Remnant Review
A debate began over capital theory on one of my site's forums.
Hunter, a follower of George Reisman, argues that America is experiencing capital depletion. This will lead to reduced per capita wealth, he thinks. Reisman is one of two living economists who received a Ph.D. under Ludwig von Mises. The other is Israel Kirzner. The other two are dead: Hans Sennholz and Louis Spadaro. Hunter writes:
. . . . capital is getting consumed today. Interest rates have been murdered, so even Big Investors have to speculate on risky loss-earning unicorns...some obviously and others less obviously but still effectively. The risky speculations usually go bad, so that capital speculated is often capital lost...later, eventually, in the fullness of time. It used to be that earning an investment return was possible and a reliable source of lower return income, most of which was plowed into saving for further capital investment. Now not only has a lot of the interest return been destroyed, but as people try to make up for the loss of investment income by speculating, a considerable portion of mal-invested capital and labor are wasted and later lost in part.The USA has lots of capital compared to most other countries. But its base of real capital goods averaged per capita has been shrinking for years judging from shrinking real incomes using some more realistic guess of cost of living increases.
In response, RobynH asked a question.
I take capital to mean wealth used to create more wealth. Its is subjectively so regarded. If I live in a house, it is not strictly speaking capital but a consumer good. If i rent the house out, it is capital.I hope I am right so far?
Hunter says, '' But its base of real capital goods averaged per capita has been shrinking for years judging from shrinking real incomes using some more realistic guess of cost of living increases.''
Is there a way to measure directly capital investment per person? That would be essential support for ABCT and something we could look at to judge the business cycle. I acknowledge wage stagnation has been a fact for decades in real terms for most of the population. Nevertheless critics of ABCT can point to, say, Globalization as the driver behind this while claiming capital accumulation is going on as usual. It is just being more than offset by the china price for labour.
In other words, how do we prove there is capital decumulation per capita directly?
This is a very good question. In fact, it is the question that secular economists have refused to answer. That is because, given their presuppositions, they are incapable of answering it.
I have been talking about this for about 40 years. I discussed it in detail in volume 4 of my economic commentary on the book of Deuteronomy. I went public with what is a kind of secret within the Austrian School camp. Israel Kirzner, in the name of subjective economics, fired a torpedo into the side of the good ship Ludwig von Mises. He did this in 1966 in his book, A Theory of Capital.
Kirzner is a consistent epistemological subjectivist. He says that all economic value is imputed by individuals. There is no intrinsic value. Mises was a subjectivist compared with his predecessors, but Kirzner has upped the ante. He did this early in his career. He abandoned all traces of the the concept of per capita investment. He did so in the name of Austrian School subjectivism. He did not mention Mises by name. He was too polite for that. But it was clear to me half a century ago that he knew exactly what he was doing. He was attacking Mises's concept of capital and capital investment.
Here's what I wrote in 1999, and what I published in typeset form in 2012. Here, I do not provide the footnotes. You can get them here.
The epistemological problem with all forms of welfare economics and all forms of economic policy-making is the problem of reconciling aggregative values or preferences, whose existence is denied by extreme economic individualists, yet also invoked by them at some point, and subjective values, which are dismissed as morally peripheral by methodological holists, but which are also invoked by them at some point. This topic is avoided like the plague within the economics profession, since there has never been a widely agreed-upon humanistic solution to this dualism.1. Indeterminacy
The methodological individualist moves epistemologically toward complete indeterminacy. There is no explainable continuity between the external world and the world of subjective evaluation. The momentary subjective states of the individual are said to lose contact with the external world and even with his own previous subjective states.
This epistemological indeterminacy was named by the radical subjectivist economist, Ludwig Lachmann: kaleidic perceptualism. He self-consciously invoked as his image of society the child’s toy, the kaleidoscope. A kaleidoscope is a tube that uses mirrors to produce everchanging, unrepeatable, visually fascinating, and conceptually meaningless patterns out of shifting, colored pieces of glass.
For Lachmann, and also for Kirzner, it is illegitimate to speak of national economic growth or per capita economic growth. Yet Mises argued to the contrary: “Saving, capital accumulation, is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into modern ways of industry.” For the radical subjectivist, it is illogical to argue that an increase in per capita capital leads to greater per capita wealth. Per capita capital is “a wholly artificial construct,” wrote Kirzner. Yet Mises argued: “There is but one means available to improve the material conditions of mankind: to accelerate the growth of capital accumulated as against the growth in population. The greater the amount of capital invested per head of the worker, the more and the better goods can be produced and consumed.” Mises’ original radical subjectivism has run aground on the shoals of a far more radical subjectivism. The result of pure subjectivism is the end of meaning, not just for economics but for human thought in general. It destroys continuity: through time and between individuals.
