Differences between the Chicago and Austrian schools

Today I came across a translation of an article by Zolotorev regarding the differences between the approaches of the Chicago and Austrian schools of economics. The author refers to a certain discussion about these differences that he conducted via correspondence. I suspect that this discussion was largely triggered by an article by David Friedman, in which he discusses this very difference in approaches in detail. He linked to it on his Facebook, and later returned to this topic several more times there. And this (I don’t rule it out) started with my question about what exactly he finds unsatisfactory about the ASE – in an online interview that he gave to Russian-speaking readers to mark the release of the Russian translations of The Machinery of Freedom.

In short, if there is public interest, I can translate Friedman’s article, as well as individual more or less substantive reactions from the Austrians. I will, of course, measure this interest by the number of donations received in the near future. There is also an interest for me here, because I am very interested in Friedman’s economic analysis of law, on which I plan to base much of the second part of my book about ancap, and I want to have a clearer idea of how compatible all these considerations are with the ASE.

The 2008 Crisis: Now a Direct Answer to Yesterday’s Question

Yesterday, responding to a question about the libertarian interpretation of the 2008 crisis, I used the question more as an opportunity to talk about my own topic. This left some commenters bewildered, especially given that the corresponding disclaimer did not fit within the limits of the Telegram post and is only found in the full version of the post on the website.

Fortunately, in the Facebook comments, Valery Kizilov provided a link to his own article from 2008, written in the immediate aftermath of that crisis, where he explains the Austrian theory of the business cycle very clearly and concisely. He also recommends a book for a more extensive study of the topic, where everything is explained in much more detail: Jeffrey Friedman, Vladimir Kraus. Man-Made Financial Crisis: Systemic Risk and the Failure of Regulation. M., IRISEN, 2012.

What does the AES offer as a replacement for the Central Bank and the dollar?

Anonymous question

There is no consensus on this issue.

There are hardcore supporters of returning to the gold standard with 100% reserves. The arguments of this camp were well articulated by Javier Vernón Cortés (de Soto) in the book “Money, Bank Credit, and Economic Cycles”. In short: there are time deposits, where a person deposits money for a specific term, and the bank has the right to invest it wherever it deems necessary, paying interest for this; and then there are demand deposits, where a person deposits money for safekeeping, retaining the right to withdraw it at any moment—in this case, the person should pay for the convenient service, and the bank has no right to do anything with such deposits other than store them. If demand deposits are lent by the bank to someone as a loan, then this is fraud, and divine wrath shall descend upon the bank owners. Thus, based on this strictly legal approach, supporters of the gold standard demand the return of monetary gold circulation, as well as gold-backed banknotes and gold-backed settlement accounts—then the credit expansion carried out by central banks will end, and humanity will have a single deflationary currency, as it did for a relatively short time in the 19th century, and developed quite well.

There are supporters of free banking. They argue that the main thing is to abolish central banks and overall regulation of the banking sector; let the banks decide for themselves what money to emit and how to back it, and then let the market decide which currencies are actually more convenient for people. This idea was defended in slightly different forms by Friedrich Hayek in the book “The Denationalization of Money,” and David Friedman also touched upon this theme in “The Machinery of Freedom” (although he does not belong to the AES). The forecasts of free banking supporters also differ slightly. Some argue that everything will eventually come back to the same gold standard with 100% reserves, because those who want to defraud will quickly find that their reserves begin to melt as trust in their currency is lost. Others say that 100% reserves are not needed by anyone, and if a currency offers convenience of settlement and reasonable emission rates, then no one will worry about bank runs.

Finally, there are the prophets of hyper-bitcoinization, among whom I mention Saifedean Ammous and his book “The Bitcoin Standard.” He argues that due to the gradual growth of the network effect, as well as the stock-to-flow ratio, Bitcoin will become the global measure of value. Further, again, there are options. The first—there will be nothing but Bitcoin, the great and luminous, except that it will operate in different protocol layers according to several different rules. The second option—alternative means of payment will persist, but the basis of their value will be backing by Bitcoin reserves. The reserves might be 100%, or they might not. The main argument in favor of this particular scenario is that here, no one is abolishing central banks by any decrees; they will supposedly wither away on their own.

How do you feel about Vatoadmin and his criticism of AES?

In one of the streams, he mentioned to an interlocutor that economic schools are irrelevant and that everything best from those schools has been integrated into the mainstream. Do you agree? Has he gotten too fat?

P.S. It’s a pity the site crashed. I hope all is well with you. I haven’t figured out crypto yet, but I’ll donate somehow.

