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Why I am an Austrian Economist - Take 1

Why I am an Austrian Economist - Take 1

Posted by Daniel Larimer on .
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Why I am an Austrian Economist - Take 1

Posted by Daniel Larimer on .

The good folks at bitsharestalk can always be relied upon to provide a solid critique. Their critique of this post convinced me to make a second attempt which I feel does a much better job. The original article can be found here.


Founders of major crypto-currency projects depend as much on economics as they do technology. Every crypto-currency project is a huge economic experiment and whether it will be successful or not depends upon the economic beliefs of its leaders. Recently, Vitalik, co-founder of Ethereum, made a critique of one of my blog posts based upon my assumption of an Austrian perspective on economics. Vitalik directed me to a post by Bryan Caplan of George Mason university titled “Why I am not an Austrian Economist”. This post inspired me to explain why I am an Austrian economist and why that makes BitShares stand out among the leading crypto-currency projects.

I always love it when someone can present me with a legitimate challenge to my beliefs. There is perhaps nothing more satisfying than someone revealing to me a new way of thinking that turns everything on its head. When Vitalik, whom I respect, sent me the post by Brian Caplan I welcomed the challenge to my Austrian thinking. Perhaps what I liked the most is that Caplan began as an Austrain economist and then switched after 8 years and a Ph.D in economics from Princeton.

After reading the article I came away feeling like something was off. At first it seemed to make some really compelling arguments and had me on the edge. I took a few days to mull it over before being able to fully identify the problem. The arguments were carefully constructed straw-men combined with appeal to authority and guilt by association. In particular, I felt the article was doing more to attack individual opinions by specific people taken out of context rather than defining the principles of a more sound system.

Principles Matter

I am a very principled individual and am not easily impressed with fancy math. I like the Austrian approach to economics because it is an approach based upon principles and deductive/inductive reasoning. When someone dives into set theory and calculus to describe human behavior I tend to roll my eyes. All of that mathematical complexity masks relatively simple mistakes while bamboozling the average guy who cannot follow an argument from the beginning to the conclusion. I am a smart guy with a background in math and computer science, but when economists bring out math great big red flags go up in my mind. It almost seems like math is a fancy “appeal to authority” because if you cannot follow the math most people assume it is accurate, representative, and authoritative in its conclusion.

Lets start with some basic economic principles I follow:

  1. All value is perceived value
  2. There is no unit of value
  3. An individual can only order (rank) how they value things
  4. You cannot compare value judgements among multiple people
  5. A price (exchange rate) is only valid the instant it happened and only for the parties involved
  6. You cannot perform mathematical operations on prices to draw future conclusions
  7. Only voluntary trade can reveal relative value of items

These principles are all compatible with my Golden Principle which states:

Do not do unto others what you do not want others doing unto you.

Where things get interesting is when economists draw conclusions that appear to justify a violation of the Golden Principle. For example, drawing the conclusion that using coercion or economic slight of hand to force a trade would be beneficial for society as a whole. Based upon the violation of the Golden Principle I know there has been a mistake made in the economic reasoning and can begin my search for it. It is a little bit like knowing you made a mistake multiplying two positive numbers when the result is negative.

Perhaps the biggest challenge I faced when reading Caplan’s article was his suggestion that a voluntary trade between two people may result in a loss of value to a third person. He went on to say that this loss of value may be real, but is never expressed by action of any party. This argument momentarily hit me hard because I have long considered voluntary trade to always increase the total wealth of society where “wealth” is measured as the cumulative perceived value of all parties. I have also long concluded that voluntary trade never harms a third party or their property.

It is only by returning to principles that I am able to navigate the murky waters of this economic debate. The primary principle is that of property right and the right of voluntary exchange as they are derived from the Golden Principle. I might find value in two people being married, but just because I would experience great loss at their decision to divorce does not mean I have been harmed by them nor does it mean I am entitled to damages or to demand they remain married. This gets into a new concept for me that is “the value derived from things that are not yours”.

If my girlfriend values a purse only because it is rare, then the voluntary trade of other people that results in mass production of similar purses will devalue the purse from the perspective of my girlfriend. Has she been harmed by the voluntary actions of others and how can we measure it? If she or her property has been harmed by this non-violent, voluntary act then it could completely upset my world view.

