Monday, July 13, 2009

Personal Economics--Prelude to Austrian Rules-I

Personal Economics--Prelude to Austrian Rules
"..nine tenths of the calamities that have befallen the human race had no other origin than the union of high intelligence with low desires."
The first three rules come from "Classical Economics"--the first two from Adam Smith and the third from Jean-Baptiste Say. Unfortunately, Adam Smith made a mistake that took economics off course for many years. The mistake is called the labor theory of value. Adam Smith loved the individual person so much and was so convinced of his natural system of liberty and in the ultimate harmony of interests amongst people--all of which conflict with the labor theory of value, that he was not really dogmatic about it. In his first book and even in much of the Wealth of Nations, he either ignores it or flat out contradicts it. It remained for a disciple--David Ricardo--who extended Smith’s economics but was frequently in conflict with his basic philosophy--to nail down the labor theory of value and make it a pillar of classical economics.
Marx made the labor theory of value the foundation for his own economics, with the tragic results that have plagued modern history, but the majority of 19th century economists, who were not particularly excited about Marxist ideas struggled, while still attempting to hold onto the labor theory of value. The question is, what caused Adam Smith to make his mistake in the first place? There is a wonderful essay by the French economist, Frederick Bastiat that I think explains it better than anyone. He said that the problem stems from the fact that in the 18th and early 19th centuries, intellectuals were enamored of the classical Greek and Roman cultures. Much of this stemmed from the fact that everyone aspiring to a university degree was required to learn Greek and Latin. In the time of John Milton this made sense, especially Latin, because it was used as the language of communication for all of Europe. Milton wrote anything he wanted read outside of England in Latin. Newton wrote his great treatise in Latin so that people outside of England could read it. But by the time of Adam Smith, Latin no longer served that purpose. Almost all valuable treatises were published either in English French or German and usually made available in translation. The real motivation for the learning of Latin and Greek was, in Macaulay’s words, "the glory that was Greece and the grandeur that was Rome". Intellectuals envied these two cultures because they were able to control so much of the world. Unfortunately, as Bastiat points out, it was a control based on violence. I believe, that Adam Smith’s mistakes and indeed the mistakes in economic and political thought of many intellectuals, including Hugh Nibley at my own university, can be traced to this admiration of these two ancient cultures. Adam Smith, I believe, felt that that same control could be obtained in a more peaceful way, if a person could somehow figure out what everything was really worth; hence, the labor theory of value.
This stranglehold on economics was finally solved, as so many problems are in human history, independently and almost simultaneously by three men--Stanley Jevons in English, Leon Walrus in French, and Carl Menger in German. The solution was called the marginal theory of value and had enormous appeal because it has a very mathematical ring to it.. But of the three, only Carl Menger carried the marginal theory of value to its logical conclusion. Because Menger was actually Austrian as were his early disciples, the insights developed from his initial insight have come to be known as Austrian economics. In the next installment I will attempt to explore the Austrian return to Adam Smith’s principal insight, i.e. that wealth, even the wealth of nations did not depend upon the work of the nobles and aristocrats, but rather on the work of the ordinary citizen. All of their incredible understanding of economics begins with the actions of individuals. So in the next section we will explore a simple transaction and see what we can learn from it and then explore the three rules growing out of Austrian economics.

1 comment:

Lord Keynes said...

I enjoyed reading your post.

I have my own post on the myth of the labor theory of value here:

I argue with another free market blogger here:

He (surprisingly) claims that value is subjective but at the same time is created through labour.

Feel free to comment on the debate at his blog or mine.