Monthly Archives: February 2015

Research Notes #2: Calvinism, Scholasticism, and Value Theory

Today I stumbled upon a very interesting footnote by Rothbard in his magnum opus “Man, Economy and State” on Alfred Marshall’s misguided approach to value theory which pointed to an interesting paper by one Emil Kauder (“The Retarded Acceptance of the Marginal Utility Theory”) from 1953 which proposes the thesis that the economists who originally elaborated the labor theory of value (Locke, Smith, etc.) were seriously influenced by Protestantism (and Calvinism in particular).

The main subject of the paper is why virtually all of the British classical economists, starting with Adam Smith, were so stubbornly fixed on a fallacious ‘objective’ labor theory of value, instead of adopting the much more accurate in comparison, prototypes of a marginal utility theory developed by their continental counterparts in Italy and France (e.g. Turgot).

It turns out, there was an obvious religious divide between the English and the French and Italian economists of the 17th and 18th centuries. Both Locke and Smith, the most prominent early adopters of the labor theory of value were Protestants, or had gone through protestant education, while economists like Turgot (in France) and Galiani (Italy) were Catholics or had received a catholic (i.e. a Thomistic-Aristotelian) education. Now, some of these economists, like for example Smith, were deists in their religious beliefs, but Kauder emphasizes on the difference in the education they received in their adolescence which, to quote him:

leaves its permanent impresdon on our minds, regardless of how we may change our convictions at a later date. These indelible fundamentals created spedfic social outiooks which separated the two camps.

He then gives a brief summary of the Calvinist view of the importance of labor – Calvin and his followers placed labor at the very center of their social theology, thus:

Any social philosopher or economist exposed to Calvinism will be tempted to give labor an exalted podtion in his social or economic treatise, and no better way of extolling labor can be found than by combining work with value theory, traditionally the very basis of an economic system.

John Locke wrote that God had commanded man to labor and Smith despite being a deist did show a considerable sympathy for Presbyterianism, notes Kauder. And of course Adam Smith’s metaphor of the ‘invisible hand’ is most definitely inspired by the concept of the ‘hand of providence’.

Now, this is not to say that the British economists were not influenced by the Thomistic-Aristotelian scholastic economic theory. Both the British and the continental French and Italian economists were influenced by that theory but the latter were not influenced by Puritanism. The result of this difference in religious and thus, at the time, educational background, led them to emphasize different aspects of scholastic economics. For example, Locke and Smith focused on the ‘fair-price’ concept of the scholastic economic tradition and combined it with the Calvinist glorification of labor, while for authors like Turgot and Galiani labor did not have the same importance. In the scholastic education that they got, labor was not at the center of economics life, but instead moderate pleasure seeking and happiness were. As everyone familiar with Aristotle knows, for him, moderate pleasure seeking was an important part of the good life. This Aristotelian approach of the scholastics, uncontaminated with any Calvinist exaltation of labor, had a profound influence on the direction which economic thought took in France and Italy in the 18th century:

If pleasure in a moderate form is the purpose of economics, then following the Aristotdian concept of the final cause, all prindples of economics including valuation must be derived from it. In this pattem of Aristotelian and Thomistic thinking, valuation has the function of showing how much pleasuro can be derived from economic goods.

Kauder notes that later in the 19th century the intellectual conditions are quite different and the acceptance or non-acceptance of the marginal theory of value, as fully developed in the early 1870’s by economists like Carl Menger, William Stanley Jevons and Leon Walras, cannot be explained merely by such a religious divide. However, it does help explain Alfred Marshall’s unwillingness to accept the marginal theory in full and his desire to combine it with some form of the ‘objective’ labor theory.

Marshall’s father was a devout Evangelical and Evangelicalism was basically a Calvinist revival in America and Britain in the 19th century. Marshall was himself agnostic, but, as Moldbug has convincingly argued, one can be a devout protestant without believing in a personal God. Kauder provides this quote by Marshall:

Work in its best sense, the healthy energetic exercise of faculties is the aim of life, is life itself,” comfort is “a mere increase of artificial wants

Kauder further remarks:

On the one hand, Marahall was one of the independent discoverers of marginal utility. On the other hand, his glorification of labor attracted him to the cost problem. The result was the unbalanced character of his price and value theory. He failed to make fullest use of the marginal utility theory, and he defended valiantly Ricardo’s objective value theory.”

