Why would the law of supply and demand not rest on marginal utility, rather than selfishness? Just because I have a selfish desire doesn't mean that I can satisfy the desire. Utility and means mix together with self interest to render choices regarding use of scarce resources.
That is not an economic model or prediction of utility for the purpose. It will remain to be understood what happens to all other prices and production when this single adjustment is made. In addition, the question arises why the price is being adjusted. For example, what decisions were made and what conditions changed, either actually or by way of changes in understanding, which caused the prices to change?
Besides, your example is in reference to the law of supply and demand.
Prices change based on the law of supply and demand.
Consider Bernanke’s recent comments about the control the Fed has over the economy.
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
(Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])
Swimmy, I think perhaps you are not following the argument regarding inflation.
If one created a simple model wherein everyone had x currency units today, and then tomorrow an additional quantity of costless new money was created, such that each person had 2x currency units, then inflation would serve no purpose. Each person's purchasing power would be unchanged.
What is the mathematical and logical error you see in that model?
Thanks for your remarks teageegeepea.
There is a difference between modeling and manipulating.
To model, is to create a framework that describes something.
To manipulate is to choose one or more elements among the known attributes of the model which can be controlled and then use that to coercively accomplish goals; then set the model up to "show good things are happening" based on the all wise management of the modeled system by the managers.
You note "a significant degree of accuracy". The point is that the degree of accuracy that can be attained is insufficient for the purpose.
Thanks nateemmons. I appreciate the distinction being made.
My reason for mixing is the centrality of private property and the consequent violation of property rights, using the standard of theft or fraud, that follows manipulation of currency, favored business license or heavy taxation for the purpose of redistribution. My interest in the school of thought is less theoretical and more practical application; i.e. how the body of knowledge affects the decisions by government that we then have to live with.
The problem I have here is the ganging up on the Austrian school in general because of a methodology used at the base of the theory. Mises said certain things cannot be done; he didn't say don't do them. If someone believes his presuppositions are wrong then simply prove it by doing what he claimed cannot be done.
To criticize Mises presuppositions is to claim a different set of presuppositions; i.e. we can experimentally measure the concept labeled human action and that there is nothing meaningful about human action that is antecedent to the study of history. I would say to the one making the claim, if this is the presupposition you would have us accept, please show your work.
Austrians believe that modeling for purposes of prediction is fruitless. Modeling for the purpose of control is unethical and oppressive because property rights are violated.
Other economists believe they can successfully model and manage an economy. They deal in numbers without taking into consideration human action at a level that has explanatory power. Monetarists, Keynesians, etc. ignore human action and generally treat the notion as unimportant. Austrians claim human action cannot be modeled, but knowledge of human action is required in order to model.
Austrians, for example, are able to model the effects of unrealistically cheap money, which is the source of malinvestment which leads to a boom bust cycle. We are experiencing the bust now.
With Austrians, things that can be modeled are modeled. Things that cannot be modeled or achieved are accepted, rather than, like the Keynesians, arrogantly claiming knowledge which is proven wrong time and time again.
Every time we have a bust, we are first told it should never have happened because after the last bust the bankers were given the tools necessary to prevent the bust. Then we are told that they just need a few more tools in their bag in order to fix the problem and ensure it never happens again. Then it happens again, each time bringing us nearer to the hyperinflation of 1920s Germany or today's Zimbabwe.
The economists which claim to be able to manage our economy for our good are either liars or incompetents or both. And we are supposed to accept their critique of the Austrian baseline?
Claiming the presuppositions are wrong is fine, if one can show that these need not be presuppositions because they can indeed be measured and worked into a predictive model... This proof I have not observed in a research model, let alone in the applied science, which we live with daily.
Human action can indeed be to some measure predicted.
For instance, if I conducted an experiment with 100 people wherein I presented each person with the opportunity to place their bare hand on a red hot burner on a stove, including leaving it there for one minute, I predict 100% would say no. I could even model that experiment.
However, this kind and degree of predictability is meaningless in the context of economic modeling.
What if the person who is being presented with the choice in the Allais Paradox just lost their mother to death, as well as losing their job in the same week? How does this affect the model? What does that research show?
How does one account for decisions made without adequate consideration, or when the decision maker doesn't understand the problem? What about the follow on effects of choices made in the past which encumber via contract, or cause emotional or financial pain, such that the decision is not rational or the risk assessment is distorted? Or the reverse when the rewards have been great in the past?
How many life choices exist in such pristine, simple and clear conditions as the Allais Paradox?
Are not our choices, responsibilities, assets, liabilities, obligations, future earnings, job markets, work relationships, preferences, skills, talents, capital, regulatory environments, choices of other people, comparative advantages, currency fluctuation, taxation, inflation, religious beliefs, IQ, education, weather, genetics, resource allocation, scarcity, social stability, time constraints, competing demands, influence of peers, influence of media, family relationships, beliefs about the future, and more, all knit into each decision made?
Are you really claiming that the minor complexities presented in such a simple model as the Allais Paradox rise to the level of mathematically illuminating, for the purpose of useful economic modeling, the myriad decisions inherent in daily life? After all, everything in life depends, at some significant level, on exchange of productivity, which is generated as a result of the decisions of life.
My point is that the models relating to human action which are herein employed as proofs, are not sufficiently complex to be useful or meaningful in economic modeling.
You criticize the Austrian school on the basis of presuppositions which are designed to note the limits of our ability to construct theories or predict future events. At the same time, all that is offered to suggest we are not limited are simplistic and wholly inadequate models which do nothing to solve the problem. As long as Mises claims we can't know or test these things and no one else shows that we can, I have to agree with Mises.
Besides, if these things were knowable, Mises would never have accepted stopping at this level. He would have anticipated and likely discovered and modeled the information so as to press another layer deeper, in hopes of gaining a greater mastery of the subject.
Austrians recognize that there is an unquantifiable variable in economics, namely human action, which heavily influences economic outcomes. You want to insert an arbitrary (estimated) variable value, i.e. probability estimate, in a model to account for something that Mises claims cannot be accounted for based on experience and historical fact.
Since you seem to believe that the variable value can be known and quantified for modeling purposes, what is it? What are the attributes of the variable collection which represent human action in economics?
Mises claims that human action is present, significant and cannot be measured. Are you claiming human action is absent, insignificant or measurable?
If you can set up the conditions to prove your case experimentally, then you have an argument.
How are your assumptions, i.e. probability estimates, inserted in a model going to provide feedback that will enable a valid update of the priors? Is that not circular reasoning?
If the claims made by Mises and the Austrians went no farther than to say human action cannot be measured and therefore nothing in economics can be measured, you would have an argument simply because their thinking would be inadequate. This is not the case.
To the contrary, Mises thinking regarding economic calculation in the socialist commonwealth clearly shows that human action coupled with ownership is a required component of a healthy and sustainable economy. Human action is necessary and yet cannot be measured or predicted, except that people are going to act in such a way as to satisfy their own self interest, which is conditional and subjective.
If experience and fact can be used to account for human action in economics, then Mises claims are false.
If they cannot, why discount his theory because he acknowledges a real-world constraint using a presuppositional argument?
In the example there are no debts. Savings in money terms are the dollars held, therefore the savings rate is unchanged. Savings in corn or cattle are unaffected by the change in money quantity.