Archive for February, 2010

State and education

February 22, 2010

Author James Tooley, interviewed in this segment, studied how the very poor get education in India, Africa and China. The majority of those families, who earn just a few dollars a week, choose low cost private schools over free government-run schools. He reports that their kids get better education from the less-qualified and less-paid private teachers than from their government counterparts, for about a dollar a week.

In Why millions of the world’s poor still choose to go private, economist Tim Harford also mentions Tooley and points to similar studies on private healthcare for the very poor. He explains this by the incentives and accountability provided by private ownership.

Throughout the show, Stossel pertinently questions the American public education system, on the basis of quality, price and principle, also pointing at the incentive problem. Other things being comparable (kids, neighborhood, etc.), charter schools perform better and cost less than government- and union-run schools.

Education is not different than other goods and services. There is no reason not to let the private sector provide it, on the contrary. Were they private initiatives, money sinks like “No child left behind” and “Head start” would have been canceled already, making room for better programs. As with any centrally planned service, the problem of economic calculation in the absence of private property re-surfaces: some areas will receive too much investment (ie. overeducation in France) and others not enough, producing a wasteful mismatch of supply and demand.

The only rationale left for public school is universal coverage. But as we know from many examples, the free market better solves this problem by democratizing services to the masses and serving the remaining unfortunates with the help of charities. And it does so without incurring all the downsides of socialized education.

As a step towards complete separation of state and education, Stossel advocates a voucher system to regain some of the benefits of the private sector. Such vouchers have been shown to be successful, in randomized experiments, yet politicians still oppose them.


A critique of the Austrian School of Economics

February 13, 2010

I just read Steve Kangas’s critique of the Austrian School of economics. The author seems rather well-informed about the topic, but makes some cheap mistakes and offers unsupported fallacies and broken arguments. Overall, I was disappointed not to find a more serious challenge in reading it; it most definitely fell short its assertion that Austrian economics is some “crank science”.
But this critique is better than some others I have seen; I would recommend it to other students of economics, if only to train one’s analysis skills.

I picked the excerpts that capture the author’s core arguments and misunderstandings, and provide some response below.

To be a science, a school must produce theories that are falsifiable — that is, verifiable. If a theory’s correctness or falseness cannot be verified, then it is not science.

Mathematics and economics (as seen by the Austrian School) are falsifiable by logic. In principle, you could try and falsify economic statements by observation but it would be very difficult (too many variables, too much interpretation involved).

If someone made some observations that unquestionably contradict economic laws (and thereby invalidate the action axiom), I would be extremely curious to hear about it.

Observation can be seen as an illustration, just as a circle drawn on a black board illustrates the concept of a circle, but does not constitute any form of proof.

As Bob Murphy’s sums it up in Mises’s Non-Trivial Insight: “It’s not so much that the method of the natural sciences doesn’t work when it comes to human action, but rather that their use would overlook such an incredibly better set of tools that all of us possess”


Austrians may be using the term “a priori” to mean logical proofs or axioms, such as “If A=B, and B=C, then A=C.” But if Austrians were creating economic axioms that were true by logical force, then the Austrian School would become world famous overnight, whether mainstream economists liked it or not. In truth, Austrian journals are not filled with these kinds of axioms.

The authors mentions Mises’s action axiom (“man acts”) later in his essay, but chooses to ignore it here. This single axiom turns out to have surprisingly great explanation power, as it is the foundation for a complete theory of economics.


[Analogy between statistics and photography, to conclude that statistics are useful economics tool (unlike Austrians) in discovering truth.]

The author’s bad analogy in this section leads him to a wrong conclusion. Economic analysis based on statistics does not reveal causal and universal economic laws, only historical facts.


There is an underlying reason why Austrians seek to deny the validity of statistics: if they accepted them, their positions would prove untenable. An example is the fastest period of growth in U.S. history: the New Deal era, from 1933 to 1973. This was also a time of unprecedented government growth, when the top tax rate reached 91 percent. Obviously, these numbers have to be denied.

Assuming the figures are correct, was this growth due to government or in spite of government? This illustrates how difficult it is to interpret statistics to discover economic laws.


Even the Austrian’s allies in business would not want to live in a world without statistics. Entrepreneurs have a huge demand for numbers other than prices: for example, Neilson ratings, consumer surveys, price trends, etc. It is the only way they can make enlightened investment decisions.

Running a business is not science. Entrepreneurs are greatly useful, but they do not produce economic truths. Conversely, economists don’t necessarily make good entrepreneurs.


By comparison, mainstream economists find it useful to know that unemployment has risen from 6 to 12 percent, because that means more workers will be competing for fewer jobs, and they will be reducing their wage demands to get them. It doesn’t matter what the individual wants, plans or believes — his decision to accept a lower wage is being determined by a market force larger than himself.

The causality (higher unemployment increases labor supply and puts pressure on reducing wages) is not derived from statistics, but a priori reasoning.


Technology is also often discovered or invented by accident as well, as in the invention of plastics. These accidents of history ripple through the economy, sometimes radically altering its supply and demand, and creating the market forces to which people must respond.[…] Thus, an accident of history is responsible for the big oil companies of today, and the direction of an entire global economy (not to mention the attendant pollution problems). Is this economic activity primarily traceable to the beliefs, plans or expectations of subjective individuals?

Austrians do not ignore luck and risk. Entrepreneurs capitalizing on a discovery create the change in the market, not the discovery itself as some mystical force of nature.


The opposite of this is methodological holism, which holds that groups have traits, behaviors and outcomes that cannot be understood by reducing them to their individual parts. That is, groups consist not only of individuals, but also relationships between individuals.

The author fails to provide an example, presumably some kind of group behavior, where methodological individualism falls short. All group behaviors can be traced back to individual choices and actions.


The problem with insisting on only one level of analysis is that counter-examples crop up which are nearly impossible to explain. [soldiers, charity, volunteer work, altruism, sacrifice, …]

All of these are consistent with methodological individualism and are perfectly well-integrated into Austrian economics.


One of the most famous failures of methodological individualism is why people vote. According to public choice theorists, who base their science on this method, there is no logical reason for individuals to vote.

Humans act illogically.


All market failures today can be blamed on the fact that we have a government, regardless of the actual level of government involvement in the failure.

No, all failures cannot be blamed on the government as a blanket statement. But blame can be assigned for specific failures when they can be traced back to government intervention as a qualitatively important cause.
Also, in theory, Austrian economics allow for logical proof that rule out government as a possible cause of a specific failure.


Perhaps the best way to highlight the error of market process theory is by analogy. Suppose you are the chief of a tribe of wandering nomads, and you wander into a region that is unfamiliar to everyone. Soon the tribe becomes thirsty, and everyone agrees to start searching for water.

As he continues unfolding this story, the author assumes that lack of coercive central planning means chaos and disorganization, which is clearly not the case as the praxeology and the existence of the private sector demonstrate. Some tribe members may specialize in “water seeking” and sell their services, or another tribe member may invent new technology for finding water, etc.
Also, the author ignores the question of how the tribe “chief” decides allocation of resources, such as how many people are assigned to this task, versus others. Are tribe members free to decline the assignment?


Customers vote with their dollars; voters vote with their ballots. […] Companies and politicians that do not perform well go bankrupt or are voted out of office.

If citizens don’t vote, government doesn’t go away, whereas companies go bankrupt. Government is systematically flawed (unhealthy incentives), regardless of the officials elected. Which is why Austrians tend to favor small or no government.


And if society should reduce government that has grown too centralized and inefficient, then it should do no less for monopolies, which share the same shortcomings.

Government is coercive, whereas companies are not (except when backed by government or illegal use of force). See my recent post on monopolies.


Without antitrust laws or some other countervailing market force, growing companies will not stop until they become monopolies or oligopolies.

Where is the proof for this assertion? Market forces already prevent monopoly power, and firms are victim to same knowledge problem as central planning which puts some limits on their scale.


The height of monopoly growth and abuse in the U.S. coincided with its greatest period of laissez-faire, or government nonintervention in the market.

Later the author mentions Rockefeller and Carnegie, which actually both stayed dominant in the industry by innovation and service, not “monopoly abuse”. Consumers suffer from monopoly power, but in the case of the above companies, consumers actually benefited greatly.


The problem is that at the top end, mergers become increasingly harmful to the economy, with monopolies merely representing the worst result.

Only government can make a market anti-competitive by restricting new entrants. Because of competitive forces (competition or the threat of competition) dominant players cannot abuse their position while maintaining it. Neoclassical economists use a flawed notion of monopoly.


Austrians believe in the gold standard, whereas mainstream economists favor the current system of fiat money.

This is debatable. I think all Austrians are against fiat money and support market-based money. Some think gold is the most natural market-based money.


But there is not enough gold in the world to cover the phenomenal amount of economic activity currently in it, without an equally phenomenal revaluation of gold. Furthermore, industry is making increasing demands on gold; a change in dentistry or electronics could deflate an entire economy.

Any quantity of money good beyond a minimum is sufficient to support the economic activity. Worst case (if gold is somehow completely and irrevocably consumed by industrial use), the market is capable of switching to an alternate good.


At low levels, inflation under fiat money is relatively harmless.

Fiat money is dangerous in principle and government has no rational way of deciding the “right” amount of inflation. Same goes for the interest rate. Also, the problem of inflation is how the new money enters the economy and artificially boosts (read malinvestment and bubble) some sectors over others, creating illusory wealth.


However, the deflation caused by the gold standard is truly destructive. If dollars have inflated to 2 percent of their original value, and the price of gold has risen 20 times, then maintaining the gold standard would have deflated the dollar to 2.5 times its original value. That’s a lot of unemployment.

Missing link in reasoning (non sequitur) to “lot of unemployment” and “truly destructive”.


And, of course, there has not been a single depression since World War II, not in this or any other country following Keynesian monetary policies.

Tada! Of course, the current depression has no link whatsoever to the FED’s monetary policy, fractional reserve banking, or government insurance programs. Btw, Keynes has been discredited in the economic profession by staglation of the 70s, which is an aberration in the Keynesian model.


Socialism means that workers own the means of production, not private individuals or an elite group.

Got it, the author’s point is that socialism is milder than communism, and so are its negative consequences. But these consequences remain negative nonetheless. Ownership under socialism is not as the author suggests, as government claims property on resources (tax, eminent domain, regulation) and people (draft).


[Austrian School: Politics]

Skipping the details of this section. If the author dislikes the logical conclusion of a theory, he ought to attack the theory, not the conclusions or the people.

The Adventures of Jonathan Gullible

February 3, 2010

Just finished reading The Adventures of Jonathan Gullible. This book tells the free-market odyssey of a young boy shipwrecked on a strange island. With each new encounter along his exploration, Jonathan asks questions about economic, philosophical and political matters.

The allegory of the naïve foreigner is used to stimulate thinking about our society, its assumptions and contradictions. The writing is clever and humorous; it is meant for children and adults alike.

Jonathan gets to “understand” why productivity is a threat to society; why some industries should have special protection; why people should be defended with rent control and doctor certification; why the Council of Lords provides compulsory cafeterias and schools; why citizens should pay taxes for zoos and libraries; why the Council knows better and should use the law to set un-ambiguous standards of morality; why money printing (by the Council) is good; how laws and policies are made; how politics work; why we follow the rule of the majority; and why individuals cannot handle freedom and responsibility.

This story naturally leads towards free-market principles. I recently posted about the author’s video outlining those principles.
The commentary edition of the book also contains analysis, spells out the parallel with real-world situations and provides further refences.

A ???ne is a tax for doing wrong. A tax is a ???ne for doing well.