Wednesday, March 9, 2016

AEF Spring 2016 #2--Rothbard's "Toward a Reconstruction of Utility and Welfare Economics"

It has been several years since I first read this article as an undergraduate.  When I reread it for this session, I was glad to see that it still holds up.  The same cannot be said for Cordato, he thinks that Rothbard makes several mistakes.  

To begin, Rothbard states that valuation is the "keystone" of economic theory.  Cordato disagrees.  He says that action is the keystone, not valuation.  Is this difference real or is it just one of semantics?  Rothbard clearly agrees that Human Action is the purposeful use of means to arrive at preferred ends.  Cordato clearly agrees that the Austrians have a unique perspective where all valuation is subjective.  The Austrians differ from the mainstream on both of these fronts.  The mainstream does not think that action is important, and it also does believe (sometimes implicitly if not explicitly) that some values are objective and not subjective.  So I am not going to argue which is more important.  I am not going to argue that they are equally important.  However, I will argue that each is important and critical to the Austrian perspective of economics.

Rothbard begins his argument with his perspective on Demonstrated Preferences.  Since we live in a world of scarcity, we must choose.  When we choose, we are demonstrating our preferences.  Rothbard uses this technique in Man, Economy and State to build his Law of Demand and Law of Supply.  (When I teach my foundational economics courses, I also follow this approach.)  When we use preference rankings and choices, we are able to conclude that as people use scarce means to achieve ends (as they define them), the people will "work down" their preference scale.  Simply put, they will do the thing that yields the most happiness first and the next most second, and so forth.  From this line of reasoning, we are able to deduce the Law of Diminishing Marginal Utility.  If we flip the preference scale around and look at it in terms of opportunity costs, then we can deduce the Law of Increasing Opportunity Costs.  Rothbard is following the same reasoning that Böhm-Bawerk first put forth in 1886.

In the article, Rothbard laments that Samuelson has beaten him to the punch by appropriating "Revealed Preferences" before him.  "Demonstrated Preferences" was the second-place choice.  Rothbard credits Mises for making a point of difference between revealed and demonstrated preferences, and that is is the difference between constancy and consistency.  "Consistency means that a person maintains a transitive order of rank on his preference scale (if A is preferred to B and B is preferred to C, then A is preferred to C).  But the revealed preference procedure does not rest on this assumption so much as on an assumption of constancy--that an individual maintains the same value scale over time." Cordato added that in the model of Perfect Competition there is no time and thus all preferences are constant over infinity. 

In Rothbard's section on "Utility Theory," Rothbard stresses how utility cannot be measured.  Furthermore, notions such as "Total Utility" are also meaningless because it assumes that utility is additive.  If I eat one candy bar and then a second am I really adding those two utilities together?  If we stop to think about it, what would it mean to add them together?  

During this discussion, Cordato made the interesting quip that there is no such thing as a "sunk benefit."  

As always, it seems that we run short of time when we finally get to the "good stuff."  (I actually have made the suggestion that we start the discussion at the end of the paper and move forward.)  So when we got to Rothbard's section on Welfare Economics, time was scarce.  (Yes, that was a pun.)

Cordato listed several problems that he has with Rothbard's reconstruction of welfare economics.  We discussed them (briefly), but I will just list them here:

  1. A person can only demonstrate preference, not disutility.
  2. A person cannot demonstrate his opportunity cost.
  3. As a result from points 1 & 2, we cannot demonstrate profit.
  4. Finally, all judgements of social improvements are ex post, but in Rothbard's model they are all ex ante.
We certainly tried to chew through these points, but time was short.  Nevertheless, I invite anyone and everyone to make comments on these points.

Wednesday, March 2, 2016

AEF Spring 2016 #1--Hayek's "The Meaning of Competition"

For the spring semester at NC State University, we decided to continue to look at some of the more foundational articles in Austrian Economics.  One of the more famous is F.A. Hayek's "The Meaning of Competition."  It was originally presented as a lecture at Princeton University on May 20, 1946.

Our session took place on January 29, 2016.  It was attended by several graduate and undergraduate students.  Roy Cordato and I (Paul Cwik) were the hosts.  Cordato presented the article this week and outlined four major points in Hayek's article.

