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Guest Post: A Short History of Economic Philosophy

Wednesday, September 1, 2010, 10:09 PM
by Richard Heinberg

This article ran for our enrolled users last week and is one in a series from respected guest commentators. The original article has been amended by the author in response to input from the CM community.

Economies are the systems by which humans create and distribute wealth. Economics is a set of philosophies, ideas, equations, and assumptions that describe how all of this does, or should, work.

The first economists were ancient Greek and Indian philosophers, among them Aristotle (382-322 BC)—who discussed the “art” of wealth acquisition and questioned whether property should best be owned privately or by government acting on behalf of the people. Little of real substance was added to the discussion during the next two thousand years.

The 18th century brought a virtual explosion of economic thinking. “Classical” economic philosophers such as Adam Smith (1723–1790), Thomas Robert Malthus (1766–1834), and David Ricardo (1772–1823) introduced basic concepts such as supply and demand, division of labor, and the balance of international trade. As happens in so many disciplines, early practitioners were presented with plenty of uncharted territory and proceeded to formulate general maps of their subject that future experts would labor to refine in ever more trivial ways.

These pioneers set out to discover natural laws in the day-to-day workings of economies. They were striving, that is, to make of economics a science on par with the emerging disciplines of physics and astronomy.

Like all thinkers, the classical economic theorists—to be properly understood—must be viewed in the context of their age. In the 17th and 18th centuries, Europe’s power structure was beginning to strain: as wealth flowed from colonies, merchants and traders were getting rich, but they increasingly felt hemmed in by the established privileges of the aristocracy and the church. While economic philosophers were mostly interested in questioning the aristocracy’s entrenched advantages, they admired the ability of physicists, biologists, and astronomers to demonstrate the fallacy of old church doctrines, and to establish new universal “laws” by means of inquiry and experiment.

Physical scientists set aside biblical and Aristotelian doctrines about how the world works and undertook active investigations of natural phenomena such as gravity and electromagnetism—fundamental forces of nature. Economic philosophers, for their part, could point to price as arbiter of supply and demand, acting everywhere to allocate resources far more effectively than any human manager or bureaucrat could ever possibly do—surely this was a principle as universal and impersonal as the force of gravitation! Isaac Newton had shown there was more to the motions of the stars and planets than could be found in the book of Genesis; similarly, Adam Smith was revealing more potential in the principles and practice of trade than had ever been realized through the ancient, formal relations between princes and peasants, or among members of the medieval crafts guilds.

The classical theorists gradually adopted the math and some of the terminology of science. Unfortunately, however, they were unable to incorporate into economics the basic self-correcting methodology that is science’s defining characteristic. Economic theory required no falsifiable hypotheses and demanded no repeatable controlled experiments. Economists began to think of themselves as scientists, while in fact their discipline remained a branch of moral philosophy—as it largely does to this day.

The notions of these 18th and early 19th century economic philosophers constituted classical economic liberalism—the term liberal in this case indicating a belief that managers of the economy should let markets act freely and openly, without outside intervention, to set prices and thereby allocate goods, services, and wealth. Hence the term laissez-faire (from the French “let do” or “let it be”).

In theory, the Market was a beneficent quasi-deity tirelessly working for everyone’s good by distributing the bounty of nature and the products of human labor as efficiently and fairly as possible. But in fact everybody wasn’t benefiting equally or (in many people’s minds) fairly from colonialism and industrialization. The Market worked especially to the advantage of those for whom making money was a primary interest in life (bankers, traders, industrialists, and investors), and who happened to be clever and lucky. It also worked nicely for those who were born rich and who managed not to squander their birthright. Others, who were more interested in growing crops, teaching children, or taking care of the elderly, or who were forced by circumstance to give up farming or cottage industries in favor of factory work, seemed to be getting less and less—either proportionally (as a share of the entire economy), or often even in absolute terms. Was this fair? Well, that was a moral and philosophical question. In defense of the Market, many economists said that it was fair: merchants and factory owners were making more because they were increasing the general level of economic activity; as a result, everyone else would also benefit . . . eventually. See? The Market can do no wrong. To some this sounded a bit like the circularly reasoned response of a medieval priest to doubts about the infallibility of scripture. Nevertheless, despite its blind spots, classical economics proved useful in making sense of the messy details of money and markets.

