So wrong, Mr. Varian

"Transitivity is a hypothesis about people's choice behavior, not a statement of pure logic." Intermediate Microeconomics, 8/e, page 36.

Self-consciousness on methodology

"More than other scientists, social scientists need to be self-conscious about their methodology."

Milton Friedman, "The Methodology of Positive Economics"

Externality = violation of a property right = coercion = the opposite of freedom = anchor to underdevelopment

I mean, if somebody is smoking in the park and I'm reading there and I don't like the smoke, such as Coase shows, the externality is not merely a matter of the smoker causing a damage to me (Pigou's naïveté). Damage is not a sufficient condition to have a (negative) externality. If and only if a violation of a property right occurs, have we an externality. The other way of seeing an externality, i. e. the need to internalize, consists precisely in the need to put a stop to such a violation of the property right, to such a coercion. Externalities can be defined only in the context of a register of property rights, since they are precisely violations to such a register. On the other hand, even in a completely internalized society where there would be no externalities at all, we could have damages and benefits perceived by some agents by the actions of other agents. The feature of those damages and benefits, however, would be so, in such a system, that our damaged or benefited agents would no have any right whatsoever over putting a stop to the damages or continue enjoying the benefits happening by the actions of other agents, which we re are assuming to be the proprietors of the things causing damages and profits to other agents in our example.

And linking the concept of coercion to the work of Friedrich Hayek in his "The Constitution of Liberty", in which he defines freedom as "that condition of men in which coercion of some by others is reduced as much as is possible in society" (page 11). This is, freedom is the absence of coercion. Coercion is the opposite of freedom. Whereas there is freedom there's no coercion, whereas there's coercion there's not freedom.

This is important, for instance, to understand the key feature by which we can tell a society in which the development advances at a reasonable pace from one in which that reasonable pace is not present. Anyone who has lived in an underdeveloped (*) country bears witness that externalities are a key feature of those countries either because a property register existing it is violated (corruption, blackmail, theft, and a regrettable etcetera) or because there is not such a register in the first place (on which the work by Hernando de Soto is particularly illustrative).

(*) In order to emphasize backwardness, but euphemistically called sometimes "developing" as if full stagnation would be possible and as trying to convey basically the opposite idea of what really happens in countries composed of mostly poor people under world standards, i. e. almost absence of a developing pace.

Beyond a college assignment

After 18 years and a lost count, I guess that Friedman's paper is the thing I have most re-read.

In praise of Rothbard the economist

It's usual to consider Murray Rothbard as the most eccentric, radical, intolerant, pure kind of Austrian economist, the remotest land to Neoclassicism.

I guess that this view about Rothbard comes from his anarcho-capitalistic political views, sharp tongue, and being author of a rare criticism on Adam Smith in which the otherwise deemed as the father of modern economics and a champion of the free market is left as an "inveterate plagiarist" inconsistent in his defense of laissez-faire. But note that this three "defects" of Rothbard deal with his activities as a political philosopher, agitator, and historian, but none essentially with his capability as an economist.

However, there's just no much of a picture of Rothbard the pure economist. I think that this is because people just don't use to read Rothbard's work on economics, in particular Man, Economy, and State. Why reading a 1441 pages long treatise which is merely a secondhand paraphrase to the original and in any case shorter Human Action?

Well, in order to understand the irreplaceable role of Rothbard in the tradition of the Austrian School in particular and the economic science in general we have to pay attention to Rothbard background in the first place.

Rothbard, at difference of the previous generations of the Austrian school economists, is a born American, natively speaking English, and being originally trained in the tradition of Neoclassical economics. He understands and feels Anglo-American culture and Anglo-American (aka Neoclassical) economics in a way in which no native Austrian could dream of, and which certainly neither Hayek nor Mises master at that level. Rothbard is a natural.

It is only after earning a BA and a MA on economics at Columbia University that he stumbled onto the Austrian school while reading a book by so orthodox authors as George Stigler and Milton Friedman.

He then begins to learn Austrian economics in a passionate, intense and deep way, eventually being guided by the Mises itself. Due to the early stage in which he begins to study under Mises in America (less than six years after Mises migrated) and the intensity of his learning, it can be hardly an exaggeration to call Rothbard the first Austrian economist of the American era of the school. (A few American economists, say Benjamin Anderson, had previously studied in the Austrian school tradition but they had done so in Austria and in a time in which Austrian economics wasn't seen as different of mainstream economics, i.e. before Keynes. They couldn't be bridges since there were no gaps.)

So, what is really Rothbard? If you take seriously Rothbard as an economist and pay no attention to his caustic rhetoric (if there were ten ways of saying something Rothbard was to choose the most upsetting), you're going to discover an originally Neoclassical trained economist then turned into conversant with Austrian economics and you can see all the way his strong Neoclassical influence, from the authors he quote, through the use of graphs, through the examples he uses, through the concepts he uses, through the very analysis he undertakes. Hide the author's name from his Man, Economy, and State and ask someone to guess if the analysis is either Austrian or Neoclassical, and, behold, you bet not anyone is going to be sure or give the same answer than anybody else.

