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    Austrian Capital Theory

    READINGS

    Garrison Lect-1. 1 Capital Theory
    Slides by Dr. Roger Garrison

    Garrison Lect-1. 4 Hayek and Friedman
    Slides by Dr. Roger Garrison

    Garrison Lect. 3 Hayek and Keynes
    Slides by Dr. Roger Garrison

    AUDIO

    Austrian Capital Theory
    Lecture by Dr. Roger Garrison, Mises University 2013
    http://mises.org/media/7985/Austrian-Capital-Theory

    Hayek and Friedman: Head to Head
    Lecture by Dr. Roger Garrison, Mises University 2013
    http://mises.org/media/8010/Hayek-and-Friedman-Head-to-Head

    Hayek and Keynes: Head to Head
    Lecture by Dr. Roger Garrison, Mises University 2013
    http://mises.org/media/7995/Hayek-and-Keynes-Head-to-Head

    QUESTIONS

    1. What (if anything) is the unit of capital?
    2. What are the differences between Knight’s and Hayek’s capital theorems?
    3. Why does Knight say that time is irrelevant? How does Hayek refute him?
    4. What happens to the structure of production when savings are increased? Decreased? Why?
    5. What is the role of maintenance in the capital structure? Is capital constant or permanent?
    6. In what sense does Friedman agree with Keynes when it comes to economics? In what ways do they differ?
    7. How do the Austrian School and Chicago School differ in their methodology? How does this affect their analyses?
    8. Why does Friedman dismiss interest rates as being a variable when describing recessions?
    9. What is the money velocity equation? Is this a valid concept?
    10. How does the Austrian School use statistics?
    11. What are the methodological differences between the “circular-flow” framework and the “means-ends” framework? How does the concept of equilibrium differ between the  two views?
    12. What causes the bust to occur in the Keynesian framework? How is this fundamentally different from the Austrian School?
    13. Keynes insisted that savings and investment are not influenced by the interest rate. Why is this rejected by Hayek (and the rest of the Austrian School)?
    14. What was the one graph included in Keynes’ General Theory? Why was this graph included?
    15. Why does Garrison separate consumption and investment in the PPF?
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    I, Pencil

    This week, we’ll be taking another break from Man, Economy, and State to take a deeper look at Leonard Read’s famous essay, I, Pencil.

    READINGS

    I, Pencil by Leonard Read
    First published in The Freeman, Dec. 1958

    AUDIO

     

    VIDEO

    QUESTIONS

    1. Why does the pencil say that it is more of a mystery than a tree or the sunset? Is this comparison merited?
    2. What is the “structure of production”? How does the pencil explain this?
    3. What does the pencil think is the most miraculous part of his history?
    4. If the government seized control of a process, what does the pencil say will inevitably happen? What knowledge is necessary to combat this?
    5. Why is the pencil particularly opposed to the U.S. Postal Service?
    6. What is the Economic Calculation Problem? What insights can the pencil give to us in this regard?
    7. Does production occur without coercion? Is some coercion necessary for the modern era? Why or why not?
    8. How does the pencil’s family tree illustrate the importance of the division of labor? Could the pencil exist without it?
    9. Would the pencil support the U.S. Patent Office?
    10. Extra Credit (and an introduction to Ch. 4 of Man, Economy, and State): How would the value of the pencil’s “ancestors” be determined. Extra points for explaining how an entrepreneur would calculate the prices of these inputs.
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    Resurrecting Lachmann

    The Boston Austrian Economics Group and the Manchester Austrian Economics Group joined forces to host the event “Who is Ludwig Lachmann?” on Wednesday, May 7, 2014. We were joined by leading Lachmann scholar Michael Valčićfor an evening of lively discussion and debate. So, who is Ludwig Lachmann, and why would anyone spend dinner discussing him?

    Murray Rothbard noted in a 1993 preface to Man, Economy, and State that: “It has indeed become evident in recent years that there are three very different and clashing paradigms within Austrian economics: the original Misesian or praxeological paradigm, to which the present author adheres; the Hayekian paradigm, stressing ‘knowledge’ and ‘discovery’ rather than the praxeological ‘action’ and ‘choice,’ and whose leading exponent now is Professor Israel Kirzner; and the nihilistic view of the late Ludwig Lachmann, an institutionalist anti-theory approach taken from the English ‘subjectivist’-Keynesian G.L.S. Shackle.”

