Economics Is, Indeed, A Real Thing

Scott Adams asks if economics is a real thing.  My answer is that yes, it is, but that many people don’t really understand what it actually is.  Economics is not predicting what markets will do; economics, properly defined, is the study of human action, of catallactics.  Adams talks about a “newly expanded” definition of economics which “involves studying human behavior as opposed to business and money,” but I would counter by arguing that this is not a new definition at all.  Good economists were studying human behavior for centuries.  I’m not talking about Ludwig von Mises and FA Hayek; I’m talking about Nassau Senior and Richard Cantillon.  To be honest, I think that a study simply of “business and money” is not only a naive interpretation of economics, but economists are not investment advisors.  Actually, every good economist I’ve ever met has said the same thing:  they bet on the market, not on individual participants.  This is because they understand, first of all, that markets are reasonably efficient (even if we don’t all completely buy into Gene Fama’s arguments), and second of all, that economics has never truly been about individual stocks or even prediction; it’s about understanding and analyzing human behavior.

It’s Like Planned Economies Don’t Work Or Something…

(Via Mike Munger)

When the government starts mandating that organizations use things which don’t exist, you have problems.  This kind of idiocy—and then following through on fines because organizations didn’t buy something which didn’t exist!—is a natural outcome of government control.  The major difference between the US and USSR in this case is that at least the government officials in charge of the businesses knew the game well enough to lie through their teeth…

Free Currency Competition

Larry White has a great write-up of the Free Competition in Currency Act of 2011.  It’s important that he notes that it would not eliminate the USD, or even the Federal Reserve’s role in currency markets.  Rather, it would re-create the open competition which existed for over a century in the United States.  The best part about this act is that it does not mandate anything either way.  If people decide that they want to use only Federal Reserve USD, they are free to.  But if there are better alternatives, people are free to switch.

One problem that I could see is that the elimination of the USD as applicable to “all debts” is that there could be higher transaction costs in negotiating currencies.  This would also require that the Supreme Court not try to re-establish Juilliard v. Greenman.

In The Papers: Those Dishonest Economists

I have a lot of respect for George Selgin’s academic research, and his paper entitled Those Dishonest Goldsmiths is a good reason why.


Modern accounts of the origins of fractional-reserve banking, in economics textbooks and elsewhere, often assert that London goldsmiths came up with the idea around the middle of the 17th century, and first implemented it by clandestinely lending coin that they were supposed to keep locked away in their vaults. I assess the veracity of this claim by examining contemporary, circumstantial evidence bearing upon it, and also by considering the circumstances under which, according to English legal doctrines at the time in question, goldsmiths were entitled to lend coin that had been surrendered to them. I conclude that the goldsmiths were almost certainly innocent of the crime for which they are so frequently accused, and that the accusation may well have taken shape through later writers’ confusion of (1) crimes other than embezzlement of whichgoldsmiths were accused by their contemporaries and (2) documented embezzlement of stored coin, not by goldsmiths but either by the British crown or by merchants’ servants.

Goldsmiths are believed to have pioneered fractional reserve banking in the 17th century (1).  This is a myth, but is very popular (2-4), including for many Austrians (4-5).  The basic idea is that jewelers and goldsmiths would hold gold (in coin and non-coin forms) in safes.  They realized that the gold is just sitting there, waiting to be collected.  So what’s the harm in lending out this gold in the meantime, earning a bit of interest back at low risk? (2)  People who tell this story talk of “warehouses” and goldsmiths who charged “storage fees,” implying that the smiths were embezzling or at least performing shady activities.

In reality, that entire story is almost entirely backwards.  Fractional reserve banking dates back at least to medieval northern Italy, and possibly even to ancient Rome or Greece (6).  Furthermore, there are no facts supporting the embezzlement claim (6).  There are, however, facts which go against the claim.  For example, instead of charging “storage fees,” goldsmiths paid out interest, or at least did not charge fees to holders.  This implies that people believed that the goldsmiths were getting something out of the arrangement.  Furthermore, there is no court testimony on the books for claims of embezzlement (6-7).  Considering that most goldsmiths at that time were Jewish, and considering that Screw the Jew was a European pastime, it would seem that if this line of legal argument held any validity, somebody certainly would have used it.  But as far as we know, nobody did.

In fact, in Samuel Pepys’s diary, he described interest payments and was shocked that the Amsterdam markets didn’t pay out interest (8).  So why would people like Pepys give their gold to smiths?  Because consumers prefer the convenience of bank deposit notes over carrying relatively heavy specie (8).  Also, government coins during the 1600s were awful—it was hard to find a coin which was not clipped, shaven, or otherwise degraded.  Bank notes did not have those problems (10).  And bearer notes, written by goldsmiths, were “intended to pass anonymously from hand to hand” (11).  This belies the idea that what you put in the vault was supposed to remain yours in perpetuity without claim to ownership shifting.

Selgin also discusses bailment laws which were in place in England during the 1500s and possibly even earlier.  These laws are based on Talmudic principles (no great surprise).  In the Talmud, if specie is tied in a package, it is meant to be stored for safekeeping; on the other hand, if the coins are “loose,” they may be lent out (14).  In English law, there was no resource to demand specific coins back unless they were presented to the holder in a sealed bag (15-16).

So where do these charges come from?  Selgin argues that the charges gained traction due to actual misconduct charges and actual embezzlement against smiths (18).  Goldsmiths were charged with clipping and melting down coins for sale as bullion, as well as usury (20).

In The Papers: Human Action

Gene Callahan has a relatively old paper that I just recently found, entitled Oakeshott and Mises on Understanding Human Action.


Although Michael Oakeshott and Ludwig von Mises were arguably two of the more 
profound theorists of human activity in the twentieth century, there has been remarkably 
little comparative study of their ideas. That is especially surprising when one considers 
how compatible those ideas were in a number of areas, such as the a priori nature of the 
postulates of human action, the nature of historical thought, the  fundamental dichotomy 
between explaining not- intelligent goings-on and intelligent activity, the ambiguous 
character of the statistical social sciences, and the importance of meaning in theorizing 
human conduct. Comparing their formulations of common concepts permits new, 
illuminating perspectives into each thinker's work.
Despite such compatibility, their ideas also contain interesting and important differences: 
on the modality or lack thereof in human thought, the nature of rationality and its 
relationship to tradition, and the character of economics as a science. This paper will 
explore both the similarities and differences between the ideas of Mises and Oakeshott. 
Because a full consideration of all of the areas mentioned above would likely result in a 
book rather than a paper, I will restrict myself here to examining their views on the 
general principles of human action and how those principles relate to the character of the 
social sciences

Callahan starts by elaborating upon Ludwig von Mises’s idea of praxeology:  from the fact that humans engage in purposeful activity, we may derive a number of things (1).  Mises spent much of his career diving deep into the science of human action—science in the old European sense of an “organized body of knowledge” rather than the modern notion of a quantitative natural science.  Although Oakeshott never directly engaged with Mises’s ideas, Callahan argues that the two share a number of similarities.  For example, both find vital the notion that actors understand their own circumstances and assign their own meaning to these circumstances.  A person acts because something “as he understands it, must appear to be unsatisfactory to him.”  In addition, there is an expectation for both that this action will improve the individual’s circumstances (2).

For both philosophers, values are not “given” and certainly neither believed that human action was nothing more than maximization subject to constraints (3).  Beyond that, though, there are certain strands which are compatible even though the two were not in contact.  Callahan argues that Mises understands what praxeology implies, whereas Oakeshott “puts them on the broader philosophical basis” (4).  Neither had a required ontology regarding how postulates come to be—they could come from G-d, biological evolution, or even random guesses (4).  What is important simply is that they exist, not necessarily how we get there.

What’s interesting is that Callahan argues that Mises was a methodological dualist:  Mises subscribed to the idea that intelligent action needs completely different theories compared to “non-intelligent goings-on” and that these are “fundamentally different activities” (5).  Oakeshott seems a little fuzzier, but you could make an argument that his thoughts are compatible with that notion as well.  Both believed, as Nardin wrote on Oakeshott, that “the social sciences, like the natural sciences, are explanatory, not prescriptive” (7).  In other words, we may use the social sciences to explain how people behave, not necessarily how people should behave.  This is where normative individualism comes into play.  Both also reject the notion of social holism, placing them squarely in the methodological individualist tradition (7-8).

I’ll end this with a quotation from Mises which I like a lot and wish would get broadcast in every econometrics course:

If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not “measured” the “elasticity of demand” of potatoes. He has established a unique and individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes, and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions. (11)

Leijonhufvud’s Hayek Interview

Not too long ago, I watched an interview of FA Hayek by Axel Leijonhufvud.  The interview was mostly historical and biographical, focusing on Hayek’s growing up in Vienna and the circles in which he traveled there.  Near the end, though, I heard Leijonhufvud try to steal a point intellectually.  This is in the third to final topic, “Interfering in spontaneous changes.”  The interviewer asks,

The process whereby the Western countries gave up first the gold standard, and then what you call a discipline–and I agree there is a discipline–of fixed exchange rates: Is that not an evolutionary process, and are you not, with these proposals, in effect rationally trying to reconstruct, rationally trying to controvert, as it were, a process of evolution?

Hayek’s response was sharp and correct:  it is not a rationalist intervention to reverse rationalist intervention.  Governments forcing us down one path does not make it “evolutionary,” even democratically elected governments.  Those are still politicians and planners trying to push their agendas and not the spontaneous interactions of free individuals pursuing their own ends.  Opposing interventions made in the past does not mean that you are imposing your own plan, but can also be removing the plans of others and letting everybody create their own plans for their own spheres, instead of one plan from up high, regardless of how the planners were brought into the fold.