Per Bylund

This book [pdf here] provides a wonderful discussion on the theoretical implications of treating capital [goods] as heterogeneous. It may not seem very radical, since everybody knows that a hammer is not exactly the same thing as a ladder, an airplane, or a machine. But to economic theory, this is a radical move. Only in the Austrian school is capital heterogeneity fully embraced and developed, and Lachmann’s Capital and Its Structure is the greatest contribution in this strand of the literature.

Lachmann discusses the functions of different capital formations and derives the obvious truth that capital is heterogeneous, which means it has different uses and therefore multiple specificities and complementarities, which in turn implies that capital can be combined in new and unique ways, which can only mean that capital exists in the form of a structure. (more…)

This book [pdf here] provides a wonderful discussion on the theoretical implications of treating capital [goods] as heterogeneous. It may not seem very radical, since everybody knows that a hammer is not exactly the same thing as a ladder, an airplane, or a machine. But to economic theory, this is a radical move. Only in the Austrian school is capital heterogeneity fully embraced and developed, and Lachmann's Capital and Its Structure is the greatest contribution in this strand of the literature.Lachmann discusses the functions of different capital formations and derives the obvious truth that capital is heterogeneous, which means it has different uses and therefore multiple specificities and complementarities, which in turn implies that capital can be combined in new and unique ways, which can only mean that capital exists in the form of a structure. This structure is ever under pressure from the changing world to continue producing optimal output, which is why an important role for the entrepreneur in the market is to create and change capital formations to make most use of the existing (scarce) capital. This process necessarily takes time, which ties directly in with the unique approach of the Austrian theory of the business cycle.To me, Lachmann's discussion confirms much of my own work on the firm and provides a taxonomy and broader reasoning as well as economic rationale for answering how and why firms emerge in a market. It is not simply the case that capital formations can be created and changed through market trade or contracting - it is sometimes necessary to create a high-density to realize and/or maintain such unique structures.This is, however, where Lachmann fails to realize the true extent of his reasoning. States Lachmann (on pages 41-42): In a market economy a firm can always vary its capital combination by buying and selling capital goods. hence, each firm will intermittently use the market in order to acquire those capital instruments whcih, when operated by the labour avaialable at current wage rates, will maximize profits. This statement obviously leaves out the very problematic question of where these markets for factors come from, which directly relates to Mises's (in contrast to Hayek's) argument why socialism cannot work. The reason, to Mises, was the lack of markets for factors, which makes economic calculation impossible and therefore undermines successful entrepreneurship. Lachmann, of course, does not need to discuss where capital markets come from - his object is to explain the heterogeneity of capital.But this is where the theory of the firm perfectly provides the missing piece of the puzzle, and explains both the creation of capital and the creation of capital markets. The firm plays a very central role in the market place.

A nice summary of the rise and fall of the Swedish welfare state, “the capitalist welfare state” to the author. The book covers the “golden years” approximately 1870-1970 and discusses how and why Sweden could go from being one of the poorest to one of the richest countries in the West – while supporting an expanding welfare state. He also discusses how everything got messed up in the two decades 1970-1990, and why the welfare state as well as Swedes’ relative prosperity could not survive this institutional change. Overall a thoughtful and nice summary of the rise and fall and renaissance (?) of the Swedish welfare state – and what are the reasons for its relative success.

A nice summary of the rise and fall of the Swedish welfare state, "the capitalist welfare state" to the author. The book covers the "golden years" approximately 1870-1970 and discusses how and why Sweden could go from being one of the poorest to one of the richest countries in the West - while supporting an expanding welfare state. He also discusses how everything got messed up in the two decades 1970-1990, and why the welfare state as well as Swedes' relative prosperity could not survive this institutional change. Overall a thoughtful and nice summary of the rise and fall and renaissance (?) of the Swedish welfare state - and what are the reasons for its relative success.

Mises supposedly said that Carl Menger’s Principles was still (at the time) the best introduction to Austrian economics. This is certainly true, but I would go further than that. The Principles is not only an introduction to Austrian economics but a great introduction to sound economic thinking. Whether you agree with “Austrians” or not, and whether you have successfully finished a graduate degree in economics or not, you will still learn a lot about economic reasoning, the logic of social relations, and – especially – the economic way of thinking.

Menger’s treatise is a very easy read, is exclusively written in beautiful prose (no math), and focuses on understanding how the market functions through first understanding how and why individuals choose to act. But it is not simply an overview of concepts; it is a thorough analysis of the bases and starting points for economics as well as the understanding that necessarily follows. (more…)

Mises supposedly said that Carl Menger's Principles was still (at the time) the best introduction to Austrian economics. This is certainly true, but I would go further than that. The Principles is not only an introduction to Austrian economics but a great introduction to sound economic thinking. Whether you agree with "Austrians" or not, and whether you have successfully finished a graduate degree in economics or not, you will still learn a lot about economic reasoning, the logic of social relations, and - especially - the economic way of thinking.Menger's treatise is a very easy read, is exclusively written in beautiful prose (no math), and focuses on understanding how the market functions through first understanding how and why individuals choose to act. But it is not simply an overview of concepts; it is a thorough analysis of the bases and starting points for economics as well as the understanding that necessarily follows. Menger provides an impeccable understanding for what is action, why individuals act, how to understand value from the individual actor's point of view - and how these things beautifully provides a sufficient basis for understanding exchange, market pricing, and money.Whereas this treatise is wonderful in every possible way, not to speak of the historical value of being one off the three simultaneous findings of the "marginalist revolution," there is one problem with it: it was supposed to be the first volume in a multiple-volume treatise. But Menger never got to writing the second volume, and because of this the world is clearly at a loss.

A nice introduction to the study of functional entrepreneurship and the context in which it exists and is exercised. But emphasis should be on the word “introduction” – this is not a heavy analysis in scholarly style, but rather a quick overview of the topics studied re: both entrepreneurship and institutions. I’m not sure exactly how this essay, which is no doubt beautifully written and easy to grasp, should be evaluated or valued: exactly what is the audience?

Boettke and Coyne are scholars in the field, but while they do cite a number of scholarly studies their own work is but a lay man’s introduction to the field, its foci and the questions currently discussed. Other scholars in this field or with an interest in entrepreneurship, new institutional economics, institutions, or the theory of the market would not have much to gain from reading this essay.

A nice introduction to the study of functional entrepreneurship and the context in which it exists and is exercised. But emphasis should be on the word "introduction" - this is not a heavy analysis in scholarly style, but rather a quick overview of the topics studied re: both entrepreneurship and institutions. I'm not sure exactly how this essay, which is no doubt beautifully written and easy to grasp, should be evaluated or valued: exactly what is the audience?Boettke and Coyne are scholars in the field, but while they do cite a number of scholarly studies their own work is but a lay man's introduction to the field, its foci and the questions currently discussed. Other scholars in this field or with an interest in entrepreneurship, new institutional economics, institutions, or the theory of the market would not have much to gain from reading this essay.