Reading this paper made me check Rothbard’s section on Calvinism in the first volume of his “Austrian Perspective on the History of Economic Thought” which I hadn’t looked into up until now. There he notes (following Kauder’s thesis) the contrast between the catholic-scholastic and the Calvinist views of economic life:

“The Scholastic focus was on consumption, the consumer, as the goal of labor and production. In contrast, a rather grim emphasis on work and on saving began to be stressed in Calvinist culture. This de-emphasis on leisure of course fitted with the iconoclasm that reached its height in Calvinism — the condemnation of the enjoyment of the senses as a means of expressing religious devotion. One of the expressions of this conflict came over religious holidays, which Catholic countries enjoyed in abundance. To the Puritans, this was idolatry; even Christmas was not supposed to be an occasion for sensate enjoyment.

He also emphasizes the importance of Aristotle with regards to Scholastic theories:

The Aristotelian balance, or golden mean, was considered a requisite of the good life, a life leading to happiness in keeping with the nature of man. And that balanced life emphasized the joys of consumption, as well as of leisure, in addition to the importance of productive effort.

He builds upon Kauder’s thesis (and references it extensively) and agrees that the fundamental difference between the French/Italian and British approaches to economics was the result of the religious divide between scholastic Catholicism and Calvinist Protestantism, respectively.

It is hardly surprising of course, that leftist economics, just like leftist politics, is likely massively influenced by some form of Protestantism. Modbug himself traced the origins of modern anglo- leftism through Unitarianism, colonial Puritanism, all the way back to Calvinism. The most leftist modern economic theory, Marxism, is of course based on the labor theory of value. You would think that modern mainstream economists have fully abandoned any sort of an objective cost/labor theories of value, proven fallacious a century and a half ago, but that is not entirely true. Actually one of the main criticisms that any contemporary Austrian Economist will levy against a large chunk of the modern mainstream academic economists is their reluctance to let go of objective cost/labor theories completely (Alfred Marshall is after all considered one of the fathers of modern economics). Although all Keynesians and Neoclassicals do broadly accept the marginal theory of value, some traces of an objective cost/labor approaches to value theory are still (sometimes) found in their thought.

Advertisements

Idiot’s Guide to Natural Economic Growth

I have been noticing for quite some time now, that there are a lot of people in neoreaction, or people interested in neoreaction, who tend to have a very limited understanding of economics, either because their interests lie elsewhere or simply because they do not have the time to study the subject. This post is for those people who wish they would know more about economics, especially macroeconomics. Moldbug himself had quite a few posts on economics, and those are all very good, but in some cases I believe he sacrificed simplicity in order to be as detailed and thorough as possible. The aim of this post is exactly the opposite. Understanding how the process of natural economic growth operates is indeed somewhat complicated (although not as complicated as some ‘experts’ would like to convince you), but in this post, I will try to explain it in the simplest way possible, so that whoever is new to economics can have at least a general understanding of this topic. Keep in mind, I am not a professional economist myself, I do not have a fancy degree, but I have read quite a bit about the topic and I think I have at least a general idea of what the fuck is going on. Which should be more than enough for the purposes of this post.

The modern world has actually almost entirely forgotten what natural economic growth looks like. And this is another reason why reviewing this subject is so important. You will never hear a mainstream economist say what I am about to write in this essay (hardly surprising of course, considering that I am following the Austrian School’s account here). Through the constant repetition of boom and bust cycles, along with multiple interventions by governments in order to ‘stimulate the economy’ natural economic growth has become a thing of the past. The scientific consensus is that natural growth is evil. So it is almost an accident if it happens at all nowadays.

Now, I should clarify that what is meant by natural economic growth is growth which does not rely on the helping hand of the government with its massive stimulus programs and policies of monetary expansion. Yes, contrary to popular belief an economy can grow based entirely on private enterprise and you don’t have your government spending accounting for 40% of GDP in order to keep GDP growth positive (then again GDP is a fudged aggregate anyways, but that is another topic). Now, as every Austrian economist will tell you, governments are not better at growing economies than private businesses. In fact they are much worse. And usually when they do try to ‘stimulate’ growth, that is exactly what causes the infamous business cycle. But this is not a post about Austrian business cycle theory, so we are not going to talk about that.

However, to paraphrase Hayek, in order to know why things go wrong we should know how they go right in the first place. So you cannot understand business cycles without understanding natural growth. You can’t understand why your computer is not working without understanding how it is supposed to work, etc.
Before going into the main subject however, we will first discuss a concept which is fundamental for understanding human action. We shall begin by discussing the existence of universal time preference amongst humans.

What is time preference?

