A few weeks ago I was engaged in an online debate with a gentleman who objected to my advocacy for Universidad Francisco Marroquin in Guatemala. Specifically, he didn’t like their focus on Austrian economics. The issue that the anonymous blogger took umbrage with was his assertion that “they don’t use math.” I’ve heard this complaint before – many times; mostly from the planners (Keynesians, communists, etc.) They are all under the impression that we can “model” our way to prosperity – if only we had all the information and did the math right. That chalkboards full of formulas will, if drawn correctly, make national economies grow: the birds will sing, the tides will recede, the trees will grow bread and milk and honey will flow from the rocks.
For them it’s all about the math.
In a past life – I spent a year dissecting the Bolivarian Alliance of the Americas; a regional socialist economic and political alliance among five radical left-leaning countries in Latin America; led of course by Venezuela and Cuba. I was writing the conclusive book on this topic (conclusive because the Alliance withered away when it ran out of stolen money to redistribute – so nobody will ever write a book about it now, unless it’s an obituary. But who would bother?). Part of my book was a chapter or two on their economic model which they called 21st Century Socialism. Basically, the short description (you can read the whole section in my book if you’re interested) is what I like to call quantum socialism (darn, I should have coined that phrase in my book – I would have made a million dollars. Oh, right – profit is bad. Darnit again.). The “economist” (using that term loosely) who came up with this idea is Heinz Dieterich – a professor at the National University of Mexico (or, for those of us who know, Commie Central). His assertion was that – given the great advances of computational power (provided to a grateful public by the free market – don’t tell Heinz) – we can finally make the labor theory of value work. The supercomputers now have the power in real time to carry out the fractionalization of the man hours necessary to produce everything, spitting out the conclusive, “real” value of an item at any stage of the productive process. Through computers, we can now aggregate enough information that we can finally make communism work.
Our savior, at long last, will be a huge online spreadsheet.
Dieterich advised Hugo Chavez, who was excited about this theory – and, well, we all know how that went. Heinz claims they didn’t do it right (I think I’ve heard that before).
Now, I like to think of myself as an amateur Austrian. Amateur because I really don’t know anything about economics. In my defense, at least I admit that – unlike our elected leaders and their warlock advisors – yes, I’m referring to Krugman – who wear their ignorance with pride as all planners must, lest their doubt reveal the holes in their grand spreadsheets, after which the entire edifice of arrogance would come crashing down, leaving us with no cereal for our morning breakfast. And Austrian, referring to the school of economics that begins with a single philosophy: individual liberty. The free market traditions that underpin all successful economies – ideas we got from Adam Smith and that were perfected by Mises, Hayek, Rothbard, Hazlitt, Ayn Rand (not an economist but our greatest advocate of individual liberty), Friedman (also not an Austrian but definitely a free marketer) – among so many others. Some still alive today, people like Pedro Schwartz (who once took down Krugman – it was epic).
Hayek once said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Even Thomas Picketty – the guru of redistributionism – said, “Economists tend to think they are much, much smarter than historians, than everybody. And this is a bit too much because at the end of the day, we don’t know very much in economics.” That’s a remarkable admission for somebody who wants to take all your money.
Back to my blogger detractor; I’m an Austrian because I believe in the fundamentals of individual liberty – of man’s instinct for trying to make the right decisions for himself – and that the aggregate of these decisions, if left uncoerced, will lead to a better economic environment not only for him but for others. What Ayn Rand called “rational self-interest” which leads to more generalized prosperity because the economists aren’t then required to “know” everything – instead trusting that the instincts which are part of human nature will lead to greater prosperity for the collective. And isn’t that what the planners say they want too?
For the detractors (there are many) who say that man does not always act in their own self-interest; of course I know this – I’m not naïve (well not entirely). My response to them: the mistakes of one person in a large complex system like our national economy is infinitesimally less damaging than the mistake of one of the planners in charge of an entire segment of national production; and if it goes wrong for the individual, he will starve. The planner will just get reassigned (this is called Moral Hazard – google it). And yes, of course, there’s plenty of room for math. Modeling is important, studying supply and demand and micro and macro-economic principles and all the equations and formulas that we all learn in our economics classes (yes, I took the classes. No, I still have no clue how to do any of the math).