    Rothbard counted Lachmann not only as an Austrian economist, but an Austrian economist of high contemporary importance. Is Rothbard’s description of Lachmann in the above passage accurate? To prepare for the May 7 event, the Boston and Manchester groups got a dose of Lachmann with a few suggested readings: “The Role of Expectations in Economics as a Social Science,” “Complementarity and Substitution in the Theory of Capital,” and “From Mises to Shackle.”

    LachmannRothbard attributes nihilism to Lachmann. Rothbard is charging Lachmann with epistemological nihilism, not moral nihilism, since as a wertfrei (“value free”) endeavor, Austrian economics is not concerned with morality, just means and ends. Epistemological nihilism holds that no theory, law, or other form of knowledge can accurately describe reality.

    According to Rothbard, Lachmann has this “institutionalist anti-theory approach.” In another passage, Rothbard opines: “It must be noted that nihilism had seeped into current Austrian thought…It began when Ludwig M. Lachmann, who had been a disciple of Hayek in England in the 1930s and who had written a competent Austrian work entitled Capital and Its Structure in the 1950s, was suddenly converted by the methodology of the English economist George Shackle during the 1960s. Since the mid-1970s, Lachmann, teaching part of every year at New York University, has engaged in a crusade to bring the blessings of randomness and abandonment of theory to Austrian economics.” Is this charge of epistemological nihilism true?

    Lachmann writes: “As regards universal laws, nobody doubts that human beings are subject to them. The question we face is not whether such laws exist, but whether those which do are of much help in enabling us to understand how social situations change.” He is not an epistemological nihilist, it is clear. And his hesitance at applying economic theory to history and its data in order to verify laws is quintessentially Austrian. Correlation does not imply causation, and economics is essentially about causation, about what humans cause to happen through their actions. Only experimentation can prove causation. And on experimentation, Rothbard himself wrote: “In the sciences of human action…it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the ‘facts’ of human history are complex ones, resultants of many causes.”

    That is not to say there is no disagreement between Lachmann’s economics and Rothbard’s economics. Rothbard is comfortable with statements such as: “Any increase in capital goods can serve only to lengthen the structure, i.e., to enable the adoption of longer and longer productive processes.” (MES 8.4).

    Capital and its StructureLachmann, on the other hand, decries any quantitative reference to capital as a whole, such as “increase in capital goods.” He says in Capital and Its Structure (the book Rothbard claimed to approve of): “…we cannot add beer barrels to blast furnaces nor trucks to yards of telephone wire…Where [the economist] has to deal with quantitative change he needs a common denominator. Almost inevitably he follows the business man in adopting money value as his standard measurement of capital change. This means that whenever relative money values change, we lose our common denominator…In equilibrium, where, by definition, all values are consistent with each other, the use of money value as a unit of measurement is not necessarily an illegitimate procedure. But in disequilibrium where no such consistency exist, it cannot be applied.” And to Lachmann, we live in perpetual disequilibrium: “We are living in a world of unexpected change; hence capital combinations, and with them the capital structure, will be dissolved and re-formed.”

    Both the Boston and Manchester groups were receptive to Lachmann’s ideas on the inherent problem with quantifying capital. After all, do breweries represent capital goods to the temperance promoter? Does a brewery constitute more capital than, say, a tow truck? Breweries are not even goods to the promoters of temperance: Breweries are bads and detract from total capital goods. Because valuations differ and there is no homogenous/equilibrium valuation in terms of money, the very concept of an objective “increase in capital goods” seems faulty.

    So where is Lachmann’s paradigm today in Austrian thought? Other than Jaime’s restaurant in North Andover, Massachusetts, it is conspicuously absent. Most of Lachmann’s works are out of print, cost a small fortune to purchase, and are not viewable anywhere online. To compare with the other paradigmatic leaders in Austrian thought that Rothbard named: Hayek is commonly taught in economics classrooms around the world, even at the undergraduate level. Rothbard is dear to hundreds of thousands of anarcho-capitalists, constitutionalists, and even the Communist Party secretary of Shanghai is getting into him. Lachmann has inspired no such mass adoration, but perhaps he should. Is it time to resurrect Lachmann? Whether the answer is yes or no, it can’t hurt to learn about him.