Saturday, July 3, 2010

Belated Rothbard Graduate Seminar Wrap-Up

Well, it's been a while since I got back from Auburn. It was a great week. I liked it better than the Mises University I attended last year. It felt less crowded and less rushed. There was more time for discussion, more face time with faculty, and since it's aimed primarily at grad students, we got deeper into the subject matter.

I want to pick out three things that stick out among all the things I learned.

Rothbard has an excellent discussion of tax incidence which I found revelatory. It is commonly argued that who "really" pays for a tax on a good depends on the elasticity of demand for the good; this will determine whether the seller of the good can raise her prices or not by some amount.

The flaw in this argument is that if the seller could charge more than she does currently, what was to stop her from charging this price before the tax was imposed? Given a stock of goods to sell, the entrepreneur will try to maximize revenue. Placing a tax on a good does not change the revenue-maximizing price. The entrepreneur will have to lower her price by the amount of the tax, so that the consumers' out-of pocket expenses are the same. This means the entrepreneur's product will bring her less revenue than before, which in turn causes her to impute lower values to the factors of production she buys. The result is that production of the taxed good will be reduced until the cost-revenue spread is substantial enough to keep the remaining firms in business. I don't remember whether Rothbard says anything on the subject, but it appears to me that exactly how much of the tax will be paid by the producer of the good and how much will be "paid" by her suppliers will vary from case to case based on the specific conditions in each case. The specificity of the factors of production in question will likely be the most important consideration.

Now that I think about it, if the tax is large enough that it acts as an effective price floor, the analysis will be a bit different, but the only thing I can think of that resembles a real-life example would be cigarette taxes.

The other two things I wanted to touch on are more technical matters regarding ordinal preference ranks. Austrians hold it true that we rank our wants from most urgent to least urgent, and likewise rank consumer goods that satisfy these wants. They also argue that the neoclassical assumption of transitivity doesn't hold. But ordinal preference ranks have to be transitive in the trivial sense, so it isn't clear why Austrians should have a problem with neoclassical transitivity, at least prima facia.

The issue is that neoclassical usage of "transitivity" implies a persistence of value ranks in time. If you chose an apple over an orange, a banana over an apple, and an orange over a banana successively, a neoclassical economist would say that your choices violated transitivity and were therefore irrational. An Austrian economist would say that for some reason, you must have changed your mind along the way, and that this was no cause for alarm.

The other point was that while there are difficulties in figuring out what someone's "complete" preference ranks are, all we need to do catallactics (the praxeological study of indirect exchange) is a subset of the "complete" ranks containing units of a single good and units of money--diminishing marginal utility ensures that within the subset, certain difficulties that arise when thinking about three or more goods. For instance, lets say given a choice between A, B, and C, you choose A. We know that A was at the top of your ranking at the time of the choice, but we want to know about B and C so that we can construct a demand schedule. One way we might think about that is if we go back and time and tell you to choose two of A, B, and C, expecting that you will choose A and your second-ranked good. But we cannot know that you will choose A at all, a priori. Maybe A is a beer, B is gin, and C is tonic water, and you like beer but love gin and tonics together while disliking them separately. But if we restrict the goods we consider to bundles of some consumer goods and bundles of currency, it would be reasonable to assert that if you chose A when you could chose one, you would have chosen A if you could chose two.

Now, that leaves some questions about whether we can work with preference ranks when there is no medium of exchange in the economy (ex. a Robinson Crusoe economy), but that's a separate issue. We can certainly construct supply and demand schedules, and that's what we care about for almost all of economics.

All in all, RGS was awesome and I'm very glad I went. I'm about two thirds of the way through the copy of Bureaucracy by Mises that I bought during the week, and so far that's been enjoyable. If there's anything really awesome in the part I haven't read yet I'll be sure to blog about it, otherwise I think my next entry will be a commentary on Boetie's Discourse on Voluntary Servitude. Been putting that off for ages now.

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