Why I Despise Central Banking, Keynes, And Keynesians Like Paul Krugman

Western Europe, and, in particular, England, developed ahead of the rest of the world only because here the people managed to contain their rulers. Kings, and their royal servants, had to "obey the law" no less than the people. Property and contracts were thus secure from State predation. Economic development naturally followed. In England, the beginning was in 1215 AD - the signing of the Magna Carta. With this, there was "due process," habeas corpus, and much more. After this, the people said, of their rulers:

The King is UNDER God and the Law

and

There is no King where Will rules and not the Law

Such events never happened in nations like ours. Our rulers were always arbitrary.


With the coming of written constitutions, a new concept emerged alongside that of the Rule of Law - and that is "limited government": the purpose of constitutions was to limit the powers and scope of the State. There are two effective means of limiting this power: one, by constitutional law; and the second, by the Budget.


Both these limits to government have been overthrown in modern times by the Keynesians, what with central banking and fiat paper money. These have been weapons in the hands of rulers to buy up support and to finance anything and everything to their own glory, from wars to welfare to space exploration. Entire parliaments can be bought. This is particularly true of India.


The whole world has been inflated. Money is no longer something "hard." It is just government paper. 


Yet, this government paper still has a "promise to pay" inscribed upon it, signed by the central banker. This promise - which makes the note a solemn contract - is meaningless today. The note is actually a Property Title. Today, there is no property backing this title. This is the problem the whole world is facing.


These central banksters practice "fractional reserve banking" with private bankers who are members of their paper money cartel. They say they are "lenders of last resort." Money as well as banking become corrupt under such a system. 


We need gold as money - and free private banking under ordinary commercial law. The writings of Jesus Huerta de Soto are vital in this context. And there is an essay on their import in my Natural Order: Essays Exploring Civil Government & the Rule of Law, which you can read online here. This version is dated 2007 - and I am hoping to have a new edition out next year.


The Keynesians have a very different view of money and banking - one based on "immorality." Keynes claimed to be an "amoralist" - but that was just his homosexuality. As an economist of money and banking, he was a pucca immoralist. Read about Keynes and the "ruling class" who adopted his ideas wholesale in this brief article by Garet Garret. Also, do read the article "Why the State demands control of money" by Hans-Hermann Hoppe.


Today, the most prominent Keynesian in the world is the Nobel laureate Paul Krugman. On the crisis in the Eurozone, Krugman writes that the best way out is to resort to "the power of the printing press" - and let the European Central Bank do the needful, even if current rules do not permit it. 


Really! If printing money could produce wealth, Indians would have been rich long, long ago.


Indeed, even producing more gold and silver does NOT create wealth, as the history of Spain and Portugal testify. The silver mines of Potosi and all the gold looted from South America did not make these nations rich. 


Britain got rich when gold was exported by the East India Company in exchange for spices - much to the displeasure of the mercantilists. What constitutes the "wealth of nations"? Adam Smith answered that in 1776 - and the plain answer was that it was NOT the hoard of bullion. If so, what can more irredeemable paper notes accomplish?


But Keynesian errors are not new. Ludwig von Mises, in his Notes & Recollections, writes of Carl Menger that his essay on "Geld" (money) which he contributed to the German-language Encyclopaedia of the Social Sciences was brilliant. A few pages later, Mises writes:

For obvious reasons I frequently discussed G. F. Knapp's Staatliche Theorie des Geldes (State Theory of Money) with Menger. His answer was, "It is the logical development of Prussian police science. What are we to think of a nation whose whose elite, after two hundred years of Economics, admire such nonsense, which is not even new, as highest revelation? What can we still expect of such a nation?"

Menger, Mises writes, foresaw the destruction of Old Europe. He foresaw the wars that engulfed the whole world. All these wars were financed by "funny money." And these wars will forever continue until the State is once again "limited" by the Budget. And money is gold. Money is private.


Mises once wrote that these "intellectual battles" of our time are something everyone must plunge into - if civilisation is to be saved. These are not difficult issues to understand: what is money? what is banking? etc. I see people crack their brains on crossword puzzles, computer games and Sudoku every day. Yet, these are just pleasurable pastimes, meant to banish boredom.


Surely people can crack their brains at the vital issues of our age - money and banking? The future of our kids - and theirs - depend on it. If Krugman-types win the day, all will be lost.


Paul Krugman also wants to "protect" corrupt banking practices. He wants the power of the printing press to wipe out banking sector losses - irrespective of how much inflation will surely follow, and how much capital loss ordinary people will have to suffer. At least we in India ought to know better than to endure continued inflationism to fund welfare.


In the USSA, there is only one presidential candidate who knows money and banking well - and that is Ron Paul. His photograph graces this post. He wants to "end the Fed." He wants to end war too. He stands for Gold, Freedom, and Peace. 


I wish Ron Paul would add PROPERTY to this list. Without property, there can be no freedom; there can be no "limited government"; there can be no "rule of law": rechtstaat.


Ron Paul will succeed - and civilisation will be saved - only if all you people out there STUDY money and banking and arrive at your own decisions as to what is truth and what is falsehood; what is good, and what is evil.


So, don't "agitate" at political rallies before agitating your brains first.


This is my sincere advice to you all. 

On Kings, For Kings: Take #2

This morning, at the tea-shop, I met two Gurkhas from Nepal. One said he'd been in Pondicherry for 12 years. The other said he'd been here for 26 years! Both said that they'd prefer to stay back home - if only their country had some economic prospects to offer. Both said that today things were far worse than during King Birendra's reign. They decried Nepal's politicians. And they did not say anything good about their new king, Gyanendra, or his son, Paras.


Hans-Hermann Hoppe comes to mind. In his magnificent book Democracy: The God That Failed Hoppe puts forward the thesis that "traditional monarchies" are always much better than democracies. Yet, if we look around, we see so many kings who don't know a thing about government: Thailand, Nepal, Bhutan, Japan - and even England and all the Crowned Heads of Europe.