  1. There are major conceptual flaws in the model of Perfect Competition (PC).
  2. The use of Perfect Competition (PC) as a Normative Benchmark is misleading and dangerous.
  3. Hayek presents a proper role in which to view competition.
  4. Hayek creates a brief outline of the Austrian Theory of Monopoly.
Let's take a closer look at each.

The major conceptual flaws in the PC model begin with the assumption of Perfect Knowledge.  By making the assumption of perfect knowledge, the economist is essentially assuming away the problem.  In fact with the assumption of perfect knowledge the entire need for competitive behavior disappears.  It is the absence of competitive activities.  Why?  It is simply due to the fact that all of the supply curves (cost curves) and demand curves are fully known.  If all of the curves are known then the problem is one of simply grinding through a mechanical process.  The problem reduces to "given these two lines, please compute where they cross."  Austrians define "competition," which we will see in Point #3 below, as a rivalrous process.  Furthermore, the question of how the market actually works in the real world is never really investigated.  The perfectly competitive model is a static (no time) and competition is a sequential series of equations to be solved.

The second point that Cordato presented was using the PC model as a benchmark.  The PC model was originally designed to be a tool to show a sequence of cause and effect.  For example, suppose that a firm or an industry was using steel as an input.  If we see that the price of steel rises, what will the effects of this change have on the industry?  The PC model does a good job of tracing out the cause and effects of this question.  Unfortunately, the tool has become the entire toolbox.  It was originally supposed to look at very narrow questions.  However if you walk into a mainstream International Trade class, one of the very first assumptions that is made is to assume perfect competition.  This assumption is the beginning of the building of the Heckscher-Ohlin model.  (I just pulled my old International Trade textbook off my shelf and it literally says, "First, we assume that perfect competition prevails in both output and factor markets."  When every model starts with the PC model, it creates a false standard.  On one end of the spectrum is perfect competition and on the other end is monopoly.  Everyone knows that monopoly is bad and so the thing on the other end must be good.  What's that thing?  Why it is nothing less than perfect competition.  And if we even look at the name, we know that it is something to desire--it's even called PERFECT.  What's not to like?

Actually, there is a lot not to like about using the PC model as the benchmark.  The rules and regulations that government policies create set the PC model as the goal.  This goal setting is misleading and dangerous.  Let's take a look at a simple example.  In the PC model, there are many, many sellers.  In fact there are so many that not a single one of them can influence or affect the price; they are "price takers."  If a company is larger than simply being a mere price taker, then to get us closer to perfect competition, the government needs to intervene and make it smaller.  Think of how silly this standard truly is.  When I go to work I drive past two gas stations and one's price is a penny lower than the other.  Clearly, one of them is not a price taker.  So they are too big!  When I look for used DVDs, I see that there are several prices.  Clearly these sellers are also not price takers.  The idea of setting "price taking" as a goal is confusing an assumption of the PC model with an outcome.

The third point that Cordato brought up was on how we should look at competition.  Competition is a rivalrous process.  Why do sports teams play the game?  They do so because regardless of what the teams looks like on paper, any one team can beat another team on a given day.  Furthermore, how many are needed to have competition?  When I ask my students this question, most will say at least two.  However, I ask how many run or swim.  I then ask if they ever keep time.  Why would they do that?  With whom are they competing?  They are competing with themselves.  The minimum number needed for competition is one.  Even if you are the only producer in a market, there are always potential rivals.  Leonard Read once said that getting rid of competition was like standing in a stream with a broom trying to sweep the water away.  With one stroke, the water is gone for a moment, but then it comes rushing back in.  To be a natural monopolist, it means that one must out compete everyone else on every single vector of competition there can be.  That means one must have better prices, better quality, better hours, better location, better customer service, and so forth.  It must be better in absolutely everything.  If one area slips, say customer service, then that opens the door for a niche competitor to get into the market.  And besides, how would a customer view such a monopoly? If it has better everything, then consumers would be very happy.  However, the PC model says that only small price taking companies are good for customers.  How counter-intuitive!  In the real world, the companies that please the customers by doing a better job grow larger.