Some Kazakh

Thank you for the explication from Vatoadmin, because I would have been too lazy to sift through his streams in search of specific quotes. As for the thickness, he is still far from Kakha Bendukidze; let him keep trying.

Now, to the main part of the question.

Economic mainstream today, indeed, has long ceased to be some kind of cohesive theory. It is simply a set of views on economics, none of which are perceived by economists as complete nonsense. At the same time, taken together, they can be internally contradictory—to this, an economist will say that each economic tool has its own area of application, and that is perfectly normal—and the task of economics is precisely to study when a wise regulator should apply what.

The Austrian school is indeed part of the mainstream. It primarily describes exactly how economic agents behave in a free market, and also shows with disdainful curiosity what distortions are introduced by this or that form of coercion. The mainstream also describes how economic agents behave in a free market (and often does so using an apparatus that grew out of the Austrian school), and then asserts that the market can and should be regulated, that it is done in such-and-such a way, for such-and-such goals, and produces such-and-such results. Or it doesn’t, in which case one must study what went wrong and make corrections to economic policy next time.

Regarding the Austrians’ dislike of using mathematical apparatus to describe complex phenomena, I would explain it roughly like this. A mainstreamer will imperturbably calculate how many human bodies and how many horse bodies a White Walker needs to lay out a pattern in the snow, how much time he will spend on it, and by how much the temperature in the forest will drop as a result of performing this ritual. An Austrian simply postulates that White Walkers are an evil that has no place in the forest, and he will not require mathematical models for this.

Now tell me, how can a decent economist not despise such primness?

How much nonsense is there in Netesov’s cycle on the mistakes of libertarianism, and how should one respond to it?

Danila

This is about the following cycle of three articles: Libertarians have shrugged their shoulders, Soviet society is not 1984, and Corporate Wastefulness in the 21st Century.

Shoulders

§1. The concept of Schumpeter’s entrepreneurial function and Hayek’s dispersed knowledge is described, as well as the problems that arise in a planned economy lacking access to this knowledge, since it is embedded in market prices. Everything is quite correct, with various amusing examples from life in the USSR.

§2. Mises’s calculation argument is described, according to which in the absence of market prices, a planning agency has to assign them arbitrarily, leading to suboptimal resource allocation, making the planned economy wasteful and inferior to the market economy. As a partial answer to how the USSR managed to survive for 70 years, it is pointed out that it was able to peek at some market prices from its capitalist neighbors. There are no complaints about this paragraph either.

§3. Here, the author, on one hand, shows that the lion’s share of innovations appears in small startups, but on the other hand, says that the world has long been ruled not by shopkeepers, but by corporations, and therefore classical liberalism is a libertarian’s dream. Essentially, “pipe down and return to the real world from your beloved 18th century.” Generally, the facts presented are quite correct, but the author’s pathos is unclear: the fact that the current economy is not fully market-based does not mean that its state is optimal or even inevitable. It’s just the way it is now.

1984

§4. Here the author points out that both Mises’s calculation argument and Hayek’s argument about dispersed knowledge neglect empirics. Since a global planned economy has never been built, it cannot be verified that it is incapable of economic calculation. Since the Soviet economy contained some rudimentary elements of a market rather than being fully planned, it again cannot be verified that a planned economy is unable to account for this dispersed knowledge. In short, the unverifiability of the arguments regarding the impossibility of building a planned economy is confirmed by the fact that no one has ever been able to build a pure planned economy. I would say that the absurdity (okay, let’s say more gently—the paradox) of such argumentation is quite obvious.

On the other hand, it is pointed out that both Hayek in The Road to Serfdom and Orwell in 1984 clearly overdid the pessimism of their forecasts, because the inefficiency of a totalitarian society quickly begins to require a minimum of market lubrication, and only with its presence is this planned machine somehow able to move forward. Again, the criticism seems strange. Hayek says: if you are consistent in your madness, this is what will happen. Then Netesov claims: look, Soviet society was not consistent enough in its madness, therefore Hayek was wrong. Well, sort of…

§5. Here it is said that Hayek claimed: under a system of centralized planning, all plans are handed down from above by one leader. But this is not the case: huge, cumbersome structures were built to create plans, which worked terribly, and these plans were not properly fulfilled. It is clear that empirical data should differ somewhat from theoretical ones: the Soviet Union was not an ideal system of centralized planning because such an ideal system is simply unattainable, just as absolute zero is unattainable.

But essentially, the author is right: The Road to Serfdom is not a detailed description of a specific USSR, nor even of socialism as a system. It is simply a political pamphlet, a warning to British society not to flirt too much with the Labour Party. For studying socialism, Hayek’s book is too superficial; if anyone is interested, there are many established Sovietologists, and the author suggests getting acquainted with them.