To me (and I do believe Hoppe will concur with me on this) the greatest monarchs of Europe were the Hapsburgs - and America did the world a great disservice by pulling them down. Of course, they had their own tragedies, too - and the mysterious death/suicide of Crown Prince Rudolf was one of these. It damaged Carl Menger's career, for sure, for Menger was Rudolf's teacher.


In the world of today, democracies are ALL failing - from the USSA to Europe to Japan to India - and the main reason is the "funny money" which is causing "capital consumption" and consequent "de-civilisation."


Traditional monarchies must replace them - or we must head for a "Natural Order."


Traditional monarchies ruled without Parliament. The monarch commanded the public administration - and that is all. People lived in a "private law society." There was zero legislation. The King rarely passed statutes binding on all his subjects. The people had Property, Contracts and Torts - and Liberty, too.


And there is more. Traditional monarchies never produced paper money. Money was GOLD - and gold is a form of "private money." Under traditional monarchies, the world was under a Gold Standard. Below is Adam Smith's famous "Three Duties of the Sovereign" - and do note there is NO mention of money:

According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings:

first, the duty of protecting the society from violence and invasion of other independent societies; 

secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice;

and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.

Now, if some monarchs here and there want to emulate their ancient forbears and govern their nations well, I recommend a book, and that is Carl Menger's Lectures to Crown Prince Rudolf of Austria. Menger had been hand-picked by the Empress Catherine to tutor her son in "classical liberal political economy" and had he made it to the throne, Rudolf would surely have made an excellent king.


But this book is now with us, in an edition prepared by Professor Erich Streissler of Vienna University, from the hand-written notebooks of Rudolf himself, which were found in the State Archives.


Kings who wish to deserve their crowns and thrones ought to read this book.


And then, who knows, the magic of the Hapsburgs might be recreated in some other parts of the world.

Between Instinct And Reason

While in Juggernaut Puri, my thoughts turned to Stuttgart, Germany, a beautiful city I once had the good fortune to visit, a city where both Mercedes-Benz as well as Porsche are headquartered. In Stuttgart, it struck me, God is crucified - and the people ride chariots. Here in Puri, it is God that rides the chariot, while the people can barely make their way around town. Funny old world, ain't it? In Stuttgart, the Mercedes-Benz museum displays the first "Popemobile" ever made - they made the chariot for their Supreme Pontiff. And all taxis in Germany are Mercedes - for the people. There are, of course, trains and trams - the railway station is stunningly beautiful - and the Intercity Express (ICE) train I took into town travelled at over 350 kmph. Wheels. Wheels for the people.

My thoughts then went to Friedrich Hayek's last book Fatal Conceit: The Errors of Socialism which begins with the assertion that economic activity lies "between instinct and reason." We have given up the instinct to snatch and grab, to plunder, and prefer to trade instead - but we have not reasoned why. We are guided by a "sense of gain" and we therefore prefer survival through peaceful exchanges - but we have not reasoned beyond that. We trade because it is something we have learnt from childhood, as a "means of obtaining desired objects." The child wanting a chocolate will see his father buy it for him - and he learns that this is the way to obtain all that you need. He does so all his life - and his children and grand-children do the same, without reasoning why. It is the same with the worship of God - these are practices learnt by imitation, by following tradition, without reasoning why.

Now, chariots require roads. The road outside the Juggernaut Temple is broad and wide - but there is NO ROAD to my hotel, a cute little old building close to the sea. It has rained in the morning, and there are mud-filled puddles everytwhere. Messy. You feel icky walking around this Holy City. But in Germany, where God is crucified and people have wheels, they have the most incredible roads. There are signs on German autobahns saying "No Speed Limit" - and I once rode a Porsche Carrera at 235 kmph, feeling like James Dean, though fortunately surviving to tell the tale. In India, we have neither roads nor wheels. This is a "centrally planned economy." A planned disaster.

There are two critical areas where we humans go astray in our thinking - when we think about God, and when we think about our Kings. The Sun Temple at Konarak was built by a king in his own glory - but the people paid the taxes. What should they pay taxes for? No one has thought of this. Jawaharlal Nehru called his Big Dams the "temples of modern India" - and the people paid, people who had neither wheels, nor roads, nor phones, nor electricity. The idea was that The State creates wealth by making steel. None thought this absurd - because everyone operated "between instinct and reason," and they deferred to their King just as they defer to God.

All our politicians who wear khadi uniforms are similarly operating between instinct and reason. I asked a little boy whether he would like to make himself a t-shirt by sitting at a spinning-wheel (charkha), which would take him about two years to make one t-shirt, or whether he would just go to a shop and buy one. The little boy - with his "sense of gain" - said he would buy a t-shirt from a shop. We all specialise in the "division of labour" because of our sense of gain - but we never reason beyond that. Neither do the politicians. They themselves do not manufacture their own uniforms at home. They buy them from the Khadi Bhandar. Even Rahul Gandhi has not sat at a charkha - ever. All we see around us are people - both kings as well as commoners - operating between instinct and reason.

Economics is a very young science. It was unknown to the ancients. Its principles have become known only fairly recently. To the Austrian School, it all begins in 1871 with Carl Menger, though Menger himself studied Adam Smith carefully, and his own Lectures to Crown Prince Rudolf followed the Wealth of Nations, which is dated 1776. 

But young sciences often go wrong. Much has gone wrong with Psychiatry - another young science which also began in Vienna. And so it is with Economics. To me it appears that there are barely a handful of people who understand Economics in the entire world. All that is taught in the universities - macro, micro, welfare - is complete bunk.

Even the eminent professors are operating "between instinct and reason." They merely repeat what they have learnt by imitation - they never think things through for themselves. They are like the priests who recite ancient texts they have memorised. The true Science of Economics requires "mental reconstruction" of human actions in markets. The Marshallian diagrams and the Walrasian equations do no such thing. Junk them all, in toto.

And do read Fatal Conceit: The Errors of Socialism, Hayek's last book. Hayek wrote it hoping to challenge any eminent socialist to a debate - but none dared to debate him. They let him quietly die, hoping no one would read his last great book.

Errors.

They are all in serious error.

And these errors are destroying our civilisation.