Rothbard is no less than a bridge to teach Austrian economics to Neoclassical trained economists (notwithstanding being an utmost tool to learn economics from scratch). He goes far beyond the translation of Nationalökonomie into Human Action so that Anglo-American students learn Austrian economics. Because Man, Economy, and State is not a translation from German into English. It is a translation from Austrian into Neoclassical. Even more, he at once puts Neoclassical economics into Austrian dress and "Neoclassicalizes" Austrian economics.

Rothbard is a sort of Saint Paul, an apostle to the Gentiles. Because of that plus its neat exposition and Easter-bunny pieces of original contribution, I have no doubt in recommending,at least to the beginner, Man, Economy, and State over Human Action.

In this stage of the Austrian school's evolution, characterized by its being mostly American and flourishing in English language (with a terrific impulse of internet, the great Privatseminar where everybody from Costa Rican proletarians to Harvard mollycoddles can learn and teach), the potential contribution of Rothabard cannot be underestimated.

Clash of titans?

Are Mises's definition of "economics" and Hayek's definition of "market" incompatible with each other? Mises defines economics as the science whose study subject is purposeful behavior. On the other hand, Hayek stresses the fact that a spontaneous order is by itself purposeless, it doesn't have a purpose of its own. Relating these two odeas, one could be led to the perplexing conclusion that economics doesn't deal with the analysis of the spontaneous order of the market. Since this doesn't seem to match common sense or the usefulness of economics, then either Mises or Hayek or both have not the most useful definition of their respective concepts, or the relation above between the definitions of economics and spontaneous order is not the most suitable. I feel that the problem is with Mises.

A-realistic assumptions

Tons of mischief would have been saved in the epistemology of economics had Friedman referred to the a-realism of the assumptions rather than to its unrealism. Friedman's whole point is easily understood and made compatible with, say, praxeological epistemology if you realize that the role of assumptions is to describe only the relevant elements of reality, therefore remaining necessarily silent to the rest of the description of reality. Assumptions can't be fully descriptive. That's the essence of Friedman's. But this feature refers to a lack of conveying information, not to the conveying of false information.

When the assumption of "perfect information" is given, this is just an economic way of saying that no attempt of analysis will be made with the theory to explain the imperfection of information. The assumption is a clause of resignation. Yes, a very coarse, superficial, and ultimately wrong exegesis would state that perfect information is an unrealistic assumption because information isn't really perfect, but the true role of the assumptions is rather a-realistic: to give up the possibility of analyzing the role of the imperfection of information, to abstract the phenomenon to study from informational rough edges, to specialize the theory in certain other problems not related to information. But, what's of the most importance regarding Friedman's conclusions: this resignation is content-meaningful. It's not just irrelevant whether it's a-realistic or not: it is precisely the way in which the very boundaries of the explanatory power of the theory is defined, it alone tells us what for and what not for is the theory! You have to pay close attention to the propositions stated through assumptions because they tell you when can you use the theory. Maybe if we understand this, we can be not so harsh as Hayek when he bitterly criticizes the whole equilibrium analysis (see his "The Use of Knowledge in Society") or when Kirzner does the analogous with the model of perfect competition (in "Competition & Entrepreneurship)".

I think that the true contribution of Friedman can be stated as "the violation of the assumptions of a theory have no appreciable effect on the implications of such a theory". (Compare to page 18 in the original edition of the essay.)

Additionally, even if more implicitly and less frequently quoted, I think that an important contribution of Friedman's essay is the fact that every theory is a construction, a designed, and in this sense, artificial, explanation of reality; that there is no such a thing as a "real" or utopically true explanation beyond the theory.

Economists and the market

You can classify economists into two groups: on the one side, those radicals who believe that the market is the final solution to any economic problem, on the other side, those who don't understand the market.

The lesson of economics most often forgotten

Factors affecting a free labor market ultimately are reflected in wages, not in unemployment. Persistently high unemployment is due exclusively to minimum wages.

Recent evolution of Costa Rican public finance

I was just reviewing data on the statement of operations of the central government of Costa Rica and I thought that maybe some of you can find interesting findings.


Data are for the central government of Costa Rica. Although Costa Rica is a unitary republic, the central government is somewhat similar to the "federal government". It excludes municipalities and state owned companies. Data are for the period Dec-06 through Jan-12 and are measured in multiples of real colones of Dec-06. The source is www.bccr.fi.cr.

As you see, there was a surplus since Dec-07 through Dec-08. Basically, the deficit has been increasing since then. The maximum deficit occurred in Oct-11. A first interesting finding is that the deficit was due more to income reduction than to expenditure expansion.