Hayek says that competition is the mechanism that allows entrepreneurs to acquire the knowledge that the PC model assumes to be known.  Competition tells us who will serve us well.  It is a "Discovery Process."

Finally, Hayek presents an Austrian Theory of Monopoly.  Cordato was surprised at how well Hayek and Rothbard line up on this point.  For them, the only barrier is government.  In contrast to this point are Mises and Kirzner.  They allow for the possibility of a resource monopoly.  While this might seem to be a minor technical point that never occurs in the real world (and it truly is), it is one of the few instances where Rothbard and Hayek are not on the same side as Mises.

And finally, finally, we do have fun in these sessions.  One of the fun things that arose (at least to a geeky economist such as myself) was this turn of phrase:

Private Sector:
"Where there's a problem, that's where the money is."

Public Sector:
"Where there's money, that's where the problem is."

Tuesday, February 9, 2016

Austrian Economics Forum Fall 2015 Recap Part 2

The third video from my three part lecture series at North Carolina State University  has been uploaded on to YouTube.  In this video, I extend the analysis of the Austrian Theory on capital and interest to that of the business cycle.  I then compare the Austrian Business Cycle Theory with several competitors.  Here is the link: Prof Paul Cwik: Austrian Business Cycle, Lecture #3

Tuesday, February 2, 2016

Austrian Economics Forum Fall 2015 Recap

After quite the hiatus, I suppose that I should try to get back to blogging.  

North Carolina State University is the location for the open to the public campus club: "Austrian Economics Forum."  Since its founding the idea was to promote the development of Austrian Economics from the Graduate-Student level and above.  This year we have decided to open it up to include undergraduate students and any other interested parties.  The idea is to go back and start filling in the foundations.

In an attempt to get back to the roots I presented several lectures. The first was on October 16, 2015. Here is the link: Dr. Paul F. Cwik 10-16-2016 NCSU - Menger & the Early Austrians  

(The preview picture, which was automatically edited by this cite, clearly thinks that I was excited about this point on the Methodenstreit.)

In this talk I cover the four most significant contributions made by Carl Menger.  I also take a look at Eugen von Bohm-Bawerk and Friedrich von Wieser. I present a little of who they were and I explore their most important contributions to the science of economics.  Additionally, I add some important points made by Philip Wicksteed, William Smart and David I. Green.

The second lecture that I presented took place on November 1, 2015.  Here is the link to that lecture: Dr. Paul F. Cwik on Austrian Capital and Interest Theory  

In this lecture, I build on the first lecture.  I begin with Bohm-Bawerk's review of others' ideas on Capital and Interest.  Then we build his positive theory and compare it with John Bates Clark.  In addition to this, I also look at the way in which the Austrians view interest rates (based upon the subjective notion of time preference) and compare it with the mainstream view, which is based upon both subjective and objective factors.

I then build the Structure of Production and stress the importance of not only capital substitution, but capital complementarity.

The third lecture was a presentation of the Austrian Theory of the Business Cycle, which builds upon the first two lectures.  At some point in the near future, it will be posted to Youtube and I will link it here.

Tuesday, June 2, 2015

Extending the Tree of Knowledge through Branching

A striking feature of the Great Depression was the number of bank failures. Between 1930 and 1933, over 9,000 banks suspended operations, never to conduct business again.  The problem became so desperate that newly-elected President Roosevelt declared a “Bank Holiday” in which an inspection was to occur and only the sound ones would be allowed to reopen.  There are many reasons for the number of bank failures, but curiously Canada’s banking system didn’t suffer the same fate.  In fact Canada had zero bank failures between 1927 and 1980.  (That’s over fifty years without a failure!)  What could be the difference?  The answer is simple: branch banking was allowed in Canada, but not allowed in the US.  The simple principle of diversification was denied to the US banking industry and when the crisis hit, the banks fell like dominos.

Today, there is another industry set up for a similar failure: US colleges and universities—private institutions in particular.  In the same way that the US imposed “unit banking” on the financial industry, we currently have a similar anti-competitive, and anti-diversification, system targeting higher education.

It wasn’t until just recently that I discovered this situation firsthand.