Some of these errors are so deep that I think the world is run by "criminally insane" people. And you want to go to them for "education"?

Constitutionalism - And Its Failure

As the fires of revolt and revolution spread around the world, and these oppressed peoples look for solutions like constitutions, it seems to me that these opening paragraphs from Friedrich Hayek's Law, Legislation & Liberty (Volume I: Rules and Order; University of Chicago Press, 1973) could serve as a much needed guide in such troubled times.

When Montesquieu and the framers of the American Constitution articulated the conception of a limiting constitution that had grown up in England, they set a pattern which liberal constitutionalism has followed ever since. Their chief aim was to provide institutional safeguards of individual freedom; and the device in which they placed their faith was the separation of powers. In the form in which we know this division of power between the legislature, the judiciary and the administration, it has not achieved what it was meant to achieve. Governments everywhere have obtained by constitutional means powers which those men had meant to deny them. The first attempt to secure individual liberty by constitutions has evidently failed.

Constitutionalism means limited government. But the interpretation given to the traditional formulae of constitutionalism has made it possible to reconcile these with a conception of democracy according to which this is a form of government where the will of the majority on any particular matter is unlimited. As a result it has already been seriously suggested that constitutions are an antiquated survival which have no place in the modern conception of government. And, indeed, what function is served by a constitution which makes omnipotent government possible? Is its function merely that governments work smoothly and efficiently, whatever their aims?

In these circumstances it seems important to ask what those founders of liberal constitutionalism would do today if, pursuing the aims they did, they could command all the experience we have gained in the meantime. There is much we ought to have learned from the history of the last two hundred years that those men with all their wisdom could not have known. To me their aims seem to be as valid as ever. But as their means have proved inadequate, new institutional invention is needed.

The footnotes to this section contain some definitions of constitutionalism that I am appending below:

1. "The original idea behind constitutions is that of limiting government and of requiring those who govern to conform to laws and rules."

2. "All constitutional government is by definition limited government... constitutionalism has one essential quality: it is a legal limitation of government; it is the antithesis of arbitrary rule; its opposite is despotic government, the government of will."

3. "Constitutionalism is the process by which governmental action is effectively restrained."

Immediately thereafter, another footnote says this of modern Democracy:

"The modern conception of Democracy is of a form of government in which no restriction is placed upon the governing body."

In the opening chapter titled "Reason and Evolution" Hayek tells us where we went wrong - and it all begins with not understanding that human society is a self-generating spontaneous order. The order is completely "natural" because man is a "rule-following animal" - but these rules have never been formally articulated, like Private Property. Thus, the illiterate crowds in our teeming bazaars are following these rules - which learned constitutional lawyers are unaware of - and that is why perfect order prevails, and posses of armed policemen are unnecessary. 

Hayek then goes on to point out our philosophical errors - the constructive rationalism of Rene Descartes and his contemporary Thomas Hobbes. In that Age of Reason, these ideas popularised the dangerous fiction that human society could be "designed anew" - by legislators. It was only during the Scottish Enlightenment that David Hume, Adam Ferguson and Adam Smith articulated the opposing viewpoint: that human society is an "order without design." Or that the natural spontaneous order we inhabit is "a product of human action and not human design," as Ferguson put it, in his An Essay on the History of Civil Society (1767). In a footnote, Hayek quotes from the introduction by Duncan Forbes to the 1966 reprint of this book, in which Forbes writes that the "superstition" that Legislators are Founders of States was precisely that these Scots destroyed:

The Legislator myth flourished in the eighteenth century, for a variety of reasons, and its destruction was perhaps the most original and daring coup of the social science of the Scottish Enlightenment.

It is only after studying these men that Charles Darwin conceived his theories of evolution - another "order without design." I have an earlier post on this.

And it was Carl Menger, founder of the Austrian school of Economics, who put it best when he wrote, in his discourse on the methodology of the social sciences (1883):

How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a ‘common will’ directed towards their establishment?

Markets have not been designed, just as languages have not. Nor have morals. Money was not invented by one mind - and certainly not that of a great ruler. All have evolved.

Ludwig von Mises must also be invoked here, for it is he who pointed out where true freedom lies:

"What gives to the individuals as much freedom as is compatible with life in society is the operation of the market economy. The constitutions and bills of rights do not create freedom."

The errors of the Cartesian-Hobbesian kind have only been multiplied by modern socialists - who speak of "social engineering" as though humanity is just putty waiting to be given shape by omniscient and omnipotent legislators. Rousseau typifies such nonsense. As with Hobbes, so with Rousseau, both popularised the false notion that society is formed by a "social contract" - and it from these errors that the problems of modern constitutionalism stem. Indeed, Contract is but Private Law. The only social contracts are treaties.

The true picture, that men are "rule-following," allows us to see Law as natural and evolved - though not articulated - and Legislation as interference, as democratic totalitarianism, and as an enemy of individual Liberty as well as a ceaseless violation of Private Property.

Without Legislation, human society would not be lawless - on the contrary, we would peacefully thrive in a "private law society."

The rebels and revolutionaries of today must therefore look towards the English Magna Carta of 1215 AD as their guide - for this is when constitutionalism began, by limiting the sovereign and guaranteeing the liberties of the people.  However, since modern democratic governments have exceeded their constitutional bounds, new limits need to imposed upon them, some of which I have attempted to outline in a previous post:

• Freedom in the choice of media of exchange. That is, an end to the fiat money monopoly; the end of “legal tender.” Fiat paper notes can circulate – but we are free to refuse them. This will impose financial discipline on The State. Inflationism will finally end. Capital will be accumulated - not consumed. Poor people will benefit greatly.

• The Inviolability of Private Property by any actions on the part of The State – either through Legislation or through its lawless agents.This will guarantee Liberty.

• Freedom from the National Debt: that is, an end to State borrowing. This will impose further restrictions on recklessness and irresponsibility in State spending, while also securing the prosperity of future generations.