Freakonomics was an immediate success when hitting the bookstores back in 2005. I guess its melding of pop culture with economics was something unexpected, long awaited, and seemed interest in the market. Granted, the book is an easy read with plenty of provocative examples and a clear logical reasoning that is scarce both on television and in many classrooms. However, it seems the authors choose examples primarily to provoke rather than actually show what economic reasoning might contribute to our understanding of the real world. In fact, much of the discussions in the book are but pop-style stories based on correlations found through data mining. The book thereby demotes economics to simple and inductive data analysis and data mining, which is pretty far from the view of economics as a purely deductive science of human action we should be used to. Perhaps this is simply a natural “next step” from the overly mathematized economics of today, but in many of the cases discussed in Freakonomics the authors fail to show how it is economics that has guided their quest for understanding the world. It might as well have been statistics or any kind of fumbling in the dark. In conclusion, economists of the traditional variety may find this book slightly repulsive due to its data-guided reasoning, while economists of the more recent and inductive data-bending kind might find this both fascinating and inspiring. The non-economist public will find that it is an interesting and provocative read, but should not read it hoping to learn economics – there are many much, much better books for that purpose.

Freakonomics was an immediate success when hitting the bookstores back in 2005. I guess its melding of pop culture with economics was something unexpected, long awaited, and seemed interest in the market. Granted, the book is an easy read with plenty of provocative examples and a clear logical reasoning that is scarce both on television and in many classrooms. However, it seems the authors choose examples primarily to provoke rather than actually show what economic reasoning might contribute to our understanding of the real world. In fact, much of the discussions in the book are but pop-style stories based on correlations found through data mining. The book thereby demotes economics to simple and inductive data analysis and data mining, which is pretty far from the view of economics as a purely deductive science of human action we should be used to. Perhaps this is simply a natural "next step" from the overly mathematized economics of today, but in many of the cases discussed in Freakonomics the authors fail to show how it is economics that has guided their quest for understanding the world. It might as well have been statistics or any kind of fumbling in the dark. In conclusion, economists of the traditional variety may find this book slightly repulsive due to its data-guided reasoning, while economists of the more recent and inductive data-bending kind might find this both fascinating and inspiring. The non-economist public will find that it is an interesting and provocative read, but should not read it hoping to learn economics - there are many much, much better books for that purpose.

I was recently recommended to read Bryan Caplan‘s 1999 article “The Austrian Search for Realistic Foundations” (JSTOR). Caplan is no doubt an intelligent scholar, but he does not show this fact in the mentioned article. Rather, to any reader knowledgeable in Austrian economics, this article appears at best to be a spectacle.

The reason for this post’s title is the very basic mistake Caplan makes throughout the article. Granted, it is all too prevalent in scientific discourse and it is a very easy mistake to make (I am bound to have made it myself at times). In fact, it is not a phenomenon exclusive to science; one may argue that it is a fundamental part of political discourse and rhetoric, especially in agitation. Yet science is supposed to be free of rhetoric, so why does Caplan make this mistake?

The answer is that most people (and this most likely applies to Caplan in this case) are not aware of them committing this type error. The problem is perspective: the fact that one cannot understand another’s arguments simply because one does not share his or her perspective. (more…)

