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A Rejoinder to Mr. Murphy
Victor Aguilar
Ludwig Mises' Originary Interest and Praxeological Method
Murphy writes, "Since (I take it) the purpose of this contest is to defend the (theoretical) honor of the editors of the Quarterly Journal of Austrian Economics, it is far more appropriate for me to focus on Aguilar's criticism of Hayek and (especially) Garrison and Mises [rather than Skousen]" (Murphy, p. 1). Yet, in my Critique, I raise four objections to Garrison's Time and Money. Murphy ignored the first two, he responded to the third one with a false analogy to physics and he responded to the fourth one by mislabeling Skousen's theory as mine and then criticizing me for Skousen's mistake.
As for defending Mises, Murphy concedes both of my major objections. Regarding Mises' theory of originary interest, Murphy writes, "Aguilar basically asks how one can derive the originary rate of interest from the vast array of prices in an actual structure of production. I too raised a similar objection in my dissertation (2003)" (Murphy, p. 14). Regarding Mises' pseudo-axiomatic praxeological method, Murphy concedes, "I certainly agree that Mises never formally lays out his praxeological system the way he says it should be done; a pithy summary would be to question whether Mises' method agreed with his methodology. It is also humorous when Aguilar asks, ’Who ever heard of an axiomatic system with only one axiom?' (Aguilar, p. 34)" (Murphy, p. 14).
The four (unanswered) objections that I have to Garrison's theory are as follows:
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Mainstream economists use the term "Production Possibilities Frontier" to mean that it is impossible to cross this boundary, not just that bad things happen when one does. If Garrison will admit that depressions are caused by malinvestment, not overinvestment, then he can avoid discussing unsustainable events that take place outside the PPF. I observe that "Hayek describes a rather mechanical shuffling of wealth back and forth between the higher and lower stages of production" ( Aguilar, p. 29). Garrison must concede that this is all that his theory does too. 9 Nobody is going to accept that the economy can be outside the PPF, even if Garrison denounces such ventures as "unsustainable."
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In Section VIII, which Murphy declined to respond to, I write, "Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be sustainable combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency" ( Aguilar, p. 26). It is a conundrum. If Garrison raises the specter of inflation to explain unsustainability, he cannot explain his identification of real and nominal interest rates, but if he assumes stable prices, he cannot explain unsustainability. Garrison must concede that his theory is only applicable in times of stable prices and, hence, the interest rate is real throughout his graph. This is basically the same concession that I demanded for mistake #1.
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Garrison was obfuscating when he wrote, "The time dimension that makes an explicit appearance on the horizontal leg of the Hayekian triangle has a double interpretation" (2001, p. 47). Skousen definitely means the amount of goods flowing by every year and, in spite of his obfuscation, this is also what Garrison means. This choice is a problem for Garrison because it implies that there must be a maximum interest rate. Garrison wanted to reach out to mainstream economists by attaching his triangle to their PPF but, unfortunately, this committed him to using income rather than wealth, which pinned him down on the wrong side of his double interpretation.
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Garrison insists on using simple interest but will not follow through on this choice to its logical conclusions. As we have seen, the choice of a linear construction over an exponential one produces nonsensical results, in this case, that the maximum interest rate is half the gross national output. Garrison must concede that, if he does not want people to think he is an innumerate boob, he is going to have to use compound interest.10 This is basically the same concession that I demanded for mistake #3, since adopting the DWCS implies both agreeing to study wealth rather than income and also compound interest rather than simple interest.
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9 Murphy asks, "How can a website be ’wasted?' Why wouldn't it just be relocated to a more appropriate use" (Murphy, p. 13)? Well, there were costs associated with producing this website. Murphy was paid $1000 for his rebuttal and the designers who created the layout did not donate their time. I myself spent a whole Sunday afternoon writing Critique of Austrian Economics. If I were to come to my senses and realize that what the economics community really wants is another sycophantic ode to Rothbard, it would be hard to describe the expenditures on this site as anything other than "wasted." Murphy writes, "[I]f all capital goods were perfectly non-specific, then there couldn't possibly be a boom-bust cycle.’ The dot.com bubble in no way contradicts this" (Murphy, pp. 11-12). Murphy does not understand the difference between websites and search engines. When I wrote, "The dot.coms are highly nonspecific, facilitating the sale of products at every stage of production" (Aguilar, p. 16), I was referring to search engines. For instance, www.badscience.com gets a lot of hits from people looking for Philip Plait's www.badastronomy.com, but badscience.com is just a bunch of miscellaneous links to commercial websites. Their clients, who probably have no knowledge of the deception involved in generating the traffic they are paying for, advertise products at every stage of production. Badscience.com is a survivor of the dot.com crash, and one that Plait probably wishes had failed along with the others. I continue to ask: Can Garrison tell us in which of his five stages badscience.com belongs?
10 In Appendix A of my book (1999, pp. 213-224) I raise the possibility that the time-value of money is not exponential. I had certainly hoped that it was, since my third axiom is equivalent to this assumption, but I was surprised to discover that 1/t2 also works. I speculate that the inhabitants of another planet might organize their economy in this way and feel that it perfectly natural to calculate interest by taking the square root of the amount owed, inverting, subtracting a constant, squaring and inverting again. While this may seem awkward to us, it is not inconsistent and I cannot criticize such an alternative set of axioms any more than Euclideans can criticize Lobachevsky's axioms.
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