This intellectual battle broke out at the 1974 meeting of graduate students and senior professors, including Kirzner and Rothbard, that was held at a tiny law school in South Royalton, Vermont. The school became much larger, but that was I think its first year. It was a one-week conference. I described it in 1999. I reprinted that description here: https://www.garynorth.com/public/15129.cfm
What soon became the problem was the visible division in the ranks of the shepherds. Basically, it became a competition between Murray Rothbard and Ludwig Lachmann, with Kirzner serving as a stern moderator. But Kirzner had been instrumental in persuading New York University to hire Lachmann for the 1974-75 term. This was an institutional coup: two Misesians on one faculty. Kirzner was not in a position to come down too hard on Lachmann, a fellow Jew from South Africa, where Kirzner's father had been a rabbi.When I listened to Lachmann's first speech, I was impressed by two things: (1) he was marching into the mists of something he called kaleidic perception; (2) he had the goofiest lecturing style I had ever encountered. I had heard a lot of goofy lecturers in my day, but this was something special. With my right index finger, I could type faster than he spoke, or so it seemed to me at the time. He also had a peculiar sing-song style, with his voice going up and down for no apparent rhetorical reason -- kaleidic rhetoric, I guess.
This kaleidic business turned out to be a phrase from G. L. S. Shackle (SHACK-el], a British economist. I had not heard of Shackle before I heard Lachmann's lectures. Shackle's big epistemological point is that human perception is not so much linear as momentary. Man lives in a series of moments. Each moment is autonomous, without a past or future. Meaning is momentary. The future as perceived in the present is like a child's kaleidoscope, in which patterns come and go without rhyme or reason. So, we cannot forecast the future. The future is not linear. It is accessed through a series of discrete moments. I am different now than I was when I started writing this essay, which explains why I use a word processor: low-cost revisions. Something like that.
It only occurred to me as I was writing this, a quarter century later, that when I think "kaleidic," it calls up an image of something flashy that is done with mirrors, but which loses its appeal as we mature.
Kant's Stepchildren
What Lachmann was promoting was half of Immanuel Kant's epistemology Kant had propounded a fundamental dualism between deterministic cause and effect, devoid of freedom or choice, which he called the phenomenal realm, and a contingent realm of ethics, which is beyond the determinism of cause and effect, which he called the noumenal. I had read Richard Kroner's little book, Kant's Weltanschauung (1914), so I had at least an undergraduate's understanding of this dualism. What I was hearing was a call to march into the realm of the noumenal in quest of understanding, a pathway rarely frequented by economists except when fleeing from an unpleasant logical conclusion. Furthermore, Kant had always let us have our kaleidoscopes, but he always assumed that we would need only one, when contemplating ethics, God, and why some things are funny. (Example: "Why is Jerry Lewis funny to the French?" Kantian answer: "Because they are French -- no logical reason.") We had our choice: right eye or left eye. The other eye could have fitted with a microscope, a telescope, or no scope at all. Lachmann was handing us a second kaleidoscope. "You need two of these; tape this over your other eye, and follow me."
It became clear before the week was over that Rothbard was having none of this. As a follower of Aristotle rather than Kant, he never spent time or page space discussing the noumenal. He was a throwback epistemologically. He was never one to do things half way. He was not recommending that we go back to Hume or even Locke (except when discussing the origin of private property: labor mixed with land). He wanted to take us back to Aristotle.
Prior to this conference, this epistemological split in the ranks of the Austrians had not been visible. Mises had been a Kantian, as his Theory and History (1957) revealed. So was Hayek, only Hayek did not know this yet. Rothbard's previous excursions into philosophy had been limited to defending Mises' a priorism. He did not get into the other philosophical and ethical issues: Mises' Kantianism and his utilitarianism. Two decades earlier, F. A. "Baldy" Harper -- who was not bald -- the founder of the IHS, had pressed Mises to defend his system ethically. Harper told me that he asked Mises, "If socialism were found to be more efficient than capitalism, would you still oppose it?" To which Mises answered: "But it isn't more efficient than capitalism." Harper said Mises would not go beyond this statement. Harper was an anarcho-capitalist and was interested in the ethics of the free market, or more to the point, the immorality of state intervention.
Rothbard was to follow this pathway, not Mises' utilitarianism. Rothbard opposed the state for ethical reasons. He followed Mises on the issue of the impossibility of rational socialist economic calculation, but his main reason for opposing socialism was ethical, not technical. This is why he applied the adjective "monstrous" to the state in his popular writings. Mises would never have done that.