Importantly, these early philosophers had some inkling of natural limits and anticipated an eventual end to economic growth. The essential ingredients of the economy were understood to consist of labor, land, and capital. There was on Earth only so much land (which in these theorists’ minds stood for all natural resources), so of course at some point the expansion of the economy would cease. Both Malthus and Smith explicitly held this view. A somewhat later economic philosopher, John Stuart Mill (1806-1873), put the matter as follows: “It must always have been seen, more or less distinctly, by political economists, that the increase in wealth is not boundless: that at the end of what they term the progressive state lies the stationary state. . . .” [Czech 93]

But starting with Adam Smith, the idea that continuous “improvement” in the human condition was possible came to be generally accepted. At first, the meaning of “improvement” (or progress) was kept vague, perhaps purposefully. Gradually, however, “improvement” and “progress” came to mean “growth” in the current economic sense of the term—abstractly, an increase in Gross Domestic Product (GDP), but in practical terms, an increase in consumption.

A key to this transformation was the gradual deletion by economists of land from the theoretical primary ingredients of the economy (increasingly, only labor and capital really mattered—land having been demoted to a sub-category of capital). This was one of the refinements that turned classical economic theory into neoclassical economics; others included the theories of utility maximization and rational choice. While this shift began in the 19th century, it reached its fruition in the 20th through the work of economists who explored models of imperfect competition, and theories of market forms and industrial organization, while emphasizing tools such as the marginal revenue curve (this is when economics came to be known as “the dismal science”—partly because its terminology was, perhaps intentionally, increasingly mind-numbing).

Meanwhile, however, the most influential economist of the 19th century, a philosopher named Karl Marx, had thrown a metaphorical bomb through the window of the house that Adam Smith had built. In his most important book, Das Kapital, Marx proposed a name for the economic system that had evolved since the Middle Ages: capitalism. It was a system founded on capital. Many people assume that capital is simply another word for money, but that entirely misses the essential point: capital is wealth—money, land, buildings, or machinery—that has been set aside for production of more wealth. If you use your entire weekly paycheck for rent, groceries, and other necessities, you may have money but no capital. But even if you are deeply in debt, if you own stocks or bonds, or a computer that you use for a home-based business, you have capital.

Capitalism, as Marx defined it, is a system in which productive wealth is privately owned. Communism (which Marx proposed as an alternative) is one in which productive wealth is owned by the community, or by the nation on behalf of the people.

In any case, Marx said, capital tends to grow. If capital is privately held, it must grow: as capitalists compete with one another, those who increase their capital fastest are inclined to absorb the capital of others who lag behind, so the system as a whole has a built-in expansionist imperative. Marx also wrote that capitalism is inherently unsustainable, in that when the workers become sufficiently impoverished by the capitalists, they will rise up and overthrow their bosses and establish a communist state (or, eventually, a stateless workers’ paradise).

The ruthless capitalism of the 19th century resulted in booms and busts, and a great increase in inequality of wealth—and therefore an increase in social unrest. With the depression of 1893 and the crash of 1907, and finally the Great Depression of the 1930s, it appeared to many social commentators of the time that capitalism was indeed failing, and that Marx-inspired uprisings were inevitable; the Bolshevik revolt in 1917 served as a stark confirmation of those hopes or fears (depending on one’s point of view).

Beginning in the late 19th century, social liberalism emerged as a moderate response to both naked capitalism and Marxism. Pioneered by sociologist Lester F. Ward (1841-1913), psychologist William James (1842-1910), philosopher John Dewey (1859-1952), and physician-essayist Oliver Wendell Holmes (1809-1894), social liberalism argued that government has a legitimate economic role in addressing social issues such as unemployment, health care, and education. Social liberals decried the unbridled concentration of wealth within society and the conditions suffered by factory workers, while expressing sympathy for labor unions. Their general goal was to retain the dynamism of private capital while curbing its excesses.