Unlimited government, which is arbitrary power, is an extremely destructive thing, much to be abhorred by all who desire human welfare. As Trenchard and Gordon, both Whigs (and Hayek preferred to call himself a Whig rather than a "conservative") put it in Cato's Letters, way back in the England of the 1720s:

There is something so wanton and monstrous in lawless Power, that there scarce ever was a human Spirit that could bear it; and the Mind of Man, which is weak and limited, ought never to be trusted with a Power that is boundless. The State of Tyranny is a State of War....

Power is like Fire; it warms, scorches, or destroys, according as it is watched, provoked or increased. It is as dangerous as useful. Its only Rule is the Good of the People; but because it is apt to break its Bounds, in all good Governments nothing, or as little as may be, ought to be left to Chance, or the Humours of Men in Authority: All should proceed by fixed and stated Rules....

This demonstrates the inestimable Blessing of Liberty. Can we ever over-rate it, or be too jealous of a Treasure which includes in it almost all Human Felicities? Or can we encourage too much those that contend for it, and those that promote it? It is the Parent of Virtue, Pleasure, Plenty, and Security; and 'tis innocent, as well as lovely. In all Contentions between Liberty and Power, the latter has almost constantly been the Aggressor. Liberty, if ever it produces any Evils, does also cure them: Its worst Effect, Licentiousness, never does, and never can, continue long. Anarchy cannot be of much Duration: and where 'tis so, it is the Child and Companion of Tyranny; which is not Government, but a Dissolution of it, as Tyrants are Enemies of Mankind.

I trust I have provided all those good people who are fighting their domestic tyrants and seeking their Liberty with plenty food for serious thought. Good luck to you all. May all tyrannies end. And may Liberty triumph.

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."

Crisis In Mainstream Economics - And The Austrians

I was extremely happy to read this article from the Wall Street Journal that discusses, in some depth, the crisis in mainstream Economics that has occurred because of the ongoing crash. At the outset, the nature of this academic crisis - a theoretical / philosophical crisis - is described in these words:

For decades, most economists, including the world's most powerful central bankers, have supposed that people are rational enough, and the working of markets smooth enough, that the whole economy can be reduced to a handful of equations. They assemble the equations into mathematical models that attempt to mimic the behavior of the economy. From Washington to Frankfurt to Tokyo, the models inform crucial decisions about everything from the right level of interest rates to how to regulate banks.

In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built.

Unfortunately, the "new ideas" that are discussed are essentially the same old stuff and nonsense, only this time being paraded around using supercomputers. This is one of the new ideas presented:

Create a richly complex, computer-based simulation of the economy like those scientists use to model weather patterns, epidemics and traffic. Given enough computing power, such "agent-based" models can include millions of individual players, who don't have to be rational or agree with one another.

So, if you are a student and enter mainstream Economics, this is the direction in which you will head. It seems "scientific" - but is actually an intellectual cul-de-sac.

The WSJ article above says that a great deal of financial support to those economists who develop "new ways to model the economy" is coming from the Institute for New Economic Thinking, funded by the billionaire George Soros. Fifty million dollars has been donated to this institute by Soros, and they have already funded 27 "new models" that are being developed.

But, is this "new thinking"? And do we really need new thinking at all?

For the student of Economics looking for real, valid knowledge, the only other way to look at things, other than this mainstream modeling approach, is the "tradition" of the Austrian School. The word "tradition" needs to be stressed - because this is most definitely not "new thinking." The unique approach to this vital science that has characterised this school of thought begins with Carl Menger (1871). In the last century, these ideas were fully developed by Ludwig von Mises - and, following him, by his two most illustrious students: the Nobel laureate Friedrich Hayek, who attended his Vienna seminars; and Murray Rothbard, who attended his seminars in New York. The Mises Institute (website here) is the best place to visit if you wish to study Austrian Economics.

The most important difference between Austrian Economics and the mainstream "modeling" approach is that the Austrians reject mathematics entirely. Their Economics is "logical." Its basic element is the "acting individual" - and not the collective. Indeed, what Austrian Economics proves beyond doubt is that nothing about The Market Economy can be quantitatively predicted, and that no government intervention with its working can be "rational." Just as central economic planning fails, so does Keynesian central banking. So, indeed, does centralised legislation - which is the democratic way by which the modern State intervenes in markets. If you acquire knowledge in Austrian Economics, you will inevitably proceed into other areas - including history, political philosophy, and law. You will gradually develop an integrated world view. You will be possessed of a "social philosophy."

Recommended read: My earlier post discussing Austrian methodology - thereby showing why the standard demand-and-supply diagram of the mainstream is a wrong way to teach the subject.

The "Education" Of Prince William

I watched a programme on BBC TV last night on the next "royal wedding" - between Prince William and Kate Middleton, who studied together in St. Andrew's, Scotland. Much of the programme was devoted to the education and training that the young prince had undergone in order to be fit to perform his future duties.

First: At St. Andrew's, Prince William studied "Art History." Later, he also studied Geography.

Second: The prince received military training. There was a clip of his "passing out parade" at Sandhurst. Of course, he also served briefly in Afghanistan.

Third: The prince was attached to an "international charity" for a while. This took him to Chile, where he spent a few months in a camp, with onerous duties. There was clip of him cleaning toilets!

Let us look into the relevance of all three above:

First: To my mind, neither Art History nor Geography are relevant "knowledge" for a future monarch. What is most essential, however, is that such a prince receive sound grounding in "political economy" - and, thereby, be possessed of a guiding political philosophy. In this context, I think the then Emperor and Empress of Austria-Hungary did extremely well by placing the young Crown Prince Rudolf under the tutelage of Carl Menger, and it is goes further to their credit that Menger was selected as teacher because of his strong "classical liberal" leanings. Rudolf's notes from these lectures (1876) are now available in print, with an English translation, from Edward Elgar - and I hope someone in Britain will recommend them to the young Prince William. This blog contains quite a few posts on these lectures, which you can find by clicking on the label "Carl Menger" on the right-hand bar.