I was recently recommended to read Bryan Caplan's 1999 article "The Austrian Search for Realistic Foundations" (JSTOR). Caplan is no doubt an intelligent scholar, but he does not show this fact in the mentioned article. Rather, to any reader knowledgeable in Austrian economics, this article appears at best to be a spectacle.The reason for this post's title is the very basic mistake Caplan makes throughout the article. Granted, it is all too prevalent in scientific discourse and it is a very easy mistake to make (I am bound to have made it myself at times). In fact, it is not a phenomenon exclusive to science; one may argue that it is a fundamental part of political discourse and rhetoric, especially in agitation. Yet science is supposed to be free of rhetoric, so why does Caplan make this mistake?The answer is that most people (and this most likely applies to Caplan in this case) are not aware of them committing this type error. The problem is perspective: the fact that one cannot understand another's arguments simply because one does not share his or her perspective. This is where scientific method is crucial, since it attempts to do away with most of the idiosyncratic perspective vision of the scholar in order to reveal the naked facts and subject them - rather than the perspective - to scrutiny.In other words, the error committed by Caplan in the aforementioned article is that he attempts to critique Austrian economics, and especially prominent Austrians' critique of neoclassical economics, from the perspective of neoclassical economics. It may be the case, a point which I'm leaving out of this discussion here, that Mises, Rothbard, Kirzner et al. are making the same mistake in their critiques of neoclassical economics, but that is not the point Caplan is trying to make. Rather, he is attempting to prove Austrians' arguments for Austrian points wrong.In order to do so, it is necessary for him to analyze the arguments put forth from the point of view of Austrian economics. After all, one cannot critique e.g. Mises's and Rothbard's very Austrian point that indifference cannot be manifested through action from a neoclassical point of view; the only result of doing so is confusion. And, unfortunately, confusion is the only thing a knowledgeable reader will gain from reading Caplan's article.I will here focus on only one of Caplan's arguments, the one on indifference. However, this should not be interpreted in his favor: the error unfortunately permeates the article. But the interpretation on indifference, and especially Mises's and Rothbard's rejection of it, is of fundamental importance. (And yes, I realize my saying so may be interpreted, especially by non-Austrians, as my being dogmatic rather than analytic in my approach. But let's see to the argument before drawing any premature conclusions.)Caplan seemingly attempts to make two points in this section. First, he wishes to show that individuals can indeed be indifferent even though Mises and Rothbard seemingly do not accept this view. Second, and in support of the first argument, he shows that focusing on action is limiting in that it may not in fact reveal preference but may be a result of true indifference. He even makes an admittedly nice rhetorical point that an actor may indeed through introspection (an obvious swipe at Austrians adhering to the Misesian method) know he is indifferent, yet still choose to purchase a sweater of a certain color instead of the other (the example used by Caplan).But this completely misses the point; Caplan simply doesn't get what Mises and Rothbard are talking about. Austrian economics is not another brand of neoclassical economics, even though some self-proclaimed Austrians claim so, but a different paradigm (just as Rothbard claims). Neoclassical economics tries to understand (or, rather, explain) choice, whereas Austrian economics are only indirectly interested in choice - Austrians study patterns arising due to action. Caplan obviously doesn't get (or chooses to disregard) this fact.From Caplan's neoclassical point of view, being interested in the individual's choice and therefore his true rather than revealed preference, it matters a great deal if an actor indeed doesn't care (i.e., is indifferent) if he ends up purchasing a blue or a green sweater. Caplan is trying to understand consumers' preferences, which is a necessary psychologism part of neoclassical economics (this necessity follows, in my view, from an erroneous focus on subjects' choice rather than the economically much more relevant action).Indifference makes a difference (no pun intended), since neoclassical economists are trying to explain and, perhaps more importantly (at least if we trust Friedman), predict choices. Our future predictions of market demand are dependent on our understanding if you strictly preferred the green sweater that you ended up buying - or if you really didn't care and could as easily have tossed a coin. (The latter, of course, signifies a strict preference for a sweater as compared to no sweater and/or the money you paid for it.)From this perspective, the action itself doesn't matter much since next time you might end up picking the blue sweater. In order to predict whether to produce only a billion green sweaters based on the data we have on your previous choices or if we should perhaps produce both blue and green sweaters, indifference is of fundamental importance. As Caplan's discussion implies, the Misesian and Rothbardian statements that such indifference is basically worthless since it cannot be revealed (manifested) through action are ridiculous and false.Taking this one step further, since neoclassical economists (like all of us) only have data on the actions taken - i.e., that you indeed bought the green sweater - it is very important to figure out what this means in order to correctly predict future actions as well as what to do with the data, how to interpret it, and how to use it. As was suggested above, a producer of sweaters need to know if the demand for green sweaters is due to strict consumer preference or simply coincidence; and, more importantly to the neoclassical economist, this producer and regulating agencies will hold you accountable if your predictions turn out wrong. So you need to know: was the action based on strict preference or not?But Caplan misses the basic point here: that neither Mises nor Rothbard are neoclassical economists. He also seems to misunderstand that Mises and Rothbard, as well as other Austrians, do not share neoclassical economists' view of economics. Mises and Rothbard do not dogmatically focus on action simply because they have a thing for action. They focus on action because their perception of economics is different from that of neoclassical economists such as Bryan Caplan.To Austrians, what is important is not an individual's choice. And by choice, I  here mean  a "meatier" concept than simply to make a decision; a choice necessarily includes the weighing or ranking of available alternatives as well as the preferences and preference rankings (and perhaps values) on which such a ranking is made whereas decision is simply the non-reflective selection of one of the alternatives. Choice, in other words, implies the process of reflecting on the meaning of selecting one rather than the other, whether decision is simply picking one.Austrians study action and, more importantly, the processes created and patterns arising in an economy due to individual action. The difference is fundamental and pervasive: Austrians try to understand market phenomena based on what can be observed in the market place - they do not (at least not primarily) try to predict people's choices.Let's recapitulate for the sake of clarity.Neoclassical economists necessarily tread into the territory of psychologists in order to try to understand people's true preferences (or lack thereof) through which their actions may be explained and, consequently, future actions predicted. Their focus is almost exclusively on trying to predict what will happen in the future, which makes the reasons for actions important - if we see future actions change, this means that people's reasons have changed. There is a one-to-one relationship between reason and actions, and the reason is the cause - and we need it in order to predict future effects (actions).Austrians do not attempt to predict the future, but wish to understand phenomena. How do we understand a phenomenon in the market? Only through tracing it back to its basic components, i.e. people's actions. Does it matter what exact reasons people had for those actions? Does it matter if a million consumers felt they were indifferent so they tossed a coin and they all got heads, so they purchased a million green sweaters? The answer is no. We are not attempting to explain why people chose green sweaters - we are attempting to understand (and explain general causal relationships) the effects of a million people suddenly buying green sweaters.As Austrians, we need only realize that there was something that made these million people choose to buy green sweaters rather than blue ones (or pants, or groceries, or nothing) and that this something (which could be unique for each of the million consumers) means they all - for whatever reason - preferred to pick up the green sweaters. Because we know, through introspection and experience, that if they did not prefer the green sweaters to the alternatives available to them, they would not purchase them.So we can without any problems whatsoever assume strict preference through observing action. This does not mean that the individuals' choice to actually buy the green sweaters was swift, obvious, and without agony. (These things do not matter to us, because we are not attempting to predict their future choices and do not need to understand their exact preference rankings.) It only means that we know that a million people ended up acting to buy green sweaters (rather than anything or nothing else), and from this - through our causal-realistic understanding of economic phenomena - we would expect to see certain things.This ties in to the Austrians "inability" to exactly predict when e.g. a bubble will burst or what the future price of green sweaters will be. We are not in the business of psychologizing or predicting people's actions, but only in understanding phenomena. As Austrian economists, therefore, we can say that the sudden actions of a million consumers to pick up and purchase green sweaters will create a sudden (perceived) shortage of green sweaters, which will spur production of green sweaters and, perhaps, investments in higher order goods to increase production of green sweaters. Simply because we would expect suppliers to assume (correctly) that there is an overall increase in the demand for green sweaters and also assume (correctly or not) that there are profit opportunities in producing green sweaters (rather than blue, or whatever) for next week's sales.We cannot say if the latter is true, of course, since the future is uncertain. We know from experience that entrepreneurs tend to make profits through more or less correctly anticipating people's actions, but we do not know how (or who or when).Neoclassical economists tend to focus on trying to systematically do what successful entrepreneurs do: predict future actions. And they try to do so through assuming they know something about the choice people make (or, more correctly: the choices people made), even though they can only observe people's actions. And based on this, these economists provide industrialists and regulators with predictions based on which the latter make plans.Yet it is, as Austrians realize, but a guessing game, and a pretty naive one at that. And, so far, this undertaking of theirs has been quite unsuccessful. After all, when is the last time a neoclassical economists accurately predicted, as is their aim, an event?Whereas I do not hold Caplan at all responsible for any of the failures of neoclassical economics, his critique of Austrian economics fails due to the neoclassical spectacles through which he has chosen to look at the works of Mises, Rothbard, and others. And the result is at best a spectacle.

In an article recently accepted for publication in the Quarterly Journal of Austrian Economics, I draft a model for explaining how firms emerge in the market place. Whereas theories of the firm generally attempt to explain the rationale for firms, their boundaries, and how they are internally organized, there are pretty much no studies at all on how firms emerge and what the process looks like.

This process is targeted in my article, and I use the fact that division of labor provides a production process with increasing returns to scale but that this division of labor is also restrained by the contextual degree of specialization. In the market, therefore, we will find a somewhat homogeneous specialization degree. Any actor choosing to limit the scope of his or her productive activities to a much further degree will find the products of his efforts incompatible with the surrounding market. Therefore, there is a trade-off between the increased efficiencies of division of labor and the cost of incompatibility. (more…)

In an article recently accepted for publication in the Quarterly Journal of Austrian Economics, I draft a model for explaining how firms emerge in the market place. Whereas theories of the firm generally attempt to explain the rationale for firms, their boundaries, and how they are internally organized, there are pretty much no studies at all on how firms emerge and what the process looks like.This process is targeted in my article, and I use the fact that division of labor provides a production process with increasing returns to scale but that this division of labor is also restrained by the contextual degree of specialization. In the market, therefore, we will find a somewhat homogeneous specialization degree. Any actor choosing to limit the scope of his or her productive activities to a much further degree will find the products of his efforts incompatible with the surrounding market. Therefore, there is a trade-off between the increased efficiencies of division of labor and the cost of incompatibility. This means the process towards greater efficiency in production processes will only slowly adopt an increased division of labor, which means there is no reason for firms: all factors are quite compatible as is.The rationale for firms, I argue, lies in the entrepreneurial aim to establish new structures of production that take advantage of previously unseen and unforeseen specialization and divisions of labor. In order to establish such structures, the entrepreneur must create an environment that is input- and output-compatible to the surrounding market while providing sufficient internal density between factors to support extra-market division of labor. The firm, therefore, is a vehicle with which the entrepreneur manages to realize production structures that are not only unimagined by others - but impossible to realize through market contracting.This article, at present titled "Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market," drafts a model for the process in which entrepreneurs organize firms in order to establish their imagined structures of production. In another article, recently presented at the Southern Economic Association's meeting in Atlanta, Ga., I attempt a further formalization of the model.These articles (and others) are available on my SSRN page.