Non-Marxian economists channeled social liberalism into economic reforms such as the progressive income tax and restraints on monopolies. The most influential of the early 20th century economists of this school was John Maynard Keynes (1883-1946), who advised that when the economy falls into a recession government should spend lavishly in order to restart growth. Franklin Roosevelt’s New Deal programs of the 1930s were a laboratory for Keynes’s ideas, and the enormous government borrowing and spending that occurred during World War II were generally credited with ending the Depression and setting the nation on a path of economic expansion.

The next few decades saw a three-way contest between the Keynesian social liberals, the followers of Marx, and temporarily marginalized neoclassical or neoliberal economists who insisted that social reforms and Keynesian meddling by government with interest rates, spending, and borrowing merely impeded the ultimate efficiency of the free Market.

With the fall of the Soviet Union at the end of the 1980s, Marxism ceased to have much of a credible voice in economics. Its virtual disappearance from the discussion created space for the rapid rise of the neoliberals, who for some time had been drawing energy from widespread reactions against the repression and inefficiencies of state-run economies. Margaret Thatcher and Ronald Reagan both relied heavily on advice from neoliberal economists of the Chicago School (so called because of the widespread influence of the University of Chicago School of Economics, which graduated several generations of economists steeped in the ideas of monetarists like Milton Friedman, 1912-2006; as well as Austrian School economist Friedrich von Hayek, 1899-1992). One of the most influential libertarian, free-market economists of recent decades was Alan Greenspan (b. 1926), who, as U.S. Federal Reserve Chairman from 1987 to 2006, argued for privatization of state-owned enterprises and de-regulation of businesses—yet Greenspan nevertheless ran an activist Fed that expanded the nation’s money supply in ways and to degrees that neither Friedman or Hayek would have approved of. As a side note, it’s worth mentioning that the Austrian School of Ludwig von Mises (1881-1973) and Hayek should be distinguished from the Chicago School: the former has followed a more purely individualist, libertarian line of thinking, focuses much of its analysis on the business cycle, and usefully critiques central banks and fiat currencies; while the latter is more results-oriented and heterodox and accepts central banks and fractional-reserve banking as givens. Both reject Keynesian government intervention in favor of unfettered markets.

There is a saying now in Russia: Marx was wrong in everything he said about communism, but he was right in everything he wrote about capitalism. Since the 1980s, the nearly worldwide re-embrace of classical economic philosophy has predictably led to increasing inequalities of wealth within the U.S. and other nations, and to more frequent and severe economic bubbles and crashes.

Which brings us to the global crisis that began in 2008. By this time all mainstream economists (Keynesians and neoliberals alike) had come to assume that perpetual growth is the rational and achievable goal of national economies. The discussion was only about how to maintain it—through government intervention or a laissez-faire approach that assumes the Market always knows best.

But in 2008 economic growth ceased in most nations, and there has as yet been limited success in restarting it. Indeed, by some measures the U.S. economy is slipping further into a recession that might more correctly be termed a depression. This dire reality constitutes a challenge to both mainstream economic camps. It is clearly a challenge to the neoliberals, whose deregulatory policies were largely responsible for creating the housing bubble whose implosion is generally credited with stoking the crisis. But it is a conundrum also for the Keynesians, whose stimulus packages have failed in their aim of increasing employment and general economic activity. What we have, then, is a crisis not just of the economy, but also of economic theory and philosophy.

The ideological clash between Keynesians and neoliberals (represented to a certain degree in the escalating all-out warfare between the U.S. Democratic and Republican political parties) will no doubt continue and even intensify. But the ensuing heat of battle will yield little light if both philosophies conceal the same fundamental errors. One such error is of course the belief that economies can and should perpetually grow.

But that error rests on another that is deeper and subtler. The subsuming of land within the category of capital by nearly all post-classical economists had amounted to a declaration that Nature is merely a subset of the human economy—an endless pile of resources to be transformed into wealth. It also meant that natural resources could always be substituted with some other form of capital—money or technology. The reality, of course, is that the human economy exists within, and entirely depends upon Nature, and many natural resources have no realistic substitutes. This fundamental logical and philosophical mistake, embedded at the very heart of modern mainstream economic philosophies, set society directly upon a course toward the current era of climate change and resource depletion, and its persistence makes conventional economic theories—of both Keynesian and neoliberal varieties—utterly incapable of dealing with the economic and environmental survival threats to civilization in the 21st century.