I teach Economics and Finance at the University of Mount Olive in North Carolina.  UMO is a small, private, Christian and non-profit school in eastern North Carolina.  In January 2014, we launched our first graduate program, a Masters of Business Administration.  As a part of our business strategy we decided to launch the program entirely online.  The original idea was once we had the program up and running, we would look into seated and hybrid courses.  The business strategy was simple.  We wanted to diversify.  First, by adding a Graduate Program and, second, by extending ourselves outside of our region.  We had all seen the ads on TV by other schools pitching their online degree programs.  We wanted to get into that market where the world could provide us with students.  At UMO, a majority of our students are adult learners and many of those are affiliated with the military.  Working around deployments is nothing new for us.  For example, I have had a student who had to finish his Money and Banking course from Qatar.  So the faculty’s acceptance of the idea of an online degree for adult learners from all over the country came naturally.

The ability of a small Southern, Christian school to diversify is necessary.  As a regional school, we have been putting too many of our financial eggs in a single basket.  Some have made the quiet projection that within the next 5 years, 3 to 4 North Carolina colleges may disappear.  Mount Olive has had its fair share of financial difficulties, has successfully emerged from them and is better as a result.  We have learned, the hard way, the difficulties for a private school competing against tax-supported public schools.  We owe it to ourselves, our students and most importantly to our alumni that we not simply survive, but flourish.  (Imagine having a degree from a school that no longer exists.)

Last January, I had the honor to teach the very first MBA course offered at Mount Olive.  Of course, the first class drew heavily from our Alumni.  Over the following semesters, I have seen graduates of other schools join our program, however, they were still local to Mount Olive’s region.  This result, of course, makes sense because people who aren’t all that familiar with the school won’t apply.  Then I noticed that our reach extended west of I-95 and into the Triangle Area.  And so I asked our program director, almost off-handed, when we would see students from Virginia and South Carolina.  It was then that I learned the awful truth: we were not allowed to compete for students in other states!  It is against the law.  (My jaw hit the floor.)

In 2010, the US Department of Education issued a regulation that stated colleges and universities could only offer online programs in states where they also had a physical presence.  In July 2011, the DC District Court struck down this regulation.  However, the Department of Education appealed and in 2013 it issued a Notice of Proposed Rulemaking (NPRM).  Simply, the DOE announced that it intends to make a rule on the topic of State Authorization.  And this is where we stand today.

So while there is technically no Federal Rule preventing a college from advertising online programs across state lines, individual states have their own individual laws that prevent competition.  In other words, in order for the University of Mount Olive to compete across the country, UMO would have to request special authorization from each and every state that has a State Authorization law, which apparently is every state except maybe Hawaii.  Furthermore, the state would have to specifically name the school that it allows to compete with its own local schools (that means we’d have to lobby other states’ legislators—which is never cheap and hardly a guaranteed result).  There are other loophole-ish ways around some state laws.  Apparently some state laws are fairly vague.  In fact, I was told that some of the schools that advertise across the country have, in some states, a single guy with a phone in an office that creates their “physical presence.”  I am not sure if this is truly the case, but as with all loophole strategies, a single court case or amendment to state legislation can crush that approach.  (If you are interested in reading legalese for yourself, you can find it in the Code of Federal Regulations, Chapter 34, Section 600.9 State Authorization,  Enjoy!)  The reality of these government restrictions is the creation of a chilling effect to new and innovative methods of delivering education; and it is a costly one as well, both in terms of schools lobbying for authorization and in terms of lost revenue. 

Diversifying how a school offers its courses is an act of entrepreneurship.  Reaching beyond the school’s natural regional limitation is also an act of entrepreneurship.  Both are necessary for a healthy and growing institution.  I teach entrepreneurship in my economics classes, and I see case after case of entrepreneurial ideas being squashed by the heavy hand of government.  In many cases, state legislators want to restrict online competition from “outside” educational institutions, especially if the competitor is a for-profit entity.  Regardless of the stated reason, it is the same protectionist argument that David Hume and Adam Smith fought against centuries ago.  It is the same argument made against bank branching in the early 20th century.  In each and every case, the result is that cost of protection exceeds the benefits.

