WEBVTT NOTE 5.02. The Evenly Rotating Economy 1 00:00:00.000 --> 00:00:05.000 2. The Evenly Rotating Economy 2 00:00:05.000 --> 00:00:13.000 Analysis of the activities of production in a monetary market economy is a highly complex matter. 3 00:00:13.000 --> 00:00:21.000 An explanation of these activities, in particular the determination of prices and therefore the return to factors, 4 00:00:21.000 --> 00:00:27.440 Factors, the allocation of factors and the formation of capital can be developed only 5 00:00:27.440 --> 00:00:34.040 if we use the mental construction of the evenly rotating economy. 6 00:00:34.040 --> 00:00:37.080 This construction is developed as follows. 7 00:00:37.080 --> 00:00:43.320 We realize that the real world of action is one of continual change. 8 00:00:43.320 --> 00:00:49.060 Individual value scales, technological ideas and the quantities of means available are 9 00:00:49.060 --> 00:00:50.940 are always changing. 10 00:00:50.940 --> 00:00:54.360 These changes continually impel the economy 11 00:00:54.360 --> 00:00:56.280 in various directions. 12 00:00:56.280 --> 00:01:00.000 Value scales change and consumer demand shifts 13 00:01:00.000 --> 00:01:02.320 from one good to another. 14 00:01:02.320 --> 00:01:05.440 Technological ideas change and factors 15 00:01:05.440 --> 00:01:07.920 are used in different ways. 16 00:01:07.920 --> 00:01:12.580 Both types of change have differing effects on prices. 17 00:01:12.580 --> 00:01:15.800 Time preferences change with certain effects 18 00:01:15.800 --> 00:01:19.040 on interest and capital formation. 19 00:01:19.040 --> 00:01:21.440 The crucial point is this. 20 00:01:21.440 --> 00:01:24.520 Before the effects of any one change 21 00:01:24.520 --> 00:01:29.040 are completely worked out, other changes intervene. 22 00:01:29.040 --> 00:01:32.640 What we must consider, however, by the use of reasoning 23 00:01:32.640 --> 00:01:37.040 is what would happen if no changes intervened. 24 00:01:37.040 --> 00:01:40.800 In other words, what would occur if value scales, 25 00:01:40.800 --> 00:01:44.400 technological ideas and the given resources 26 00:01:44.400 --> 00:01:46.280 remained constant? 27 00:01:46.280 --> 00:01:51.880 What would then happen to prices and production and their relations? 28 00:01:51.880 --> 00:01:59.320 Given values, technology and resources, whatever their concrete form, remain constant. 29 00:01:59.320 --> 00:02:06.420 In that case, the economy tends toward a state of affairs in which it is evenly rotating, 30 00:02:06.420 --> 00:02:13.000 that is, in which the same activities tend to be repeated in the same pattern over and 31 00:02:13.000 --> 00:02:15.040 over again. 32 00:02:15.040 --> 00:02:26.040 The rates of production of each good remain constant, all prices remain constant, total population remains constant, etc. 33 00:02:26.040 --> 00:02:35.040 Thus, if values, technology and resources remain constant, we have two successive states of affairs. 34 00:02:35.040 --> 00:02:41.040 B, the period of transition to an unchanging, evenly rotating economy 35 00:02:41.040 --> 00:02:48.040 and B, the unchanging round of the evenly rotating economy itself. 36 00:02:48.040 --> 00:02:53.040 This latter stage is the state of final equilibrium. 37 00:02:53.040 --> 00:02:57.040 It is to be distinguished from the market equilibrium prices 38 00:02:57.040 --> 00:03:02.040 that are set each day by the interaction of supply and demand. 39 00:03:02.040 --> 00:03:10.800 And, the final equilibrium state is one which the economy is always tending to approach. 40 00:03:10.800 --> 00:03:18.240 If our data, values, technology and resources, remained constant, the economy would move 41 00:03:18.240 --> 00:03:23.360 toward the final equilibrium position and remain there. 42 00:03:23.360 --> 00:03:29.840 In actual life, however, the data are always changing, and therefore before arriving at 43 00:03:29.840 --> 00:03:38.840 At a final equilibrium point, the economy must shift direction towards some other final equilibrium position. 