Kirzner in I974 was coming off his success in having the University of Chicago Press publish Capitalism and Entrepreneurship (1973). This was the first time that an American disciple of Mises had persuaded a major university press to publish a book based on a Misesian insight. But this insight was a limited one: defining of the entrepreneurial moment - the "ah, ha" of the realization of a profit opportunity- and developing its implications. The entrepreneurial moment, Kirzner argued, cannot be understood in terms of a purely linear rational process, or else the opportunity would be grasped by many participants in the market, and any economic return above the risk-adjusted rate of interest would disappear Logic is good, but without the non-linear "ah, ha" event, the investor cannot safely get a return higher than T-bill rates.
If Kirzner's entrepreneurial moment of perception sounds a lot like Lachmann's moment of kaleidic perception, that is because they are both variants of Kent's noumenal realm -- undetermined and indeterminate. The difference is, Kirzner's entrepreneur returns from the mountaintop of the "ah, ha!" into the valley of opportunity. Lachmann's entrepreneur is forced to stagger blindly from one kaleidic moment to the next. Kirzner's entrepreneur sees himself on the road to easy street. Lachmann's entrepreneur sees himself on an unmarked highway.
Kirzner was not in a position to drum Lachmann out of the rag-tag Austrian School army. By the end of the conference, Rothbard had made it clear that he was ready to demote Lachmann at least to corporal.
The issue was subjectivism. How radical is it? Must it be imported into every nook and cranny of economic analysis, substituting unconnected, autonomous, undetermined kaleidic links for complex chains of perception and reasoning? If we cannot make objective rational judgments, Rothbard asked, of what use is economics? I remember an exchange that Kirzner says he does not remember. Kirzner was discussing capital strictly in terms of the lone individual's value scale -- a major theme in his book, A Theory of Capital (1966). There can be no collective imputation of value to capital, he said, according to economic science: the impossibility of making interpersonal comparisons of subjective utility. This was Kirzner's Hobinsian moment: the appeal to Lionel Robbins' 1932 rejection of welfare economics -- a position of radical subjectivism that Robbins abandoned under pressure from Roy Harrod in 1939, without explaining how or why.
Rothbard was familiar with Robbins' argument. He had used it in his classic essay on welfare economics in the 1956 Festschrift for Mises, On Freedom and Free Enterprise, edited by Mary Sennholz. But now he, like Robbins before him, drew back from the cliff of radical subjectivism. Rothbard asked Kirzner this question: "If a wine-loving Frenchman survived a nuclear war in a bomb shelter, and came out of it as the sole survivor and therefore the owner of all the wine of France, is he richer than a nation that had not been at war?" Kirzner would not take the bait. He continued to say that the economist cannot say which nation is richer, for there is no way to assess the wealth of nations. There can be no interpersonal comparisons of subjective utility. Rothbard thought this conclusion was ridiculous; the survivors would be richer. it may be ridiculous, but it is Andconsistent with the subjective epistemology of Mises, Hayek, and Robbins just not with their conclusions. The noumenal value scale of the observer cannot be challenged by the phenomenal value scale of the collective, since there is no such scale, scientifically speaking, according to strict subjectivism.
Shackle had taken this argument one step beyond into his own Twilight Zone. He argued that not only can there be no interpersonal comparisons of subjective utility, there can be no inter-temporal comparisons, either. The individual is not the same person today as he was last year or last week or yesterday. His valuations way back then (five seconds ago) may not be his valuations now. There is no cause-and-effect pathway from one noumenal moment to the next. The indeterminacy of moments of perception overcomes their linearity. Lachmann's position followed Shackle's.
The Legacies
The Austrian School in North America divided at this point. Some of the attendees followed Lachmann into the kaleidic mist. They have continued to defend the kaleidic moment; but this defense does not seem to add to anyone's ability to restructure economics into a more rationally compelling whole. This is because kaleidic moments are antithetical to rationalism and wholes. There is no kaleidic treatise on economics comparable to Human Action or Man, Economy and State.
The Rothbardians have halted at the on-ramp of the kaleidic highway, but they have not answered Lachmann-Shackle in terms of Mises' view of subjective valuation. They have remained content with such Misesian concepts as capital investment as the basis of economic growth, and his suggestion that monetary expansion will produce rising prices, thereby implying a meaningful price index. Rothbardians still believe that individual time-preference determines -- I said determines -- the objective market rate of interest. As Rothbard had us singing one evening, "Give me that old time-preference, that old time-preference, that old time-preference; it's good enough for me. It was good enough for Mises; it was good enough for Hayek; it was good enough for Fetter; and it's good enough for me!"