The greatest strength of US Higher Education is that there is free and open competition.  Unlike the failing public K-12 system, where students are assigned to schools, US colleges and universities must persuade customers to freely opt for one’s school.  This competition ensures higher standards and lower costs.  Increasingly, each decade the government erodes this market connection through tax subsidies, grants, and so forth, but nevertheless, the link still exists.  At UMO, we are very aware of the importance of each and every student.  These students consciously choose to enroll with us and not somewhere else.  It is difficult enough to compete with institutions that benefit from the taxes that come out of my paycheck.  And it is beyond enraging to learn that we are banned from competing across state lines.  Nevertheless, I am optimistic.  Technology seems to find interesting ways around bureaucratic obstacles. 

The best solution is to extricate government from the higher education market.  Although such a goal may be wildly optimistic, we can at least do away with these State Authorization laws.  When the crisis hit the financial markets in the early years of the Great Depression, the result was that more than 9,000 banks closed their doors forever.  It is no secret that today there is a bubble in Higher Education.  If schools are unable to properly diversify, I shudder to think about how many Alumni will have degrees from schools which will no longer exist?

Wednesday, August 21, 2013

A Course in Free Markets

This year I was asked to put together a class that does not shy away from the virtues of the free market.  This Summer I was speaking at Clemson University for the Foundation for Economic Education (FEE) and I showed my course outline to Larry Reed, the President of FEE.  After looking at it, he not only liked it, but asked if I could make the outline widely available.  And so here it is, my economics course that argues that Free Markets are a good and moral system that creates good character and expands societal wealth and living standards.  I hope you like it and if you have any comments, please feel free to do so.

Tentative Course Outline:     

WEEK #1     Read Part I: “Non-Contradiction” of Atlas Shrugged
     Morality of Markets

1.                “The Economic Foundations of Freedom,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 3-10.  Found here:

2.                “Liberty and Dignity Explain the Modern World,” by Deirdre N. McCloskey, in The Morality of Capitalism, 2011, pp. 27-30.  Found here:

3.                “The Intellectual Defense of Liberty,” by Walter E. Williams, October 1, 2007.  Found here:


4.                Honesty and Trust,” by Walter E. Williams, February 1, 2005. Found here:

5.                “Competition and Cooperation,” by David Boaz, in The Morality of Capitalism, 2011, pp 31-36.  Found here:

6.                “Ayn Rand and Capitalism: The Moral Revolution,” by David Kelley, in The Morality of Capitalism, 2011, pp. 69-.  Found here:

7.                “The Elite Under Capitalism,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 18-25.  Found here:

8.                “The Market Economy and the Distribution of Wealth,” by Ludwig Lachmann, in The Morality of Capitalism, 2011, pp. 87-95.  Found here:

LABOR DAY September 2nd -- NO CLASS

     Counter-Factual Reasoning

9.                 “The Lesson,” by Henry Hazlitt, Economics in One Lesson, 1946, Ch 1 pp. 3-7.   Found here:

10.             “The Broken Window,” by Henry Hazlitt, Economics in One Lesson, 1946, Ch 2 pp. 11-12.   Found here:

11.             “The Candlemakers’ Petition,” by Frederic Bastiat, in Economic Sophisms, part 1, 1845.  Found here:

12.             Bastiat “Something Else,” by Frederic Bastiat, in Economic Sophisms, part 2, 1848.  Found here:


13.             “I, Pencil,” by Leonard Read, 1958. Found here:
     Methodological Individualism

14.             “The Individual in Society,” by Ludwig von Mises, excerpted from Human Action, 1966. Found here:

15.             “The Class Struggle,” by Ludwig von Mises, Theory and History, pp. 112-122.  Found here:

TEST #1  September 11th

WEEK #5                   Movie: Atlas Shrugged Part I

WEEK #6     Read Part II: “Either-Or” of Atlas Shrugged
     The Individual and Society

16.             The Law, by Frederic Bastiat, 1950, pages 1-9, 17-21, 24-29 and 63-64.  Found here:

17.             “Economics and Property Rights,” by Walter E. Williams, January 1, 2008.  Found here:

