Mises University is an annual conference hosted by the Mises Academy of the Ludwig von Mises Institute. It is a week long intensive seminar series on Austrian Economics and more.
I am participating this year and things have already gotten interesting. Not only are there great speakers, but there has been some intellectual action on the online forums as well. This post contains condensed notes so far.
Informal, Intuitive, and Ordinal Estimation. Risk and Uncertainty.
- A Misesian entrepreneur is basically what a modern neoclassical or finance student would call a “risk-taker.” It is someone who operates within risk and uncertainty.
- Austrians delineate risk and uncertainty. I need to study this more, but here’s my understanding:
- Risk can be measured. Gambling is risky. Uncertainty can not be measured. An example of an uncertain game could be a game with a rule in which the player does not know the rule.
- Risk is the “known unknown.” Uncertainty is the “unknown unknown.”
- Risk involves an uncertain outcome, but at least the possible outcomes are known, and their probability distribution may also be known. Austrian Uncertainty also involves an uncertain outcome, but even the possible outcomes may not be known, neither need their distribution be known.
- Risk can be eliminated but uncertainty cannot. A rational actor can make a riskless choice, but never a certain choice. This is because uncertainty is part of the human condition. As far as an actor knows a particular choice may be optimal, but there is always the possibility that the actor is missing information. It would be interesting to explore if this may not be true, but I think it is the Austrian meaning of the word.
- Klein spoke about the difficulty of modelling their actions as calculable actions. I think we can model them, although weakly, in the following way:
- If we do not know P(A), the rational expectation is a probability of 50%. This minimizes error.
- If we know P(A) < P(B), but not P(A) or P(B), but we do know A and B occur on some probability (ie, not 0%), the rational, risk-minimizing expectation is P(A) = 25%.
- This is because we assume P(B) = 50%. This implies 0% < P(A) < 50%. We expect P(A) is 50% between to minimize risk.
- Therefore, lacking cardinal information we can still come up with rational expectations. This logic applies to Case Probability.
- I think this is very much the intuitive approach entrepreneurs take, whether they do so explicitly and consciously or not. The intuitive approach is more like P(A) > P(B) rather than a rigorous estimate of P(A).
- An intuitive approach could be described with such language as, “I think X is going to happen,” “X could happen,” “X is probably going to happen,” “I think X is going to happen,” and so on. All of these are examples of information which might not be helpful in a formal estimation, but which can be used in an informal estimation using the kind of ordinal calculation I describe above.
- Opinion can be used in an informal modelling approach. This both is and isn’t a rational actor model. I would call this a mad actor, an Austrian actor, or a Misesian actor. There is a method to this actor’s madness. It is a rational actor in the Misesian sense, but not in the neoclassical sense. It is a teleological actor seeking to satisfy its ends according to its beliefs, although those beliefs need not conform with reality at all.
- This ordinal approach works with an arbitrarily complex system.
- Intuition can have complex determinants including education, experience, nature, nurture, and maybe other stuff if that wasn’t exhaustive enough. Intuition should not be considered a baseless arbitrary action.
- Intuition can deal with uncertainty to some degree. Ordinal valuation involves uncertainty.
- Many decisions are hybrids of intuition and rational action, in the neoclassical sense. Put another way, informal and formal valuations play roles in real decisions. Cardinal information with formal modelling is like a formal valuation. For example, estimating firm stock value from it’s price to earnings ratio would be a formal valuation. Estimating firm stock price based on a logical frame of reference would be informal. For example, your opinion as an expert on which products are better and by what degree.
- To illustrate: Let’s say I don’t know the price of A, nor do I know the price of B, but I do know that A costs less than B. You can see that this could not be useful in formal estimation. We can logically deduce, however, that A “probably costs about half of B.” This is an informal estimate, but it is mathematically and logically valid. It even holds if we don’t KNOW A costs less than B. Maybe we just feel like, expect, best-guess, etc. that A costs less than B. Still holds.
- The Austrians hold to subjective value theory. I affirm both subjective and objective value. The two are a false dichotomy.
- Labor Theory of Value collapses into subjective value when we realize that the producer produces in anticipation of some value. These two are also a false dichotomy.
- I think we can have intrinsic value using classical concepts of long-run value without a labor theory of value.
- If long-run prices are ultimately determined by economic law then there is some objective, intrinsic value to each good. Specifically, the long run price of a good is its intrinsic value. It’s not that subjective value doesn’t exist, it’s that subjective value and objective value both exist and are compatible, in my view.
- Subjective value may dominate in the SR and objective in the LR.
- It may be the case that the objective value of all goods is 0 if in the LR all prices approach 0.
- Intrinsic value is de facto confirmed in many approaches to finance. Fundamental estimation or value investing utilize objective valuation mechanisms and use these to guide purchase. They are estimating objective values. The irony is that this means there is objective value in the subjective opinion of those actors using these types of analysis.
- A value investor attempts to uncover an objective, intrinsic value based on market fundamentals. For example, if a company makes X profit per year and pays a Y% dividend per share, there is a rational expectation that the company is objectively, fundamentally worth a certain price.
- Prof. Joe Salerno gave his presentation today, 7/22/14, on “Calculation and Socialism.” He said that a socialist economy is “impossible,” according to Mises. It was clarified that this socialist economy is impossible in the sense that it cannot economize, or produce efficient outcomes, not that it cannot exist at all or allocate resources in inefficient ways. In other words, this kind of social order is unsustainable, not impossible. I think we can argue similarly about price. I think a long run, sustainable price is essentially a kind of intrinsic value.
- I’m not saying subjective value doesn’t exist. I’m saying subjective value leads to objective value.
- I would argue that an equilibrium price which is reached by a market is both objective and subjective at the same time. Most individuals cannot single-handedly manipulate a market price for a common good. In this sense, among others, it is objective.
- On the other hand, a price cannot arise except by mutual subjective valuation and transaction between people. It is also subjective.
- In short, there are 3 arguments I hold to (NONE OF THEM RANDIAN) for objective value:
- Market equilibria prices are objective in that individuals cannot influence them.
- Long Run prices (perhaps a subset of equilibria prices) are objective in that individuals cannot influence them.
- Economic law is objective so any price determined by economic law is objective. Clearly economic law holds in the long run, but it may hold in the SR as well.
- A long-run, sustainable price is essentially an intrinsic, objective value. It answers the question, “Regardless of my personal opinion or preference, what is this thing really, objectively worth?” It is determined objectively, by economic law.
Objections to Austrian Economics
- Murphy notes that some free market economists like David Friedman oppose Austrianism for being anti-empiricist and non-scientific at points. Murphy defends the pure axiomatic and deductive approach.
- He claims the Pythagorean Theorem is an example of a truth we know in math without needing to measure it to verify it.
- I would argue that the Pythagorean Theorem is a well-validated, scientific law. It is an observation and an induction, not a cause or something we can know divorced from empirical reality.
- Furthermore, in the Friedman-Murphy debate Murphy used this example on Friedman and Friedman threw it back in his face. The Pythagorean Theorem (read: Pythagorean THEORY), it turns out, doesn’t hold in the real universe all the time. Specifically, it doesn’t hold in super large cosmic structures nor in super small subatomic physics. Or, at least, when it holds it does so in a non-Euclidean fashion. I’m no physicist so please don’t expect me to prove that, but David said this is known through empiricism, science, and observation.
- In short, the Pythagorean Theorem is a theory based on observation and not a necessary cause or axiom. It is subject to revision.
- Bryan Caplan made a bet with Murphy on how inflation would shift at one point in time, as mentioned in his speech. Murphy lost the bet. This is typical of the bad utility of Austrianism in prediction. It predicts direction well, but magnitudes and so forth very poorly. It is exceptionally difficult to use Austrian economics, for example, to price a stock or value a firm. I am working on some solutions to this.
- Bryan Caplan also wrote Why I Am Not an Austrian Economist. His paper raises some good points and I take issue with some other points, but I will not address that here.