Regularities, Science, And Austrian Economics

Today is the winter solstice - the day celebrated over 4000 years ago as marking the birth of the pagan god Mithras, the "Unconquered Sun," the patron of contracts, the subject of a previous post.

From the summer solstice till today, nights keep getting longer and longer. Night would completely swallow day were it not for this day, after which days start lengthening. And the sun remains unconquered - or so the ancients thought.

If we think about how our remote ancestors made "scientific" discoveries - like the equinoxes, solstices, seasons, and tides - we see the importance of "regularities." When there are regularities, the world is no longer chaos and confusion, and certain events can be accurately predicted. This kind of "knowledge" mattered greatly to nomads, just as they did to settled farmers or those who lived off the oceans. The methodology consisted of observation and measurement. This is how the first almanacs and calendars were created. This remains the basic method of "science" till this day, especially Physics.

Whereas the natural sciences and Physics in particular have advanced tremendously, thereby improving our lives, it remains a queer fact that the Science of Economics appears very late in human history. It was unknown to the ancient Greeks as well as to the Romans. Chanakya's Arthashastra has nothing to do with Economics at all, and is what I consider to be a treatise on the public administration of a totalitarian State. The first real economists of the world are from 16th century Spain - the "Scholastics" - and Lew Rockwell's speech in their honour provides a good introduction to them. Adam Smith had no idea of their work - and his Wealth of Nations came only in 1776. Why did the Science of Economics take such a long, long time to appear?

In my view, the simple answer to this question lies in the basic truth that there are no observable and measurable "regularities" in economic affairs. All the "data" that anyone can collect will always reveal a continuous flux. It is for this precise reason that "positivism" in Economics - based on statistics and mathematics - can never work.

Let us take an example from modern commercial "knowledge": a recent report from Deutsche Bank on inflation and "monetary policy" in India (this link is available for the next 90 days only). The "research team" of this major multinational bank is looking for "regularities" so as to be able to make "predictions" - but the stark fact remains that they cannot find any. Their data-crunching reveals that different "rates of inflation" are occurring in different classes of goods.

This is proof of a very huge error in mainstream Economics - the belief that there exists a strict mathematical relationship between the money supply and the "price level." There is, in fact, no such price level at all. All the data is in a state of flux. Thus, the scientific basis of "monetary policy" is complete nonsense. If there was "sound money," commercial banks would not waste money "studying" such things.

In any case, inflationism is "deliberate policy." It is the deliberate choice of an immoral and anti-social method of financing State expenditure: and banks should know that.

The credit for making Economics truly "scientific" goes to the Austrian School, whose founder, Carl Menger, discovered the idea of "subjectivity" - that is, of valuation within the individual mind - in his very first work of 1871, just about 100 years after Adam Smith. This unique approach - of looking for regularities within the mind rather than in the outside world of observation and measurement - took him directly into methodology, which was the subject of his second book in 1883. These initial ideas were fully developed by Ludwig von Mises in the next century.

At the core, the uniquely Austrian method lies in an examination of the "logical structure of the human mind" - an exercise that reveals certain "categories of thought" in matters economic that are common to all of us. For example, the category of Capital exists very much in the mind of the unlettered nomadic herdsman, who keeps a careful eye on the size of his herd to make sure he is not "consuming capital." Nomadic herdsman were the first "capitalists" - and cattle were money in ancient times. The word "pecuniary" has its root in cattle.

Once we have our focus on the inner workings of the mind - how it thinks, the "laws of thought" that guide human action - we find an altogether hidden set of "regularities": these reveal, in brief, that the indirect exchange economy of The Market is completely "human." It is our "natural order." "Indirect exchange" refers to the intermediation of Money - a "medium of exchange," something that trading minds spontaneously created: Indeed, in Menger's Principles of Economics (1871) you will find a section "On the Origin of Money" that makes for highly enjoyable reading, written in lucid prose with pertinent references to ages past, unlike the "reports" and other jazz that come to us nowadays from the State, the universities, the chambers of commerce, and even multinational commercial banks, with all the numbers and figures and all that "positivist" measurement of the external world.

[Menger's Principles can be downloaded free here, thanks, of course, to the Mises Institute. Click on Chapter Eight to begin reading about the origin of money.]

A PhD scholar recently wrote to me about his proposal to build a computer-intensive, "agent-based model to study volatility." It seems this approach is proceeding fast apace in many western universities - a kind of "growth area," if you know what I mean. All I did was to point out the futility of looking for theory in "volatility." Theory must be looked for in "regularity."