For help, we can look to the ecological and biophysical economists, whose ideas have been thoroughly marginalized by the high priests and gatekeepers of mainstream economics—and, to a certain extent, to the likewise marginalized Austrian School, whose standard bearers have been particularly good at forecasting and diagnosing the purely financial aspects of the current global crisis. But that help will not come in the form that many would wish: as advice that can return our economy to a “normal” state of “healthy” growth. One way or the other—through planning and method, or through collapse and failure—our economy is destined to shrink, not grow.


Richard Heinberg is the author of nine books, including:  Blackout: Coal, Climate, and the Last Energy Crisis (2009), Peak Everything: Waking Up to the Century of Declines (2007), The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism and Economic Collapse (2006), Powerdown: Options and Actions for a Post-Carbon World (2004), and The Party's Over: Oil, War and the Fate of Industrial Societies (2003).

He is Senior Fellow-in-Residence of Post Carbon Institute and is widely regarded as one of the world’s foremost Peak Oil educators.  He has authored scores of essays and articles and has appeared in many film and television documentaries, including Leonardo DiCaprio’s 11th Hour, and is a recipient of the M. King Hubbert Award for Excellence in Energy Education.

More information about Richard can be found on his website.

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13 Comments

Dragline's picture
Dragline
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Re: Guest Post: A Short History of Economic Philosophy

Nice article -- it's about time we put economics back in the philosophy drawer where it belongs (at least as it as discussed on the macro/public level).

Yet there is wonderful work being done on the margins where there is more thought and less ideology.  Beinhocker's Origins of Wealth (looking at evolutionary or biological-type modelling) and Steve Keen's work on dynamic debt models.

These issues are coming to a head in the next decade, and we will need new ideas like those presented here.

ozzy43's picture
ozzy43
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Re: Guest Post: A Short History of Economic Philosophy

There is a revisionist flaw deeply embedded in this essay and IMO it imperils the sense of the whole. It's captured by this snippet:

"...neoliberal economists of the Chicago School (so called because of the widespread influence of the University of Chicago School of Economics, which graduated several generations of economists steeped in the ideas of Austrian economist Friedrich von Hayek, 1899-1992)"

The Austrian School of Economics, based on work by Hayek, von Mises, Rothbard, et.al. is in fact utterly opposed to the views of the Monetarists of the Chicago school, both on ethical and economic grounds. That is, there are two wildly divergent views of economics here being bundled together as though they are one, and the result is a skewed 'history.'

Considering that the Austrian school in fact is the only one who has predicted and explained what has happened in the real world economy from the Great Depression (e.g. WW2 did NOT end the Gt Depression - that's just one of many articles of economic faith taught in schools which is false) to the current ongoing Depression, one would think they would merit a mention which distinguishes them from the Monetarists and the Keynesians, both of which represent pro-State economic philosophies (the former tending toward corporatism aka fascism, the latter toward socialism). The Austrian economic philosophy is generally (and in the case of Rothbard, explicitly) anti-State. So there have been, in fact, THREE major economic currents within the US over the last century, not two, as posited above. All of those incorporated in the above article - including Monetarism, Keyenesianism and Marxism, are pro-State, and as such are the ones which get the publicity, as we see here. There is a reason for this.

The author goes on to say: "both philosophies conceal the same fundamental errors" - I think this is correct. But it is my view that the Austrians do NOT encompass a major error which lies at the heart of both Monetarism and Keynesianism (and the one which lies at the heart of the current meltdown) - which is that the State and its elitist overlords can be trusted to 'manage' in one way or another, the economy. The Chicago school, remember, while it is being characterized as a laissez-faire privatization machine above, is, in the most important respect, not that at all. The Monetarists believe in fiat currency and a central bank - just like the Keynesians. So what they explicitly do NOT want is privatization of money supply or a metallic currency standard. Both of these schools are horrified at the notion of a gold standard and a dissolution of private banks control of the money supply, both of which the Austrians wholeheartedly support. And that, my friends, is the real distinction when it comes to economics: who controls the money supply and is there a sound currency? On these most important of criteria, the Monetarists and Keynesians are in lock step. And THAT is what is at the root of the current economic crisis.