Reviewing sources of income, one finds that, on average, collection of customs taxes account for 28% of income and earnings taxes for 27%.
Customs diminished 24% in the period Oct-08 through Nov-09. This occurred mainly due to the international financial crisis and consequent shrinkage of international trade.

This diminution accounts for the main source of deficit increase.

On the side of expenditure, the main findings are these: on average, payrolls account for 37% of expenditure and current transfers for 36%. They constitute by and large the main source of expenditure. However, they didn’t increase meaningfully; i.e. their growth didn't accelerate.

However, if you see total expenditure you may notice a hump in for Dec-10 through Dec-11. This was due to a 50% increase in transfer of capital to other public sector institutions. All over the period Dec-06 through Jan-12, this item alone accounts for 7% of expenditure.

Protectionism and Krugman

Imagine you begin to sell some good you produce. People buy a lot of product. You just can't cope with so much demand. You invest an important share of your wealth in a very specific machine only useful for manufacture the good you sell. You invest because you expect demand for your good to continue growing. But once you have made the investment, that by the way nobody commanded you to make, you realize that people are beginning to buy from a foreign firm which is selling cheaper than you can, even after the investment of your machine. Yes, you get hurt. But you get hurt because the expectations you built disappointed you, not because the owners of that foreign firm are violating any right you were previously entitled to on the budgets of the potential buyers of your good. However, if in order to avoid competition by the foreign competition you coerce either buyers or other sellers or both so that they cannot make transactions among themselves, it is you the violator. Aren't you?

It is tragicomic to me when noble Krugman et al, in their "International Economics", 9/e, page 51 et seq., say some people get hurt because of trade. Yes, they get hurt, but they get hurt as I get hurt when somebody informs me that my plan to travel to your farm on next Saturday accompanied by Angela Lansbury and by Mr. Obama in order to enjoy a Jim Carrey's play with live music by the original Sepultura's lineup is not going to be possible. It is just a correction on my expectations, precisely the damn thing which markets do, so that we can keep as coordinated as possible in a world sometimes less than ideal.

But if the situation is explained so that it looks that I got hurt because somebody else's "fault", consequently implying a violation of a right of mine (to fullfill my expectations even at expense of violating a true right of others), I guess the analysis is not the best, to say the least.

Not everybody wins with trade? Some people get hurt with trade? In the devious sense setted out by Krugman et al... Well, dah! Because, yes, according to my plan I get hurt when cruel Mr. Obama prefers to be in political meetings than to enjoy Max Cavalera's twist and shout, but this is very different than violating a presumed right of mine. You cannot avoid feeling some hideous taste to deception in Krugman exposure.

And this is what our children are learning in their international trade courses. So primitive a stage, we still are in.

Just trade

It is pleonastic to talk about "free" trade. Only as long as it is "free", can an action be considered "trade".

(By the way, can somebody give me an example of "unfair" trade?)

On the side of the worker

The most effective way to put a (definite) end to institutional unemployment and galloping inflation is to convince workers to accept that nominal wages can diminish at times and that avoiding the proscription of such declines is ultimately beneficial for they themselves. The elaboration and polish of an explanation as clear and simple as possible, prepared not for the academician but for the masses of workers is probably one of the most important tasks of economics.

A lesson on microeconomics

The production theory explains how production decisions, not supply decisions, are taken. Similarly, supply decisions doesn't depend on production decisions.

The market for protectionism

Protection from competition provided through coercion to competitors is like any other good. The producer will buy protection so long as he values better the income he receives than the expenditure he incurs in.

One factor of production

If you use only one factor of production, by definition, you can only produce a perfect substitute of that factor of production.

When, for instance, Krugman et al, in their book International Economics 9/E, page 26 et seq. speak about a basic model with "only one factor of production", they are not using the concept of "factor of production" as used in the economic theory of production. Not at all! They are merely using the term "labor" as a numeraire of unit of account.

Mises on Popper

"The positivistic principle of verifiability as rectified by Popper is unassailable as an epistemological principle of the natural sciences. But it is meaningless when applied to anything about which the natural sciences canno supply any information [as in the case of the sciences of human action, including economics]." Ludwig von Mises, The Ultimate Foundation of Economic Science, page 108.

Market failure

A market failure is a situation in which the economist fails to understand the market.

On the Church

I guess that it can be told with respect to the Church what Mises told about the utilitarian philosophy, that it

"does not look upon the rules of morality as upon arbitrary laws imposed upon man by a tyrannical Deity with which man has to comply without asking any further questions. To behave in compliance with the rules that are required for the preservation of social cooperation is for man the only means to attain safely all those ends that he wants to attain." The Ultimate Foundation of Economic Science, page 95.

My summary of Hayek's "The Use of Knowledge in Society"

Even if equilibrium analysis is a useful preliminary to the study of the economic problem which society faces, namely the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired, it is high time to remember that it systematically leaves out the explanation of the very problem itself, of economic process.