This is where Austrian economics and principles come to play. All value is perceived value and thus not something intrinsic in any property. Perception is entirely under the control of each individual and can only be changed by that individual. The purse has not objectively been damaged and no one has forced my girlfriend to change her perception of its value. After all, she is still free to value it however she wishes. If she chooses to revalue her purse relative to other goods and services that is her choice. We will know that she has revalued her purse only when she trades it for something else. When she finally does trade it for something else the result is an increase in perceived value to both parties.

Value Entitlement

The result of attempting to assess changes in perceived value as a result of a voluntary transaction among 3rd parties is to introduce the concept of objective value. Objective value is value that exists outside the perception of an individual. This in turn causes value to become something tangible that can be converted into a property right. Once you start down this path you lay the foundation of communism. You give everyone a legitimate claim on the value of everyone else’s property because everyone perceives value in everything.

It is the subtle conversion from subjective value to objective value that is often overlooked by economists when they start trotting out the mathematical equations. They end up drawing conclusions that government spending can produce wealth and grow the economy despite the necessity for non-voluntary, coerced, trade.

Economists that go down the path of maximizing value for all of society inevitably make the mistake of attempting to measure value objectively. They end up attempting to aggregate changes in value and optimize the allocation of resources by means other than voluntary trade. In effect it almost always turns into “end justifies the means” thinking.

Challenges of Being an Austrian Economist

Absent the use of math, an Austrian economist is left to produce written arguments subject to all of the imprecision of the English language. Written arguments are easily misunderstood, impossible to calculate, and are often imperfect expressions of a deeper understanding. When entering a discussion with mainstream economists the Austrian approach is often accused of “hand waving” and imprecision and their arguments are picked apart on technicalities and corner cases.

When an Austrian is faced with a bunch of equations with custom operators and layers and layers of implied meaning it becomes much more difficult to debunk because even if the Austrian could identify the flaw in the abstractions, attempting to explain it would take far more time than the average man is willing to sit through. The result is that mainstream economists ride on the appeal to mathematical authority and straw man attacks while the Austrian is forced to refine and clarify his reasoning even as his words are twisted and misrepresented at every turn.

Given two people with theories, one with equations and one without, the one with equations is automatically assumed to be more scientific and thorough by most people. As an Austrian who’s founding principles forbid the use of mathematical operations on value in almost all circumstances it becomes a real challenge.

Economics and Crypto Currency

A crypto-currency is effectively an economic experiment and if the economics of the system are not sound then the experiment will eventually give way to the economic laws of nature. Bitcoin, Ripple, BitShares, Nxt, Ethereum, and Maidsafe are the leading crypto-currency projects and each of them has very different economic foundations.

As far as I can tell BitShares is the only system that explicitly tries to be fully consistent with Austrian economics and the principles of voluntary trade. It is the only system designed around Austrian economic principles rather than economic math. BitShares was the first project to provide the company metaphor for understanding both the value of the coins, the cost of mining, and the impact of and morality of dilution (vs inflation). BitShares is the first project to recognize the decreasing marginal utility of each additional degree of decentralization. BitShares was the among the first to recognize the the economic inevitability of centralization in all systems.

Over and over again it is the understanding of economics, Austrian Economics, that has given rise to many of the innovations in the BitShares space. I am sure there are things I have not fully understood and examples of mistakes I have made along the way. The key is my approach to economics and my commitment to certain principles.

Conclusion

I am an Austrian economist because it is the only branch of economics that is consistent with the principles of freedom. This means that it is the only branch of economics that I feel holds the keys to securing the life, liberty, and property of all. Economics matters, invest accordingly.

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Welcome!

My name is Daniel Larimer and I am the founder of BitShares. My mission in life is to find free market solutions to secure life, liberty, and property for all.

The purpose of this blog is to help create a free society by encouraging people to join our community which is centered around Bitshares, a next generation fully decentralized crypto-currency exchange. I use Austrian Economics to engineer the economic incentives which make freedom and non-violence profitable.


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