Thus, there is a legitimate third school of economic philosophy (and it happens to be the one which would never have gotten us into this economic mess to begin with because it is the only one which has correctly diagnosed the roots of modern economic crises) which is (as usual) entirely missing from the above 'history' - and that revisionism is, IMO, telling, and contributes to a faulty conclusion - that all modern economic theories are junk and should be jettisoned and we should turn to ecological economists. I agree that there is a lot of junk in Monetarism and Keyensianism - in fact, both are merely tools for empowering those elements of society arguably most responsible for our present predicament. But can ecological economists demonstrate the predictive and analytical capacity of the Austrian school? I don't know, but it seems a pertinent question to ask before handing the whole thing over to them.

One of the chief difficulties in driving the peak oil debate is overcoming the innumerable myths and illusions of modern industrial society. For example, one of the most pernicious (and obvious to many in this community) of these is that man is somehow 'above' nature and they geophysical limitations must needs bow to humanity's boundless capacity for ingenuity. We see the detritus resulting from this illusionary view of reality piling up all around us.

But an even more pernicious myth subscribed to by many in the peak oil community, as far as I can tell, is that of the modern American government as a representative and socially beneficent entity, when in fact it is a predatory, rapacious, murderous gang of thugs run by various coalitions of elites (using flawed economic theories such as Monetarism and Keynesianism to accomplish their ends), one which wears the mask of a democracy which serves at the will of the people, when nothing could be further from the truth.

In other words, the two schools the author discusses are not prevalent today because of 'true believers' in them (it is fairly simple to demonstrated their flaws after all - for example, Keynes' theory at its very core insisted that the economic state known as 'stagflation' was literally impossible - so much for Keynesianism) - they are prevalent because the utilization of them results in the desired ends - greater State power (Keynesians) and greater elite wealth (Monetarists). This is the lesson of the current crisis which the author, it seems to me, misses in its entirety. But it's a dangerous lesson to miss, especially in these times.

The danger, IMO, is this: in failing to pierce such illusions, we begin our chain of reasoning with flawed premises, such that, regardless of the soundness of the following logic, our conclusions will be equally flawed. The results would be similar to what happens when we fail to see through the 'man is above nature' illusion. 

To sum up: there are indeed fundamental problems with 'modern economics' - the author of this piece correctly identifies some (assuming economic inputs such as natural resources are effectively limitless with available quantities controlled primarily by the price mechanism which directly leads to an assumption that perpetual growth is possible), but entirely misses the other because he apparently accepts the conventional view of modern economics, which is purposefully flawed. But we need to grasp all of the problems in order to make sensible decisions or suggestions - such as throwing out all of modern economics in favor of some new flavor of economics which, for all we know, may incorporate the very unidentified flaws of the old!

As John Michael Greer points out, these times call not for consensus, but dissensus. Our 'normal' mode of seeking consensus via the mechanism of representative government is not only flawed because consensus puts all one's eggs in one basket, but doubly so due to the fact the the State under which we live isn't, in fact, representative to begin with, and can in fact be expected to actively oppose any efforts to alter the status quo, which is the core agenda of it's rulers. Any 'future' economics which relies upon the notion of government as an honest broker of effective solutions will fail just as certainly as our current set has.

In short, the longer we suppose the State to be a giant cuddly teddy bear which is capable and desirous of honestly, earnestly solving major social problems, rather than the rabid grizzly intent upon mass fraud and embezzlement that it is, the longer we will place ourselves at its mercy and expect it to provide solutions to problems associated with peak oil, or anything else. To put it another way, it is not primarily economics that is at the root of our predicament - but rather governmental actions and the political embrace of flawed economic theories for purposes of aggrandizement. It's the politics, stupid.

Dmitry Orlov has it right - when it comes to politicians, "don't pay any attention to them - it only encourages them - they are a colossal distraction.' I think this is a far more important and relevant piece of advice than most realize.

deggleton's picture
deggleton
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Re: Guest Post: A Short History of Economic Philosophy
ozzy43 wrote:

...an even more pernicious myth subscribed to by many in the peak oil community, as far as I can tell, is that of the modern American government as a representative and socially beneficent entity, when in fact it is a predatory, rapacious, murderous gang of thugs run by various coalitions of elites (using flawed economic theories such as Monetarism and Keynesianism to accomplish their ends), one which wears the mask of a democracy which serves at the will of the people, when nothing could be further from the truth.

