The Folly of Price Fixing

by Don Boudreaux on April 24, 2009

in Great Depression, Prices

Historian Burt Folsom explains how price-fixing helped to further depress America's economy during the 1930s.

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BoscoH April 24, 2009 at 9:07 am

I just love the empty third-wayism suggested in the comments: The market can not be completely free and it can not be completely control, but to much of the either will ruin it.

Left out was the conclusion that Jesus H. Obama will know exactly what this balance is.

spencer April 24, 2009 at 10:24 am

I love this, you guys just will not give it up.

You blame something that was in existence for about 15 months, the NRA, during which real GDP growth was double digit for the great contraction of 1929-33 long before the NRA came into existence.

You really count on people's ignorance to sell your ideology don't you.

vidyohs April 24, 2009 at 10:26 am

"I agree with the first response. Capitalism is perfect in its own form. It is a great theory but fails when you add one thing. That one thing is greed. I think that is one of the best quotes that I have ever seen. It is self serving for the wealthy but unworkable for the society at large. The rich want to stamp out competiton and control prices. Set the price high enough that the middle class can not afford the finer things. It\’s a simple situation of seperation of class similiar to the different levels of passengers on the Titanic." John Lowery.

To continue in Boscoh's vein, that quote from the comments section of the article speaks to the vast mal-indoctrination of the American mind to believe that somehow greed (a character flaw when in excess) can be equated to what amounts to a mechanical process (capitalism), a tool, that produces or creates wealth.

It's as foolish as saying "My hammer became greedy and pounded nails I didn't want pounded."

Such a simple misunderstanding of fact being so prevelant speaks to the successful and almost universal indoctrination of the American mind in the beliefs, ways, and mores of the great socialist church.

Remember, Kruschev stood at the podium at the U.N., pounded it with his shoe and said, "We will bury you." Was he speaking figuratively or metaphorically? Have we been buried? Who is left that really knows what a free market is, especially if we seek such in government?

Did the Berlin wall come down because we won, or because we lost? Either way it could come down as it was no longer necessary.

tw April 24, 2009 at 10:31 am

More recently, Nixon imposed wage and price controls, and the economy of the 1970s was similarly harmed.

Methinks April 24, 2009 at 10:33 am

He was a violator of “fair competition.” His gain was not just the loss of his competitors but of the whole country. By encouraging codes of “fair competition,” the NRA was giving all existing businesses a chance to make profits, to pay high wages, and to survive the price-cutter.

Modern day Europe – where you can have sales only on designated days with discounts not exceeding X% and you can't advertise. There was a WSJ article about that a few years ago, but I can't find it anymore.

Randy April 24, 2009 at 10:34 am

So, Spencer, the NRA was found unconstitutional, but you're still arguing that it was a good idea?

Don Boudreaux April 24, 2009 at 10:49 am

More to the point, Spencer should read Robert Higgs's book Depression, War, and Cold War (Oxford University Press, 2006). The prospect of such interventions, even on a scale larger than the NRA, was very real throughout the 1930s.

MWG April 24, 2009 at 11:23 am

I'd like to hear Spencer's take on price fixing in general…

John Dewey April 24, 2009 at 11:50 am

spencer: "You blame something that was in existence for about 15 months, the NRA, during which real GDP growth was double digit for the great contraction of 1929-33"

Spencer, where did either Professor Boudreaux or Professor Folsom say that the NRA caused the great contraction of 1929-1933. I couldn't find that aywhere.

Now let's explorre your "timeline" which seems to argue that the NRA coincided with economic expansion.

Jan-May, 1933 – factory employment increased 23%, payrolls increased 35%

June, 1933 – National Industrial Recovery Act passed, NRA created

Jul-Dec 1933 – NRA implements price controls and terms of sale; industrial production drops 25%

1933 – despite very strong pre-NIRA payroll gains, real GDP for 1933 declines by 1.3%

1934 – real GDP increases by 10.8%, apparently only a partial recovery to the period immediately prior to NIRA passage

early 1935 – incoming NRA Chairman Samuel Williams ends price controls: "Greater productivity and employment would result if greater price flexibility were attained."

