Archives for posts with tag: Ludwig von Mises

Most people reading this blog are probably already aware of the “dehomogenization” charges lead by Joseph Salerno. In an essay first published in 1992 Salerno argues that Friedrich Hayek’s thought should be dehomogenized from Ludwig von Mises’, strongly implying that the latter is better than the former. This distinction builds on Hutchinson’s (1981) distinction between “Hayek 1” and “Hayek 2.” As the argument goes, somewhere around the publication of the “Economics and Knowledge” essay in 1937, Hayek switched from Mises’ a priorism to Karl Popper’s falsificationism. This assertion is very convincingly challenged by Bruce Caldwell’s 1988 essay, Horwitz’ 2003 essay suggest that there really isn’t much to heterogeneity and that if there is any it’s complementary, and you’ll find an interesting discussion arguing that Hayek in fact was methodologically a Misesian in Roger Koppl’s Big Players and the Economic Theory of Expectations, and also arguing interesting bits and pieces on this debate in Pete Boettke’s Living Economics, among many other essays. Readers might also enjoy the numerous posts on the topic over at Punto de Vista Economico.

I’ve been reading Ross B. Emmett’s 2007 essay titled “Knight’s Challenge (to Hayek): Spontaneous Order Is Not Enough for Governing a Liberal Society” in the volume Liberalism, Conservatism, and Hayek’s Idea of Spontaneous Order edited by Peter McNamara and Louis Hunt. According to Emmett, a constant in Frank Knight’s criticism of Hayek is the role of discussion. This is seen the the capital theory controversy between the two, but also in his reviews of The Road to Serfdom  and The Constitution of Liberty. According to Emmett (p. 69–70);

While the substance of their “capital controversy” need not detain us, Knight drew some interesting conclusions from their exchange regarding the prospects for liberalism; these conclusions foreshadow his criticisms of Hayek some 30 years later. During the controversy the two men corresponded about their differences, and Knight believed they were making progress toward a common understanding through the give-and-take of discussion about specific questions and responses. But then Hayek, unbeknownst to Knight, published an article on the theory of capital that made only a passing reference to Knight’s criticisms. Knight interpreted the article to mean that Hayek would make little effort to respond directly to the specific objections of Knight and others to Austrian capital theory.

Emmett documents how Knight emphasized the role of discussion both from methodological and political philosophy perspectives.  According to Knight, discussion not only has role in science, but also in law making. The idea of a free society for Knight being ‘the search for agreement by discussion, which advances in response to “specific questions” or particular problems, rather than a “systematic exposition” of abstract positions’ (ibid). Knight thought these two forms of discussion, scientific and politic, were absent in Hayek.

Let’s however concentrate on the methodological portion of Knight’s criticism. It is more obvious and explicit in his reply to Hayek’s early work (pre-1937), but it’s really present throughout. What I thought was highly interesting is that, at least in Knight’s criticism, Hayek is the one having a Misesian methodology (Knight calls it a “systematic exposition”) and Knight is the one adopting the more Popperian position concerning the role of discussion among scientists (“the meeting of specific questions is the way to ‘advance knowledge'” from Knight’s 1934 letter quoted in Emmett). I’m not sure whether this is enough of a distinctive and unique trait of Popper’s methodology. It’s pretty central in his French essays but seems not to be really a focus in the Anglo-Saxon secondary literature on Popper.

I would be interested in hearing from people more familiar with Knight and Popper than I am on this topic.

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Over at Punto de Vista Economico Nicolas Cachanosky has a very enlightening post on the debate hosted by the Online Library of Liberty about Ludwig von Mises’ Theory of Money and Credit that I posted about earlier. The whole thing is worth reading, as well as Nicolas’ various essays on the topic (here and here for example).

In this post I’m going to go further than I did the last post. I am going to claim that there might actually might be room for a reconciliation in the debate over the convergence to 100-percent reserves in free banking. That is, with a small concession one-hundred-percenteers might be able to salvage the idea that competition among free banks would lead to something close enough to a reserve ratio of 100%. This position was argued by Antoine Gentier in his 2003 book “Economie Bancaire: Essai sur les effets de la concurrence et de la réglementation sur le financement du crédit,” but you might also find it elsewhere in English. A short version of the argument is present in Gentier’s forthcoming paper in English in the JEEH.

He argues that in practice both positions are very close to another, because in the end what matters is not a snapshot or an average of reserve ratios, but the marginal reserve ratio. Indeed, “[p]ast money creation is not the main problem because it has already disrupted the economy by changing relative prices. The main problem relies in the ability of the banking system to create new currency now, and further distort the structure of production.” Over the period studied by Gentier (2003), and myself with Gentier (unpublished), while competing banks’ reserve ratio was very low, their marginal reserve ratio was close to 100%. Because of the phenomenon of adverse clearing, competing banks of issue are incapable of wildly expanding their circulation of banknotes. If they did they would be quickly drained of specie, much like was the case of the Ayr Bank in free banking era Scotland (See White 1995, 27-29). This is something Mises agrees to. It means that free banks could not create credit “out of thin air” like it is sometimes claimed, but had to do it almost entirely through accumulation of prior savings. This is one of the reasons that free banks have very high capitalization levels. At the margin, reserve ratios in free banking would indeed be “up very high and possibly close to 100 percent,” to use the words of Hummel.

White, L. H. 1995. Free Banking in Britain: Theory, Experience, and Debate, 1800-1845. 2nd ed. London: The Institute of Economics A ffairs.

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