44 00:03:38.840 --> 00:03:48.840 Hence, the final equilibrium position is always changing, and consequently no one such position is ever reached in practice. 45 00:03:48.840 --> 00:03:54.840 But even though it is never reached in practice, it has a very real importance. 46 00:03:54.840 --> 00:04:00.840 In the first place, it is like the mechanical rabbit being chased by the dog. 47 00:04:00.840 --> 00:04:09.840 It is never reached in practice, and it is always changing, but it explains the direction in which the dog is moving. 48 00:04:09.840 --> 00:04:20.840 Secondly, the complexity of the market system is such that we cannot analyze factor prices and incomes in a world of continual change 49 00:04:20.840 --> 00:04:33.840 Unless we first analyze their determination in an evenly rotating world where there is no change, and where given conditions are allowed to work themselves out to the full. 50 00:04:33.840 --> 00:04:40.840 Certainly, at this stage of inquiry, we are not interested in ethical evaluations of our knowledge. 51 00:04:40.840 --> 00:04:46.800 College, we are attaching no ethical merit to the equilibrium position. 52 00:04:46.800 --> 00:04:52.600 It is a concept for scientific explanation of human activity. 53 00:04:52.600 --> 00:04:59.840 The listener might ask why such an unrealistic concept as final equilibrium is permissible 54 00:04:59.840 --> 00:05:06.200 when we have already presented and will present grave strictures against the use of various 55 00:05:06.200 --> 00:05:11.520 Unrealistic and Anti-Realistic Premises in Economics. 56 00:05:11.520 --> 00:05:18.440 For example, as we shall see, the theory of pure competition so prevalent among writers 57 00:05:18.440 --> 00:05:22.160 today is based on impossible premises. 58 00:05:22.160 --> 00:05:28.200 The theory is then worked out along these lines and not only applied uncritically to 59 00:05:28.200 --> 00:05:35.880 the real world, but actually used as an ethical base from which to criticize the real deviations 60 00:05:35.880 --> 00:05:50.880 The concepts of indifference classes and of infinitely small steps are other examples of false premises that are used as the basis of highly elaborate theoretical structures. 61 00:05:50.880 --> 00:05:59.880 The concept of the evenly rotating economy, however, when used with care, is not open to these criticisms. 62 00:05:59.880 --> 00:06:25.880 For this is an ever-present force, since it is the goal toward which the actual system is always moving, the final position of rest, at which, on the basis of the given actually existing value scales, all individuals would have attained the highest positions on their value scales, given the technology and resources. 63 00:06:25.880 --> 00:06:31.880 This concept, then, is of legitimate and realistic importance. 64 00:06:31.880 --> 00:06:41.880 We must always remember, however, that while a final equilibrium is the goal toward which the economy is moving at any particular time, 65 00:06:41.880 --> 00:06:48.880 changes in the data alter this position and therefore shift the direction of movement. 66 00:06:48.880 --> 00:06:57.880 Therefore, there is nothing in a dynamic world that is ethically better about a final equilibrium position. 67 00:06:57.880 --> 00:07:04.880 As a matter of fact, since wants are unsatisfied, otherwise there would be no action, 68 00:07:04.880 --> 00:07:08.880 such a position of no change would be most unfortunate, 69 00:07:08.880 --> 00:07:14.880 since it would imply that no further want satisfaction would be possible. 70 00:07:14.880 --> 00:07:21.320 Furthermore, we must remember that a final equilibrium situation tends to be, though 71 00:07:21.320 --> 00:07:30.680 it can never actually be, the result of market activity, and not the condition of such activity. 72 00:07:30.680 --> 00:07:37.820 Far too many writers, for example, discerning that in the evenly rotating economy, entrepreneurial 73 00:07:37.820 --> 00:08:04.220 Another danger in the use of this concept is that its purely static, essentially timeless 74 00:08:04.220 --> 00:08:10.580 Mathematics conditions are all too well suited for the use of mathematics. 75 00:08:10.580 --> 00:08:19.160 Mathematics rests on equations, which portray mutual relationships between two or more functions. 76 00:08:19.160 --> 00:08:24.720 Of themselves, of course, such mathematical procedures are unimportant, since they do 77 00:08:24.720 --> 00:08:27.980 not establish causal relationships. 78 00:08:27.980 --> 00:08:33.720 They are of the greatest importance in physics, for example, because that science deals with 79 00:08:33.720 --> 00:08:40.280 with certain observed regularities of motion by particles of matter that we must regard 80 00:08:40.280 --> 00:08:42.640 as unmotivated. 81 00:08:42.640 --> 00:08:49.080 These particles move according to certain precisely observable, exact, quantitative 82 00:08:49.080 --> 00:08:51.040 laws. 83 00:08:51.040 --> 00:08:56.840 Mathematics is indispensable in formulating the laws among these variables, and in formulating 84 00:08:56.840 --> 00:09:01.240 theoretical explanations for the observed phenomena. 85 00:09:01.240 --> 00:09:08.120 In human action, the situation is entirely different, if not diametrically opposite. 86 00:09:08.120 --> 00:09:15.760 Whereas in physics, causal relations can only be assumed hypothetically and later approximately 87 00:09:15.760 --> 00:09:24.160 verified by referring to precise observable regularities, in praxeology we know the causal 88 00:09:24.160 --> 00:09:26.040 force at work. 89 00:09:26.040 --> 00:09:35.080 This causal force is human action, motivated, purposeful behavior, directed at certain ends. 90 00:09:35.080 --> 00:09:40.480 The universal aspects of this behavior can be logically analyzed. 91 00:09:40.480 --> 00:09:47.160 We are not dealing with functional, quantitative relations among variables, but with human 92 00:09:47.160 --> 00:09:54.560 reason and will, causing certain action, which is not determinable or reducible to 93 00:09:54.560 --> 00:09:56.760 to Outside Forces. 94 00:09:56.760 --> 00:10:03.120 Furthermore, since the data of human action are always changing, there are no precise 95 00:10:03.120 --> 00:10:07.080 quantitative relationships in human history. 96 00:10:07.080 --> 00:10:12.280 In physics, the quantitative relationships, or laws, are constant. 97 00:10:12.280 --> 00:10:19.800 They are considered to be valid for any point in human history, past, present or future. 98 00:10:19.800 --> 00:10:25.400 In the field of human action, there are no such quantitative constants. 99 00:10:25.400 --> 00:10:31.640 There are no constant relationships valid for different periods in human history. 100 00:10:31.640 --> 00:10:37.960 The only natural laws, if we may use such an old-fashioned but perfectly legitimate 101 00:10:37.960 --> 00:10:46.640 label for such constant regularities in human action, are qualitative rather than quantitative. 102 00:10:46.640 --> 00:10:49.540 They are, for example, precisely the laws 103 00:10:49.540 --> 00:10:52.860 induced in praxeology and economics, 104 00:10:52.860 --> 00:10:57.860 the fact of action, the use of means to achieve ends, 105 00:10:57.860 --> 00:11:02.500 time preference, diminishing marginal utility, et cetera. 106 00:11:03.360 --> 00:11:06.960 Another difference is one we have already discussed, 107 00:11:06.960 --> 00:11:10.440 that mathematics, particularly the calculus, 108 00:11:10.440 --> 00:11:13.200 rests in large part on assumptions 109 00:11:13.200 --> 00:11:15.900 of infinitely small steps. 110 00:11:15.900 --> 00:11:22.060 Such assumptions may be perfectly legitimate in a field where behavior of unmotivated matter 111 00:11:22.060 --> 00:11:30.780 is under study, but human action disregards infinitely small steps precisely because they 112 00:11:30.780 --> 00:11:37.340 are infinitely small and therefore have no relevance to human beings. 113 00:11:37.340 --> 00:11:45.820 Hence the action under study in economics must always occur in finite, discrete steps. 114 00:11:45.820 --> 00:11:51.540 It is therefore incorrect to say that such an assumption may just as well be made in 115 00:11:51.540 --> 00:11:56.580 the study of human action as in the study of physical particles. 116 00:11:56.580 --> 00:12:07.180 In human action, we may describe such assumptions as being not simply unrealistic, but anti-realistic. 117 00:12:07.180 --> 00:12:13.100 Mathematical equations, then, are appropriate and useful where there are constant quantitative 118 00:12:13.100 --> 00:12:16.860 of Relations Among Unmotivated Variables. 119 00:12:16.860 --> 00:12:19.180 They are singularly inappropriate 120 00:12:19.180 --> 00:12:22.540 in praxeology and economics. 121 00:12:22.540 --> 00:12:27.160 In the latter fields, verbal logical analysis of action 122 00:12:27.160 --> 00:12:32.220 and its processes through time is the appropriate method. 123 00:12:32.220 --> 00:12:34.860 It is not surprising that the main efforts 124 00:12:34.860 --> 00:12:38.120 of the mathematical economists have been directed 125 00:12:38.120 --> 00:12:41.680 toward describing the final equilibrium state 126 00:12:41.680 --> 00:12:43.760 by Means of Equations. 127 00:12:43.760 --> 00:12:48.560 For in this state, since activities merely repeat themselves, 128 00:12:48.560 --> 00:12:52.240 there seems to be more scope for describing conditions 129 00:12:52.240 --> 00:12:55.320 by means of functional equations. 130 00:12:55.320 --> 00:12:57.760 These equations, at best, however, 131 00:12:57.760 --> 00:13:02.600 can do no more than describe this equilibrium state. 132 00:13:02.600 --> 00:13:06.640 Aside from doing no more than verbal logic can do, 133 00:13:06.640 --> 00:13:09.720 and therefore violating the scientific principle 134 00:13:09.720 --> 00:13:15.800 of Occam's razor, that science should be as simple and clear as possible. 135 00:13:15.800 --> 00:13:21.800 Such a use of mathematics contains grave errors and defects within itself. 136 00:13:21.800 --> 00:13:28.440 In the first place, it cannot describe the path by which the economy approaches the final 137 00:13:28.440 --> 00:13:30.800 equilibrium position. 138 00:13:30.800 --> 00:13:38.360 This task can be performed only by verbal, logical analysis of the causal action of human 139 00:13:38.360 --> 00:13:39.840 and Human Beings. 140 00:13:39.840 --> 00:13:46.080 It is evident that this task is the important one, since it is this analysis that is significant 141 00:13:46.080 --> 00:13:48.360 for human action. 142 00:13:48.360 --> 00:13:56.440 Action moves along a path and is not describable in an unchanging, evenly rotating world. 143 00:13:56.440 --> 00:14:02.880 The world is an uncertain one, and we shall see shortly that we cannot even pursue to its 144 00:14:02.880 --> 00:14:32.880 The Theory of Money and State The Theory of Money and State 145 00:14:32.880 --> 00:14:36.880 and the Misleading Picture of the World of Action. 146 00:14:36.880 --> 00:14:41.880 Finally, the mathematical equations of the evenly rotating economy 147 00:14:41.880 --> 00:14:47.880 describe only a static situation outside of time. 148 00:14:47.880 --> 00:14:52.880 The mathematical economists or econometricians have been trying 149 00:14:52.880 --> 00:14:57.880 without success for years to analyze the path of equilibrium 150 00:14:57.880 --> 00:15:01.880 as well as the equilibrium conditions themselves. 151 00:15:01.880 --> 00:15:07.880 Econometrician Frederic Tsoyton recently admitted that such attempts cannot succeed. 152 00:15:07.880 --> 00:15:13.880 All that mathematics can describe is the final equilibrium point. 153 00:15:13.880 --> 00:15:22.880 The mathematical equations of the evenly rotating economy differ drastically from the mathematical equations of physics, 154 00:15:22.880 --> 00:15:26.880 which describe a process through time. 155 00:15:26.880 --> 00:15:39.880 It is precisely through this description of constant quantitative relations in the motion of elements that mathematics renders its great service in natural science. 156 00:15:39.880 --> 00:15:49.880 How different is economics, where mathematics at best can only inadequately describe a timeless end result? 157 00:15:49.880 --> 00:16:04.880 For a discussion of the logical method of economics, see Human Action by Ludwig von Mises and The Neglected Work, The Character and Logical Method of Political Economy by J. E. Cairns. 158 00:16:04.880 --> 00:16:12.880 If any mathematics has been used in this treatise, it has been only along the lines charted by Cairns. 159 00:16:12.880 --> 00:16:21.240 I have no desire to deny that it may be possible to employ geometrical diagrams or mathematical 160 00:16:21.240 --> 00:16:28.480 formulae for the purpose of exhibiting economic doctrines reached by other paths. 161 00:16:28.480 --> 00:16:34.880 What I venture to deny is the doctrine which Professor Jevons and others have advanced, 162 00:16:34.880 --> 00:16:41.700 that economic knowledge can be extended by such means, that mathematics can be applied 163 00:16:41.700 --> 00:16:47.700 to the Development of Economic Truth as it has been applied to the development of mechanical 164 00:16:47.700 --> 00:16:54.420 and physical truth, and unless it can be shown either that mental feelings admit of being 165 00:16:54.420 --> 00:17:01.820 expressed in precise quantitative forms, or on the other hand that economic phenomena 166 00:17:01.820 --> 00:17:10.620 do not depend on mental feelings, I am unable to see how this conclusion can be avoided. 167 00:17:10.620 --> 00:17:16.640 The use of the mathematical concept of function is particularly inappropriate in a science 168 00:17:16.640 --> 00:17:18.560 of human action. 169 00:17:18.560 --> 00:17:26.400 On the one hand, action itself is not a function of anything, since function implies definite, 170 00:17:26.400 --> 00:17:30.920 unique mechanical regularity and determination. 171 00:17:30.920 --> 00:17:38.100 On the other hand, the mathematics of simultaneous equations dealing in physics with unmotivated 172 00:17:38.100 --> 00:17:42.380 Motion stresses mutual determination. 173 00:17:42.380 --> 00:17:49.380 In human action, however, the known causal force of action unilinearly determines the 174 00:17:49.380 --> 00:17:50.740 results. 175 00:17:50.740 --> 00:17:57.020 This gross misconception by mathematically inclined writers on the study of human action 176 00:17:57.020 --> 00:18:02.960 was exemplified during a running attack on Eugen Boehm-Bawerk, one of the greatest of 177 00:18:02.960 --> 00:18:07.400 all economists, by Professor George Stigler. 178 00:18:07.400 --> 00:18:13.980 Yet the postulate of continuity of utility and demand functions, which is unrealistic 179 00:18:13.980 --> 00:18:20.400 only to a minor degree and essential to analytic treatment, is never granted. 180 00:18:20.400 --> 00:18:26.080 A more important weakness is Boehm-Bawerk's failure to understand some of the most essential 181 00:18:26.080 --> 00:18:33.660 elements of modern economic theory, the concepts of mutual determination and equilibrium developed 182 00:18:33.660 --> 00:18:40.700 by the use of the theory of simultaneous equations. Mutual determination is spurned for the older 183 00:18:40.700 --> 00:18:48.660 concept of cause and effect. The weakness displayed here is not that of Boehm-Bawerk, 184 00:18:48.660 --> 00:18:55.580 but of those like Professor Stigler, who attempt vainly and fallaciously to construct economics 185 00:18:55.580 --> 00:19:03.340 on the model of mathematical physics, specifically of classical mechanics. Stigler appends a 186 00:19:03.340 --> 00:19:09.340 A footnote to the above paragraph, which is meant as the coup de grâce to Boehm-Bawerk. 