In a previous post I discussed the well-known fact that economists’ predictions are always wrong, and why they always are. But one obvious problem with predictions was left out of the discussion, and I would like to discuss this problem in a separate post. In contrast to the previous post, which was quite general in tone and content, this issue is mainly methodological and somewhat philosophical.

The previous post discussed the problems of measurement and the very problematic assumption that “people are like rocks,” i.e. that individuals share a fixed and observable nature in the same way that rocks have common simple properties. I also stretched the discussion to cover the ever present tension between the Weberian concepts of erklären and verstehen.

The former kind of science strictly emphasizes explaining facts and establishing simple causal relationships that can be derived from the observable properties of the entity. The latter stresses the subjective understanding of what is going on, and finding a way of rationally establishing a way to “see” how things work and are related. Weber explicitly states that erklären is the purpose and method unique for the natural sciences whereas the social sciences need to have a verstehen-based perspective. Predictions, hence, are possible only in sciences based on the erklären methodology and this is the conflict in economics: a fundamentally social science attempting to make use of primarily (only?) the methods and methodology of the natural sciences.

But predictions are problematic in and of themselves even if we ignore the tension arising from using erklären methodology studying verstehen phenomena. The very nature of predictions imply the usage of historic data to say something about the future. As we know, and have known at least since the days of the Ancient Greeks, it does not follow from the fact that the sun has risen every morning for centuries that it will continue to do so. History and future are not the same and may even be very different. What makes the future so troublesome is that it is fundamentally uncertain and we cannot use the certain facts of history to create knowledge about it.

As was stressed in the previous post, extrapolating doesn’t necessarily make sense. Doing the same maneuver for predictions about the future from data about historical events makes even less sense. Tomorrow will not be exactly like yesterday, which is a fact everybody knows and should know. This fact is true for details as well. That a rock falls to the ground if dropped today does not mean it will do so tomorrow.

However, we can conclude that a rock will fall to the ground if dropped tomorrow if we can show what makes it drop and we can rely on the properties of these causes being the same tomorrow. A rock has a fixed nature with certain properties and these do not change. We have been able to establish that a rock is dead matter that responds to exogenous forces in a very reliable and predictable way – we know that a rock is a rock is a rock and that this means something in terms of its nature.

It may be the case that tomorrow does not have gravity or that all rocks have turned into lollipops, but that doesn’t change the fact that rocks, according to our defintion, are rocks and that they respond to different forces in certain ways. We cannot with complete certainty say that everything will be the same tomorrow, but we can make general statements that will hold true for the things, forces, and properties we have specified (if we have done a good job specifying them). 

Now try the same thing with a human being. An individual is an individual is an individual. If this is true in the same sense as a rock is a rock, then we should be able to establish if one and every individual likes ice cream, responds the same way to stimuli like heat and cold, reacts to a certain situation the same way with a high level of certainty. 

Try the latter and compare a rock with an individual. Expose the rock to exogenous forces and observe its “behavior” and what happens to it. Then expose an individual to some stimuli and observe the behavior. Repeat it and observe the behavior – is it exactly the same? You will find that different individuals react in different ways to stimuli – and that one individual’s reactions will change over time as he or she learns. The rock never learns.

So even if the way a rock is affected by certain experiments is not purely certain for the future, it is very much predictable. The way John Doe reacts to, e.g., a speeding car about to hit him is different every time – and may not [ever] be the same as how Jane Doe reacts. It is not predictable; we cannot know what will happen (i.e. how the individual will react). 

So how will people react to lower prices in a certain good? We can attempt to predict that tomorrow, if the price for widgets is 10% lower, people will purchase 500,000 more widgets. But that doesn’t make sense. If the price is indeed lower it does not follow that the people who bought a widget yesterday at the higher price are more likely to buy a widget again. It also doesn’t follow that people in general value the widget in the same way. 

The only thing we can say is that ceteris paribus people will tend to purchase more of the cheaper good, at least for as long as they subjectively expect to be better off through purchasing one [more]. People want to be better off (which follows from the definition of better) and therefore make choices to improve their situation – to the best of their ability. But their preferences change and their ranking of those preferences change – as do their needs, perspectives, experience, knowledge, etc. An individual is not an individual is not an individual, at least not the same way a rock is a rock is a rock.

The problem of induction is problematic in natural science where dead matter is studied, even though the deathness of matter makes its properties reliable and effects predictable. Add life to the equation and the problem of induction becomes insurmountable and obviously so. 

Some things do seem to be repeated over time and the saying that “history repeats itself” may be thought to disprove the point I am making. But it doesn’t. It may be true that history tends to repeat itself if we do not learn from it, but the problem is that there is no “we” in the sense that there is a “rocks.” Individuals are different from each other and they change over time; humankind may not learn from the lessons of history, but it is equally true that situations do not repeat themselves – only man-made abstractions of them do. It is rational to learn from the essence of a situation not to repeat it or its negative consequences, but it is equally rational to say that things have changed and therefore the outcomes may do so too.

The lesson to be learned is that collectivism doesn’t work when we speak of human behavior simply because human behavior is not as tightly bound to the properties of “human” as the effects on a rock are to its properties. The reason is that human consciousness is not necessarily the same as the human body – one could possibly predict the effects of stimuli in medicine, but not in economics. Medicine works with the properties of the human body, i.e. its constitution and chemical and biological relationships (however complex); economics studies human behavior, where one individual’s choice to act is not based on the same facts as another’s, and a specific individual tends to learn – and change – from experience.