In other words, the two schools the author discusses are not prevalent today because of 'true believers' in them (it is fairly simple to demonstrated their flaws after all - for example, Keynes' theory at its very core insisted that the economic state known as 'stagflation' was literally impossible - so much for Keynesianism) - they are prevalent because the utilization of them results in the desired ends - greater State power (Keynesians) and greater elite wealth (Monetarists). This is the lesson of the current crisis which the author, it seems to me, misses in its entirety. But it's a dangerous lesson to miss, especially in these times.

The danger, IMO, is this: in failing to pierce such illusions, we begin our chain of reasoning with flawed premises, such that, regardless of the soundness of the following logic, our conclusions will be equally flawed. The results would be similar to what happens when we fail to see through the 'man is above nature' illusion. 

To sum up: there are indeed fundamental problems with 'modern economics' - the author of this piece correctly identifies some (assuming economic inputs such as natural resources are effectively limitless with available quantities controlled primarily by the price mechanism which directly leads to an assumption that perpetual growth is possible), but entirely misses the other because he apparently accepts the conventional view of modern economics, which is purposefully flawed. But we need to grasp all of the problems in order to make sensible decisions or suggestions - such as throwing out all of modern economics in favor of some new flavor of economics which, for all we know, may incorporate the very unidentified flaws of the old!

As John Michael Greer points out, these times call not for consensus, but dissensus. Our 'normal' mode of seeking consensus via the mechanism of representative government is not only flawed because consensus puts all one's eggs in one basket, but doubly so due to the fact the the State under which we live isn't, in fact, representative to begin with, and can in fact be expected to actively oppose any efforts to alter the status quo, which is the core agenda of it's rulers. Any 'future' economics which relies upon the notion of government as an honest broker of effective solutions will fail just as certainly as our current set has.

Thanks so much for making the significant distinction and calling the spade a spade.  I wish more would see your post than conceivably will, given its location.  Please consider putting a stand-alone version in a Discussion area.

Going in, I thought there would be mentions of B. Ward, K. Boulding, E. F. Schumacher and/or H. Henderson.  Maybe they fit in the long history.

David

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angle
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Re: Guest Post: A Short History of Economic Philosophy

Thanks to CM & Co. for making this article available to the general public, and to ozzy43 for his response. I've been struggling to come to grips with the history and terminology behind economic theory (something I'm very unfamiliar with) and this has been a very approachable basic overview.

For my part, I'm not convinced yet that any one approach is the "best" one, but I am interested in looking into both the ideas of the Austrian school and ecological economics.

goes211's picture
goes211
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Re: Guest Post: A Short History of Economic Philosophy
deggleton wrote:
ozzy43 wrote:

As John Michael Greer points out, these times call not for consensus, but dissensus. Our 'normal' mode of seeking consensus via the mechanism of representative government is not only flawed because consensus puts all one's eggs in one basket, but doubly so due to the fact the the State under which we live isn't, in fact, representative to begin with, and can in fact be expected to actively oppose any efforts to alter the status quo, which is the core agenda of it's rulers. Any 'future' economics which relies upon the notion of government as an honest broker of effective solutions will fail just as certainly as our current set has.

Thanks so much for making the significant distinction and calling the spade a spade.  I wish more would see your post than conceivably will, given its location.  Please consider putting a stand-alone version in a Discussion area.

Going in, I thought there would be mentions of B. Ward, K. Boulding, E. F. Schumacher and/or H. Henderson.  Maybe they fit in the long history.

David

Wow!  I don't know how I missed this comment.  I must agree with David.  Ozzy, you must put this out in the forum for general discussion.  It is one of the best comments I have read around here in a long time.

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metalmongrel
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Re: Guest Post: A Short History of Economic Philosophy

Well done to both Ozzy and the original writer of the article, some very good points made!

