Rothbard’s Mistake

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Being interested in the history of the 1930s, I recently picked up a copy of America’s Great Depression by the influential libertarian Murray Rothbard (1926–1995). I choked on the introduction, where Rothbard lays out his theory about theory, which makes no sense to me.

“This book rests squarely on the Misesian interpretation of the business cycle,” he writes, referring to the theories of the older libertarian economist, Ludwig von Mises (1881–1973). “Note that I make no pretense of using the historical facts to ‘test’ the truth of the theory. On the contrary, I contend that economic theories cannot be ‘tested’ by historical or statistical fact. These historical facts are complex and cannot, like the controlled and isolable physical facts of the scientific laboratory, be used to test theory . . . The only test of a theory is the correctness of the premises and of the logical chain of reasoning.”

You have to keep in mind that the map sometimes lies, or maybe tells you a truth different from the one you need to know.

Philosophers make a distinction between statements that are valid and statements that are true. Validity is like math. It’s about logic. If P then Q. It’s theory. Truth is about what’s real, which is not the same thing. Logic is useful, but ultimately what we care about is what’s real.

I am reminded of the accounting classes I took many years ago. I gave up on accounting, but one thing has stuck in my mind: the professor described accounting as a map of the “territory” of a firm, and warned us not to confuse the map with the territory. The “map” might say the company is making money, but the truth might be that it runs out of cash before the owners are paid. (As a business journalist I wrote about some companies like that.) The map is useful; to steer the company you need the map. But you have to keep in mind that it sometimes lies, or maybe tells you a truth different from the one you need to know.

Back to Rothbard. He says that an economic theory is “a priori to all other historical facts.” It can be used to explain the historical record, but it cannot be tested. Here is his argument:

Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical “test” to resolve the debate? How can the government rationally decide upon its next step? Clearly, the only possible way of resolving the issue is in the realm of pure theory — by examining the conflicting premises and chains of reasoning.

This strikes me as piffle. There are several ways of deciding between the two claimants. You can compare what happened at times when the policy was imposed with what happened at times when it wasn’t. You might compare the depression of the 1930s with the depressions of 1920–21 or 1893–97 or 1873–79, etc., and see that the one in the 1930s featured the slowest recovery in US history. That is evidence (not proof) that whatever policies were tried didn’t work too well. You can dig deeper. How did investors, entrepreneurs, company managers, workers, and other people in the 1930s respond to the National Recovery Administration? To mass unionization? To the retained-earnings tax? To the abandonment of gold? What did supporters and opponents predict the players would do, and what did they do?

Robert Higgs asks these kinds of questions in Depression, War and Cold War. You can reject what he does — none of his arguments amount to a drop-dead test such as you find in a chemistry lab — but they are ingenious. They are instructive. They make a case.

The social life of humans is more complicated than a test tube.

Rothbard argues, in essence, that such questions are too messy to answer. A theory cannot be “tested” in the way a question in chemistry can be “tested” by heating compounds in a test tube. He’s right in thinking that you can’t test that way with economic policies, but it doesn’t mean that “empirically there is no possible way of deciding between them.” You can look at what lawyers call “the preponderance of the evidence.” “Test” is a high-hurdle word, the wrong word. You can evaluate. You won’t get to 100% certainty, but it’s unlikely that you’ll be stuck at 50-50, either. You can decide, but you have to look at the territory as well as your map — and you may find yourself correcting your map to make it fit the territory better.

Essentially Rothbard denies this.

“Clearly,” he asserts, “the only possible way of resolving the issue [of choosing the best economic policy] is in the realm of pure theory — by examining the conflicting premises and chains of reasoning.” In other words, the only way to decide what to do “in the territory” is to pick the best-looking map without looking at the territory.

No, no, no! Because the social life of humans is more complicated than a test tube, and because cause and effect are mixed up and piled on each other, you have to check your “map” against the territory all the time. Because your theory is only an approximation. A simplification. It is not life.

Praxeology is not primary. Supply and demand curves are not reality.

To quote the philosopher Robert Heinlein: “What are the facts? Again and again — what are the facts?”

If you say, “I don’t care about what facts you have. What experiences, or what statistics, or anything. I have my theory, I’m sure it’s right, and I don’t need to ‘test’ it,” you become irrelevant. You become ignorable. You become the frog at the bottom of the well.




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A Depression that Should Not Be Forgotten

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I liked The Forgotten Depression but did not love it.

Its subject is the depression of 1921 — a valuable subject because, as the author indicates, the depression went away without massive government intervention. Imagine that.

The author's brief history of the problems some big banks got into, in the late 1800s and early 1900s, is excellent. Grant shows how the principals of the banks had their own fortunes tied up in the banks’ capital, which usually kept them prudent. Still, they made mistakes. For instance, National City Bank (“forerunner of today’s Citigroup” p. 18) for instance, invested in Tsarist Russia — just before the Bolshevik revolution. The firm had over 60% of its capital tied up in sugar investments in Cuba, when prices were high, then crashed. Guarantee Trust, another huge bank of the time, was considered "too big to fail," almost a hundred years before our present policies on that subject.

The author aptly characterizes the 1920–21 depression as the last major downturn to be "un-medicated" (by government stimulus policies), and makes telling comparisons with the activist Herbert Hoover and Franklin Roosevelt administrations. Notably, the earlier depression was of short duration, while the “medicated” depression of the 1930s and the recent Great Recession went on and on. Grant’s discussions of the various economists, bankers, and policy makers involved in the problems of the 1920s are challenges to today’s economists, policy makers, and historians.