[ad]In a previous post I discussed the well-known fact that economists' predictions are always wrong, and why they always are. But one obvious problem with predictions was left out of the discussion, and I would like to discuss this problem in a separate post. In contrast to the previous post, which was quite general in tone and content, this issue is mainly methodological and somewhat philosophical.The previous post discussed the problems of measurement and the very problematic assumption that "people are like rocks," i.e. that individuals share a fixed and observable nature in the same way that rocks have common simple properties. I also stretched the discussion to cover the ever present tension between the Weberian concepts of erklären and verstehen.The former kind of science strictly emphasizes explaining facts and establishing simple causal relationships that can be derived from the observable properties of the entity. The latter stresses the subjective understanding of what is going on, and finding a way of rationally establishing a way to "see" how things work and are related. Weber explicitly states that erklären is the purpose and method unique for the natural sciences whereas the social sciences need to have a verstehen-based perspective. Predictions, hence, are possible only in sciences based on the erklären methodology and this is the conflict in economics: a fundamentally social science attempting to make use of primarily (only?) the methods and methodology of the natural sciences.But predictions are problematic in and of themselves even if we ignore the tension arising from using erklären methodology studying verstehen phenomena. The very nature of predictions imply the usage of historic data to say something about the future. As we know, and have known at least since the days of the Ancient Greeks, it does not follow from the fact that the sun has risen every morning for centuries that it will continue to do so. History and future are not the same and may even be very different. What makes the future so troublesome is that it is fundamentally uncertain and we cannot use the certain facts of history to create knowledge about it.As was stressed in the previous post, extrapolating doesn't necessarily make sense. Doing the same maneuver for predictions about the future from data about historical events makes even less sense. Tomorrow will not be exactly like yesterday, which is a fact everybody knows and should know. This fact is true for details as well. That a rock falls to the ground if dropped today does not mean it will do so tomorrow.However, we can conclude that a rock will fall to the ground if dropped tomorrow if we can show what makes it drop and we can rely on the properties of these causes being the same tomorrow. A rock has a fixed nature with certain properties and these do not change. We have been able to establish that a rock is dead matter that responds to exogenous forces in a very reliable and predictable way - we know that a rock is a rock is a rock and that this means something in terms of its nature.It may be the case that tomorrow does not have gravity or that all rocks have turned into lollipops, but that doesn't change the fact that rocks, according to our defintion, are rocks and that they respond to different forces in certain ways. We cannot with complete certainty say that everything will be the same tomorrow, but we can make general statements that will hold true for the things, forces, and properties we have specified (if we have done a good job specifying them). Now try the same thing with a human being. An individual is an individual is an individual. If this is true in the same sense as a rock is a rock, then we should be able to establish if one and every individual likes ice cream, responds the same way to stimuli like heat and cold, reacts to a certain situation the same way with a high level of certainty. Try the latter and compare a rock with an individual. Expose the rock to exogenous forces and observe its "behavior" and what happens to it. Then expose an individual to some stimuli and observe the behavior. Repeat it and observe the behavior - is it exactly the same? You will find that different individuals react in different ways to stimuli - and that one individual's reactions will change over time as he or she learns. The rock never learns.So even if the way a rock is affected by certain experiments is not purely certain for the future, it is very much predictable. The way John Doe reacts to, e.g., a speeding car about to hit him is different every time - and may not [ever] be the same as how Jane Doe reacts. It is not predictable; we cannot know what will happen (i.e. how the individual will react). So how will people react to lower prices in a certain good? We can attempt to predict that tomorrow, if the price for widgets is 10% lower, people will purchase 500,000 more widgets. But that doesn't make sense. If the price is indeed lower it does not follow that the people who bought a widget yesterday at the higher price are more likely to buy a widget again. It also doesn't follow that people in general value the widget in the same way. The only thing we can say is that ceteris paribus people will tend to purchase more of the cheaper good, at least for as long as they subjectively expect to be better off through purchasing one [more]. People want to be better off (which follows from the definition of better) and therefore make choices to improve their situation - to the best of their ability. But their preferences change and their ranking of those preferences change - as do their needs, perspectives, experience, knowledge, etc. An individual is not an individual is not an individual, at least not the same way a rock is a rock is a rock.The problem of induction is problematic in natural science where dead matter is studied, even though the deathness of matter makes its properties reliable and effects predictable. Add life to the equation and the problem of induction becomes insurmountable and obviously so. Some things do seem to be repeated over time and the saying that "history repeats itself" may be thought to disprove the point I am making. But it doesn't. It may be true that history tends to repeat itself if we do not learn from it, but the problem is that there is no "we" in the sense that there is a "rocks." Individuals are different from each other and they change over time; humankind may not learn from the lessons of history, but it is equally true that situations do not repeat themselves - only man-made abstractions of them do. It is rational to learn from the essence of a situation not to repeat it or its negative consequences, but it is equally rational to say that things have changed and therefore the outcomes may do so too.The lesson to be learned is that collectivism doesn't work when we speak of human behavior simply because human behavior is not as tightly bound to the properties of "human" as the effects on a rock are to its properties. The reason is that human consciousness is not necessarily the same as the human body - one could possibly predict the effects of stimuli in medicine, but not in economics. Medicine works with the properties of the human body, i.e. its constitution and chemical and biological relationships (however complex); economics studies human behavior, where one individual's choice to act is not based on the same facts as another's, and a specific individual tends to learn - and change - from experience.

The general conclusion at the moment seems to be that there is a need for a new set of theories of the market and economics – “crisis economics.” The reason for this need is the fact that “no one” predicted the current downturn and crisis, and that the predictions made turned out as wrong as they could possibly be. In fact, many economists predicted increased growth and continued prosperity while the true future held an economy in freefall with a number of imploding industries and sectors. 

In an opinion piece in the National Post the obvious question is asked: Why Do We Have Economists? The question had to be asked, especially since there has been no real “blame game,” no real and public debate on why all predictions turned out wrong, and no consequences for the economics profession. After all, economists often stress the fact that action is taken under rational assumptions of consequences and that all actions have consequences of some form. The army predicting economists is obviously an exception to that rule.

As some sociology professors frequently joking: say what you will about economists, but you will always get a straight and precise answer – and you always know that it is wrong. So the question asked by the editor of the National Post should be well taken; it is an important one. Why do we have economists?

But there is a question that is more important, especially for the professional economists who make all these “always wrong” predictions, and that is what makes the predictions always turn out wrong? The answer to this question lies in the error of Milton Friedman in his now famous (should-be infamous) article “The Methodology of Positive Economics” and the people who followed him (and still do).

Economics prides itself of being a deductive science, i.e. that new knowledge is deduced directly and logically from true premises or assumptions. Friedman argued that it doesn’t matter if the assumptions are wrong as long as one can extract general rules from which one can make predictions that are somewhat reliable and come close to the truth. What he spelled out was a theory of economics aiming to be a natural science, where exactness is both important and possible. In economics, however, we should learn that exactness is neither important nor possible.

In order to provide a positive, rigorous science that can produce exact predictions, one has to through out all understanding (in the Weberian verstehen-sense) and rely solely on cold data. One cannot make predictions unless that which is studied is perfectly observable and with clear boundaries. But what if we apply this line of thinking on human action, which is the core of what is studied in economics. Are the causes, nature, and consequences of human action perfectly observable and have clear boundaries? How do we measure the causes of an individual’s actions? His choice of action? The action itself? Its consequences?