Austrian economics now has several banners, depending on which of Mises' themes the economist emphasizes. The Lachmannites emphasize the role of indeterminate intuition to the exclusion of other economic concepts. As Pete Seeger might put it, they are neck deep in the big noumenal, and the darn fools say to push on. As far as l can see, Lachmann's economics is Alzheimer's economics. Ask a Lachmannite, "How are you doing?" and the answer will be: "Fine. Now, ask me again. Things may have changed."
The Kirznerians are content to wade into noumenal waters up to their knees, but they no longer bother to swim. They may paddle around a bit. They sing the praises of the entrepreneurial "ah, ha" and the lone imputer. They still speak of the market- a suspiciously aggregative concept -- and the uncertainty-bearing process that never quite clears it. They seem uninterested in building up Austrian School intellectual capital, a collective concept and therefore meaningless. For them, there is no overarching Austrian system, for a system runs into such statistical icebergs as national capital, per capita wealth, index numbers, and business cycles. The early Kirzner, the Kirzner of Market Theory and the Price System (1963), has not been seen for over thirty years. Ask a Kirznerian, "How are you doing?" and you get this answer: "If the 'you' is singular; I'm doing fine. if it's plural, the concept is methodologically meaningless."
The Rothbardians extend the Misesian tradition, but without the Kantianism, the utilitarianism, and the defense of limited civil government. They also have a willingness, following Rothbard, to move from the economic concept of collusion, by way of a market-based theory of state-granted monopoly, to the politically incorrect concept of conspiracy. incorrect ideas have consequences, Mises said. So do monopoly returns, Rothbard added, so we ought to follow the money when we write about collusion. Ask a Rothbardian, "How are you doing?" and the answer will be: "Not as well as I'd be doing if the monstrous state were overthrown by the voluntary actions of cooperating individuals who would then disperse and go home."
TO ANSWER ROBYNH'S QUESTION
Using standard economic theory, there is no answer to her question. Kirzner made that clear as early as 1966 in his book, A Theory of Capital. This position was implied in Chapter VI of Lionel Robbins's 1932 book, The Nature and Significance of Economic Science. He was an early convert to free-market economics by Mises. In 1932, he was a pure subjectivist. He understood that it is conceptually impossible for a consistent subjectivist economist to make interpersonal comparisons of subjective utility. Therefore, we cannot really measure capital. He did not say this, but this was the implication of his position. Kirzner did say it, and he has never said otherwise ever since 1966.
If we accept pure subjectivism, there is no answer to the question. We cannot measure capital. But, if true, then Mises was wrong about the connection between increasing per capita investment and economic growth. There would be no way to measure economic growth. Kirzner drew this conclusion.
My view is that we can make educated guesses about it. If we remove about 90% of the government's component of GDP, which would leave mostly the private sector, it would be possible to measure economic growth. But, as Rothbard said in the early 1950's, governments use statistics to plan the economy. Therefore, there should be no compulsory government statistics collection and no publishing of these figures. The figures would have to be left to private agencies searching for entrepreneurial insights regarding specific markets, not the general economy.
So, I do not take the GDP figure very seriously as a measure of national wealth. But, since we do have the GDP figure, plus figures regarding unemployment, capital losses in public markets, and similar aggregates, we can make sense of where we're going. They do give us some idea of whether we are doing better or worse than we did 10 years earlier, 20 years earlier, or 200 years earlier.
It is mostly guesswork. It is subjectively interpreted. But, when enough people think they are doing a lot worse, I take it seriously. When 40 million Americans lose their jobs in less than three months. I take this seriously. In terms of economic output, their loss of output is not reflected in the capital markets. But it is going to be reflected in the fiscal deficits of the states that are sending out the unemployment checks. That is politically relevant. If investors were not willing to buy the bonds of these states, the states would not be able to make these payments. That would put 40 million people in a crisis -- a crisis imposed by the governors who unilaterally shut down their employers' businesses.
My conclusion is simple: we can place a little bit of trust in GDP figures, but not much. The main thing they tell us is the trend. Even though conceptually flawed, the GDP figure does measure continuity. Are we doing better than last year or 10 years ago? If we strip the governments' component out of the figures (which the government statisticians and financial analysts never do), we do get some sense of progress or retrogression.
CONCLUSION
I have attempted here to supply a detailed consideration of a cogent question. The general public, and even graduate students in economics, are unaware of the philosophical foundations that underlie their concepts. They are unaware of the fact that, within the economics profession, there is no theoretical answer to the question that RobynH posed.
I have been dealing with these issues in print for about 40 years. Nobody has paid any attention. By now, a good number of the readers who started this article have gone on to other things. These are philosophical questions, and most people don't like philosophical questions. This includes economists. But philosophical questions cannot be avoided indefinitely. Once in a while, somebody like RobynH asks a relevant question, and no secular economist gives straight answers. That's because no secular economist has straight answers to give.
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