Meanwhile, Grant adds texture and depth to his story with descriptions of the difficulties suffered by the various sectors of the economy during the Forgotten Depression: farming, steel production, the auto industry, construction, and even haberdashers (including one very famous and resentfully unsuccessful one). But be prepared for a massive amount and variety of statistics about earnings and losses, interest rates, unemployment rates, sales rates and amounts, etc., etc. The author is an expert who knows how to deal with statistics. His writing is not nearly as dry as it could be.

Notably, this earlier depression was of short duration, while the “medicated” depression of the 1930s and the recent Great Recession went on and on.

He is also basically sound on substantive economic issues. He provides a good explanation of the classic gold standard up to the 1920-21 depression, and then of the fake "gold exchange" standard thereafter. He understands market forces and government intrusions and distortions. His description of the anti-business, anti-market biases, or ideology, of the key figures in the Woodrow Wilson administration is appropriately sickening.

Unfortunately, Grant’s presentation of basic business-cycle theory is lacking, save for a discussion of people who believe in the market vs. people who think government competent to force “solutions” on it. His explanations of how government coercion usually has unfavorable, unforeseen, and mostly unacknowledged repercussions is good, but probably not good enough to convince those who believe in such things.

Two other matters need to be mentioned.

First, the book has a section called Acknowledgements, which is more like a bibliographic essay. I liked this section very much. It is moderately short, fun, and informative to read, and it gives a great commentary on Grant’s main sources, some of which I highly recommend. The Great Depression sources, which he uses to excellent effect throughout the book, are very important

Second, the "hero" of Grant’s story is wonderful. But I won’t give it away. It’s in the book.


Editor's Note: Review of "The Forgotten Depression: 1921: The Crash that Cured Itself," by James Grant. Simon & Schuster, 2014, 272 pages.



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Poverty and Crime

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If you’re like me, you have been instructed, from your youth on up, that crime is caused by “conditions” — meaning economic conditions, meaning poverty. You’ve also been told that crime can be reduced, or even eliminated, by the abolition of poverty — which, of course, can come only by means of massive government action.

These were some of the ruling theses of President Lyndon Johnson’s War on Poverty, which continues in its thousand institutional forms unto this day, more than four decades after he declared it.

The theses were always vulnerable, on their face. What do you mean by “crime”? Do you mean a Hollywood producer’s rape of a female staffer, who is too afraid to report the crime? Do you mean a party in West LA, where rich people snort a barrel of coke, and are never caught? Or do you mean a guy who’s pushing weed in Fresno, or a girl who’s arrested for prostitution on the streets of Grand Rapids? Do you mean crime that’s successfully prosecuted, or do you include crime that never gets recorded?

And the thesis has long been vulnerable to the evidence. Johnson’s War on Poverty immediately preceded an enormous wave of crime. The hundreds of billions of dollars that American communities spend on welfare has not demonstrably reduced the incidence of crime, however you want to define that term. Most serious analysts believe those dollars have increased it, by fostering a culture in which principles of individual responsibility are no longer considered necessary.

But wait a minute: what is “poverty,” anyhow? What’s the standard? What’s the definition? Was “poverty” the welfareless condition of virtually all Americans in the 1920s? If so, was it the lack of government welfare that induced millions of people to violate the Prohibition laws, and some thousands of them to kill and maim their fellow-citizens in pursuit of profits from that violation? In a larger sense: isn’t poverty relative? The poor of the 1950s were much richer in absolute terms than the poor of the 1920s, yet fewer people were sent to prison in the 1950s. The poor of the 1980s and 1990s were richer still; yet a much larger proportion of the populace went up the river in the 1980s and 1990s than in the 1950s.

Now comes the following announcement from a website in my town (voiceofsandiego.org), about the FBI’s new report on crime in America during 2010, the year of a great depression, especially here in far southern California:

“In San Diego, the number of violent crimes — murder, rape, robbery and aggravated assault — dropped 5.3% from the previous year and the number of property crimes — burglary, theft and vehicle theft — dropped 4.6%. (Nationwide, violent crime dropped 5.5% and property crimes were down 2.8%.)”

The author adds a reference to the prevailing wisdom:

“Nationwide crime declines in recent years have continued to puzzle criminologists, who expected worsening economic conditions to lead to more crime.”

Experts might be puzzled, but no one with any sense, or historical perspective, would suffer their fate. Officially recorded crime went down during the 1930s — the time of the Great Depression. Why shouldn’t it go down in 2010?

We can’t quantify the sources of crime, but we should know this: crime, and the definition of crime, has less to do with “economic conditions” than with community mores, individual opportunities, and (in a reverse sense) government action. When the government declares alcohol or drugs to be illegal, “crime” automatically results. But when individuals and communities hunker down in order to get through a period of relative poverty, crime may well diminish. Only God knows the exact linkages, but it’s not puzzling that people whose families are making less money than before may respond by doing something legitimately and dependably profitable rather than something criminal.

Indeed, as William Blake commented two centuries ago, the idea that poverty causes crime is a slander on poor people. It ought to be resisted by every person of generous mind, and especially by all of us — and there are many, many of us — who have struggled to come out on the other side of bad “economic conditions.”




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