May, 1935 – National Industrial recovery Act declared unconstitutional

1935 – GDP increases another 8.9% following strong gains in latter half of year, after price controls ended and NIRA abolished

It appears to me that economic expansion began 5 months before passage of NIRA, but was sidetracked by NRA price controls and regulation. Wasn't that the poihnt Professor boudreaux was making?

Spencer, you can learn much about the economic impact of FDR's policies by reading Lawrence Reed's 15 page paper, Great Myths of the Greart Depression

Don Boudreaux April 24, 2009 at 12:03 pm

Thanks for this excellent post, John.

dg lesvic April 24, 2009 at 12:09 pm

John Dewey,

As I have said to you elsewhere, about your history, that it is excellent, and a valuable contribution, but, still, no substitute for economics. which, simply, comes down to this:

The market always tends toward equilibrium.

Don Boudreaux April 24, 2009 at 12:13 pm

dg lesvic,

I disagree. I know that you're much more fond of Mises's works than I am, but I do not see that the claim "markets always tend toward equilibrium" to be one that can be deduced with only logic. It's an empirical claim. I can very easily imagine free markets failing to equilibrate.

And while I understand and appreciate the logic of the argument that shows self-interested traders moving prices and other market phenomena (such as product qualities) toward a position fairly described as 'equilibrium,' that logic does not prove itself to hold in reality. To judge its empirical relevance requires empirical observation.

dg lesvic April 24, 2009 at 1:06 pm

The Cornerstone of Economics

Adam Smith defined both the free market and the whole science of economics by the idea of the Invisible Hand, or tendency toward equilibrium. It is the cornerstone of economics, and under attack from all points upon the spectrum, even a half-baked Misesianism. But it is Murray Rothbard who speaks for the real Mises when he explains that the final equilibrium position is "like the mechanical rabbit being chased by the dog. It is never reached in practice and is always changing, but it explains the direction in which the dog is moving." Man, Economy, and State, P 276

The market always tends toward equilibrium between the supply of and demand for manpower to engage in all occupations; for whenever there are relative oversupplies in some and undersupplies in others, the market will bid the wages of the oversupplied downward and those of the undersupplied upward, thereby drawing manpower from the one to the other, until there are no more relative oversupplies and undersupplies but equilibrium between the supply of and demand for manpower to engage in all occupations.

Since the market always tends toward equilibrium, and interference with it toward disequilibrium, the market is the optimum, and, any departure from it, from the most to a less satisfactory state of affairs, and, any interference with it, completely counterproductive, bringing about the exact opposite result of what was intended.

But, given entrepreneurial error and disequilibrating as well as equilibrating action in the market, the Austrian School has been perplexed by the possibility of the disequilibrating outweighing the equilibrating, and the market tending more toward disequilibrium than equilibrium.

But since it tends toward a final state of rest (see Mises, Human Action, P 245), it must tend toward equilibrium, for it could not rest at disequilibrium.

Entrepreneurial error doesn’t change the fact that the market tends to correct it, and that interference with the market is interference with the correction.

The possibility of market failure is immaterial. Economics is not a science of possibilities, for anything is possible, nor of certainties, for nothing is certain. It is a science of practical and reasonable assumptions, and the futility of human action is not one of them. The possibility of getting hit by a truck if we get out of bed in the morning doesn’t mean we shouldn’t get out of bed. To live we must act, to act presume success, and, to analyze our action, a universe conducive to it, tending not toward disequilibrium and chaos, but equilibrium and order.

Don Boudreaux April 24, 2009 at 1:17 pm

dg lesvic,

It'll come as no surprise to you that I agree with most of your posts, and am enormously appreciative of your comments here at the Cafe. You're a gem!

But one reason why so few people (including myself) are convinced by Mises's a priori method is that it sneaks in, unawares to those who practice it, way too many assumptions about empirical reality.