But it all must start with an idea – the right idea; lest in our attempts at planning we inadvertently starve our people, which has happened too often in the past and continues today.
Joel D. Hirst's Blog 
Thank you for denouncing the farce that became a tragedy in my country. As I have repeatedly said, this “revolution” is the closest thing to an ideological chemotherapy that I have suffered for now I don’t think I have one single interventionist cell left in my bloodstream. Best regards from Caracas.
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stay strong – pronto habra libertad otra ves.
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Funny how the people who point out that men often act irrationally fail to recognize, or refuse to, that this applies even more so to government officials.
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exactly! but with greater damage.
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Same with those who denounce what they imagine is capitalism and claim that without government regulation rapacious and short sighted business would destroy us all.
If I ask what makes those government regulators unimpeachable paragons of impartial virtue and those capitalists amoral predators I usually get silence. Even now with Flint in the news these people can’t connect the dots and still think a person in public service is ipso facto trustworthy and incorruptible.
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Its amazing. And also the idea that the only regulation that can happen is govt., top down, unaccountable. Uber does a great way of regulation – in fact crowdsourcing is the greatest new mechanism for regulation; better than anything we’ve ever seen.
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Really enjoying your articles and unassuming delivery. Thank you.
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thank you
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“Our savior, at long last, will be a huge online spreadsheet.”
I used to teach Microsoft Excel and Lotus 1-2-3 before that. I’ve never seen a spreadsheet that didn’t contain ANY errors, and I can guarantee that any large MULTI-USER spreadsheet contains not only lots of errors, but also lots of unfounded assumptions.
I agree IN THEORY ( I want to live in Theory, because everything works there…) that with COMPLETE knowledge of conditions and COMPLETE understanding of the mechanics, we could IN THEORY construct an accurate spreadsheet. But NOT for economics, because too many of the economic factors are absolutely unknowable, because they are the results of other people making decisions based on incomplete and/or inaccurate data. Even if I assumed that the chairman of the Federal Reserve had complete and perfect information AT PRESENT, he can’t predict what _I_ might do in some circumstances, because _I_ do not have complete and/or accurate information.
And since there are millions of actors who each make their decisions based on partial/partially accurate data, no forecast can ever be entirely accurate EVEN IF the central planners had complete and perfect information. WHICH THEY DO NOT.
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Somebody once said that math introduces rigor to economics. Also mortis.
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Actually I think it’s probably true that an advanced enough AI could run the economy in a socialist style. The great debate between the Austrian economists and the socialist economists in the early 20th century was about the problem of economic calculation and how there was no possibility in those days of replicating the incredibly complex computation the market “does” naturally (by taking advantage of all the millions of individual brains of producers and consumers using price signals).
But since it’s all just a bunch of simultaneous equations, there really is no reason, in principle, why a sufficiently advanced computer could do it.
The added wrinkle is, though, that it would need, as some of its input, intimate knowledge of everyone’s scale of preferences. And that might be – to say the least – considered to be somewhat intrusive. On the other hand, it’s conceivable that people might trust a benign AI with that information.
But it’s really for a more medium-future timescale (i.e. by the time it’s really conceivable, we will probably have colonized the solar system at least). We’re still very far from the possibility, IMHO.
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its an interesting theory for speculation (as long as we don’t try to do it – we end up starving people) 🙂
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No supercomputer can run the country as well as the much more advanced supercomputer we call the market, composed of every brain making a purchase decision. You simply can’t be in all the places in the market collecting all the local information to set a market price with a machine.
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#SpontaneousOrder
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Let’s do the math. What is the computing power of one human brain? How many brains make decisions on the widget in question, like an iPhone? Whether Droid, iPhone or other? How much would the equivalent Intel processors cost to run the analysis? How long to program with current data? How much to maintain data? Reprogram algorithms to reflect changing markets? Yup, no spreadsheet can do it.
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Yes, exactly. Also, no way short of having a chip implanted in us to gauge the basic “Needs” of every citizen. If instead we make decisions for ourselves, a free market will react to our needs (demand) with supply by entrepreneurs who are willing to take risks for adequate returns. An efficient command economy requires a near perfect prediction of demand, which presupposes the honorable, and only benevolent intentions of those in command. Corruption, and waste yield their rotten fruit of shortage, suffering, riots, black markets, sickness and death.
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Communism and socialism would not exist, if those in charge had to follow their own rules and suffer the consequences of their actions.
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Moral Hazard
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The post states “Dieterich advised Hugo Chavez, who was excited about this theory – and, well, we all know how that went.”
I can understand Chavez ‘s excitement. The theory, as applied in Venezuela, left Chevez with a personal wealth of about $2 billion at his death. I think Chevez would have called that a success.
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ja – good point.
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Just found your blog via Instapundit and it’s a delight. Love your style and your Austrian take on the problem of how we live as economic beings. The fantasy of the ultimate spreadsheet was, I thought, convincingly demolished by Hayek. The computer can never know enough because it can only approximate the knowledge of the human participants in the economy –and THEY don’t have the knowledge either! It’s emergent.
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You are of course absolutely correct! If only more folks understood that. What always baffles me is that most people assume that you take the “private citizen” hat off and put the “govt. hat” on of an individual, and all of a sudden they become benevolent and infallible.
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The math cannot be correct unless ALL variables are accounted for (e.g. climate models). Just like central planning, one can never know all the variables. ergo, no further math gymnastics needed – one cannot math from a false premise to a correct answer.
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I would revise…
If it goes wrong for the individual, he starves.
If it goes wrong for the planner, we all starve.
Though the point that the behavioral feedback loop is intact in the former situation is taken. Venezuela is enjoying the latter feedback now, we’ll see if the loop is behavioral in the future…
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good point – thanks!
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Austrian use a marginal utility subjective theory of value. Essentially something is as valuable as you find it to be. To amalgamate all these individual determinations of values free markets are needed, and from these arise prices . Indeed without free markets prices don’t exist ( demand and supply equations have never determined a real world price) , Obviously without valid pricing the economic ( profitable) use of resources is not possible . And that is why the USSR collapsed just as Von Mises had predicted it would back in the 1920s. and that is why Bolivarian socialism is collapsing today .
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Well put!
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I have an MBA and I can do the maths. But regardless I believe that the microeconomics of the kitchen table drive the economy. One of the classic models that the macro planners seem to love is substitutability. It all seems well and good till one asks the econ “is it the price trigger, product availability or quality of product” that causes the switch. They can’t answer that one. Reality is it could be any combination of the three and that is why their modelling fails.
Enjoyed the post. Thanks.
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Thanks – good thoughts!
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First we create the perfect mathematical economic (climate) model… Then come the assumptions.
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Again, well-penned.
I found myself giggling though.
Your sense of humour and thrusting cynicism make for hilarious reading.
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ja – one must laugh, to not cry.
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Mathematicians who study computable model theory know that you can embed the (provably unsolvable) halting problem into just about anything that has an unknown in it, but economists continue dithering around with approximate solutions to partial differential equations and the like as if something so simple counted as “higher math”.
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Keynesian don’t do math either. They pretend to do math and play with macro models that have little bearing on reality because they use such a simplified set of variables, the model is neither descriptive nor predictive. In reality, the best economics can do is use statistics and project, contrast, and compare. But, that i not math.
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And since variables are unknowable – best if folks just guess and let people alone.
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Didn’t Von Mises and his brethren question whether macroeconomics even existed? It was just a leap in assumptions from microeconomic analysis. It is the original sin of economics to see the two as separate.
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I remember this “we can do it with computers” idea from the long ago past: there was some early 90’s commie symposium I was part of, and they said that everything now was ok because, (I’m trying to remember the exact piece of microprocessor he was talking about), that “we could do all the math on a 16 megabyte processor”.
I’d heard the same thing over the years: although the Soviets had computers just as soon as they could steal them, and it never did them any good.
And either way, the incentive problem of money doesn’t stop once you can calculate prices.