Greedy Escort

§6. Here, the author first suggests that libertarians get rid of praxeology. Then he begins to reason that a corporation is not some single and indivisible entrepreneur, but a multitude of people, each acting in their own personal interests, which do not necessarily coincide with some conceptual interests of the corporation as a whole or even its management. The question arises: why should we discard praxeology if it is precisely concerned with the consideration of individual human interests, which are much broader than economics?

It is also pointed out that Mises’s calculation argument regarding the impossibility of economic calculation in a planned economy applies to corporations in the same way. That is, the more internal transfer pricing within a corporation is detached from the market, the worse resources are distributed within it. Next, positive and negative economies of scale are mentioned, which Mises touched upon only slightly. Well, Mises wasn’t the only one; Ronald Coase did a lot of work in the field of firm theory, and supporters of the Austrian School of Economics can perfectly well use his constructions; they fit into the general economic theory and do not violate the principles of praxeology.

Further in this very long paragraph, there are reflections that the efficiency of a corporation becomes even lower when it reaches the state trough, and Mises is accused of ignoring this circumstance. Here, one can only be surprised, because the entire sixth part of Human Action is devoted to various distortions that the government can introduce into economic activity.

§7. Here, referencing Hernando de Soto, explanations are given as to why supercomputers are unable to save a planned economy, and then a question is left hanging about what prevents these same arguments from being applied to TNCs. Nothing prevents it. Centralization has its costs, and decentralization has its own.

§8. Here the author repeats a number of theses from previous paragraphs and mentions that Joseph Salerno proved: market prices convey a reliable signal to entrepreneurs only under proximal equilibrium. He uses this as an argument that Hayek is outdated, and along with him, the entire Austrian School. But Salerno is also a representative of the Austrian School, so we are seeing an evolving school rather than a dead dogma, so what’s the problem?

§9. In conclusion, Netesov lists the reasons why, in his view, the rapid expansion of the influence of the Russian-speaking libertarian movement has slowed down significantly recently. The selection looks like a set of random facts that caught the author’s eye and serves as a warning to me personally not to do the same, because it looks very funny from the side. There, literally, as reasons for the end of the golden age of libertarianism in Russia, he lists the publication of a feuilleton with 13 thousand reads (I first learned about it from Netesov’s article), Usanov’s weak performance in debates with Vatoadmin, and the failure of Zelensky’s reforms. Where is my pre-New Year depression? I also influenced the fading interest in libertarianism in Russia!

In my view, the problem is more that almost all the low-hanging fruit have been picked, and further, if one wants to continue spreading their ideology at the previous pace, new approaches must be found. The second problem is, undoubtedly, the COVID restrictions, which completely cut off the sphere of offline agitation. The third is the recent split of the libertarian community. However, the latter circumstance, on the contrary, may provide new growth points due to increased competition for fresh minds.

The argument regarding the economic impossibility of ancap

Hello, I have a dispute with a person who claims:

“In order to achieve a perfect market, it would be necessary, first, to create an absolutely symmetrical information space; second, to exclude non-excludable and non-competitive goods from the economic system; third, to eliminate external effects; fourth, to completely remove differentiated products; fifth, to somehow maintain all the above-mentioned (in themselves fantastic) conditions; sixth, to prevent the intentional violation of the established order by others.”

A perfect market is a market in a vacuum, a simplified model for graphs and clear explanations of theories. Therefore, the transition to a “beautiful ancap” is impossible not because of “omnipresent etatism,” but simply because the conditions for its existence in the form you imagine are unattainable”

How should I prove that the market is real? Perhaps you can suggest some articles on this topic?

Igor

This is a classic “straw man” rhetorical device, where it is not the opponent’s actual thesis that is refuted, but one that is convenient to refute. A perfect market (or perfect competition) is a term from neoclassical economic theory, whereas ancap is based primarily on the Austrian school. Something similar to the perfect market model is described by Mises in Human Action, introducing such a theoretical construct as a uniformly functioning economy. In such an economy, all agents possess full information, and all other conditions described by your opponent are met. As a result, such an economy is absolutely predictable, and entrepreneurship is impossible within it. This theoretical construct is introduced for exactly one purpose: to demonstrate the difference between a real economy and a uniformly functioning one, and thereby show what the role of the entrepreneur consists of (which is precisely obtaining profit by utilizing the uncertainty of the future) and the role of the investor (which is to maintain a certain reserve of capital goods in the past for consumption in the future). Similarly, in physics, there is the concept of uniform rectilinear motion; in various schools of dance and martial arts, there are basic stances, basic steps, and so on. To say that an ideal market is a market of perfect competition is like claiming that an ideal dance is a couple moving in basic steps from a basic stance, while the whole essence of dance is precisely improvisation based on that very foundation.

