The way I left off in part one of this article was by mentioning the various problems facing both the solitaire player and the entrepreneur. However, “the entrepreneur” is better stated, psychologically and practically, as an individual acting in an entrepreneurial manner, or an individual employing entrepreneurial tools, or an individual fulfilling entrepreneurial functions, considering that all people employ this mental device in some capacity or another, and to varying degrees. The difference between the “consumer” and the “producer” is an entirely artificial one in the lens of the kaleidoscope: We all consume and we all invest.
Is not the act of “consuming” food an investment in the prevention of hunger; one of a myriad of capital goods, used to produce further capital in the process of maintaining one’s own life?
Is the not capital maintenance on a capital good itself an investment, while at the same time consumption? Is not the house you buy ultimately for your consumption?
Mises carefully explained that all intentional human action is meant to achieve desired ends. The function of the entrepreneur is to invent new solutions, be they goods, services, or even just ideas, to solve problems that are the cause of felt unease. The core part of entrepreneurship is inventing new solutions to problems, which is in reality what we do every time we synthesize a new decision based upon the current experience and past experience, hoping to correctly predict the effects of present and past events and act in accordance with the attaining “desired ends” (shit you want) in the future. This is, ultimately, Lachmann’s take on Mises’ action. Indeed, Lachmann also argues that there is little difference between the bondholder, shareholder, stockbroker, “consumer,” “producer,” et cetera, in terms of their set of functions in the marketplace. Rather, they simply vary in utilization of certain means: to what degree a given skill is used (such as economic forecasting or underwater basketweaving), how often that skill is used, how well used that skill is in various parts of the market system, ad infinitum, ultimately (and intentionally in some, if not most respects) piling on top of the capital that any given individual or group in this instance has accumulated. We all perform these functions in some way or another. For example, I “invested” time and work in accumulating the ability to play beer pong well (and neglected my investment in Snappa, restricting me to play it poorly).
Liquidation and reconfiguration of capital due to decreased production (or at least, in the immediate, static sense, decreased economic activity) essentially stamp the other side of the coin of what happens during economic progress, and especially booms; artificial and unsustainable or not. For example, booms (not “booms” with quotation marks, a.k.a. bubbles) come to a slow close when induced by the market through properly time-coordinated production expansion; or may never see a conventional “close” at all, just a leveling off of profits, interest, et cetera. Meanwhile, a quicker and more dramatic close usually occurs when the “boom” is originally induced by a monetary expansion. As we know, in this process, some store owners have to put things on clearance more often, cheaper used car shops get more business relative to big-name dealerships, takeout starts beating fine china, et cetera. In the prior said process of both capital contraction and capital expansion, as is always, mistakes are made by all that involve some stray from the actual amount of thing X they expect to sell or buy, now or in the future. It may involve selling items at a discount, or losing out on profits from miscalculation, or eating the seedcorn, or simply trading one thing you had for something else you only now desire in this situation. As well, one can benefit by someone else’s misestimation of market value: This is how profit drives the price structure towards integrating more information, of course.
Liquiation is the other side of the coin of capital construction. in fact, they fit this bill so well that they are essentially chiral; even stigmergic. However, delineating the polarity of these aspects of capital allocation is necessary before delving into their similarities.
The solitaire player, building the tableaux, slowly organizes and thus constructs up her alternating stacks of red and black reversely-sequential cards in order to accumulate (read: successfully organize) more and more cards, and continue to pull from the deck, until she is able to use them to attain her goal of filling the foundations with sequential cards of the same suit. If though, she hits a snag, she may be forced to pull a card from the foundations to use to bridge a gap between a deadlock (loss) and consistent progress. This helps illustrate the micro instantiation of liquidation: Pulling one resource to be used in a capacity that is more-useful now, but less gainful than before, due to new circumstances, where there is more gain (or less loss) involved in said capital’s new place in the structure.
Herein lies the story Lachmann readily identifies with monetarists and (prophetically) future new-classicists: “Deflation is bad, period. ” Liquidation is bad in the aggregate (though acceptable in the short-term fluctuations of the market) and not necessary to relieve problems of “too much” slack in the money supply. Longer-term monetary and price deflation can be survived or outgrown, but only by an increase in output that manages to overcome the slump in currency, if the money supply has no floor that central bank alchemists can invent. Sadly, many intelligent monetarists have far less of a technical understanding of market structures and rely far too heavily on hypothetical mathematical equilibriae without knowledge of the intricate structures of accumulated capital. Such a methodology causes its proprietors, at any time, to observe a handful of aggregations of variables, empirically retrieved from a vastly complex system with infinite variables and using it to diagnose said system’s entirety. This goes out to you, logical positivists.
Good thing I’m running Tor on my good old 95 system on an AMD 386 with a 512mb hard drive and 64 megs of ram with the front-side bus pushing the data transfer rate of a damn serial modem. Just kidding. Lachmann readily points out the issues with static-equilibrium analysis, dynamic-equilibrium analysis, and the concept of equilibrium ever instantiating itself in any actual economic activity or situation. Because time is constantly moving forward, all micro and macro variables are constantly changing, and there can be no analysis of economics without time, which precludes analysis involving equilibrium constructs, or at least those in his day (which still largely dominate mainstream macroeconomics). The capital structure, to Lachmann, exhibits not a “shape,” but rather, a “morphology,” a continuum of shapes, ever-changing and ever-evolving. Structures, properly coordinated collections of things, are constantly assembled and disassembled, accumulated and dispersed, built high and knocked down. This applies all the way down to the level of the individual mind and its ideas and beliefs. These ideas and beliefs are shaped by the external world and its constructions, and these same ideas and beliefs shape the structures of the world as well.
At this point, an old-school Keynesian or monetarist of the variety that fears all deflation might simply call Lachmann’s ideas those of a plain old liquidationist. Not the case. To call someone a “liquidationist” perjoratively, in this instance, implies that liquidation is simply a bad thing. This means, of course, that there is no malinvestment, only collapses in demand. Utter absurdity. Are there no bad investments? Is anything anyone buys a boon to the economy? Look at GDP and NGDP. They are not indicators of growth, capital accumulation, or economic strength. They are measures of economic activity. Governments could pay everyone in the world to quit their jobs, bury printed money, dig it back up, and keep it. The GDP would skyrocket and we would all starve shortly thereafter. Strangely enough, Keynes suggested that this would work in a depression when interest rates are already at zero and pumping money into bonds is like “pushing on a string;” the liquidity trap. Guess who invented the GDP and saw it as the chief economic indicator? As you surely know, Keynes. So what Keynes is saying, is that, because all economic activity is useful, we can equate GDP with economic health. Because GDP is comprised of state spending, consumption spending, and investment spending, plus or minus the trade balance (spending at home or abroad), and spending is the driving factor of all growth, and demand creates its own supply and the reverse, the GDP must be measure of growth itself, therefore we can measure GDP, real or nominal, and see how good “the economy” is. All we have to do is get a lot of money into circulation and a lot of economically useful stuff will go down. We just have to shave off the extra fat when the economy is at full employment and inflation is merely causing discrepancies between the real and nominal price. Right. Remember, this comes from the same Keynes that told Hayek, his good friend, that he did not even believe what he wrote in his “General” Theory, but was rather simply trying to persuade British policymakers to reduce the real wage rates of workers through inflation (they were believed by many to be too high and the cause of stagnant growth at the time). Hayek says that he even claimed that he knew it was a special circumstance he was trying to solve with state means, as Garrison argues is correct and unneeded. Indeed, commending Lenin in his tactics, Keyes mentioned that if you want to destroy capitalism-as-it-is (a term I borrow from Garrison) and replace it with socialism-of-any-sort, the easiest and sneakiest way to confiscate wealth from the general population is through inflation.