There is nothing about the category (or is it categories?) of human action that requires that, in free markets, it moves those market toward equilibrium. And this is true even if there are no outside forces, such as new discoveries of ore, to change the facts of the market.

Empirically, I think it to be true that free markets tend toward ever-elusive equilibria. And I think that this tendency is explained in significant part by the logic of human action.

But that free markets tend toward ever-elusive equilibria remains an empirical claim.

We have here evidence of some of the differences that separated Mises and Hayek. I have never found Mises to be remotely convincing in his a priorism.

dg lesvic April 24, 2009 at 1:29 pm

Prof Boudreaux,

Here's what Mises had to say about that:

"The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus."

And, what I said, in a similar vein, in reference to Joseph Stiglitz:

"However revolutionary his thinking, a real revolution in economics, the 'marginal revolution' of over a hundred years ago has passed him by. He has 'observed' higher taxes on the rich having 'no adverse effect.' For he saw what happened above but not at the margin of profitability, where all change occurs, he saw the jobs created, in spite of the higher taxes, but not those that failed to emerge, because of them. That was hidden from a Nobel Prize winning, empirical and mathematical 'economist.' For economics is not an empirical and mathematical but theoretical and logical science.

dg lesvic April 24, 2009 at 1:48 pm

The Chicago School of Superstition

Milton Friedman's empiricism is like that of ballplayers not changing their socks so long as they keep getting hits. While, to Friedman, the test of a theory is how it works out in practice, to the man he read out of the science, Ludwig von Mises, such tests can never be conclusive, for there is always the question of whether concurring events are cause and effect or coincidence.

"The question whether there is any connection between them can only be answered by" a theory "established beforehand on the ground of aprioristic reasoning…If there were no economic theory…economic facts would be nothing more than…unconnected data open to any arbitrary interpretation."

Theories of human action "are, like…logic and mathematics, a priori…not subject to verification or falsification on the ground of experience and facts….both logically and temporally antecedent to any comprehension of historical facts…a necessary requirement of any intellectual grasp of historical events. Without them we should not be able to see in the course of events anything else than kaleidoscopic change and chaotic muddle."

"There is no means of studying the complex phenomena of action other than first to abstract from change altogether, then to introduce an isolated factor provoking change, and ultimately to analyze its effects under the assumption that other things remain equal."

"Action and reason are congeneric and homogenous…two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason…Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contradictory in theory is no less contradictory in reality."

Since they are all complex, "Every historical experience is open to various interpretations and is in fact interpreted in different ways…History can neither prove nor disprove any general statement."

That is not to rule out empiricism altogether. For the basic premises of economic theory, such as the disutility of labor and variety of resources, are derived from observation. But the theory itself is completely antecedent to it.

Sam Grove April 24, 2009 at 2:16 pm

"Every historical experience is open to various interpretations and is in fact interpreted in different ways.."

Witness George.

spencer April 24, 2009 at 3:02 pm

John Dewey– you are exactly what I'm talking about.

Your data supports my point.

The NRA only existed in 1934-35 during which you agree that real GDP grew 10.8% and 8.9%. We agree that these numbers are right. There is no quarterly data on real gdp for this period, so you agree with me that during the time the NRA existed we had the strongest peace time growth in the history of the US.

So why are you disagreeing with me?

I'm not in favor of price controls I'm against dishonest history.

Don and the Folsom are blaming the problems of the 1930s on the NRA and that is an utterly ridiculous position to take.
The timing is completely wrong. If A is suppose to cause B, A has to happen before or at the same time as B. But Folsem and Don are taking the position that A happened after B,but still caused B. I know all about the economic theories involving anticipating the impact of economic policy, but I have never seen a single example of retroactive economic policy working. But that is what Don and Folsem are arguing and what you have to believe in to accept their analysis. Let me know when you figure out how to make retroactive economic policy so I can make a fortune in the stock market.