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I remember McNamera and his genious boys tried to redo our national defense with mathematical models like the ones talked about here. The problem is the models were only as good as the assumptions you incorporate into them. For example one of their models concluded that we should dump all of our conventional forces in favor of only nukes, on the assumption that nukes had more destructive power for the buck than any conventional weapon. But the model totally ignored the scenario where the situation was not extreme enough to call for nukes, but was extreme enough that you needed a military response. Without robust conventional forces you could not do it. So your only options were either nuke the world, or do nothing and appease the enemy.
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Excellent article. And, on a side note: how angry was Krugman at the end of that take down? He didn’t even offer courtesy applause and wouldn’t look at Pedro Schwartz. He looked as if he might cry.
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Ya, he was really upset. I guess nobody ever told him to his face he was wrong before.
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Hello Joel! Another interesting post. You have got one thing absolutely right in this piece I think. One of the key weaknesses of economic thinking is indeed that it often relies on models and theories which can bear scant relation to reality, or which fail to factor in (and therefore make disproportionately significant) events which are extremely rare and therefore have a very low probability of occurring. (See Black Swan Theory)
Lets take the holiest of all holy cows for libertarian free marketeers such as yourself as an example of this… Adam Smith’s good old invisible hand, or the idea that unregulated markets will automatically reach an optimal price equilibrium based on supply and demand, with the magical end result of peace and prosperity.
Well I hate to break it to you Joel, but there is no such thing as the invisible hand of market forces! It amazes me that you are still talking about free market economics as if the global financial crisis hadn’t already totally discredited it in the eyes many both within and outside of the field of economics.
Oh and by the way, Adam Smith (who only ever used the term ‘invisible hand’ once in the whole of the Wealth of Nations) warned of plenty of cases where your cherished ‘natural liberty’ doesn’t work but can instead lead to precipitous bubbles and crashes (does this sound familiar to anybody!?)
Good old Adam also wrote a book of moral philosophy to accompany the wealth of nations in which he warned of the dangers of unfettered capitalism and the stupefying potential of the division of labour. Unfortunately most people who refer to Adam Smith have never actually read his writing in the original and rely on largely inaccurate reinterpretations of his writings that have claimed him as a champion of free market economics.
Essentially Adam smith’s view is more sophisticated and nuanced than the one you are expounding despite the fact that he was writing 240 years ago!
To your great credit you admit that you don’t know much about economics and indeed what you do know seems to be based on a second hand understanding of 19th century thinking.
I thought I would attach a few links to help get your admittedly interesting starting point re. some of the flaws in economic theory a little bit closer to the 21st century (and its not just lefty nonsense either, its from the Harvard Business Review and a leading Economist at Cambridge University so disregard casually at your peril)
http://www.huffingtonpost.com/ian-fletcher/a-review-of-ha-joon-chang_b_840417.html – A brief summary of Ha Joon Changs bipartisan and extremely thorough debunking of many of the myths of neoclassical economics (I would really recommend you read the whole book, it might change your life)
https://hbr.org/2012/04/there-is-no-invisible-hand – A full explanation of how no economist has ever been able to prove that the invisible hand exists, and demonstrating that the idea of individual liberty and free-markets moving economies towards equilibrium is a total fallacy.
Happy Reading!
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Have you read “road to serfdom” and “economics in one lesson”? also good reads.
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Ok, so you’ve made it to the first half of the 20th century with your thinking now. Thats kind of progress I suppose. You do realise that there is quite a large and interesting sphere of economic thinking that lies somewhere between central planning or what you erroneously seem to call socialism (correction, its actually called communism) and the stuff that you are peddling?
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OP–Voluntary communism does just fine without calculus math and is fairly stable if unexciting, as Libertarians have pointed out. They explicitly defend it as a valid option within free exchange. It’s limited by Dunbar’s number to small colonies or communes, but these can federate indefinitely. Example: Hutterite colonies, that wisely split off when they reach 200 people or so.
Mises destroyed the computer spreadsheet argument before spreadsheets back in the 1920’s.
For more on world Libertarians, see http://www.libertarianinternational.org
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