In my view, this substitution is made far too often partly because of the poor choice of the term “perfect market” itself—it contains a manipulation that makes one think of this phenomenon as something desirable, for who doesn’t dream of perfection! Meanwhile, a perfect market is generally indistinguishable from a perfect planned economy, where everything is also calculated and predetermined. Likewise, we could speak of a perfect communism, where absolutely all material objects are in public ownership, and absolutely all actions are performed only with universal consent after comprehensive and full discussion. Indeed, such a theoretical model of perfect communism is used by theorists when they demonstrate the necessity of self-ownership.

*Who taught you to dance like that? Where is the correct stance?*

What do you think regarding the statistics published by PLUM, according to which losses from cartel agreements exceed spending on antitrust policy? What do you think about PLUM in general? Has it gone downhill?

Ultra-sexy dragon

I’ll start from the end. The channel you are asking about is called “Platinum Thoughts of Young Leftists.” The theses proposed for consideration are indeed the platinum thoughts of young leftists. So why should I think that the channel has gone downhill? On the contrary, it has finally achieved harmony of form and content; it is wonderful.

But seriously, one unsuccessful article or series of articles does not yet write off a channel, especially if it is the product of collective efforts.

On the channel PLUM-TV, several notes were published with examples of how cartel agreements harm consumers, and how state antitrust measures benefit consumers. At the same time, it is not difficult to provide examples of how cartels fail to comply with their own agreements for reasons obvious in terms of economic theory (it is profitable for each participant to break the agreement). It is also not hard to find examples of how state antitrust measures harm consumers.

PLUM concludes from this that the state is a quite viable tool if it is properly tuned. Proponents of AES conclude from this that facts are simply events interpreted through one theory or another, statistics are the result of processing many facts using a theory on how facts should be processed, and the results of statistical research are simply an emotional plea in a political struggle, but by no means an argument in a dispute over which theory is correct—since in selecting countless events into what is called a fact, a certain theory is already being applied, meaning that proving a theory using facts is a distortion. PLUM concludes from this that AES is a faith, not a scientific theory, insofar as it is so deaf to facts. Proponents of AES point out that mathematics is also deaf to facts, describes its own little models and generally doesn’t care whether perfect circles exist in reality. This, however, does not prevent it from being successfully applied to real life—though not to everything and not blindly.

In general, this is a long-standing dispute, many spears have been broken, and generally, it is clear that both induction and deduction should be applied carefully. As for whether the state should be given a chance to improve, or whether it should be razed to the ground, I have touched upon this repeatedly in my previous posts. For example, you can refresh your memory with the post on under what circumstances libertarians might consider their teaching a false idea.

Crises. Where to lay some straw?

Freedom pride, which I have mentioned here before, published an article on their VK page “How Not to Bring Back 2008”, where they briefly outline the Austrian theory of the business cycle (thanks!), and then move on to explain the real business cycle theory, which in the author’s presentation essentially claims that no cycles exist, only random shocks—basically, sometimes a black swan just craps on your business from the sky. That’s all there is to it, and there’s no need to ponder where these swans come from; it doesn’t matter.

Of course, such an approach seems insufficiently satisfying for something claiming the status of a theory. The Austrian approach clearly identifies the cause of cycles: credit expansion by banks operating under fractional reserves and the regulation of the discount rate by central banks. Without specifying the causes, it becomes something like stating a death was caused by the flu, while the deceased was over a hundred years old and their body was completely worn out. Had they not died of the flu today, they would have died of a heart attack tomorrow. In other words, the specific black swan is less important than the systemic factor of old age.

However, within the framework of the article, it is indeed not so important why cycles happen; it focuses not on how to get rid of credit expansion, but on what allows the economy of one country or another to weather crises more easily. Accumulated statistics by country show that countries with free economies endure crises much more easily, even though it would seem that the most terrifying bubbles inflate in the financial markets there, and they should be worse off. But that’s not the case; the market levels the structure of supply and demand much faster than any dirigiste government measures.

That is to say, even if one considers either business cycles or simply random shocks to be inevitable, a country can quite possibly minimize their consequences simply by having a liberal economy. It is for the sake of this optimistic conclusion that I recommend this somewhat controversial article.

Ancap-chan

I answer questions on ancap, libertarianism, economics, politics, ethics, law and occasionally on abstract topics.

Тег: AES