Second: It is a matter of historical record that the last British monarch to lead his troops into battle was George II, in 1743, at the Battle of Dettingen. During the battle, George II's horse "ran off with him." The battle was won, fortuitously. On the other hand, it is also highly instructive that Carl Menger's lectures on political economy to Prince Rudolf followed Adam Smith - but with a crucial difference. In Adam Smith's "three duties of the sovereign," the first duty had been "the duty of protecting the society from violence and invasion of other independent societies." Since Austria had already suffered enough wars, Menger decided to OMIT teaching the prince this duty - and only taught the other two! The lectures emphasise the importance of the "international division of labour" - and how this requires international peace.

Third: The Third World can never "develop" through either "foreign aid" or the work of "international charities." Prince William went to Chile - where what has actually worked miracles is the Free Market. On the problems and prospects of the Third World, Prince William should read Peter, Lord Bauer - whose mantra remained: property rights, free trade and sound money.

Let me conclude with some words on the soundness of the British pound:

The Bank of England was established in 1694, shortly after the "Glorious Revolution," with a monopoly on the issue of banknotes in England and Wales, with the specific purpose of financing the government's war effort. However, from 1797 - 1821, it was unable to redeem its notes in gold - and, by then, the "National Debt" had also grown. Peel's Banking Act of 1844 attempted to set things right - but failed. The Bank of England is the world's "model" central bank - with clones everywhere. Today, it is engaged in "quantitative easing."

Interestingly, Carl Menger's lectures to Crown Prince Rudolf include two lectures on money - the first on coinage, in which the lesson imparted is that gold coins constitute true money; and the second on paper banknotes, in which the lesson imparted is that the future prosperity of Austria-Hungary depend on making these banknotes redeemable in gold on demand. At the time of the lectures, 1876, because of repeated wars, redemption had been suspended. This, as Menger painstakingly explained, was a very bad thing.

In India, you can buy the book containing Menger's lectures to Rudolf here.

It is an ancient tradition of the City of London that the Worshipful Company of Goldsmiths conducts an annual ritual in which they engage in the "testing of the coinage." Today, this annual ceremony is still held - but the Lord Mayor no longer attends.

Why Roads Matter Most

Yesterday's post concluded saying:

Liberty! Property! Contract! That is all it takes to make a country grow.

Today, let me add just one thing to that list - and that is ROADS.

Roads matter greatly for economic growth. Growth occurs when every individual enterprise grows - and since each individual enterprise is engaged in "production" and "exchange," it follows that their produce must be physically transported from the place of production to the big centres of exchange - the markets. In India, perishable commodities like fish, fruit and vegetables are wasted in megatonnes because of poor roads. And all the other trades suffer as well.

Our horrible roads provide evidence of the fact that "pseudo-economists" dictate government spending policies here. Real economists have always emphasized the importance of roads. In the Wealth of Nations (1776), Adam Smith makes the comment that the new roads being built then were the "greatest improvement," for they enabled every remote village gain proximity to the mighty city. Carl Menger, in his lectures on Political Economy to Crown Prince Rudolf of Austria (1876), stresses the importance of roads in the very first lecture. He begins, like Adam Smith, with the "division of labour" - and then goes on to say that the better the roads, the greater the division of labour. Thus, if good roads exist between your remote patch of land and the mighty city, you might become a specialized orchard-owner. Without these roads, you will be stuck in "self-sufficiency," growing your own food and probably spinning your own yarn as well.

Then there is history. Sher Shah Suri was an Afghan warrior who took North India from Humayun, and he possessed no "economic advisors" - but it is he who built the Grand Trunk Road from Peshawar to Bengal, that is still the life-line of North India. There is the story of Akbar taking 5000 workmen personally to the Khyber Pass so as to built a road smooth enough to take wheeled vehicles. In Srinagar, Kashmir, I was told of the existence of an Old Moghul Road leading down to the plains - and that it now lies disused and abandoned. We also know that "all roads led to Rome" in very ancient times.

Ancient cites were inevitably crowded, with narrow lanes. People lived cheek-by-jowl because transport was primitive. You walked, or rode a horse, or, more likely, an ass. All old cities are like that, including the older parts of London. With modern transportation, we now have "suburbs" - and people live in space and comfort. If Indians want their overcrowded cities to become modern cities, and if they want to build new cities and towns, they will have to lay great stress on road-building. I am also a great fan of tramways. In London the Underground was built around 1905 - railways came before the car - and it is this that enabled Londoners to spread out. In India, the State is building underground railways in a few cities - but not building roads that car owners could use to spread out. They are also not allowing private entrepreneurs to build tramways that could serve all the smaller cities and towns. Calcutta's tramway was also built around 1905 - by a private company. In 1905, I am confident, there were no cars in Calcutta.

How do we build an excellent roads system in Indyeah? Well, I wrote a post on that some weeks ago.

To conclude: The "pseudo-economists" who dictate government spending policies in India, who have never invested in roads for 60 years, are utterly ignorant of both Economics as well as History. Their vision of India is Gandhian - "self-sufficient village economies." This means no division of labour, no specialization, no trade, no markets, no cities, and no civilization. It means permanent poverty for all villagers. It means ghastly overcrowding for all city-dwellers. This, in a huge country with super-abundant land. The "rural-urban divide" throughout India is because of these ignoramuses.

I hope my readers now see the colossal error we are making by entrusting this The State with "education." Once again, we must pin down the political philosopher who is really to blame - and it turns out to be the very same madman Jean-Jacques Rousseau. It was Rousseau who popularized the idea of mass education by The State. I remain firmly on the side of Frederic Bastiat, who despised Rousseau, and who wrote these telling lines:

If you want to have theories, systems, methods, principles, textbooks and teachers forced on you by the government, that is up to you; but do not expect me to sign, in your name, such a shameful abdication of your rights.

You don't need this "miseducation."

Order Without Design... And Fatal Conceit

A chance conversation during our walkabout last evening led to some interesting philosophical insights - and I thought I ought to write about them. It all began with a kingfisher perched atop a post, and the discussion turned to how its brilliant blue feathers are hidden when it sits, and how this might be its means of camouflage and survival. The discussion then turned to Darwin and his theories of "evolution" and "natural selection." Darwin established that the order of the natural world we are witness to is an "order without design." The comings and goings of the species has proceeded without the services of any supreme designer of all the various species.

