Archive for the ‘Economics’ Category
Yesterday (September 29th ) was Ludwig Von Mises’s birthday. The man whose guiding principle in life was – “Tu ne cede malis sed contra audentior ito” . Translated, this means
Do not give in to evil but proceed ever more boldly against it
In my opinion he was the most honest man to have walked the earth in a long long time. When he revived the Austrian school of economics and patiently explained the reason why markets and only markets can bring prosperity and happiness, his ideas were brushed away as out-dated by his contemporaries, who were drunk with Socialism. When the mighty evil empire came crumbling down in the nineties, Mises was finally proved right. He had conclusively demonstrated fifty years earlier that Socialism was an impossibility and would only result in poverty, starvation, slavery and death whenever and wherever it is tried. Even some prominent socialists admitted that Mises had been right all along.
Personally too Mises was a gem of a human being. Though an ardent advocate of Capitalism and prosperity, he had little material profit in life. No university was willing to open it’s doors to him, for fear of being targeted by the vindictive socialist intellectuals. While he advocated classical liberalism and tolerance in social matters, in private life he was a deeply conservative man. He married just once and lived a content life with his wife till his last breath. His wife recounts an anecdote in her bio-graphy of him, which tells us a lot about his deeply compassionate nature. Mises who fought the violent labour union ideas that were being promoted at the time, once refused to change his ageing secretary when she could no longer efficiently work. He said that if he removed her, she would find it tough to make ends meet and said he could manage with her. Contrast this with the great friends of the labourers in the Soviet Union, who mercilessly massacred the very same laborers who trusted them. Mises would not compromise his beliefs at any cost. Once he stormed out of a meeting of economists who were discussing various methods of collecting income tax, declaring that they were all a “Bunch of Socialists”.
Even today Mises’s contribution is rarely acknowledged. Today the mainstream media and academic establishment occasionally come down from their throne and acknowledge the Austrian school’s remarkable ability to explain so many things that confounds the Ivy league schooled economists. But even then they only mention F A Hayek’s name. F A Hayek was Mises’s student, who brilliantly expanded Mises’s business cycle theory and even got the Nobel for it. But Hayek was soft towards his opponents. He attributed all their crimes against humanity to just intellectual mis-judgement. But Mises was more forthcoming and would call a spade a spade. He never had kind words for the Socialists. That’s probably why no university will ever mention that such a man walked on the earth and provided us with all the tools necessary to defend civilization from the hands of the Socialist butchers. His magnum opus – “Human Action” is a must-read for every honest man who loves his and his loved ones’ freedom and wants to preserve it. But beware. Mises is a wise old man – like the Bheeshma of our own Mahabharatha. His moral convictions are incorruptible. He would patiently but surely prove to be wrong, all that our collectivist intellectuals teach us. A true teacher does not provide one with fish. He teaches one how to fish. Mises teaches us to think for ourselves. He doesn’t force anything on us. He does not manipulate our emotions. His voice is calm, clear and dis-passionate. At the end we learn what is true and what is false. What is right and what is wrong. But it is a different question what we choose to do with this knowledge, for we have to remember that
Truth will set you free. But it will make you miserable first.
You can read a short bio-graphy of Mises as penned by Rothbard here
And a video on the man he was,
Some quotations of his, that demonstrate his courage, wisdom and integrity
If history could teach us anything, it would be that private property is inextricably linked with civilization.
Once the principle is admitted that it is the duty of the government to protect the individual against his own foolishness, no serious objections can be advanced against further encroachments
The common man is the sovereign consumer whose buying or abstention from buying ultimately determines what should be produced and in what quantity and quality
It is irrelevant to the entrepreneur, as the servant of the consumers, whether the wishes and wants of the consumers are wise or unwise, moral or immoral. He produces what the consumers want. In this sense he is amoral. He manufactures whiskey and guns just as he produces food and clothing. It is not his task to teach reason to the sovereign consumers. Should one entrepreneur, for ethical reasons of his own, refuse to manufacture whiskey, other entrepreneurs would do so as long as whiskey is wanted and bought. It is not because we have distilleries that people drink whiskey; it is because people like to drink whiskey that we have distilleries. One may deplore this. But it is not up to the entrepreneurs to improve mankind morally. And they are not to be blamed if those whose duty this is have failed to do so.