Regardless of this libertarian, rather than purely economic tangent (or perhaps, polemic), let me shift and refocus our area of observation towards microfoundations versus macroeconomics. As we know, Lachmann disdained what was called “macroeconomics” in his day; what we would now regard as macroeconomics plus empiricism and aggregation. By this, I mean that there have been recent resurgences in topics in macroeconomic study that were ignored from the lessons of the “marginal revolution,” come the “Keynesian revolution,” as it were, until the “monetarist counter-revolution” stabbed traditional Keynesianism at its core. Granted, monetarism is no friend to disaggregation or subjectivism (utils, anyone?) yet the simple trend towards capitalist understandings of its own structure (a.k.a. the “right”) has still far-outstripped the Keynesian feel-good platitudes and doublethink ungoodspeak. Indeed, Friedman-styled Chicago school economics is far friendlier to Austrians than, say, market monetarism. Since the 70’s- and 80’s-styled monetarists attacked the Keynesians with the short-run/long-run Phillips curve, along with the public-choice school’s attack on political money (along with even Friedman’s own rule), marginalism, subjectivism, disaggregation, microfoundations, and the like have become far more prevalent in the thoughts and understandings of your average student of economics (which is anyone that thinks about economics). Skepticism of central banking in its means, motivations, and structural minutiae have permeated the mainstream, thanks to the intellectual revolution spearheaded by Chicagoans, Austrians, public-choice folks, and “supply-siders,” all of which we owe a great debt, as Lachmann would surely agree, strangely enough. That is not to say that we owe Reagan some political praise in this bloothirsty arena; rather, I mean to say that the insight that Volker employed by slamming on the monetary brakes does not go unnoticed by Austrians. Indeed, modern monetarists hardly give a shit.
As old friends become new enemies, the monetarists were Chicagoan when helpful, but now monetarism has turned dangerous again. I do not mean to say this lightly.
Somehow “market” monetarists want a central bank, unlike Chicagoans, who were transparent in their capacity as harm-reducers. The market-monetarist modus operandi? PQ targeting (as in, mv=pq). Real markets eh? Inflate whatever you can’t build? All that means is that, as Lachmann would readily recognize, they think malinvestment either does not exist or does not matter. Given that they use a model that assumes neutral money and homogenous capital, it is plainly recognizable in the Austrian and especially Lachmannian lens that NGDP targeters do not even possess the apparatus with which to deal with such issues. How can one calculate the correct real GDP (by any means, be it gold or paper), as Lachmann would argue, then do some math and target some nominal GDP in the future? How can one possibly estimate the correct supply of money, and a fortiori, control all of the various measures of money (M1, M2, M3, MZM, et cetera) in an environment with perhaps infinite variables: the capital structure? If this is not dripping green with Lachmann’s lime-infused LSD then I don’t know what s.
Next, the new-“classicists,” being supply-side pure-RBCT neoclassicals and generally just new-school EMH monetarists, well, we all know their story. As mentioned in another article on my crappy web site, the real business cycle theory is not without its merits, but not for the reasons its common adherents believe. Lachman argued implicitly, as I would explicitly, that the EMH and other such New Classical tools are completely unuseful when analyzing dynamic relations between economic variables.
The third group of monetarists, unconventional in my classification as such, is the “New Keynesian” school. Sticky prices, sticky wages, menu costs; it all sounds silly to an Austrian that has read the literature of his school alone, but the problems of it are indeed real. However, not only can we show empirically, but also know deductively, that these issues are only ameliorated by allowing markets to relieve pressure from wage rigidities, price inflexibilities, and so on. Markets unhindered allow humans to coordinate the things they want with the things others want. So what do we have here, despite my rude shortness with the New Keynesians? Lachmann would interject here and say that neoclassicals as a whole, not just monetarists, or new Classicists, or classicists as a whole, or even the post-Keynesians that he liked, fully understood that they look through the wrong end of the telescope. Studiying the planets from an individual standpoint and looking through the smaller side of the telescope is generally much more successful at determining constants, especially stationary objects, as opposed to trying to look through the wrong end of the telescope at a group of objects that are constantly moving. Micro primacy, I suppose, is key here, but Lachmann and the other Austrians I periodically give props generally agree on such matters and have divergent understandings of the mid-term stuff instead.
Objective and subjective factors interact. The rate of time preference, or the subjectively appraised agio of present over future goods, is a marginal concept; and where the margin occurs depends largely on how extensively people have made provision for present and future consumption. This in turn depends partly on the transformability through investment of present goods into future goods.
Stay tuned for the convergence of this series and that of Garrison…