We hemmed and hawed about this idea of "order without design" when I turned the discussion towards the worldview of "classical liberals" - from Adam Smith to Frederic Bastiat to Carl Menger, right down to Friedrich Hayek - that they too saw the market economy as an example of natural order: an "order without design."

Take Adam Smith and the "invisible hand." He begins by saying that the individual entrepreneur "neither intends to promote the public interest, nor knows how much he is promoting it." He goes on to say that the individual entrepreneur "intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Adam Smith was a bitter critic of all those who fancied themselves capable of "designing" the market order - and we can see from the following quote why our "central economic planners" do not like students of Economics to read Smith. These are his famous words on the "conceit" of such people:

The man of system... is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it.... He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse [sic] to impress upon it.

Frederic Bastiat wrote with awe about the "natural order" - which, to him, a devout Catholic, was a testament to the wisdom of God. The "invisible hand" of Smith became, to Bastiat, the hand of God. When Bastiat argues in favour of Liberty, he argues in favour of a world that Providence has ordained. The world of government controls and dirigisme was, to Bastiat, an "artificial order." His book Economic Harmonies is entirely devoted to showing how the natural order of Liberty is devoid of conflict, is harmonious.

Carl Menger, of course, put it best when he wrote - and this marks the beginning of a true "science of Economics," for here he is writing about method, about epistemology:

How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a ‘common will’ directed towards their establishment?

It was left to Hayek to develop these ideas to their fullest, especially in his last book Fatal Conceit: The Errors of Socialism. The opening chapter is titled "Between instinct and reason" - and, in this, Hayek makes the case that the natural order of human society, including markets, laws and morality, has "evolved" and is a part of our "culture." We have suppressed our instinct to snatch and grab, to plunder, and prefer to trade instead - but we have not reasoned why. We do not even know that the golden rule of our market order is Property. We therefore cannot see through the madness of communists and socialists - and I read just the other day that one more appeal has been filed with our Supreme Court on our non-existent right to Property. Between instinct and reason, indeed.

The word "conceit" is common to both Adam Smith and Hayek. It is a fitting word for all those "intellectuals" who believe that they know how to "design" something that is beyond the comprehension of any single mind, or group of minds. The market order utilises the knowledge of each one of us - it relies on the "fragmentation of knowledge." The conceited planner imagines himself to be a super-mind, capable of "centralising knowledge."

The idea of an "order without design" is a powerful one - and the idea of "central economic planning" is as ridiculous as considering the diversity of nature to be the product of "intelligent design." What reason informs us in all these matters is that there are limits to reason. There is much that reason cannot accomplish. Designing a market order - which is the ONLY "Social order" - is one of them. Its diversity is the product of human diversity. It is God's work. No mortal man should be allowed to tinker with it. Note that these mortals use another extremely evil term to designate their intentions, a term far more evil than "central economic planning" - and that term is "social engineering." Today, they call it "public policy" - and the "knowledge" contained in this "subject" should be treated with extreme suspicion.

Of course, the human market order is different from the Darwinian natural order in some very important ways, which we must carefully note. In the jungle, every species survives through camouflage; its survival depends on its ability to hide from predators. In the market order, there are no predators, and we all try to loudly advertise our wares. The market order is the truest human society - for in this, every man gains only by serving his customers better than his competitors. All entrepreneurs are driven by the desire to serve their fellowmen better. The flourishing of human society depends entirely on the universalisation of this natural, market order.

The Word

The illustration accompanying this post is that of an advertisement for LewRockwell.com. The logo stands for "Anarchy" and the lines at the bottom say "The State is the Problem / Anarcho-Capitalism is the Answer." Lew Rockwell is the Founder and President of The Ludwig von Mises Institute, which has for long been "advancing the scholarship of Liberty in the tradition of the Austrian School." The original Austrians - Menger, Mises and Hayek - called themselves "liberals" in the classical European sense. Hayek preferred to call himself a "Whig" - and that was the word Adam Smith applied to his own politics. How did this term "anarcho-capitalism" come about?

In America, the word "liberal" was corrupted. It was robbed by those who are essentially "socialist." Ludwig von Mises was quite horrified. In his preface to Human Action he takes pains to point out that he uses the term "liberal" as it was used in 19th century Europe. It was in America therefore that a new word had to be found by those who, like Mises, believed in laissez faire capitalism - and that new word was "libertarian." The word "anarcho-capitalist" was first used by Mises' greatest American student, Murray Rothbard, who was Dean of the Austrian School after Mises' death. Today, Hans-Hermann Hoppe, Rothbard's illustrious successor, calls himself "anarcho-capitalist."

In my own case, I have preferred to call myself "Austro-libertarian" - thereby differentiating myself from other libertarians like the Ayn Randians. My last book is titled Natural Order - and this is an expression classical liberals in Europe were quite fond of. Frederic Bastiat, for example, wrote favourably of the "natural order," contrasting it with the "artificial order" of State controls and dirigisme. Adam Smith himself championed the "System of Natural Liberty."

In my opinion, it is extremely important to stress that a "natural order" exists in human affairs - that Thomas Hobbes was very wrong. Men are NOT lawless - and the "state of nature" is NOT that of a "war of each against all." As Hayek wrote, Man is a "rule following animal." The basic rule of market exchanges is Property. We see our teeming hordes all following this golden rule in all our bazaars. Hayek wrote that this rule is the product of evolution and is part of our culture - that it is not the product of "reason." No "common will" pronounced this rule. Rather, it operates "between instinct and reason." I believe it is a fundamental aspect of our innate "sense of justice."

If I may add, I was prompted to pen the opening essay outlining the features of the "natural order" after reading, many times over, Hans-Hermann Hoppe's mind-blowing Democracy: The God that Failed a few years ago. The sub-title of this great book reads "The Politics and Economics of Monarchy, Democracy and Natural Order." However, what is conspicuously missing from this book is a description of what "natural order" is all about. I therefore decided to fill in the gap. Ever since then, my e-mail ID has been "naturalorder."