Freedom is indivisible. He who has not the faculty to choose among various brands of canned food or soap, is also deprived of the power to choose between various political parties and programs and to elect the officeholders. He is no longer a man; he becomes a pawn in the hands of the supreme social engineer.
A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved.
Fascism can triumph today because universal indignation at the infamies committed by the socialists and communists has obtained for it the sympathies of wide circles. But when the fresh impression of the crimes of the Bolsheviks has paled, the socialist programm will once again exercise its power of attraction on the masses. For Fascism does nothing to combat it except to suppress socialist ideas and to persecute the people who spread them. If it wanted to really combat socialism, it would have to oppose it with ideas. There is, however, only one [emphasis in original] idea that can be effectively opposed to socialism, viz., that of liberalism. It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history. But though its policy has brought salvation for the moment, it is not of the kind which could promise continued success. Fascism was an emergency makeshift. To view it as something more would be a fatal error*
I included the last quote specifically because that is one and the only quote that can be used against Mises. When the Socialists can no longer pretend that Mises did not exist, they resort to slinging mud that he was sympathetic to Fascism. This is his quote that they use to support their accusation. Nothing can be farther from truth. The above quote has to be specifically understood in context. What Mises says is true and was the prevalent view in Europe then. Lenin and Stalin had massacred millions of Russians in their labour camps and were openly threatening the free countries. The spectre of communism was definitely haunting Europe as Marx had black-mailed. That is why the western nations adopted a policy of appeasement towards Hitler, hoping that he will contain the onslaught of Communists. But it proved to be a jump from the fire to the frying pan. Mises was talking about this prevalent view only and rightly pointed out that Fascism will not prevent the spread of Communism. He then proceeded to demonstrate in his works that Fascism was also Socialism in disguise only. Infact the Nazis and the Fascists themselves acknowledged that Mises was their enemy. When Hitler’s army invaded Austria, the Nazis stormed Mises’s residence to arrest him. as they were irritated by his ideas of liberty. Fortunately Mises had already escaped to freedom. And not surprisingly the Russians also wanted Mises and his works in their hands. When it came to destroying freedom, Fascism and Communism joined hands.
(This was my first post on economics. Moved from my personal blog. I will also move a few other posts on economics that I wrote before starting this blog)
Reality is that which, when you stop believing in it, doesn’t go away.
-Philip K. Dick
The academic community is fond of models. It is true that modeling is the only way to understand several complex phenomena. But I believe that a large part of enthusiasm for models is due to the fact that models permit unconstrained imagination unlike the real world which always comes up with new problems. The theorist who has had a sudden flash of insight hates to be told by the real world that the idea is impractical.
This is not a problem in physical sciences because, however convinced a theorist might be of his/her ideas, he/she has to corroborate it with solid experimental results for it to be accepted. We must be thankful to the early scientists for establishing this tradition of experimentation. This more than anything else has separated quarks from people of real substance. Because ultimately human imagination is unconstrained but the physical world is constrained and people want to live in the real world. So in physical sciences a model is just a convenient tool for finding the truth. It is not the truth itself.
But today, modeling is not limited to the physical sciences. In fact the biggest users of models today are Business leaders, Investment bankers , Economists and so many other ‘practical’ men. It is true that the economy has become too huge for decisions to be made solely on the basis of conventional wisdom. Models are of great practical value in predicting the outcomes of decisions of monumental importance. Whereas the utility of models cannot be questioned, we must not forget the fact that these are still just models and they cannot accurately represent the ever changing nature of reality. It is the failure to grasp this fact that has made the world seem so complex and unpredictable a place than it actually is.
The biggest casualty of this attempt to port a tool of physical sciences into the social realm is economics. It is not exactly clear why economists chose to use mathematical modeling as a tool for economic analysis. It is possible that this was partly motivated by a desire to show themselves as talented as their counterparts in physical sciences. Whatever the reason is, the world has suffered a lot due to this change of direction. Prior to the advent of modeling, the problems of economics were analysed on the basis of human actions. It was understood that the economy is only a sum total of individual actions. Hence it had to be understood only from the standpoint of human behavior. Mathematics and modeling had no place here. But this happy state of affairs was interrupted when a man named Keynes appeared on the scene. Like a pied piper he lured all students of economics away from the real world and into the imaginary world of unlimited money supply and the all encompassing benevolent state. What he preached was fundamentally no different from what Karl Marx had said a century ago. But the same people who recognized communism to be a disgusting idea, celebrated the Keynesian idea of big government. The irony is Keynes himself claimed to be a defender of capitalism and professed to hate socialism, while at the same time preaching ideas that contributed to making Socialism more popular than its proponents could have ever made it.
