Archive for August 2012 – Page 2

Chaos Theory: Private Law

“Without question, the legal system is the one facet of society that supposedly requires State provision. Even such champions of laissez-faire as Milton Friedman and Ludwig von Mises believed a government must exist to protect private property and define the “rules of the game.” However, their arguments focused on the necessity of law itself. They simply assumed that the market is incapable of defining and protecting property rights. They were wrong. I argue that the elimination of the State will not lead to lawless chaos. Voluntary institutions will emerge to effectively and peacefully resolve the disputes arising in everyday life.”

–Robert P. Murphy, Chaos Theory

The Pointy Headed Promoter

In his writings on entrepreneurship Mises is careful to distinguish the pure entrepreneurial function of judgmental decision-making under uncertainty with the flesh-and-blood entrepreneur of history, “those who are especially eager to profi t from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement: (Human Action, Scholars Edition, p. 255). Mises suggests the term “promoter” for the latter, lamenting the fact that economists have used the term entrepreneur for both the praxeological category and the historical ideal type.

Of course, Mises’s suggestion didn’t catch on, and most practitioners, and many scholars, continue to confuse the two, and also to identify entrepreneurship exclusively with new companies (what Foss and I call the “startup bias” of entrepreneurship literature). A good example is today’s (funny) Dilbert, highlighting the fact that new business ventures often fail and that firm founders work a lot of hours and aren’t always nice guys (ahem).

Cooking as Entrepreneurship

To honor Julia Child on her 100th birthday, Lynne Kiesling writes a nice post combining three of my favorite things: cooking, entrepreneurship theory, and Austrian economics. Good cooking is about the combination of heterogeneous resources, it requires experimentation and creativity, and it either works or it doesn’t. Most important:

A system that will yield the most valuable and pleasing combinations of entrepreneurial economic or cooking activities will have low entry barriers (anyone can try to cook!) and a robust feedback-based system of error correction. Low entry barriers facilitate creativity in discovering new useful products from the raw elements, as well as enabling new value creation when some of those raw elements change. Error correction, whether a “yuck, that’s gross!” at home or a lack of profits due to low repeat business at a restaurant, is most effective and valuable when there are feedback loops that can inform the cook-producer about the value that the consumer did or did not get from the dish.

This emphasis on error correction highlights one of my differences with Kirzner’s approach to entrepreneurship. In Kirzner’s system, which emphasizes entrepreneurship as a coordinating agency, the entrepreneur is modeled as “piercing the fog” of uncertainty — hence the familiar metaphor of entrepreneurship as the discovery of preexisting profit opportunities. My approach focuses on action, not discovery, and gives a larger role to uncertainty. What generates coordination, in this approach, is the entrepreneurial selection process, not the “correctness” of entrepreneurial decisions.

Incidentally, Saras Sarasvathy often uses cooking to illustrate her “effectual” approach to entrepreneurial decision-making (i.e., cooks don’t always follow a recipe to produce a known dish, but use the ingredients they have in a sequential, experimental process). And for more on food, see here and here.

[Cross-posted at Organizations and Markets]

Salerno on The Bubble

Complete footage of his interview for the upcoming documentary The Bubble.

Is Security an Exception?

“It thus has been demonstrated a priori, to those of us who have faith in the principles of economic science, that the exception indicated above is not justified, and that the production of security, like anything else, should be subject to the law of free competition. Political economy has disapproved equally of monopoly and communism in the various branches of human activity, wherever it has found them. Is it not then strange and unreasonable that it accepts them in the security industry?”

–Gustave de Molinari, The Production of Security

Congressional Lecture by Roger Garrison (sponsored by Ron Paul): What is the Fed’s Future?

“Rep. Ron Paul sponsored this Congressional lecture on “What Is the Fed’s Future?”, the final lecture in a three part series on the Federal Reserve System for Congressional staff. As a continuing educational tool this lecture was filmed and is provided to the public. The lecture was delivered by Dr. Roger Garrison, Professor Emeritus of Economics at Auburn University.

Dr. Garrison’s lecture describes how the economic precepts on which the Fed operates are fundamentally flawed, making it only a matter of time before the Fed is the creator of its own demise. By contrasting the Keynesian macroeconomic theory upon which the Fed is based with the Austrian macroeconomic theory, what Garrison calls the capital-based framework, Dr. Garrison illustrates the market-distorting effects of the Fed’s actions on the structure of production. Using this comparison, Professor Garrison provides a simple yet comprehensive explanation of how the Fed’s monetary policy actions created the housing bubble and the subsequent financial crisis. He concludes by highlighting the bleak future for the Fed’s ability to manage the economy, and emphasizes the necessity of decentralized banking.”

The Division of Labor, Self-Serve Dog Wash Edition

Dirty Hairy Dog Wash
Daphne, Alabama

“The greater productivity of work under the division of labor is a unifying influence. It leads men to regard each other as comrades in a joint struggle for welfare, rather than as competitors in a struggle for existence. It makes friends out of enemies, peace out of war, society out of individuals.”  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, p. 261.

Capital is NOT a Homogeneous Blob

“Professor Lachmann has been diligently reminding us of what economists generally forget: that “capital” is not just a homogeneous blob that can be added to or subtracted from. Capital is an intricate, delicate, interweaving structure of capital goods. All of the delicate strands of this structure have to fit, and fit precisely, or else malinvestment occurs. The free market is almost an automatic mechanism for such fitting; and we have seen throughout this volume how the free market, with its price system and profit-and-loss criteria, adjusts the output and variety of the different strands of production, preventing any one from getting long out of alignment.”

–Murray N. Rothbard, Man, Economy, and State with Power and Market

A Single Reference

A single reference to Böhm-Bawerk by a Keynesian professor set Jeffrey Herbener, who I consider one of the best economists alive today, on the path toward becoming an Austrian.  Here he tells that story to Tom Woods.

10 Reasons Why Austrian Economics Is Better Than Mainstream Economics


1. Austrian economists make it their priority to make sure that the theorems they formulate are derived from self-evident axioms and constructed according to the proper rules of logical deduction. These considerations are at best of secondary importance to their mainstream colleagues.

2. Austrian economists make it their priority to make sure that the assumptions they base their theorems on are thoroughly realistic, i.e., corresponding to the state of the world as it is. Mainstream economists, on the other hand, admit that their hypotheses are based on deliberately false assumptions.

3. Austrian economists make it their priority to make sure that the theorems they formulate elucidate exact causal connections between economic phenomena, rather than deliberately assuming away their existence or importance by falling back on the physics-inspired notion of mutual determination.

4. The predictive track record of Austrian economists is incomparably superior to that of their mainstream counterparts (see, e.g., here and here).

5. The theorems and conclusions of Austrian economics are perfectly comprehensible to every intelligent layman, which cannot be said about the mathematical puzzles of mainstream economics. Read More→