18.             What Social Classes Owe to Each Other, William Graham Sumner, 1911, Chapters 1 & 2.  Found here:

WEEK #7                  
     Law of Association / Comparative Advantage

19.             Not a Zero-Sum Game by Manuel Ayau, 2007, Part 1, pp. 23-50.  Found here:

WEEK #8                  
     Direct and Indirect Exchange: Supply and Demand

20.             The Mystery of Banking, by Murray Rothbard, 2008, Chapter 2 and Chapter 1. (Yes, read them in reverse order.)  Found here:

WEEK #9                   MID-TERM  October 14th
     Profit & Loss

21.            “Profit Management,” by Ludwig von Mises, in Bureaucracy, 1962. Found here:

22.            “Bureaucratic Management,’ by Ludwig von Mises, in Bureaucracy, 1962. Found here:

WEEK #10

23.            “What Is Profit?” by Fred Foldvary, 2012.  Found here:
     Effects of Markets

24.            “The Economic Role of Savings and Capital Goods,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 26-30.  Found here:

25.            “Luxuries into Necessities,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 31-32.  Found here:

26.            “Political and Economic Freedoms Together Spawn Humanity’s Miracles,” by Temba Nolutshungu, in The Morality of Capitalism, 2011, pp. 96-99.  Found here:
     Critiques of the Welfare State

27.            “Middle-of-the-Road Policy Leads to Socialism,” by Ludwig von Mises, April 18, 1950.  Found here:

WEEK #11

28.            “Tragedy of the Welfare State,” by Tom G. Palmer, in After the Welfare State, 2012, pp. 5-14. Found here:

WEEK #12                 TEST #2  November 4th

WEEK #13                 Movie: Atlas Shrugged Part II

Read Part III: “A Is A” of Atlas Shrugged

29.            “The Welfare State as a Pyramid Scheme,” by Michael Tanner, in After the Welfare State, 2012, pp. 91-96. Found here:

WEEK #14

30.            “The Evolution of Mutual Aid,” by David Green, in After the Welfare State, 2012, pp. 55-65. Found here:

31.            “Mutual Aid for Social Welfare: The Case of American Fraternal Societies,” by David Beito, in After the Welfare State, 2012, pp. 67-88. Found here:

WEEK #15                 (finish #31)


WEEK #16

32.            “How the Right to ‘Affordable Housing’ Created the Bubble that Crashed the World Economy,” by Johan Norberg, in After the Welfare State, 2012, pp. 97-105. Found here: 

33.            “Greece as a Precautionary Tale,” by Aristides Hatzis, in After the Welfare State, 2012, pp. 21-30. Found here:


Monday, June 3, 2013

A Health Care "I Told You So"

I normally do not post these sort of things, but there is some degree of satisfaction when you are proven right.  And so this is bittersweet since the prediction was for the worse.

In June 1st edition of the Raleigh News & Observer, an article states the following:

"McCoy Faulkner collects $81 a day as a substitute teacher in the Wake County Public School System. A mere sub, he has no benefits.  
"The 62-year-old former Raleigh police officer shells out $580 a month for an individual insurance policy, more than half his monthly pay. The full-time teachers for whom Faulkner fills in, however, are eligible for free health insurance, with no monthly premiums, through their employer. 
"That’s why Faulkner was looking forward to the Patient Protection and Affordable Care Act, figuring he was the kind of person that the health care reform law was designed to help. Under the new law, anyone who works 30 hours or more a week for a large business will be eligible for employer-sponsored health care. 
"But instead of adding subs like Faulkner to its health care plan, the school system is looking for ways to avoid doing so. Wake is considering restricting its 3,300-plus substitutes to working less than 30 hours a week, effective July 1. 
"The reason: If just a third of the system’s subs were to qualify for employer-sponsored insurance, it would cost Wake schools about $5.2 million, chief business officer David Neter said."
The lesson is to think about the secondary consequences of a policy.  To evaluate any policy, we always must ask, "What are the incentives that are faced by the decision makers?"  Clearly this substitute teacher did not manage to think beyond "step one."  And so now his position goes from bad to worse. 

Read more here: