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Austrian Economics, Business Cycle, equilibrium theory, Kirzner, Ludwig Von Mises Institute, Ludwig von Mises Institute Canada, math, Mises, Praxeology, Rothbard, Trade-Cycle

Hayek, Statistics, and Trade-Cycle Theory

In Academia, Austrian Economics, Books, Economics, Essays, Humane Economy, Libertarianism, Philosophy, Western Philosophy on February 11, 2015 at 8:45 am

This essay first appeared here as a Mises Emerging Scholar article for the Ludwig von Mises Institute Canada.

Austrian economics is often caricatured and criticized because of its approach, or deliberate lack of an approach, to mathematical models, multivariable calculus, and econometrics. Attacks are leveled against Austrians such as Mises, Rothbard, and Kirzner for their failure or refusal to avail themselves of applied empirical research in their scholarship. The Austrian methodology most frequently targeted is praxeology.

It is not the purpose of this short article to refute these attacks or to explore their errors and merits. That has been done ably by others (see, for example, the series of debate-essays available here, here, here, and here). Nor does this article attempt to stand up for the deductive reasoning of praxeology or to defend its claims about a priori truths, a task better suited for a lengthy work of scholarship, not a short article. This piece instead asks one simple question: does Hayek’s early work on trade-cycle theory complicate stereotypes about the methods of Austrian economics or clarify the manner in which Austrians can and do approach economic theory? The answer, of course, is yes.

Hayek proposed that the purpose and function of trade cycle theory was strictly limited: it was “to explain how certain prices are determined” and “to state their influence on production and consumption.” Expanding trade cycle theory beyond that purpose and function was, he believed, fallacious. “Any attempt to forecast the trend of economic development,” he claimed, “or to influence it by measures based on an examination of existing conditions, must presuppose certain quite definite conceptions as to the necessary course of economic phenomena.” But economic development — and the trade cycle in particular — is too important and complex to be guided by mere suppositions regarding matters about which there is much disagreement.

That is precisely what was happening in the 1920s when statistical designs and methods were growing in popularity and replacing general equilibrium theory, away from which Hayek himself moved later in his career. Economists at this time were beginning to treat statistics as conditions or proxies for theory (and even as theories unto themselves) rather than as mechanisms for testing and verifying established theories such as basic deductive inference or feature-by-feature comparison of the natural rate of interest (i.e., “equilibrium”) with the existing market rate.

According to Hayek, empirical research either affirms or discredits given methodologies but does not introduce new theories to explain fluctuating trade cycles. Amassing statistics, he maintained, is not the same as adducing or formulating economic laws. Statistics are nevertheless useful because, he explains, “there can be no doubt that trade cycle theory can only gain full practical importance through exact measurement of the actual course of the phenomena it describes.” Statistics, however, will not cultivate theoretical excellence of a kind that should direct trade-cycle theory or the policies that flow from it.

Statistics are useful in the negative sense: they disprove and discredit theories rather than affirm or prove them. They are corroborative but not ultimate guides; they are useful only to the extent that they enable us to make accurate predictions about future conditions, e.g., “to infer from the comparative movements of certain prices and quantities an imminent change in the direction of those movements.” Once statistics are gathered, a theory must be extracted from them–-they create inferences to be studied and aggregated, not comprehensive theories to be canonized. That is why Hayek declares that the “value of statistical research depends primarily upon the soundness of the theoretical conceptions on which it is based.” Statistics can be made to prove different points, but only a theoretically sound approach to classifying and elucidating statistics will bring about reliable forecasts.

Correct business forecasting depends on correct theorizing; therefore, Hayek propounds, we must labor to attain correct theories, never settling with what we perceive to be complete knowledge. Traditional equilibrium theory is not enough for him because it does not adequately account for money, a commodity or medium of exchange whose very status as such depends on its wide use and general acceptance on the market, not to mention its ability to reflect the subjective values of producers and consumers. The production of money and the often arbitrary increase in its supply by banks distort the natural interest rate and call into question the usefulness of equilibrium theory in a money economy.

Hayek demonstrates in his early work on the trade cycle that statistics and theories can be interactive and participatory so long as the former isn’t treated as a substitute for the latter. Statistics alone aren’t pure math, of course, and the creation of economic simulacra in the form of models and diagrams can lead to the type of scientism — the privileging of data over theory — that Hayek decries. Math is a term for what is done with data already gathered; it refers to many topics of study but in this context to the deductive and systematic study of facts and figures and their observable patterns to arrive at true concepts and accurate measurements regarding the concrete conditions of our phenomenal world. So understood, math is not the ultima ratio but an indispensable tool, not an end but a means to an end. Only from this premise does Hayek’s trade-cycle theory become fully comprehensible, and although his paradigms of trade-cycle theory and equilibrium evolved over time, his foundational approach to the role of statistics and theories remained crucial to his thinking.

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Note: Quotations come from F.A. Hayek, Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard. Edited with an Introduction by Joseph T. Salerno. Auburn, Alabama: Ludwig von Mises Institute, 2008.

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Aécio Neves, Abstention, Barack Obama, Brazil, Campaign, Canada, Dilma Rousseff, Election, Libertarianism, Liberty, Ludwig von Mises Institute Canada, Marina Silva, Socialism, The Socialist Party, The Workers' Party, U.S. Midterm Elections, Vote, Voting

Free Not to Vote

In America, Arts & Letters, Austrian Economics, Libertarianism, News and Current Events, Politics on October 22, 2014 at 8:45 am

This piece first appeared here as a Mises Emerging Scholar article for the Ludwig von Mises Institute Canada.

The 2014 U.S. midterm elections are coming up, and I don’t intend to vote. A vote is like virginity: you don’t give it away to the first flower-bearing suitor. I haven’t been given a good reason, let alone flowers, to vote for any candidate, so I will stay home, as well I should.

This month, my wife, a Brazilian citizen, drove from Auburn, Alabama, to Atlanta, Georgia, on a Sunday morning to cast her vote for the presidential election in Brazil. She arrived at the Brazilian consulate and waited in a long line of expatriates only to be faced with a cruel choice: vote for the incumbent socialist Dilma Rousseff of the Workers’ Party, for the socialist Aécio Neves of the Brazilian Social Democracy Party who is billed as a center-right politician, for the environmentalist socialist Marina Silva of the Socialist Party, or for any of the other socialist candidates who were polling so low that they had no chance of victory. Brazil maintains a system of compulsory voting in addition to other compulsory schemes such as conscription for all males aged 18.

Logan Albright recently wrote about the folly of compulsory voting, support for which is apparently growing in Canada. He criticized the hypocrisy of an allegedly democratic society mandating a vote and then fining or jailing those who do not follow the mandate. He also pointed out the dangers of forcing uneducated and uninformed citizens to vote against their will. This problem is particularly revealing in Brazil, where illiterate candidates have exploited election laws to run absurd commercials and to assume the persona of silly characters such as a clown, Wonder Woman, Rambo, Crazy Dick, and Hamburger Face, each of which is worth googling for a chuckle. The incumbent clown, by the way, was just reelected on the campaign slogan “it can’t get any worse.” Multiple Barack Obamas and Osama bin Ladens were also running for office, as was, apparently, Jesus. The ballot in Brazil has become goofier than a middle-school election for class president.

Even in the United States, as the election of Barack Obama demonstrates, voting has become more about identity politics, fads, and personalities than about principle or platform. Just over a decade ago, Arnold Schwarzenegger became the Governor of California amid a field of second-rate celebrities while a former professional wrestler (the fake and not the Olympian kind of wrestling) Jesse “the Body” Ventura was winding up his term as the Governor of Minnesota. Today comedian Al Franken holds a seat in the United States Senate. It turns out that Brazil isn’t the only country that can boast having a clown in office.

No serious thinker believes that a Republican or Democratic politician has what it takes to boost the economy, facilitate peace, or generate liberty. The very function of a career politician is antithetical to market freedom; no foolish professional vote-getter ought to have the power he or she enjoys under the current managerial state system, but voting legitimates that power.

It is often said, “If you don’t vote, you can’t complain.” The counterpoint is that voting ensures your complicity with the policies that elected politicians will enact. If you don’t vote, you lack complicity. You are not morally blameworthy for resisting the system that infringes basic rights or that offends your sense of justice and reason. You have not bestowed credibility on the government with your formal participation in its most sacred ritual. The higher the number of voters who participate in an election, the more legitimacy there is for the favored projects of the elected politicians, and the more likely those politicians are to impose their will on the populace by way of legislation or other legal means.

Refusing to vote can send a message: get your act together or we won’t turn out at the polling stations. Low voter turnout undermines the validity of the entire political system. Abstention also demonstrates your power: just watch how the politicians grovel and scramble for your vote, promise you more than they can deliver, beg for your support. This is how it ought to be: Politicians need to work for your vote and to earn it. They need to prove that they are who they purport to be and that they stand for that which they purport to stand. If they can’t do this, they don’t deserve your vote.

Abstention is not apathy; it is the exercise of free expression, a voluntary act of legitimate and peaceful defiance, the realization of a right.

There are reasonable alternatives to absolute abstention: one is to vote for the rare candidate who does, in fact, seek out liberty, true liberty; another is to cast a protest vote for a candidate outside the mainstream. Regardless, your vote is a representation of your person, the indicia of your moral and ethical beliefs. It should not be dispensed with lightly.

If you have the freedom not to vote, congratulations: you still live in a society with a modicum of liberty. Your decision to exercise your liberty is yours alone. Choose wisely.

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"The king can do no wrong", Commentaries on the Laws of England, Elizabeth I, England, government, Ludwig von Mises Institute Canada, qualified immunity, Sir William Blackstone, sovereign immunity, The Eleventh Amendment, The U.S. Supreme Court, United States

The Immunity Community

In America, American History, Arts & Letters, Britain, History, Humanities, Jurisprudence, Justice, Law, Libertarianism, Philosophy on September 10, 2014 at 8:45 am

This piece first appeared here as a Mises Emerging Scholar article for the Ludwig von Mises Institute Canada.

The doctrine of sovereign immunity derives from the English notion that “the king can do no wrong” and hence cannot be sued without his consent. The purpose of this doctrine was, in England, from at least the Middle Ages until eighteenth century, to bar certain lawsuits against the monarch and his or her ministers and servants. With the rise of the English Parliament after the death of Elizabeth I, government officers and politicians sought to gain the power of immunity that the monarch and his or her agents had enjoyed.

In practice, however, English subjects were not totally deprived of remedies against the monarch or the government. The doctrine of sovereign immunity was not an absolute prohibition on actions against the crown or against other branches of government;^[1] subjects could avail themselves of petitions of right or writs of mandamus, for instance, and monarchs fearful of losing the support of the people would often consent to be sued.

It was not until the monarchy had been demonstrably weakened that the doctrine of sovereign immunity began to be espoused with added urgency and enforced with added zeal. In the late eighteenth century, Sir William Blackstone intoned in his Commentaries on the Laws of England that the king “is not only incapable of doing wrong, but ever of thinking wrong: he can never mean to do an improper thing: in him is no folly of weakness.” These lines convert sovereign immunity into sovereign infallibility, a more ominous yet more dubious pretension.

Once the monarchy had been abolished altogether, the idea that the sovereign had to consent to be sued no longer held credence. As Louis L. Jaffe explains, “Because the King had been abolished, the courts concluded that where in the past the procedure had been by petition of right there was now no one authorized to consent to suit! If there was any successor to the King qua sovereign it was the legislature,” which, having many members subject to differing constituencies, was not as accountable as the monarch had been to the parties seeking to sue.^[2]

The principle of sovereign immunity carried over from England to the United States, where most states have enshrined in their constitution an absolute bar against suing the State or its agencies and officers whose actions fall within the scope of official duties. The Eleventh Amendment to the U.S. Constitution likewise states that “the Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” This provision, which applies only in federal courts and which does not on its face prohibit a lawsuit against a state by a citizen of that same state, was adopted in response to the ruling in Chisholm v. Georgia (1793), a case that held sovereign immunity to have been abrogated and that vested in federal courts the authority to preside over disputes between private citizens and state governments.

Notwithstanding the complex issues of federalism at play in the Chisholm decision and in the Eleventh Amendment, the fact remains that the doctrine of sovereign immunity has been applied with widening scope and frequency since the states ratified the Eleventh Amendment in 1795. The U.S. Supreme Court has contributed to the doctrine’s flourishing. “The Supreme Court’s acceptance of sovereign immunity as constitutional principle,” explains one commentator, “depends on its determination of the intent of the Framers, which ignores a great deal of historical evidence from the time of the founding and relies primarily on a discredited account of the Eleventh Amendment first articulated in the 1890 case of Hans v. Louisiana.”^[3]

State and federal courts have now built an impregnable wall of immunity around certain state and federal officers. The sovereign immunity that is enshrined in state constitutions is, in theory, not absolute because it is conferred only to certain agents and officers and does not prohibit lawsuits to enjoin such agents and officers from performing unconstitutional or other bad acts. In practice, however, the growth of qualified immunities, which is in keeping with the growth of government itself, has caused more and more agents of the State to cloak themselves in immunity.

Bus drivers, teachers, coroners, constables, high school coaches, doctors and nurses at university hospitals, security guards, justices of the peace, government attorneys, legislators, mayors, boards of education and health, university administrators, Indian reservations, prison guards and wardens, police officers and detectives, janitors in government facilities, licensing boards, tax assessors, librarians, railroad workers, government engineers, judges and justices, school superintendents and principals, towing companies, health inspectors, probation officers, game wardens, museum docents and curators, social workers, court clerks, dog catchers, contractors for public utilities, public notaries, tollbooth attendants, airport traffic controllers, park rangers, ambulance drivers, firefighters, telephone operators, bus drivers, subway workers, city council members, state auditors, agricultural commissioners—all have sought to establish for themselves, with mixed degrees of success, the legal invincibility that comes with being an arm of the state.

Yet the idea that “the king can do no wrong” makes no sense in a governmental system that has lacked a king from its inception. Its application as law has left ordinary citizens with limited recourse against governments (or against people claiming governmental status for the purpose of immunity) that have committed actual wrongs. When the government, even at the state level, consists of vast bureaucracies of the kind that exist today, the doctrine of sovereign immunity becomes absurd. If it is true that in nine states and in the District of Columbia the government employs more than 20% of all workers, imagine how many people are eligible to claim immunity from liability for their tortious conduct and bad acts committed on the job.

Local news reports are full of stories about government employees invoking the doctrine of sovereign immunity; few such stories find their way into the national media. Judge Wade McCree of Michigan, for instance, recently carried out an affair with a woman who was a party in a child-support case on his docket, having sexual intercourse with her in his chambers and “sexting” her even on the day she appeared as a witness in his courtroom. Although McCree was removed from office, he was immune from civil liability. An airport in Charleston, West Virginia, is invoking the doctrine of immunity to shield itself from claims that it contributed to a chemical spill that contaminated the water supply. Officer Darren Wilson may be entitled to immunity for the shooting of Michael Brown, depending on how the facts unfold in that investigation.

The U.S. Supreme Court once famously declared that the doctrine of sovereign immunity “has never been discussed or the reasons for it given, but it has always been treated as an established doctrine.”^[4] A disestablishment is now in order. The size and scope of government is simply too massive on the state and national level to sustain this doctrine that undermines the widely held belief of the American Founders that State power must be limited and that the State itself must be held accountable for its wrongs. Friedrich Hayek pointed out that the ideal of the rule of law requires the government to “act under the same law” and to “be limited in the same manner as any private person.”^[5] The doctrine of sovereign immunity stands in contradistinction to this ideal: it places an increasing number of individuals above the law.

If the law is to be meaningful and just, it must apply equally to all persons and must bind those who enforce it. It must not recognize and condone privileges bestowed upon those with government connections or incentivize bad behavior within government ranks. Sovereign immunity is a problem that will only worsen if it is not addressed soon. The king can do wrong, and so can modern governments. It’s time for these governments to be held accountable for the harms they produce and to stop hiding behind a fiction that was long ago discredited.

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^[1]See generally, Louis L. Jaffe, “Suits Against Governments and Officers: Sovereign Immunity,” 77 Harvard Law Review 1 (1963).

^[2]Jaffe at 2.

^[3]Susan Randall, “Sovereign Immunity and the Uses of History,” 81 Nebraska L. Rev. 1, 4 (2002-03).

^[4]U.S. v. Lee, 106 U.S. 196, 207 (1882).

^[5]F. A. Hayek, The Constitution of Liberty, Vol. 17 of The Collected Works of F.A. Hayek, ed. Ronald Hamowy(Routlege, 2011), p. 318.

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bar associations, bar exam, Bar Examination, barrier to entry, competition, guild, Ludwig von Mises Institute Canada, Mises Emerging Scholar, occupational licensure, The Lawyers' Guild

The Lawyers’ Guild

In America, American History, History, Law, Legal Education & Pedagogy, Nineteenth-Century America on August 27, 2014 at 8:45 am

This piece originally appeared here as a Mises Emerging Scholar article for the Ludwig von Mises Institute Canada.

Last month, thousands of recent law school graduates sat for a bar examination in their chosen state of practice. They were not undertaking a harmless rite of passage but overcoming a malicious obstacle: an artificial barrier to entry in the form of occupational licensure.

Barriers to entry are restrictions on access to, or participation in, markets or vocations. Occupational licensure is a type of barrier to entry that regulates professions by requiring certification and licensing in the manner of medieval guilds. Medicine and law are perhaps the most recognizable professions to require their practitioners to obtain and maintain licenses.

The purpose of occupational licensure is to reduce competition by using government power to restrict membership eligibility in a profession. The criteria for membership are often prohibitively expensive for low-income earners. To be admitted to the law in nearly every state in the United States, you must not only pass a bar examination but also earn a law degree from an accredited law school, admission to which requires a bachelor’s degree from an accredited university.

The average student-loan debt for graduates of American colleges is around $29,400. The average student-loan debt for graduates of American law schools is between $75,700 and $125,000, depending on whether the school is public or private. The American Bar Association imposes heavy burdens on law schools such as accreditation standards that are inefficient and that drive up costs so that over time the high price of legal education is passed on to the public in the form of attorneys’ fees and costs. Having already saddled themselves with student-loan debts, recent law-school graduates pay thousands of dollars for bar-preparation courses to study for an examination that, if passed, will open the door to a job market that is the worst in recent memory. Nobody struggling financially should attempt to leap over each of these expensive hurdles.

Before the rise of bar examinations and professional licensure during the Progressive Era in the United States, aspiring attorneys simply “read law” as apprentices for practicing attorneys or as clerks for local law firms. Once they achieved a certain level of competence, apprentices were released from their tutelage and eligible to accept clients. Those jurisdictions that did require examinations allowed judges to conduct informal interviews with candidates to determine the candidates’ moral and intellectual fitness for practice. Such examinations were typically mere formalities: few candidates failed; few careers were at stake as the interview took place. Newly admitted attorneys had to demonstrate their excellence in order to gain clients. They launched their careers by charging low fees that even the poorest in society could pay. Attorneys who did not prove fit for practice never gained enough clients to sustain their business and were forced to embark on other professions.

In the late-nineteenth and early-twentieth century, energetic and entrepreneurial members of the middle to lower classes in cities such as New York and Chicago began to threaten the legal establishment that had previously been comprised of a mostly wealthy and elite fraternity. This fraternity simply could not compete with low-cost providers of legal services because, for example, the most elite attorneys considered it unseemly and degrading to advertise for services or to offer contingency fees. Bar associations that were once voluntary organizations of upper class professionals therefore began to use their political clout and government connections to obtain powers conferred by legislatures. They wanted to keep the lower classes out of their profession and to preserve a highbrow reputation for lawyers. They began to exercise a monopolistic control over the practice of law within their respective jurisdictions. Today they constitute authorized arms of the State.

In most jurisdictions’ bar associations determine who may be admitted as members and who must be excluded, whether and to what extent lawyers may advertise their services, what constitutes the “authorized” practice of law, whether a law firm must have a physical office with a non-residential mailing address, and under what conditions contingency fees are permissible. These anti-competitive practices hit communities most in need the hardest by increasing the costs of legal services beyond the ordinary person’s ability to pay.

The bar examination is the most hyped precondition for membership in a state bar association. Like hazing, it is more ritual than training; it does not help one learn to be an attorney or indicate any requisite skills for practice. It tests how well someone can memorize arcane and esoteric rules and their trivial exceptions, many of which have no bearing on actual practice. Few if any lawyers spend their days memorizing rules for courts or clients, and no one who intends to practice, say, corporate law in a big city needs to memorize obscure criminal law rules that were long ago superseded by statute.

Despite reciprocity among some states, the bar examination restricts the free flow of qualified attorneys across state lines, forcing even the best attorneys to limit their services to certain jurisdictions. The bar examination also creates racial disparities among practicing attorneys as minority passage rates tend to be lower, a fact that flies in the face of nearly every bar association’s purported commitment to diversity.

Keeping the number of lawyers low ensures that lawyers may charge higher fees. Keeping the barriers to entry high ensures that the number of lawyers remains low. It’s a popular fallacy to complain that there are too many lawyers. We don’t need fewer lawyers; we need more, so long as we gain them through competitive forces on a free market.

We need to unleash capitalism in the legal system for the benefit of everyone. We could start by eliminating the bar examination. Doing so would have no marked effect on the quality of lawyers. It would drive down the high costs of legal services by injecting the legal system with some much-needed competition. It would make practitioners out of the able and intelligent people who wanted to attend law school but were simply too prudent to waste three years of their lives and to take on tens-of-thousands of dollars of student-loan debt while entry-level legal jobs were scarce and entry-level legal salaries were low. Justifications for the bar examination are invariably predicated on paternalistic assumptions about the ability of ordinary people to choose qualified attorneys; such arguments ignore the number of ordinary people who, today, cannot afford qualified attorneys at all under the current anticompetitive system.

Abolishing the bar examination would benefit the very community it is supposed to protect: the lay public.