However, in America, libertarians seem to prefer the word "anarchy." There is this excellent article by Robert Higgs of the Independent Institute I read yesterday - and he too prefers to use this word. The article is an important contribution to our understanding of whether a State is necessary - for when I say "natural order" the cynic will immediately reply that "men are not angels." Higgs effectively blows this objection aside and argues thus:

A stateless society will sometimes be bad. Not only are people not angels, but many of them are irredeemably vicious. The outcome in a society under a state will be much worse, because the most vicious people will tend to gain control of the state.

I strongly recommend that you read this article - and think. Yet, as I said, Higgs prefers the word "anarchy" - although he notes that the dictionary gives three different meanings to it, including "chaos and confusion." It worries me - to use this word "anarchy" - since most people do not understand the "natural order" at all. In politics, we must convince, and words are all we have. They are labels with meaning. If most people possess a different meaning to a political word than the one intended, we are lost.

If "anarchy" is problematic - and it is - what word can replace it? Over the last few years, I finally decided on the exact word I personally want to use - and that word is "catallaxy." Ludwig von Mises was very fond of this word, and the entire section of Human Action that discusses what most people would call "Economics" is titled "Catallactics." Mises says that this word was in vogue in the 19th century too - and was first used by Archbishop Whately, who was a prominent political economist of his day, apart from being a theologian. The word is derived from the Greek word for "exchange" - and it is Hayek who researched its meaning and discovered that among the ancient Greeks this word possessed two additional meanings - first, "to welcome into the community"; and second, "to turn from enemy into friend." These additional meanings convey something about market exchanges that is extremely important in our troubled times.

The scourge of the modern world has not only been the hideous philosophy of collectivism, but also its natural corollary - something indispensable to statolatry - and that is "nationalism." The Nazis, of course, were "national socialists" - but narrow nationalism, powered by the dubious (and collectivist) idea of "community" - has torn our world apart. Protectionism and wars have been the natural outcome of the philosophy of "national economy." And we still live with these disastrous ideas.

The word "catallaxy" - and especially Hayek's discovery of the other meanings to this word - suggests something other than narrow "community." After all, the urban market economy is individualistic. Further, the most important "social" advantage provided by the urban, cosmopolitan market is that it provides a means of gainfully interacting with complete strangers - and the more strangers the merrier. This word therefore conveys a very powerful meaning - and suggests a rational, natural order in which all individuals can peacefully survive, and human civilization can progress without the "narrow domestic walls" of the closed community. I wrote a column on this word some months ago, and it concludes thus:

Thus, there is a “natural order” in all cosmopolitan open catallaxies. Posses of armed policemen are not required to “maintain order” in any crowded marketplace anywhere in the world. This order exists on its own. Without the “narrow domestic walls” of community, the idea of catallaxy solves the social problem for all individuals, while also uniting humanity in a rational, natural order.

To conclude: I am currently halfway through William Dalrymple's fascinating travels through the territories of ancient Byzantium, From the Holy Mountain. About the capital city, which is now Instanbul, Dalrymple notes that 72 languages were spoken in its bazaars in ancient times. Today, thanks to "national socialism," every minority has been chucked out, millions massacred and widespread tyranny rules. Dalrymple notes that this is where Christianity was born - and then taken to the West. He visits communities where Aramaic, the language of Jesus, is still spoken, where worship is still conducted as in those early days, where the most ancient hymns are still sung. He further writes about shrines where the common folk of today, both Muslim as well as Christian, continue to worship together. Yet, he also portrays a civilization that might just disappear - to be replaced by the uniformity of "community" imposed by the guns of "nationalists." This is what happened to India during the Partition. This is precisely the direction in which the "cultural nationalists" of the Hindutva type are leading our nation today. In the meantime, the USSA is spurring Islamophobia. War and civilization cannot go together. For the furtherance of civilization, cities, and markets, I do believe the word "catallaxy" is best.

On Sociology - As An "Abuse Of Reason"

Today is Margaret Thatcher's 85th birthday. As Prime Minister of Great Britain, she famously declared: "There is no such thing called society." This post is written in full support of her view.

If you visit Delhi University, you might notice that right opposite the Delhi School of Economics stands the Delhi School of Sociology. From the former emerged Amartya Sen and Manmohan Singh - both calling for State "education" for the sheeple. And, from the latter, comes Jean Dreze, Professor Emeritus, great champion of NREGA ditch-digging, "right to food" and other statist schemes. Indeed, Dreze has co-authored many books with Amartya Sen; they are bosom buddies. I have just discussed the "corruption in Economic Science" (in two parts, here and here). Today, let me say something about Sociology.

Jean Dreze is French - and Sociology originated in France. The man who invented this subject is August Comte, considered by many to be a "madman." Comte was a student of Henri de Saint-Simon (1760-1825), one of the world's first "socialists" - and his great idea was to vest all Property in the State, and have the State directed by industrial chiefs and "men of science." As to what exactly was the "science of society" Saint-Simon had no real answer. This was what August Comte (1798-1857) served up to humanity. Comte called his science "positivism" - and, with this epistemological principle, Sociology was born. The central tenet of positivism is that human behaviour is objectively measurable. Thus Emile Durkheim, another French sociologist, studied suicide by examining statistical suicide rates! So, the idea was that society would be subjected to measurement, and these sociologists / social scientists would then run the whole of society in a scientific manner.

Quite naturally, a science that offered so much power to those who mastered it spread rapidly. In Vienna a school of "logical positivism" emerged - and they were enemies of the Austrian School economists like Mises, also in Vienna at the time. But positivism entered Economics too - and no less an economist than Milton Friedman has upheld positivism as THE method of Economics. Positivism entered Law - and stood opposed to all those who believed in "natural law." Positivism entered Psychology, through "psychometrics" - and also in the works of "behaviourists" like John B Watson and BF Skinner, who, like Comte, thought they had found ways of controlling society and even re-making it. Megalomaniacs, all.