The latter comes closer than the former, but it is still not even close to having the properties of the objects studied in the natural sciences. Mixing x grams of A with y grams of B may always create the substance C, and exposing D to E or F may always show exactly z – but doing m to one individual does not necessarily create the same effect as doing m to another. People are not simply responding perfectly and blindly to exogenous influences, there is a whole lot of other things going on that are at least as important as certain influences. Some call it “free will,” but you don’t have to go as far into metaphysical or religious pondering to realize that people are neither rocks nor [simpler] animals.

The problem of economic prediction is just that underlying assumption that we can “easily” predict the outcome of numerous people through meddling with some of the variables that affect people’s choices. It is simply not the case that different individuals choose to act the same way when exposed to (or influenced by) the same stimuli. Our bodies may – may – react in the same way, but our minds do not. 

To this some might retort: thanks to the law of large numbers we can generalize our conclusions despite individuals not being alike. When the law of large numbers is applicable, we can simply assume that if we just have a sample large enough all potentially skewed or unrepresentative data will even out and we will find The Truth about human beings. But this does not change the problem at hand – we are still generalizing in the same way, but only with more data and more individuals. 

Even if we accept the law of large numbers as a sufficient reason to use statistics to understand people, we will have to face the problem with their not being the same. That people, being boundedly rational, would always choose more over less (which necessarily follows from the definition of choice) does not mean they will choose a particular outcome over another in every situation. Each individual will make a subjective assessment of his preferences and rank them, then make a choice based on what he knows of his ranked preferences (this is the decision process, whether it is carried out consciously and reflectingly or not). But the ranking may change depending on circumstances as well as what the individual has learned.

Making perfect predictions the way Friedman proposed means we must take the quality of being human out of every individual, or at least “even it out” in order to calculate precise predictions. What do we learn by knowing that people without personalities and without “inner depth” (some call it soul) would necessarily act according to our the predictions? Probably not much.

Furthermore, the predictions are based on extrapolating well beyond what is reasonable. Establishing one person’ s assessment of everyday risk and the costs he accepts to take care to avoid this risk, and translating it into dollar amounts, does not necessarily give us monotonous knowledge of this individuals preferred choices. It does not follow that he would accept a high risk to lose his life if he was paid some muliple of the cost he was willing to take on for smaller risks.

Predictions simply do not cut it. So why do we have economists?

The answer to this question is that we do not need most economists, but we do, at the same time, need economists more than ever. The reason for this is that the economists working on predicting the exact outcome of hundreds or thousands (or millions or billions) of individuals’ simultaneous choices are worthless, their methodology is fundamentally flawed and they are nothing but frauds. And they should be treated accordingly.

While we think of what to do with the predicting economists we need to find the real economists, the people who understand the market and can tell us how it functions and what is required for it to function well. Very few economists understand what the market is about and how the emergent order arises, subsists, and what it effectuates. These economists were able to say a long time ago that we were heading towards a meltdown, and they did. They even published these warnings, but nobody listened or wanted to hear about it. “Nobody” here denotes the prediconomists and the political elite that [usually] hire them. 

Economists need to do what businesses did a long time ago: go back to basics. There is no need for armies of economists trying to predict the exact results of public policy, of interest rate changes, or monetary policy, etc. The use of prediconomists is not to learn about the future or politics, but as “useful idiots” disguising blind, naive, and ignorant attempts to regulate people’s choices through granting the commandeering of society an air of scientificity. And they serve well as scapegoats when their predictions turn out to be wrong and the people in charge can hide behind their “good intentions.”

What there is a need for is real economists who do not engage in futile attempts to “scientifically” make exact predictions of people’s future choices. We need people to tell us how the market works so that we can reap the full fruits of our hard work and profit from the risks we take.

[ad]The general conclusion at the moment seems to be that there is a need for a new set of theories of the market and economics - "crisis economics." The reason for this need is the fact that "no one" predicted the current downturn and crisis, and that the predictions made turned out as wrong as they could possibly be. In fact, many economists predicted increased growth and continued prosperity while the true future held an economy in freefall with a number of imploding industries and sectors. In an opinion piece in the National Post the obvious question is asked: Why Do We Have Economists? The question had to be asked, especially since there has been no real "blame game," no real and public debate on why all predictions turned out wrong, and no consequences for the economics profession. After all, economists often stress the fact that action is taken under rational assumptions of consequences and that all actions have consequences of some form. The army predicting economists is obviously an exception to that rule.As some sociology professors frequently joking: say what you will about economists, but you will always get a straight and precise answer - and you always know that it is wrong. So the question asked by the editor of the National Post should be well taken; it is an important one. Why do we have economists?But there is a question that is more important, especially for the professional economists who make all these "always wrong" predictions, and that is what makes the predictions always turn out wrong? The answer to this question lies in the error of Milton Friedman in his now famous (should-be infamous) article "The Methodology of Positive Economics" and the people who followed him (and still do).Economics prides itself of being a deductive science, i.e. that new knowledge is deduced directly and logically from true premises or assumptions. Friedman argued that it doesn't matter if the assumptions are wrong as long as one can extract general rules from which one can make predictions that are somewhat reliable and come close to the truth. What he spelled out was a theory of economics aiming to be a natural science, where exactness is both important and possible. In economics, however, we should learn that exactness is neither important nor possible.In order to provide a positive, rigorous science that can produce exact predictions, one has to through out all understanding (in the Weberian verstehen-sense) and rely solely on cold data. One cannot make predictions unless that which is studied is perfectly observable and with clear boundaries. But what if we apply this line of thinking on human action, which is the core of what is studied in economics. Are the causes, nature, and consequences of human action perfectly observable and have clear boundaries? How do we measure the causes of an individual's actions? His choice of action? The action itself? Its consequences?The latter comes closer than the former, but it is still not even close to having the properties of the objects studied in the natural sciences. Mixing x grams of A with y grams of B may always create the substance C, and exposing D to E or F may always show exactly z - but doing m to one individual does not necessarily create the same effect as doing m to another. People are not simply responding perfectly and blindly to exogenous influences, there is a whole lot of other things going on that are at least as important as certain influences. Some call it "free will," but you don't have to go as far into metaphysical or religious pondering to realize that people are neither rocks nor [simpler] animals.The problem of economic prediction is just that underlying assumption that we can "easily" predict the outcome of numerous people through meddling with some of the variables that affect people's choices. It is simply not the case that different individuals choose to act the same way when exposed to (or influenced by) the same stimuli. Our bodies may - may - react in the same way, but our minds do not. To this some might retort: thanks to the law of large numbers we can generalize our conclusions despite individuals not being alike. When the law of large numbers is applicable, we can simply assume that if we just have a sample large enough all potentially skewed or unrepresentative data will even out and we will find The Truth about human beings. But this does not change the problem at hand - we are still generalizing in the same way, but only with more data and more individuals. Even if we accept the law of large numbers as a sufficient reason to use statistics to understand people, we will have to face the problem with their not being the same. That people, being boundedly rational, would always choose more over less (which necessarily follows from the definition of choice) does not mean they will choose a particular outcome over another in every situation. Each individual will make a subjective assessment of his preferences and rank them, then make a choice based on what he knows of his ranked preferences (this is the decision process, whether it is carried out consciously and reflectingly or not). But the ranking may change depending on circumstances as well as what the individual has learned.Making perfect predictions the way Friedman proposed means we must take the quality of being human out of every individual, or at least "even it out" in order to calculate precise predictions. What do we learn by knowing that people without personalities and without "inner depth" (some call it soul) would necessarily act according to our the predictions? Probably not much.Furthermore, the predictions are based on extrapolating well beyond what is reasonable. Establishing one person' s assessment of everyday risk and the costs he accepts to take care to avoid this risk, and translating it into dollar amounts, does not necessarily give us monotonous knowledge of this individuals preferred choices. It does not follow that he would accept a high risk to lose his life if he was paid some muliple of the cost he was willing to take on for smaller risks.Predictions simply do not cut it. So why do we have economists?The answer to this question is that we do not need most economists, but we do, at the same time, need economists more than ever. The reason for this is that the economists working on predicting the exact outcome of hundreds or thousands (or millions or billions) of individuals' simultaneous choices are worthless, their methodology is fundamentally flawed and they are nothing but frauds. And they should be treated accordingly.While we think of what to do with the predicting economists we need to find the real economists, the people who understand the market and can tell us how it functions and what is required for it to function well. Very few economists understand what the market is about and how the emergent order arises, subsists, and what it effectuates. These economists were able to say a long time ago that we were heading towards a meltdown, and they did. They even published these warnings, but nobody listened or wanted to hear about it. "Nobody" here denotes the prediconomists and the political elite that [usually] hire them. Economists need to do what businesses did a long time ago: go back to basics. There is no need for armies of economists trying to predict the exact results of public policy, of interest rate changes, or monetary policy, etc. The use of prediconomists is not to learn about the future or politics, but as "useful idiots" disguising blind, naive, and ignorant attempts to regulate people's choices through granting the commandeering of society an air of scientificity. And they serve well as scapegoats when their predictions turn out to be wrong and the people in charge can hide behind their "good intentions."What there is a need for is real economists who do not engage in futile attempts to "scientifically" make exact predictions of people's future choices. We need people to tell us how the market works so that we can reap the full fruits of our hard work and profit from the risks we take.