187 00:19:09.340 --> 00:19:13.620 Boehm-Bawerk was not trained in mathematics. 188 00:19:13.620 --> 00:19:20.340 Mathematics, it must be realized, is only the servant of logic and reason, and not their 189 00:19:20.340 --> 00:19:21.820 master. 190 00:19:21.820 --> 00:19:27.740 Training in mathematics is no more necessary to the realization of its uselessness for, 191 00:19:27.740 --> 00:19:35.100 and Inapplicability to the Sciences of Human Action than, for example, training in agricultural 192 00:19:35.100 --> 00:19:41.140 techniques is essential to knowing that they are not applicable on board an ocean liner. 193 00:19:41.140 --> 00:19:47.460 Indeed, training in mathematics without adequate attention to the epistemology of the Sciences 194 00:19:47.460 --> 00:19:54.280 of Human Action is likely to yield unfortunate results when applied to the latter, as this 195 00:19:54.280 --> 00:19:57.180 example demonstrates. 196 00:19:57.180 --> 00:20:04.340 To return to the concept of the evenly rotating economy, the error of the mathematical economists 197 00:20:04.340 --> 00:20:11.820 is to treat it as a real and even ideal state of affairs, whereas it is simply a mental 198 00:20:11.820 --> 00:20:18.980 concept enabling us to analyze the market and human activities on the market. 199 00:20:18.980 --> 00:20:26.420 It is indispensable because it is the goal, though ever shifting, of action and exchange. 200 00:20:26.420 --> 00:20:32.140 On the other hand, the data can never remain unchanged long enough for it to be brought 201 00:20:32.140 --> 00:20:33.660 into being. 202 00:20:33.660 --> 00:20:41.220 We cannot conceive in all consistency of a state of affairs without change or uncertainty, 203 00:20:41.220 --> 00:20:43.780 and therefore without action. 204 00:20:43.780 --> 00:20:50.580 The evenly rotating state, for example, would be incompatible with the existence of money, 205 00:20:50.580 --> 00:20:55.380 the very medium at the center of the entire exchange structure. 206 00:20:55.380 --> 00:21:02.040 For the money commodity is demanded and held only because it is more marketable than other 207 00:21:02.040 --> 00:21:09.600 commodities, that is, because the holder is more sure of being able to exchange it. 208 00:21:09.600 --> 00:21:16.080 In a world where prices and demands remain perpetually the same, such demand for money 209 00:21:16.080 --> 00:21:18.420 would be unnecessary. 210 00:21:18.420 --> 00:21:25.100 Money is demanded and held only because it gives greater assurance of finding a market, 211 00:21:25.100 --> 00:21:30.180 and because of the uncertainties of the person's demands in the near future. 212 00:21:30.180 --> 00:21:36.420 If everyone, for example, knew his spending precisely over his entire future, and this 213 00:21:36.420 --> 00:21:42.300 would be known under the evenly rotating system, there would be no point in his keeping a cash 214 00:21:42.300 --> 00:21:44.460 balance of money. 215 00:21:44.460 --> 00:21:50.060 It would be invested, so that money would be returned in precisely the needed amounts 216 00:21:50.060 --> 00:21:52.380 on the day of expenditure. 217 00:21:52.380 --> 00:21:59.260 But if no one wishes to hold money, there will be no money, and no system of money prices. 218 00:21:59.260 --> 00:22:02.660 The entire monetary market would break down. 219 00:22:02.660 --> 00:22:10.940 Thus, the evenly rotating economy is unrealistic, for it cannot actually be established, and 220 00:22:10.940 --> 00:22:15.860 we cannot even conceive consistently of its establishment. 221 00:22:15.860 --> 00:22:24.500 But the idea of the evenly rotating economy is indispensable in analyzing the real economy. 222 00:22:24.500 --> 00:22:30.980 Through hypothesizing a world where all change has worked itself out, we can analyze the 223 00:22:30.980 --> 00:22:35.040 The Directions of Actual Change