The damage or hard times in the depression were from 1929 to 1933 before the NRA and 1937-38 long after the NRA had gone out of existence. The period of the NRA existence was in 1934-35 and those were the strongest two years of peacetime growth in US history. Moreover, the recession of 1937-38 was due to the combination of tight money and fiscal policy that had nothing to do with the NRA.

Show me one bit of evidence that the NRA caused economic harm– Folsem did not.

I challenge to show me a single bit of evidence that the NRA caused economic weakness in 1929-33 or in 1937-38. Remember the other years of the 1930s,
1934-36 and 1938-40 had the strongest peace time growth in US history. Moreover the 1934-33 expansion was 50 months long, more than double the average expansion up to that time.

Folsem is like Amity Shale in that they give a couple of human interest stories and mistake that for data. That is not how you do history or economics.

Note that at no time am I arguing that the NRA was good policy. I agree that it was bad policy. But there is no evidence it did any harm let alone caused the recession to be worse or longer.

John Dewey April 24, 2009 at 3:29 pm

spencer: "The NRA only existed in 1934-35"

I think you are mistaken, Spencer. The National Industrial Recovery Act was passed on June 16, 1933. The National Recovery Administration started operation on August 1, 1933. As historian Lawrence Reed explained in the the link I provided earlier:

"In the five months leading up to the
act’s passage, signs of recovery
were evident: factory employment
and payrolls had increased by 23
and 35 percent, respectively. Then
came the NRA, shortening hours
of work, raising wages arbitrarily,
and imposing other new costs on
enterprise. In the six months after
the law took effect, industrial
production dropped 25 percent.
Benjamin M. Anderson writes,
“NRA was not a revival measure.
It was an antirevival measure. …
Through the whole of the NRA period
industrial production did not
rise as high as it had been in July
1933, before NRA came in.

Again, I suggest you check out historian Lawrence Reed's 15 page Great Myths of the Great Depression.

The NRA's policies were still on the books until declared unconstitutional on May 27, 1935. But Chairman Samuel Williams ended price controls at the beginning of 1935. So the economic gains in 1935 you refer to occurred after price controls and other regulations were eliminated.

Spencer: "Don and the Folsom are blaming the problems of the 1930s on the NRA and that is an utterly ridiculous position to take."

I don't think they are doing that at all. They said that the price controls implemented by the NRA prolonged the first depression of the 1930's. Professor Reed provided data and arguments that support their claim.

indiana jim April 24, 2009 at 4:42 pm

Clarity must be John Dewey's middle name.

Methinks April 24, 2009 at 5:06 pm

If it isn't, it should be, IJ. Thanks for the link, John Dewey.

John Dewey April 24, 2009 at 5:38 pm

indiana jim, methinks

Thanks for the kind remarks.

I reject the argument of others that interpretation of economic history has minor value relative to economic logic. Perhaps my mind is not as well-developed as theirs – or Mises', as I need both logic and history to make sense of the world.

A favorite quote:

George Santayana: "Those who cannot remember the past are condemned to repeat it,"

dg lesvic April 24, 2009 at 5:56 pm

John Dewey,

Mises acknowledged a place for economic history, but asked that it not be confused with economics proper, and not entirely displace it, that there be a place for economics too, a place of its own, alongside economic history.

dg lesvic April 24, 2009 at 6:16 pm

Mr Dewey,

You quoted George Santayana, as follows:

"Those who cannot remember the past are condemned to repeat it,"

Let me paraphrase that:

Those who do not avail themselves of economic logic are doomed to just the sort of endless historical disputes witnessed here.

As I had previously posted to you, in reference to another matter:

"That's good work, and a valuable contribution to the discussion.But, it's still economic history, not economics proper, and does not take its place.

Since there are statistics on both sides of every issue, a different interpretation of them on both sides, and they must all be taken on faith, they don't prove anything.