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Re: Guest Post: A Short History of Economic Philosophy

Thanks, Ozzy for a very thoughtful critique. It mirrors one comment that came through when the essay was "members only." As a result of that earlier comment I have made some adjustments to the article, which are not reflected in the (original) version above, but will be when it is published more generally soon.

You are right, the Austrians do have some extremely useful insights, and they do distinguish themselves from the Monetarists. And yet it's true that both see themselves in opposition to the Keynesians. And it is also true that the Austrians have failed to incorporate some basic economic insights from the biophysical and ecological economists. Who in turn have failed to incorporate all the insights they might have drawn from the Austrians. That's part of what I mean when I say we are still very far from having a true, mature science of economics.

Were there ever financial crises prior to fiat currency and central banks? You betcha. Do fiat currency and central banks make matters worse (at least in the long run)? As we're finding out, the answer is a resounding "yes." Ozzy, you impute to me a belief that the State is "a giant cuddly teddy bear." I have no idea where that came from--couldn't be further from the truth. That's a pure straw man argument and unfortunately it seriously dilutes some good points made earlier in your letter.

Richard Heinberg

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janb
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Re: Guest Post: A Short History of Economic Philosophy

This is just a wonderful, wonderful article!  Thank you so much, Mr. Heinberg, for that thoughtful, deep, expansive, yet very readable analysis.  I am so glad that this will be put out to the wider community.  It will be really interesting to read the it again with Ozzy's ideas evaluated/incorporated.  One thing, and I hope whoever reads this will at least consider this as a possibility: I don't believe that our government representatives are so motivated by ruthlessness as some of the comments here reflect.  IMO, they are doing their utmost to steer the big ship of our economy using directions from the sources which Mr. Heinberg describes.  That's what they've got; that's what they're using. Hopefully, these new ideas will reach the right people....or enough people..... in time.       

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ashvinp
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Re: Guest Post: A Short History of Economic Philosophy
ozzy43 wrote:

The author goes on to say: "both philosophies conceal the same fundamental errors" - I think this is correct. But it is my view that the Austrians do NOT encompass a major error which lies at the heart of both Monetarism and Keynesianism (and the one which lies at the heart of the current meltdown) - which is that the State and its elitist overlords can be trusted to 'manage' in one way or another, the economy. The Chicago school, remember, while it is being characterized as a laissez-faire privatization machine above, is, in the most important respect, not that at all. The Monetarists believe in fiat currency and a central bank - just like the Keynesians. So what they explicitly do NOT want is privatization of money supply or a metallic currency standard. Both of these schools are horrified at the notion of a gold standard and a dissolution of private banks control of the money supply, both of which the Austrians wholeheartedly support. And that, my friends, is the real distinction when it comes to economics: who controls the money supply and is there a sound currency? On these most important of criteria, the Monetarists and Keynesians are in lock step. And THAT is what is at the root of the current economic crisis.

Ozzy, very good respone and insights into the distinction between the Austrians and Monetarists/Keynesians. However, it seems that your above statements are contradictory. You say the monetarists do not support privatization of the money supply and the Austrians would liek to dissolve private banks' control of the money supply, but they are also opposed to each other in this respect? Maybe you meant that Austrians would like to return the control of money supply back to private hands away from a central authority such as the Fed? I would take issue with that because the money supply in this country has been largely determined by private banks making unregulated decisions, and the Fed hasn't done much more than funnel money to banks whenever they want or need it. In a rapidly growing speculative economy, the Fed can help the banks increase money supply by keeping rates low, but ultimately its the private banks that have to make the decisions to lend or not.

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Re: Guest Post: A Short History of Economic Philosophy

Ashvinp, I would argue that the private banks should be the ones deciding whether to lend or not. A private bank and its depositors who are exposed to losses will make much wiser, less speculative and more beneficial decisions than an institution that makes decisions while supported by a government guarantee against losses. For instances see Fannie or Freddie.

That the private banks can increase money supply via reserve banking is as a result of the legislature under which they operate.