Time preference stands for the rate of preference people have for consumption of goods and services at an earlier date versus consumption of goods and services at some later date. When an individual’s time preference rises, he starts consuming more and is saving much less (if he is saving at all). He is more concerned about the present and the near-future than the more distant future. When an individual’s time preference goes lower, he consumes less and saves more, cares more about the distant future and is more concerned about the long-term than the short-term in general. The existence of time preference reveals one very fundamental fact of human action – everyone prefers to consume sooner rather than later. This is true because of the fact that time itself is a scarce good. Humans are not immortal – we all eventually die which means that we don’t have an unlimited amount of time. Because of this fundamental fact, everything else being equal, everyone prefers to acquire and either consume or in some other fashion make use of a specific good sooner rather than later.

The time preference of the population directly influences the market interest rates and most importantly the overall structure of production of the economy. For now let’s just clarify why time preference is the most important factor in determining interest rates. First of all, what is an interest rate? As you probably know, interest is the premium that the lender charges the borrower for a particular amount of money loaned for a given period. When person A lends person B a certain amount of money at a certain interest rate for, say, a year, person B, after the year has passed, must repay A the original amount of money loaned plus the interest accrued. But why do people even charge interest rates? You already learned the answer in the previous paragraph. People charge interest on loans (whether they are monetary or not) because of the existence of time preference. When people loan money they demand a higher amount to be paid back because everyone universally prefers money and goods in general sooner rather than later. So the delayed consumption that the lender has to go through has to be compensated with an extra premium amount repaid on top of the principal.

Now that we know what human time preference is and how it relates to interest rates we can finally move on to the main discussion.

To start with the conclusion, natural economic growth is driven by savings and not by consumption as most mainstream economists like to claim. For them, especially for Keynesians, it is all about demand – aggregate demand. If demand is too low according to their metrics, the government should intervene and ‘stimulate’ the economy by randomly spending money. It is not that important how the money are spent, what is important is that the overall level of demand increases so that there is no price deflation (fall in prices) and no fall in employment. This line of thinking is (you guessed it!) fundamentally misguided totally retarded.

For economic growth to be possible, first the people’s time preference has to fall. This lowering of the time preference means that economic actors are now increasing their savings to consumption ratio i.e. they consume less and save more. This of course leads to a fall in the demand for consumer goods which also eventually lowers their price. At this point Paul Krugman is already having a seizure. But this fall in demand for consumer goods is necessary for the economy to be able to grow.

Now that the demand for, and the price of consumer goods has fallen this also leads to a fall in profits from producing them which forces firms in those consumer goods industries to cut back on their costs in order to keep themselves in business (some firms might actually be completely forced out of the market). So they start producing less, leading to a fall in the supply of consumer goods and of course, they also cut back on wages and labor as they do so. Remember that this whole process was initiated by the consumers themselves when they started saving more money and consuming less. The fall in the supply of the consumer goods is a response to the earlier fall in demand. Less consumer goods are now being produced not because of some mysterious ‘market failure’, but because the consumers themselves are now saving much more because of their lower time preference.

Now we come to the most important effect of the fall in time preferences and subsequent increase of savings – this leads to a fall in interest rates. With an increasing pool of savings available for lending and therefore for investment, interest rates fall and entrepreneurs can now borrow more money and undertake more roundabout and more productive long-term projects which were not profitable before when interest rates were higher. This leads to an increased demand in the capital goods industries as more roundabout and more long-term projects require a higher amount of capital. I believe it is common sense that more productive and complicated projects do require a longer time period to finish and a higher supply of capital. Or at least it should be to everyone who is not a Keynesian.

The result of this increase in demand for capital goods is that both the price of capital goods and subsequently the profits to be made in the capital goods industries rise substantially leading to a further increase in profits to be made in those sectors of the economy. Because of this the businesses already in those sectors start expanding and at the same time whole new business ventures get started as well. Just what you would expect to happen in an industry when the demand for its goods starts increasing. This of course means that wages start rising as well, as more workers are needed by expanding and newly started business enterprises in that sector.

These higher wages, caused by the increased demand for labor, start attracting workers from the consumer goods industries where wages were actually cut (because of the fall in demand for those goods) and some labor may have even been released. So, there is a shift of labor – from the consumer goods industries to the capital goods industries. This shift of course takes some time to happen therefore a mild short-term rise in unemployment may happen after the fall in consumption. In the real world, things happen in real time. This is not a statistical simulation in which the market can equilibrate immediately. It does equilibrate in the end, but that takes some time – several months maybe a year or two. In that period, yes, there is an increase in unemployment. But always remember that this is only temporary, as this unemployed labor is now needed for the production of the capital goods, the demand for which has risen, after the increased investment by entrepreneurs in more long-term projects.

After labor starts shifting, and the capital goods sector starts expanding, soon enough, the supply of capital goods in the economy starts increasing. This of course means that now more capital can be used in production which crucially increases the capital to labor ratio. The increase in this ratio means that workers now have more capital to work with which increases the marginal productivity of their labor (the employment of increasing amounts of capital, and labor, are of course both subject to the law of diminishing returns, but as this is an introductory text, we will not go into detail about that). Of course if labor is more productive this means that more goods can be produced than before, which, in the long-term, leads to a rise in the supply of consumer goods.

(Also, remember those long-term and more roundabout and more productive projects that entrepreneurs wanted to start after interest rates went down? Exactly. Now they are successfully completed.)

As the supply of consumer goods rises, ceteris paribus, their price falls, leading to an increased (real) wage to price ratio. In order words, the purchasing power of money rises, and people can now buy more stuff with the same wages they had before, assuming the money supply has stayed relatively constant, or at least hasn’t increased to the same degree as the supply of consumer goods (money are also subject to the laws of supply and demand as is any other good exchanged in the market economy). Fluctuations in the money supply can affect this whole process very seriously, but once again, we are trying to keep it simple, so we will leave that for another time.

The modern technical term for this process of an increase in the purchasing power of money is of course (price) deflation, or more precisely, (as Austrians would put it) productivity deflation. Deflation is, of course, demonized by every single mainstream economist you can come across nowadays. But as we just saw, natural economic growth inevitably leads to deflation, assuming a stable money supply. And this fall in prices is not scary at all, as it directly results in an increased standard of living for everyone as the consumers can now by more goods with less money than before.

But to emphasize this last point some historical examples might be useful.

The most famous one is of course the period of industrialization during the 19th century. For example, in the U.S. from 1880 to 1896, the wholesale price level fell by about 30 percent, or by 1.75 percent per year, while real income rose by about 85 percent, or around 5 percent per year [1]. Of course deflation occurred not only in those sixteen years, but throughout the whole century accompanied by massive economic growth in both Europe and the U.S. interrupted only in times of major wars.

 

Of course nowadays everyone is convinced that deflation (no matter what kind, because there are several) should always be avoided because it unavoidably leads to depression. This is absolute nonsense and I hope that by now you fully understand why. But if someone keeps insisting on an undeniable deflation=depression relationship, you can always point him to this research paper (by two economists of the Federal Reserve, no less), which clearly states that:

 

… the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-34). We find virtually no evidence of such a link in any other period. … What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.

So that’s that. I hope this post helped clarify (at least a bit) the mystical topic of economic growth. If something is unclear, post your questions in the comments below. Once again, I am not a professional economist (although I am probably still better than some), but I will try to answer any possible queries to the best of my knowledge.

[1] Data from: Milton Friedman and Anna J. Schwartz, A Monetary History of the United States: 1867–1960 (Princeton, N.J.: Princeton University Press, 1971), pp. 94–95.

Research Notes #1: Preliminary Remarks on “Kingship and Law”

So I’ve just picked up what seems to be a very interesting book – “Kingship and Law” by Fritz Kern (available for download here), who was a German historian working in the first half of the 20th century. The reason why I got interested in this work of his is because Hoppe often references it when he talks about the history of aristocracy, monarchy and democracy, and usually with relative praise.

The book (published in 1939) is a collection and translation (from German to English) of two separate papers published originally at the eve of WWI. The first paper is “The Divine Right of Kings and the Right of Resistance” and the second is “Law and Constitution”. The main objective of Kern’s research is to look into the origins of modern constitutional law in the early middle ages. It is important to note that the book focuses specifically on the early middle ages, to the exclusion of later periods, because the conception of law, constitutional and other, does change quite a bit in the high and late middle ages starting with the twelfth century onward. Read more of this post

Review of “Reflections on the Revolution in France” by Edmund Burke

Greetings, and welcome to the new incarnation of my blog. I will have to disappoint you, friends, but Tumblr was too much of a shithole even for me. Hard to believe, I know.

For my debut post here, I have a special treat – a review of one of the classic works in reactionary/traditionalist philosophy and conservative philosophy more broadly. Edmund Burke’s “Reflections on the Revolution in France” is easily one of the most influential books on politics ever written, influencing many reactionaries, traditionalists, conservatives and even libertarians, from De Maistre to Hayek. It is almost a travesty that Burke’s thought has not been considered in much detail in the neoreactionary blogosphere (at least to my knowledge). Hopefully after this short (not really) review of Burke’s magnum opus, you will be motivated to pick up the book yourself. There are only two things worth spending a lot of time on in this world and those are reading good books and listening to good music. The “Reflections” is definitely one of those good books, and the impressive style in which it is written is almost musical and certainly dramatic (but in a good way). Read more of this post