But since there is economic logic on only one side of the issue, and it is before our very eyes, it PROVES that cheap foreign imports save American jobs.

dg lesvic April 24, 2009 at 6:24 pm

In fact, Mises went further than I had said, in favor of a place for economic history, a place not just alongside economics proper but "intertwined" with it:

“Economics…adopts for the organized presentation of its results a form in which aprioristic theory and the interpretation of historical phenomena are intertwined…this…procedure…has given proof of its expediency.

However…uncritical and superficial minds have again and again been led astray by careless confusion of the two epistemologically different methods implied.”

Mises, Human Action, 3rd Ed., P 66

John Dewey April 24, 2009 at 6:44 pm

dg lesvic,

I really don't understand what point you are trying to make by continually reminding me that interpretation of economic history is no substitute for economic logic. You are not going to change what I post. You are only going to annoy me. Is that your intention?

John Dewey April 24, 2009 at 6:44 pm

dg lesvic,

I really don't understand what point you are trying to make by continually reminding me that interpretation of economic history is no substitute for economic logic. You are not going to change what I post. You are only going to annoy me. Is that your intention?

dg lesvic April 24, 2009 at 7:58 pm

Mr Dewey,

If you don't get my point, it's no great loss. I think you do good work, and hope you'll go on doing so.

dg lesvic April 24, 2009 at 8:03 pm

And I would say the same thing about Prof Boudreaux, who has managed to do the best work in economics at this time, without any help from Mises or myself. And I sure hope he'll go right on with it, and that I haven't been too much of a distraction from it.

dg lesvic April 24, 2009 at 8:04 pm

But I would also say that, when he has done his best work, it has been by the method of Mises, logic.

dg lesvic April 24, 2009 at 8:06 pm

And completely unprofessorial, plain language.

Congratulations and many thanx for that!

Your "peers" could well learn from your example.

Babinich April 24, 2009 at 10:37 pm

“In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster.” – Sir John James Cowperthwaite

MnM April 25, 2009 at 12:39 am

John Dewey,

Allow me to third IJ and Methinks. I read that article some months ago. I believe it was a link you provided then that led me to it.

muirgeo April 25, 2009 at 2:25 am

John Dewey– you are exactly what I'm talking about.

Your data supports my point.

Posted by: spencer

Exactly Spencer, Four years in and the Depression is FDR's fault. Again they'll tell you Hoover was an interventionist and list the programs that showed him to be so… of course most were enacted in the 3rd or 4th year of his term.

And again they never want to talk about Coolidge and the hands off government that lead us into the Great Depression and massive banks failures.

It's good to see some one else make those valid points because every now and then being surrounded by so much re-writing of history and cognitive dissonance you start to wonder if maybe you are missing something.

They pretend this experience as well as the Great Depression does not disprove their failed notions. Their proofs of market efficiency become ever more fanciful and require ever more absurd leaps of logic and faith and more and more re-interpretations of history. And as you point out they don't stand up to the facts.

S Andrews April 25, 2009 at 2:32 am

Since Muirgeo never acknowledges agreement on any of the posts on the Cafe, A few SIMPLE questions for muirgeo reposting from previous night's thread:


dg lesvic April 25, 2009 at 4:09 am

If I may join the side of the historians for a moment, I would remind you that "Harding (elected in 1920) inherited…one of the sharpest recessions in American history. By July 1921 it was all over and the economy was booming again. Harding had done nothing except cut government expenditure…"

Modern Times by Paul Johnson, P 216

Well, not exactly nothing. "Inflation was promoted by a desire to speed recovery from the 1920-1921 recession."

America's Great Depression by Murray Rothbard, P 126

But now, to revert to my bad old aprioristic ways, I would still ask the empirical and mathematical economists how you could observe the Invisible Hand, and, if you couldn't observe it, measure, count, or calculate it, and grasp it by any other means than conception and deduction.

Daniel Kuehn April 25, 2009 at 9:03 am

dg lesvic -
Re: "While, to Friedman, the test of a theory is how it works out in practice, to the man he read out of the science, Ludwig von Mises, such tests can never be conclusive, for there is always the question of whether concurring events are cause and effect or coincidence."