But what is "society"? And how is society to be studied and understood? Here again, it was the great Carl Menger (1840-1921) who provided the answer, and thereby lit the path for all his worthy followers. After his path-breaking Principles of Economics (1871), Menger wrote just one more book - and this time it was on the Methodology of the Social Sciences (1883). The key question Menger put forward was this:

How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a ‘common will’ directed towards their establishment?

It is this question that establishes the central difference between all the positivists and the Austrian School economists. To positivists, society is inert and what matters are the commands given to it. Social scientists measure society and come up with the "correct" commands. Central economic planners do this - with all their data. Sociologists do this - after Comte and Durkheim. And so do lawyers who view law in the positivist light - as "commands of the sovereign." Note that Professor Jean Dreze of the Delhi School of Sociology is relying on Professor Suresh Tendulkar of the Delhi School of Economics to correctly "measure" poverty. Bah!

What Menger and his followers - true scientists, all - established is that society produces a lot on its own, because of the workings of INDIVIDUALS. Language, money, markets, and even law have emerged from within society, without any "common will" directing things, without any commands from on high. The real mystery we must investigate is how this happens. How do the individuals who make up society "act"? I have written a newspaper column describing some of these issues, here.

To truly understand the "madness" of Saint-Simon and August Comte, I suggest a slim book by Friedrich Hayek called The Counter-Revolution of Science: Studies on the Abuse of Reason. It is perhaps Hayek's greatest contribution to the history of ideas. The title is dramatic - and apt. What positivists parade as "science" is nothing but the "abuse of reason." It is extremely dangerous. And our universities are full of it.

Another recommended read: My brief article on why the political value of "community" is unsuitable to a market society, which is individualistic. This article takes the Hayekian argument one step forward.

The Corruption of Economic Science - Part 2

In continuation of yesterday's post, I would like to add the following.

Let me begin with the opening paragraph of the Royal Swedish Academy of Sciences' "Information for the public" document on this year's Nobel Prize in Economic Science. That is, the opening paragraph of the section "The theory takes shape," wherein the achievements of this year's awardees is described. The Academy says:

In the 1960s, researchers had already begun to use mathematical models to study the best possible way in which a buyer can try to find an acceptable price. In a renowned article from 1971, Peter Diamond examined how prices are formed on a market where buyers look for the best possible price and sellers simultaneously set their best price while taking buyers’ search behavior into account. Even small search costs turned out to generate a radically different outcome compared to the classical competitive equilibrium. In fact, equilibrium prices are equal to the price which a monopolist would have set on a corresponding market without search costs. This result attracted considerable attention and initiated intensive research on search markets.

The notion of "equilibrium" is entirely foreign to Austrian Economics. Equilibrium is a concept borrowed from Physics by mathematical economists of the Lausanne School - and its most horrible result has been the utterly fantastic idea, one that has no bearing whatsoever with reality, of "general equilibrium." Combined with the equally fantastic notion of "perfect competition," these absurd ideas have been used to berate real markets for falling below the "standards" set by these mathematicians / pseudo-economists. Their ideological father is Leon Walras, credited with the discovery of the "marginal revolution" in 1871, along with Carl Menger of Vienna, who founded the Austrian School. Yet, Walras' ideas were totally different from Menger's, who shunned mathematics and inaugurated a true science that is realistic, subjective, individualistic and entirely logical. It was Ludwig von Mises who, in the twentieth century, developed on Menger's initial ideas and built the towering edifice of Austrian Economics that stands proud and tall today.

To the Austrians, markets are ALWAYS in disequilibrium. There is a TENDENCY towards equilibrium, but this is always disturbed by the emergence of fresh data. The idea of an "evenly rotating economy" is just a mental construct, used in an extremely limited fashion, in order to understand real life markets better. In real life, there is never any equilibrium. The "evenly rotating economy" never happens. Thus, the "science" of the Austrian School is vastly different from that which the Royal Swedish Academy of Sciences is referring to.

Of course, in order to understand the complexities of the real world, Man has always looked out for "regularities." Without regularities, all would be chaos and confusion, nothing would be understandable and predictable, and Man would be utterly clueless. The earliest regularities observed and recorded had to do with the appearance of day and night, the moon and the stars, the tides - and these led to the emergence of almanacs and calendars. But the Science of Economics presented Man with grave difficulties, because NO regularities could be observed. This absence of regularity is only because of the absence of "equilibrium" - for all prices and quantities are always in a flux.

However, the Austrians did discover regularity, of course, but not "out there." Rather, the regularities they discovered were all "in there" - inside the mind of the "acting Man," the individual, in the "logical construct of the human mind," something he shared with all his fellow men. The Austrians, thanks to their individualistic and subjectivistic methodology, their proud inheritance from Carl Menger, discovered "laws of thought" - and since humans act according to these laws of thought, their Science of Economics predicts with "apodictic certainty."

For example, the concepts of Capital and Income are "mental categories" - present in the mind of even the most primitive of herdsmen, who carefully count their sheep and cattle to ensure that they are not "consuming capital." I have another post here on how the Laws of Demand and Supply are "laws of thought," mistaught today by the mainstream.

Indeed, to the Austrians, all phenomena must be traced back to the mind of the acting individual. Menger's Principles of Economics (1871) thus traces back money to the mind of the thinking and trading man. Money is NOT a creature of The State.

Let me now quote for my readers the opening paragraph of Ludwig von Mises' Human Action: A Treatise on Economics, pdf here.

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.

Yes, Economics is an extremely young science - and it really begins with Carl Menger's Principles in 1871, barely 140 years ago. Menger's followers alone have built upon his achievements, against huge odds, complete neglect, and total disregard. This, indeed, is the story of Mises' life. It has been reported that, towards the end, Mises was so utterly despondent and pessimistic that he told a friend: "Perhaps, a thousand years from now, they will discover my writings like the Dead Sea Scrolls."

Allow me now to quote the last paragraph of Human Action. Mises concludes his magnum opus with these ringing words:

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

I therefore advise all my readers to ignore and disregard the sort of thinking - if it can be called that - being promoted by the Royal Swedish Academy of Sciences. I suggest you carefully study Human Action.