This is a legitimate question even though it doesn’t necessarily imply that economists (American such, at least) in general are Republicans. But it is a fact that economists in general tend to be to the “right” (according to the common understanding of the political right) of e.g. sociologists and political scientists. It is also a fact that you will find more libertarians in this discipline than in virtually any other such in academia. Why is this so?

The general leftist might not find this question troubling, since the “obvious” answer is that economists work with money and capital and therefore have a natural and benefiting relationship with capital owners in our capitalist economy. This may be an answer that explains some individuals’ actions and convictions, but it is hardly the reason economists in general – theoretically or in reality – tend to have free market ideals. But it may be an easy way of avoiding over-simplifying and over-politicizing the issue.

Some may argue the other side of the simplified leftist coin: that there is a “selection bias” and therefore that people who like money and capital(ism) are more likely to choose to work with and study money and capital. This too may explain why some of the individuals in economics feel they belong on the right. But it doesn’t explain why virtually a whole discipline identify with the “right” side of the political spectrum.

The real answer should be based in simple economic theory: the theory of incentives, or, rather, the assumption that people do what they have an incentive to do. This is a core understanding in economics of the true nature of human action. People do what they have an incentive to do, and understanding this may lead the individual economist researcher to the solution to many a problem. Understanding that people do what they have an incentive to do explains virtually any social standards or institutions.

What this means here is that economists think this way and therefore necessarily think this way also with respect to politics and the organization of government. Seeing that individuals in government are acting on their incentives means seeing all the possible problems with government. For instance, take any democratically elected parliament taking the proposed budget to a vote. If the members of parliament would pay whatever is spent themselves they would have a great incentive of minimize the budget, make sure that it is spent and distributed efficiently, that only projects with great chances of success and with real benefits would see the light of day. But this is not the case; politicians choose what to spend other people’s money on.

Imagine what this screwed up set of incentives would mean in another setting, e.g. a common grocery store. We know that the owner or manager of the store makes sure to hire those he can trust to sell (and not steal) the groceries and he will only buy those groceries he knows people will buy. Why? Because his ass is on the line – if he spends most of the budget on groceries nobody wants he will lose customers and therefore his own money…and perhaps the whole store. 

Now imagine the same situation but where the owner or manager can decide how much money he gets to spend through simply taking other people’s money. Whoever lives in the area has to pay whatever percentage of his income to the owner of the grocery store so that the grocerer can buy goods to offer his customers. Now what are the incentives for him to buy only good products, only products people will like, and hire people he can trust? It makes more sense to buy the cheapest groceries, no matter if people like them, and hire the people he likes or people he feels sorry for or people he wants to do a favor. 

It is not necessary to ask which grocery store will be of greater utility for the customer, even if some of the groceries in the “political” grocery store are for free. 

This is how any political parliament works: politicians claim they are limited by their budgets, but they get to decide the size of the budget (and take the money necessary) and even if they should stay within the budget. It is often the case that they spend way more than they take from people, thereby not only spending people’s earned incomes but also the money they will earn in the future. So any political organization is, in terms of incentives, totaly screwed up. Or, to translate it into economic lingo, the incentives between the principal (voter) and agents (politicians) are misaligned.

So it makes sense for economists to identify with whatever politician that seems to understand more (read: seems to be less ignorant) about these things. And these people, at least rhetorically, are often found in the political right. I say rhetorically, since it is pretty obvious to whoever understands politics that in the choice between Bush and Obama neither one understands the first thing about economics. But Bush was able to make it sound like he had a fraction of a clue. 

The interesting point is not really that economists identify with the political right, but rather why they do not follow their theoretical understanding all the way through and demolish the State – at least in their thinking. Some of them clearly do (I am one), but not very many. 

So what we have here is really a whole academic discipline that understands, or supposedly understands, economics and therefore can identify the lack of aligned incentives in political organization – but don’t do so all the way. Economists either do not fully believe economic theory or they do not believe government is what it is (and claims to be). Which is it?

Some clearly do not understand and do not wish to understand economic theory nor apply it on other things than their precious formulas and functions. Such economists will never find any truth and will not produce anything of value to anyone. But what about the rest? It is clear that many economists live in symbiosis with the State and therefore do not wish to think about it in less positive terms. After all, the government employs a lot of economists and economists find it very prestigeous to work for the people with political power. So they simply neglect to apply their economic understanding on the organization they wish to serve.

So how about the rest, i.e. economists who do understand economic theory and wo do not find it necessary to lie to themselves in what regards the State? The answer to this question is what is very sad. It should be the case that economists who end up identifying with the political “right” while supporting government simply do so because they are as brainwashed as most people. Despite being scholars in economics they have learned throughout their lifetimes that there is no way to survive without government.