The biggest problem with Keynesian economics is that it tries to fit human behavior into its model. It assumes that actions of countless individuals can not only be modeled but can also be played around with. It is on the basis of this assumption, that governments and banks try to pump money in and out of the economy trying in vain to make people act the way they want them to. Any parent with a teenaged son/daughter would know that individual behaviour cannot be regulated without the individual’s consent. Parents who attempt to do that end up with rebellious kids who blame their parents for all their misery. The argument that the parents were motivated only by a desire for the children’s welfare is seldom bought by the children. If people who are so close and important to an individual, cannot predict or regulate an individual’s behaviour, how can government planners, sitting thousands of miles away in closed cabins expect to?
Today even physical sciences realise the limits of mathematical modeling. Todays research on artificial intelligence relies heavily upon Fuzzy logic, Neural Networks and Genetic Algorithms. None of this is mathematical in its approach. The scientists have realised that a lot of phenomenon are distributed in nature and are hence inherently imprecise, unpredictable and more importantly constantly evolving in nature. So mathematics is just not the tool for the job.
If people must indeed model economic actions, I would suggest them to take a closer look around while driving their car on a busy morning. Every vehicle around you wants to squeeze the last inch of space available for it. The sole motive of every driver is to reach his/her destination in time. Most of the motives clash. I want to go straight. The car before me wants to take a turn etc. But still most of the people manage to attain their motives. How does this happen? Simple. We start with a few simple rules. Always drive on the left. Stop at signals. Keep at least a feet away from the vehicle at the front. Indicate before turning etc. As long as people stick to these rules everything is smooth. If someone violates, he/she is considered an offender and punished accordingly. So as long as the person next to you is sensible and acts in his/her own self interest, you too can safely reach your destination provided you too act in your own interest.
Now consider what would happen if were to apply mathematical modeling to the traffic regulation problem. Suppose the planners are too irritated by the delay caused by traffic jams. Rather than going for a strict implementation of the traffic rules, they decide to model traffic to prevent problems from happening it all. After all prevention is better than cure, right? So they develop an advanced system that would decide what kind of traffic flow is best for everyone. It averages out everyone’s motives and constraints and provides a fair deal for everyone. You get up in the morning and decide to take a ride to a nearby grocery. But the traffic that day is heavy. So the system calculates that every person should on average take 20 minutes to travel. So to discourage you from travelling in five minutes to the shop and in the process ‘steal’ 15 minutes from your fellow men, it taxes the 5 minute route. On another day, you are in a hurry to reach the hospital. So you want to use your car. But the system calculates that the load will be unmanageable that day and taxes every car that takes the road. If the planner is strict, it might even bar you from using car that day. After all every one has to share their troubles. What happens on a normal day? You have an on board display that tells you how much the system will tax you if you take a particular turn. The tax is directly proportional to the disturbance you will create to the regular traffic by making that turn. As long as people keep travelling straight along with the flow, no one has a problem right? But what about the place you want to reach? That is expendable because it cannot be fitted into the model. Ideal isn’t it? No more traffic jams. A world fair for everyone. I suggest to city planners to start working on this idea soon. They can get the best brains to create a model for them. I am good at mathematics. May be I’ll join too. Long live the brave new model, sorry world.
On second thoughts, traffic is a bad analogy for economic co-operation. Though it fits for the purpose of this article, the analogy should not be extended. While driving in a traffic, the presence of other vehicles only hurts you. The best thing to happen for you would be a completely free highway. But in an economy, our well-being essentially depends on the existence of other players. If very few people engage in productive activities, our standard of living will invariably be low, irrespective of how much effort we put. Taken to the extreme, however hard Robinson Crusoe tries, the one-man economy he lives in, can never lift him out of his animal – like existence. Also note that this only strengthens the case against modelling and excessive regulation. In an economy, there is an inherent harmony of interests amongst various participants ( despite the existence of competition. Your competitor in the industry is the only person whose success might materially harm you. Again lack of competition is also harmful ). So regulation leads only to introduction of problems in an otherwise healthy setup )
(To be Continued)