You have no concept of how econometricians do their work. Arbitrating whether a real causal mechanism has been specified or not is what keeps them up at night. Everyone, including Friedman, knows that "correlation is not causation". If you think this is a Misesian insight that we've all missed you're dreaming.

Daniel Kuehn April 25, 2009 at 9:30 am

On Spencer's comments -
I would tend to agree with Don that the NRA hindered recovery, but with Spencer that it doesn't seem to have made things tremendously worse (and perhaps that's only because it was ruled unconstitutional so quickly).

Keynes is in strong agreement with Don and myself on this point as well. Speaking of the NRA, Keynes wrote to Roosevelt:

"too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round." [The bolded piece sounds especially Hayekian doesn't it! It's because despite popular belief on this blog, mainstream economists and even Keynesian economists aren't ignorant of the price mechanism!!!]


"In particular, I cannot detect any material aid to recovery in N.I.R.A…. That is my first reflection–that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery."

Unfortunately, Keynes did say he supported the principle behind the NRA as a method of redistribution. That's unfortunate, and I'm personally glad most Keynesians have grown out of that. But the point is, Keynes felt very forcefully that the NRA would hurt the recovery, not help it.

What did he suggest as an alternative? Deficit spending and public works of course. And this is even more interesting, once we move into the mid to late 30s. If Don and John are willing to identify the dip in 1934 with the NRA, then can we attribute the even deeper dip in 1937 to the temporary abandonment of this deficit spending program?

It's also worth noting that the public works spending started around 1935 – precisely when John is attributing the quickened pace of recovery to the end of NRA. But do we know this? Is it the end of NRA or the start of public works – or, as I suspect, both?

I think we all need to be careful about attributing GDP growth in any given time period to any given policy – a LOT was going on during this time.

That having been said, I agree completely with Don, John, and Keynes that the NRA didn't help the recovery – it made it worse.

Sam Grove April 25, 2009 at 11:21 am

Everyone, including Friedman, knows that "correlation is not causation".

There is a difference between knowing the difference and knowing whether you have correlation or causation in any instance.

MnM April 25, 2009 at 11:23 am

S Andrews,

Please stop feeding the troll.

Daniel Kuehn April 25, 2009 at 11:48 am

Sam -
Precisely. And my point to dg lesvic is that Friedman didn't stumble around assuming without reason that he had hit on causation.

Sam Grove April 25, 2009 at 2:36 pm

I think dg is saying that theory is not derived from data so much as theory provides a means for interpreting the meaning of the data.

Events in economic history have been interpreted in different ways depending upon the premises of the interpreters, just as with many things.

The question remains as to determining the validity of the theories.

dg lesvic April 25, 2009 at 2:40 pm

I was wondering when Daniel would rear his lovely head.

The subject is economics, not econometrics, eternal truths, not passing data.

As to what Friedman knows, I prefer Friedman's to Kuehn's version of it.

Daniel Kuehn April 25, 2009 at 5:18 pm

dg lesvic -
In everybody's world but yours and Mises's, econometrics is an important part of economics. So I am staying on subject.

Sam -
Because you seem to be very ably arguing dg lesvic's points, I'll just respond to you. I wouldn't say that theory is derived from data either – that's not the way that the scientific method usually works. Obviously, when we come across some really really odd data it may inspire us to reevaluate our theory – but for the most part data is investigated to confirm or refute theory.

Premises obviously influence how we interpret economic history, but that can only go so far. If two theories claim to be confirmed by the same data, it's usually because the question that is brought to the data isn't potentially falsifiable by the data. That's just a hazard of the trade – the hope is that eventually the preponderance of evidence will point in one direction or another.

In economcis, you rarely have a grand unified theory (my apologies to Mises, dg – I'm sure he has one). So in economics I think more often than not multiple theories or "schools of thought" can be maintained by the data. What usually differentiates schools of thought in economics is what they emphasize or technical modeling differences, not the foundational insights.