Economists (many of them) may not like government, but they accept it and even support it. And they use their sound theories to make government more efficient and effective – simply because they have been taught that there is no other way. To a free-thinking individual with economic understanding this is of course the same as saying that a certain industry “must” function like the “statist” grocery store mentioned above – but that we need to make its wasteful operations as efficient and effective as possible not to get “too much waste.”

Anyone understanding the competitive market understands that waste is not acceptable, that waste is minimized automatically through the profit motive and the pressure from competition. The problem here is not only that government is a monopoly and that the profit motive is nonexistent. The problem is also that it is an organization that can “legitimately” force its customers (and non-customers) to pay for its costs while it can supply whatever it wishes at whatever cost it finds most appropriate. 

Government, in other words, is an organization that is much much worse than any monopoly mentioned in economic theory – it is a monopoly cubed, judging from the weird incentives it creates and the effect it has on the market. There is therefore no way of understanding economists’ support for government other than that they have given up in the sense not applying what they know to it. Brainwashing works, even on those who have dedicated your whole professional lives to learning the truth – and when the truth speaks out clearly against government.

[ad]This is a legitimate question even though it doesn't necessarily imply that economists (American such, at least) in general are Republicans. But it is a fact that economists in general tend to be to the "right" (according to the common understanding of the political right) of e.g. sociologists and political scientists. It is also a fact that you will find more libertarians in this discipline than in virtually any other such in academia. Why is this so?The general leftist might not find this question troubling, since the "obvious" answer is that economists work with money and capital and therefore have a natural and benefiting relationship with capital owners in our capitalist economy. This may be an answer that explains some individuals' actions and convictions, but it is hardly the reason economists in general - theoretically or in reality - tend to have free market ideals. But it may be an easy way of avoiding over-simplifying and over-politicizing the issue.Some may argue the other side of the simplified leftist coin: that there is a "selection bias" and therefore that people who like money and capital(ism) are more likely to choose to work with and study money and capital. This too may explain why some of the individuals in economics feel they belong on the right. But it doesn't explain why virtually a whole discipline identify with the "right" side of the political spectrum.The real answer should be based in simple economic theory: the theory of incentives, or, rather, the assumption that people do what they have an incentive to do. This is a core understanding in economics of the true nature of human action. People do what they have an incentive to do, and understanding this may lead the individual economist researcher to the solution to many a problem. Understanding that people do what they have an incentive to do explains virtually any social standards or institutions.What this means here is that economists think this way and therefore necessarily think this way also with respect to politics and the organization of government. Seeing that individuals in government are acting on their incentives means seeing all the possible problems with government. For instance, take any democratically elected parliament taking the proposed budget to a vote. If the members of parliament would pay whatever is spent themselves they would have a great incentive of minimize the budget, make sure that it is spent and distributed efficiently, that only projects with great chances of success and with real benefits would see the light of day. But this is not the case; politicians choose what to spend other people's money on.Imagine what this screwed up set of incentives would mean in another setting, e.g. a common grocery store. We know that the owner or manager of the store makes sure to hire those he can trust to sell (and not steal) the groceries and he will only buy those groceries he knows people will buy. Why? Because his ass is on the line - if he spends most of the budget on groceries nobody wants he will lose customers and therefore his own money...and perhaps the whole store. Now imagine the same situation but where the owner or manager can decide how much money he gets to spend through simply taking other people's money. Whoever lives in the area has to pay whatever percentage of his income to the owner of the grocery store so that the grocerer can buy goods to offer his customers. Now what are the incentives for him to buy only good products, only products people will like, and hire people he can trust? It makes more sense to buy the cheapest groceries, no matter if people like them, and hire the people he likes or people he feels sorry for or people he wants to do a favor. It is not necessary to ask which grocery store will be of greater utility for the customer, even if some of the groceries in the "political" grocery store are for free. This is how any political parliament works: politicians claim they are limited by their budgets, but they get to decide the size of the budget (and take the money necessary) and even if they should stay within the budget. It is often the case that they spend way more than they take from people, thereby not only spending people's earned incomes but also the money they will earn in the future. So any political organization is, in terms of incentives, totaly screwed up. Or, to translate it into economic lingo, the incentives between the principal (voter) and agents (politicians) are misaligned.So it makes sense for economists to identify with whatever politician that seems to understand more (read: seems to be less ignorant) about these things. And these people, at least rhetorically, are often found in the political right. I say rhetorically, since it is pretty obvious to whoever understands politics that in the choice between Bush and Obama neither one understands the first thing about economics. But Bush was able to make it sound like he had a fraction of a clue. The interesting point is not really that economists identify with the political right, but rather why they do not follow their theoretical understanding all the way through and demolish the State - at least in their thinking. Some of them clearly do (I am one), but not very many. So what we have here is really a whole academic discipline that understands, or supposedly understands, economics and therefore can identify the lack of aligned incentives in political organization - but don't do so all the way. Economists either do not fully believe economic theory or they do not believe government is what it is (and claims to be). Which is it?Some clearly do not understand and do not wish to understand economic theory nor apply it on other things than their precious formulas and functions. Such economists will never find any truth and will not produce anything of value to anyone. But what about the rest? It is clear that many economists live in symbiosis with the State and therefore do not wish to think about it in less positive terms. After all, the government employs a lot of economists and economists find it very prestigeous to work for the people with political power. So they simply neglect to apply their economic understanding on the organization they wish to serve.So how about the rest, i.e. economists who do understand economic theory and wo do not find it necessary to lie to themselves in what regards the State? The answer to this question is what is very sad. It should be the case that economists who end up identifying with the political "right" while supporting government simply do so because they are as brainwashed as most people. Despite being scholars in economics they have learned throughout their lifetimes that there is no way to survive without government.Economists (many of them) may not like government, but they accept it and even support it. And they use their sound theories to make government more efficient and effective - simply because they have been taught that there is no other way. To a free-thinking individual with economic understanding this is of course the same as saying that a certain industry "must" function like the "statist" grocery store mentioned above - but that we need to make its wasteful operations as efficient and effective as possible not to get "too much waste."Anyone understanding the competitive market understands that waste is not acceptable, that waste is minimized automatically through the profit motive and the pressure from competition. The problem here is not only that government is a monopoly and that the profit motive is nonexistent. The problem is also that it is an organization that can "legitimately" force its customers (and non-customers) to pay for its costs while it can supply whatever it wishes at whatever cost it finds most appropriate. Government, in other words, is an organization that is much much worse than any monopoly mentioned in economic theory - it is a monopoly cubed, judging from the weird incentives it creates and the effect it has on the market. There is therefore no way of understanding economists' support for government other than that they have given up in the sense not applying what they know to it. Brainwashing works, even on those who have dedicated your whole professional lives to learning the truth - and when the truth speaks out clearly against government.