The argument that the Fed doesn't control lending seems a long bow. Ultimately the Fed can create as much money as it wants, even to the point where the banks realise that their cash holdings themselves are highly speculative. In fact, the Fed is now dreaming up policies to disincentivise the banks from retaining cash such as targeting a higher inflation rate. Of course low rate settings are themselves a massive encouragement for banks to lend in normal circumstances, namely before a Keynesian endpoint which we appear to be fast approaching. This endpoint is reached when sovereign debts are so high that there is no possibility of servicing them let alone repaying them because the productive capacity of the economy has being white-anted to the point of collapse.

I think Ozzy43's post is a great summation and highlights the chasm between Austian and neoliberal economics of which the guest poster was previously unaware.

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
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Posts: 2934
Re: Guest Post: A Short History of Economic Philosophy

Richard has amended this article based on input he has received from the CM.com community. The version above now reflects these changes.

ashvinp's picture
ashvinp
Status: Gold Member (Offline)
Joined: Jan 20 2010
Posts: 412
Re: Guest Post: A Short History of Economic Philosophy
crazy horse wrote:

Ashvinp, I would argue that the private banks should be the ones deciding whether to lend or not. A private bank and its depositors who are exposed to losses will make much wiser, less speculative and more beneficial decisions than an institution that makes decisions while supported by a government guarantee against losses. For instances see Fannie or Freddie.

That the private banks can increase money supply via reserve banking is as a result of the legislature under which they operate.

The argument that the Fed doesn't control lending seems a long bow. Ultimately the Fed can create as much money as it wants, even to the point where the banks realise that their cash holdings themselves are highly speculative. In fact, the Fed is now dreaming up policies to disincentivise the banks from retaining cash such as targeting a higher inflation rate. Of course low rate settings are themselves a massive encouragement for banks to lend in normal circumstances, namely before a Keynesian endpoint which we appear to be fast approaching. This endpoint is reached when sovereign debts are so high that there is no possibility of servicing them let alone repaying them because the productive capacity of the economy has being white-anted to the point of collapse.

I think Ozzy43's post is a great summation and highlights the chasm between Austian and neoliberal economics of which the guest poster was previously unaware.

I agree that there should not be any public guarantees of a private bank system, but that doesn't mean there shouldn't be regulations on what they can do, their size, etc. and that existing legislative structures, such as the FRR, shouldn't be dismantled (not that the FRR has really limited bank lending in any practical sense). My real point was that the Fed doesn't really control money supply or lending decisions, which is painfully obvious right now depsite the trillions in QE and low rates. They had certainly added fuel to the fire during various speculative bubbles, but these bubbles can occur within completely private financial markets (with no public backstops and monetary policies) as well.

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carltonh
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Joined: Jul 27 2010
Posts: 1
Re: Guest Post: A Short History of Economic Philosophy

I have been the Austrian Econ camp for 15 years, despite my Econ and Statistics degrees. Tongue out

I think Richard could use some help on what are some limitations of the "Austrian consensus" even if not a problem with the fundamentals of this school (depending on how you define fundamentals).

1st: Richard recognizes the separate importance of land.  Murray Rothbard effectively underestimates land importance by opposing the "Lockean Proviso".  In Locke's argument for natural law based property in land ownership, it was limited to the assumption that by taking land out of the "commons" we leave "enough and as good in common ...to others". 

So Locke knew that decreasing natural resources per capita means a decreasing right to legitimately claim a fixed quantity of land as ones exclusive property.  Individual claims must shrink directly with available land per capita.  This is where Henry George's "Progress and Poverty" provides some insight, buy by leaving centralizing power in a central state, George failed in the same way Marx did.  We might say that the "anarcho-Georgists" like Albert J. Nock and Frank Chodorov rectified George's problem, but their view was never incorporated into a systemic treatise like Rothbard and Mises did.

The closest to a systematic and historically aware treatise that invokes what Richard is trying to elucidate, is Kevin Carson's book, "Studies in Mutualist Political Economy". available for free here: http://www.mutualist.org/id47.html

Another economic point that is too rarely addressed by the Austrians is the "Principal-Agent Problem" though they don't deny it.  It likewise points to a problem in assuming centralized solutions to real problems will not be subverted to other purposes, just like "regulatory capture." While Mises seemed to assume big business can solve the problem, Rothbard was more aware that scale matters, and the bigger an organization, not just government but business, the more corrupt.

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