Daniel Kuehn April 25, 2009 at 5:27 pm

In that sense, I think economics is much more similar to evolutionary biology, where theories of where and when the hominid family tree branched or how important certain genetic modifications were are the major bones of contention, rather than physics, where a grand theory like quantam mechanics completely dethrones and minimizes the interpretive power of relativity. And of course the biology metaphor is more apt because the explanatory factors influencing any given question are much more numerous, harder to account for, and harder to quantify than in physics. This is not to give into dg lesvics contention that these limitations render mathematics moot. They don't – it's still a helpful tool. And economics is arguably more amenable to quantification than biology (although perhaps not as much as physics). But the message should certainly be "proceed with caution", "keep an open mind", and "keep testing it against the data".

dg lesvic April 25, 2009 at 5:58 pm

When I woke up this morning, all I had was a pain in the neck. I didn't know when I was well off.

I'm going to ask our resident pain in the ass one simple but crucial question, and I guarantee you that he will not answer it. He will wiggle around like an eel in a bucket, but never answer it.


How could you observe the Invisible Hand?

dg lesvic April 26, 2009 at 1:05 am

Eel Man,

The Invisible Hand is a metaphor for all the invisible cause and effect relations of economics. While you can observe their effects, you cannot observe the relations between them; and, without cognition of them, comprehend their effects.

But, while the reasoning informs the observations, the observations are irrelevant to the reasoning. Observing an economic event doesn't make you Adam Smith any more than observing an apple falling from a tree made you Sir Isaac Newton.

Economics is not what any man in the street could observe, but the reasoning no one could. Without it, empirical data is a meaningless jumble. There is economics without the jumble but not without the reasoning, and without Milton Friedman's empiricism altogether, but not without Ludwig von Mises' reasoning.

How could you derive the laws of economics, which never change, from the data, that constantly changes, the invisible from the visible and eternal from the ephemeral?

And how could your observations be any part of economics if they contribute nothing to it, and are completely irrelevant to it?

dg lesvic April 26, 2009 at 2:27 am

I see above that, while you acknowledged that theory could not be derived from data, you contended that theory could somehow be refuted by data.

But all economic theory is based upon the assumption of ceteris paribus, that all other things remain equal, and "Nobody ever was or will be in a position to observe a change in one of the market data ceteris paribus." Mises

That isn't to deny that data can cast doubt upon a theory, but that isn't the same thing as refuting it.

You also wrote,

"Premises obviously influence how we interpret economic history, but that can only go so far."

Mises said exactly the same thing, that economics is just one of the tools of economic history, the starting point, perhaps, but that the historian must go beyond it. But he does so as an historian, not an economist, and by a completely different procedure.

What is to be gained by confusing the two epistemologically different procedures and fundamentally different fields other than to submerge the one in the other, to advantage of the one at the expense of the other?

You're babbling on again about mathematics, and I'm not going to keep on defeating you on that topic, and just have you slink away from it again, and reopen it later, as though you hadn't already lost the argument.

If you want to reopen it again, I'll go along with you, but only on condition that you promise to see it all the way to the end this time, without any more strategic exits.

dg lesvic April 26, 2009 at 6:35 am

Daniel (Dead Man Walking) Kuehn,

That means no more he who fights and runs away lives to fight another day.

This time it's a fight to the death.



Zero Hour

And see ya in Hell, Sucka!

indiana jim April 26, 2009 at 9:00 am

Daniel wrote: "it's [mathematics is] still a helpful tool. And economics is arguably more amenable to quantification than biology (although perhaps not as much as physics). But the message should certainly be "proceed with caution", "keep an open mind", and "keep testing it against the data".

I agree with Daniel here, and would add my paraphrase of the Gordon hypothesis that:

mathematical complexity and operationalism are negatively related in economic theory.

A colleague and I have investigated this and found it applicable across a variety of data sets and methods.

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