"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Wednesday, June 22, 2011

Another reddit link crushes Austrian Economics

This time it's a nit pick. One Austrian commenter wrote:
Free market systems ALWAYs converge to full employment/high employment ‘equilibrium’.

And the hue and cry is that Austrians don't believe in equilibrium in the first place. He quotes Lachman who points out the obvious, that things are always changing.
Of course, Mises said the same thing. Reading Human Action, Pages 245-250, will enlighten.

At any rate, the nitpicker got mixed up because he confused theoretical studies with practical studies.
The theorist, as Mises explains on those pages, in order to study the effects one variable has on an economy, imagines everything else staying the same and seeing what happens when the variable under study varies.
[Those of you who know a bit of calculus will see here something similar to taking a partial derivative of a function of many variables. You hold all the variables fixed but one when computing a partial derivative].

The commenter meant, that if we study a system where no new forces are introduced, but merely study the effects of existing forces doing their thing, then we can deduce what will happen after time passes. A certain state of affairs will be reached. The commenter asserted, correctly, that if we are studying a free market then the final state of affairs will be full employment [meaning anyone who wants a job will have one]. Non free markets won't have full employment, as we see before our very eyes these last few years.

Lachman agreed and emphasized a point Mises made, that of course in the real world new forces are introduced all the time, so that no final state is ever reached. But that does not diminish the importance of the commenter's statement. Because the new state of affairs will also lead to full employment in a free market. This is a very important thing to know. Because it teaches you that if you want the economy to steer itself to full employment, or as close as is possible to get to such a state, then institute a free market.

As an analogy to bring out what we're saying, imagine a car on a bumpy road. The bumps are such that the car can never move in a straight line, because the bumps always move it around a little bit. If the driver aims at going straight ahead [=free market], then even though he is moving right and left and up and down all the time because of the bumpy road, he is also moving in the general direction he wants to get to [=full employment].
But if he pulls his wheel sharply to the left and keeps it there always [=non free market], he will never get where he wants to go.

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