any contingent experience, for disputing
    or falsifying anything would already have presupposed
    their very existence. As a matter offact, a situation in which
    these categories of action would cease to have a real existence
    could itself never be observed, for making an observation,
    too, is an action.

    Mises’s great insight was that economic reasoning has
    its foundation in just this understanding of action; and that
    the status of economics as a sort of applied logic derives
    from the status of the action-axiom as an a priori-true
    synthetic proposition. The laws of exchange, the law of
    diminishing marginal utilit~ the Ricardian law of association,
    the law of price controls, and the quantity theory of
    money-all the examples of economic propositions which
    I have mentioned-can be logically derived from this axiom.
    And this is why it strikes one as ridiculous to think of
    such propositions as being ofthe same epistemological type
    as those of the natural sciences. To think that they are, and
    accordingly to require testing for their validation, is like
    supposing that we had to engage in some fact-finding
    process without knowing the possible outcome in order to
    establish the fact that one is indeed an actor. In a word:
    It is absurd.

    Praxeology says that all economic propositions which
    claim to be true must be shown to be deducible by means
    offormal logic from the incontestably true material knowledge
    regarding the meaning of action.

    Specificall~ all economic reasoning consists of the following:
    (1) an understanding of the categories of action and the
    meaning of a change occurring in such things as values,
    preferences, knowledge, means, costs, etc;

    (2) a description ofa world in which the categories ofaction
    assume concrete meaning, where definite people are identified
    as actors with definite objects specified as their means
    of action, with some definite goals identified as values and
    definite things specified as costs.

    Such description could be
    one of a Robinson Crusoe world, or a world with more than
    one actor in which interpersonal relationships are possible;
    of a world of barter exchange or of money and exchanges
    that make use ofmoney as a common medium of exchange;
    of a world of only land, labor, and time as factors of
    production, or a world with capital products; of a world
    with perfectly divisible or indivisible, specific or unspecific
    factors of production; or of a world with diverse social
    institutions, treating diverse actions as aggression and
    threatening them with physical punishment, etc; and

    (3) a logical deduction of the consequences which result
    from the performance ofsome specified action within this
    world, or of the consequences which result for a specific
    actor if this situation is changed in a specified wa~
    Provided there is no flaw in the process of deduction,
    the conclusions that such reasoning yield must be valid a
    priori because their validity would ultimately go back to
    nothing but the indisputable axiom of action. If the situarion
    and the changes introduced into it are fictional or
    assumptional (a Robinson Crusoe world, or aworld with only
    indivisible or only completely specific factors of production),
    then the conclusions are, of course, a priori true only ofsuch
    a “possible world.” If, on the other hand, the situation and
    changes can be identified as real, perceived and conceptualized
    as such by real actors, then the conclusions are a
    priori true propositions about the world as it really is.”

    The posting is screwed up, which probably does not make this any easier to grasp. But go to p.19.

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  17. The following is a critical appraisal of Praxology:

    http://public.econ.duke.edu/~bjc18/docs/Praxeology%20and%20Its%20Critics.pdf

    Note that, there is no definitive refutation here and that applying assumptions of the natural science to critique Mises have, well, failed because those assumptions themselves were challenged.

    One more thing. And you are not going to like this. I say this not in any way as an attack, think of it as friendly counsel – we have communicated a good deal now, so you know I’m not attacking you.

    The assumptions that underpin your epistemology of economics are in the empirical tradition, which have roots in the logical positivist tradition which have roots in the You Know Who tradition.

    Someone is going to make this critique sooner or later.

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  18. The final one is from Rothbard:

    https://mises.org/library/praxeology-methodology-austrian-economics

    This stood out to me:

    “Similarly, J.E. Cairnes wrote:

    The economist starts with a knowledge of ultimate causes. He is already, at the outset of his enterprise in the position which the physicist only attains after ages of laborious research.… For the discovery of such premises no elaborate process of induction is needed … for this reason, that we have, or may have if we choose to turn our attention to the subject, direct knowledge of these causes in our consciousness of what passes in our own minds, and in the information which our senses convey … to us of external facts.”

    “ultimate causes”. When I brought up the ultimate v proximate distinction, I had not read this passage, but there it is.

    Again, I have only read a little of these people, but because I toiled through natural theology and Humean naturalistic philosophy in the philosophy of religion, once I understood the basic axioms of their system I could derive on my own the consequences.

    Here is my advice if you really want to defeat the Austrians, you must attack their foundations; not just that, you Must demolish their foundations.

    You do not take down a drug gang by arresting the street dealers, you must either have video or audio evidence of the kingpin looking at either dope or guns on the table. That, or a wired CI.

    You must get to the heart of the thing.

    As Napoleon said: “If you are going to take Vienna, then take Vienna.”

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  19. “Credit is just an economic tool, one of many.

    Hamiltonians use so many other numerous devices to nurture a boom – tax cuts, infrastructure, military spending, light regulation, trade policy – that our GDP growth is robust enough not to compel us (either for reasons of political expediency or economic necessity) to keep credit at excessively low rates.

    The Progressives are the ones who abuse FRB because they smother economic growth with their other policies. Easy lending is their only tool (because it makes economic activity somewhat cheaper to offset the burdens of higher regulations, taxes, etc).”

    Good point.

    However, the temptation is there.

    The one thing we have not really addressed in the structure of republican government, democracy and the relationship between citizen and state. In short, the Ruling Elite are only the temporary occupiers of any state machine. This machine can be used for all sorts of purposes.

    Having coke on the table is always tempting. Initially, you may be virtuous, but it is not guaranteed to last forever, just like the early virtue of the founding fathers.

    Still, the real challenge is for a state to have the goals we both want, but attain it without having the downsides of inflating the economy.

    I have been thinking about what that would involve.

    My preliminary ideas are:

    1: The problem is to bring entrepreneurs and capital closer together more effectively and efficiently.

    2: A state should manage its economy the way you manage a stock portfolio (you idea).

    3: Develop a Zaibatsu system.

    https://en.wikipedia.org/wiki/Zaibatsu

    4: The state is the first ring, the military is the second and the third is the banks. Then, you have the key industrialises of energy, arms, transport, food. Following this, as you go further out, the economy get’s progressively anarchic and free.

    5: The state can direct (encourage) investment by moving key companies and shareholders to invest in them, or expend capital in ways that encourage inventiveness, innovation and productivity.

    6: The investors (who will likely be major conglomerates and VC whales) will get tax relief, stock in the new company, or some kind of matched funds deal. Furthermore, if you could create a Peerage system, then Whales could invest and down the road they become Barons or Lords or whatever.

    7: The trick is to have monopolies in strategically important industries that are still subject to innovative pressure. Identity, select and nurture emerging or potential industries. Maintain a certain free arena in which the free market can operate. This is like having a team in a Corporation who have the freedom to explore ideas, take risks and make mistakes.

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  20. I’m going to try to translate the Hamiltonian Business Cycle into Austrian epistemology – I’m not accustomed to this type of language, but if I get off track you can point out where I’m wrong.

    I want to identify where Hamiltonian epistemology is in conflict with Austrian epistemology so that I can refute it on Austrian terms.

    To do this I will identify where Hamiltonian and Austrian assumptions agree.

    Both Hamiltonians and Austrians agree –

    1) Downturns are the result of producers finding themselves overallocating/malinvesting resources and processes towards demand that falls short of projections.

    2) Upswings are the result of producers allocating resources and processes towards growing demand.

    3) Therefore, demand dictates when booms and busts occur.

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