Economics: Can we trust the math?

[James Heaps-Nelson]

I was doing a cursory skim of George Reisman's Capitalism to see what kind of book it is before diving in. It's available in PDF for free download at Mises.org. One thing stood out and it's sort of a pet peeve of mine about Austrian economists is a dismissal of mathematical economics, but George said it so well that I didn't mind:

"Another prominent school of economic thought is that
of mathematical economics, which is characterized by
the use of calculus and simultaneous differential equations to describe economic phenomena. The principal
founder of mathematical economics was Léon Walras
(1834–1910), a Swiss, who also independently discovered the law of diminishing marginal utility shortly after
Menger and Jevons. Vilfredo Pareto (1848–1923), an
Italian, succeeded Walras at the University of Lausanne
and elaborated his approach.
Mathematical economics is fundamentally a matter
more of method and pedagogy than of particular theoretical content. And although neither the classical nor the
Austrian schools is mathematical in the above sense,
there are mathematical economists who are allied with
their teachings and their support of capitalism. Walras,
Jevons, and Gossen are important cases in point.
Regrettably, the use of calculus and differential equations to describe economic phenomena represents a
Procrustean bed, into which the discrete, discontinuous phenomena of actual economic life are mentally forced, in
order to fit the mold of mathematically continuous functions to which the methods of calculus can be applied.
This has consequences which represent a matter of theoretical content, as well as method."

This point is important and it is also brought up by Nicholas Nassim Taleb in his Incerto series. How much can we trust the continuity of mathematical functions in modern economics?

[Michael Stuart Kelly]

James,

Sorry to be negligent in the other threads. I am in the middle of something big that is taking all my time right now. (I can't talk about it in public. At least not yet.)

But I do have to comment on this one. My inner jingle-jangle is making a racket inside my head.

 

I agree about using math to solve economics, but I don't agree it should be with theoretical models or just observing patterns of behavior. We would not build an automobile with theoretical models alone or just observing patterns of behavior. We would need math and engineering. So how about doing that with currency? How about something more practical with evidence galore happening in reality right before our eyes?

Bitcoin.

See Satoshi Nakamoto's white paper for all the math you want: 

Bitcoin: A Peer-to-Peer Electronic Cash System

If you haven't messed in this before, give it a read. It's not long. I keep trying, but I still don't understand that sucker in its entirety. Too much goddam math.  I do grasp the core concepts, though. And they are marvelous, rational, and freedom-based.

Please do not confuse Bitcoin with all other cryptocurrencies. It is different by design, by morality, and by math. Max Keiser constantly calls all cryptocurrencies that are not Bitcoin "shitcoins."  

 

Now what about the evidence?

Look at El Salvador. For many years, it was one of the most dangerous, corrupt, impoverished and oppressive places on earth. Within one year it turned into one of the safest places on earth with a booming wealth-producing economy. A good chunk of the reason is that El Salvador accepted Bitcoin as legal tender. A new young president, Bukele, was convinced by reason and math (and a goodwill version of religion) to implement this while eschewing Marxism and all similar forms of collectivism. And he threw gang members (especially MS-13) into prison. The results have been spectacular.

Argentina, now under a new young freedom-loving, collectivism-hating president, Milei, has just started cleaning up the mess the country is in, all following the El Salvador model.

btw - Ayn Rand is big in both places around these new young presidents.

This way of thinking and governing is going to spread, nay, it is spreading, and central banks all over the world are panicked. They are trying to find a way to control this, maybe by issuing their own cryptocurrency (the infamous CDCB, Central Bank Digital Currency).

 

The trouble for them is, through math and reality and engineering, Satoshi (and likely with aid of the Cypherpunks and a few others) has separated the economy from the government, much in the same way the US Constitution separated the church and state.

A fundamental characteristic of Bitcoin, one which is downplayed in the media, is that new Bitcoins cannot be issued. There are about 21 million total when all of them are finally released (a system of adoption Satoshi came up with), and there is no mechanism for new ones to come into being.

Also, there is another fundamental characteristic, equally downplayed in the media. When a person holds a Bitcoin or part of one, it cannot be confiscated by anyone or any government. It has to be accessed for trade by using the owner's hash and only that. Although this is downplayed in the public, you can bet your bottom dollar (or bottom Bitcoin  ) that the central banks are aware of this. They are sweating and staying up at night worrying about it.

Satoshi also kept himself (or the group around him) anonymous so no government can imprison him and try to force him to hack or destroy Bitcoin. I doubt there is a way, anyway, since adherence to the Bitcoin rules is enforced with a torrent-like technology. The rules are not enforced by any one person or government. They are enforced by each person on the network all over the world. Essentially, the same math is present on all computers using the same Bitcoin network blockchain. If a newcomer tries to join and uses just one figure different, it does not get in. And if the CIA or FBI or any other law enforcement agency shows up to freeze it, this can't happen since there is no place to show up to.

 

I read an interesting book about the Federal Reserve called "The Lords of Easy Money" by Christopher Leonard. He describes the mechanics of how money (dollars) from nothing enters the economy. Essentially, the US Treasury prints up Treasury Bills, which are IOUs with a maturity date. By what standard are they printed up? Well, there is a process, but essentially it is by whim. The Treasury Department decides it wants money and it prints the Treasury Bills to cover this desire.

And how to these Treasury Bills become dollars? They sell these Treasury Bills to a specific broker account at one of the Federal Reserve banks.

Now here's the magic. The broker account has no money in it. None. Zilch. Nada. But there is a little dude sitting nearby who types the money into the account--the exact amount of money needed to buy the Treasury Bills. These new dollars literally come into being from this dude's fingertips on a computer keyboard. The bank then sends these new dollars to Uncle Sam and keeps the Treasury Bills.

Then the bank uses the Treasury Bills as collateral (or reserves) to make loans to the market. Or it sells the Treasury Bills to someone else. With fractional reserve banking and other shenanigans, this makes the money supply in dollars go through the roof.

Essentially, the government and the banks of the federal reserve get gobs and gobs and gobs of free money from this system.

Bitcoin drives a stake through the heart of this con game (which is essentially counterfeiting dollars in a legal manner), as a similar system is impossible using Bitcoin. There is an attempt right now by banks to issue EFTs for Bitcoin so they can get money for nothing, but an ETF is no more a Bitcoin than a gold certificate is physical gold. This is another con since EFTs can be confiscated and issued at will.

 

Now think about this in terms of war. No one can fight a war without the government paying soldiers and buying weapons and equipment, transportation, housing for soldiers, and so on. No money, no honey, sonny. And no fucking war.

The only way to keep the current-day's version--endless war for profit--going is by using the government's free money con to pay for it. People will not fund a war of their own volition unless it is in the face of an immediate full scale invasion by a foreign enemy.

War has to be paid for by taxes and legal cons and counterfeiting (to coin a phrase  ) justified by taxes. This goes in spades for the military industrial complex monkeyshines. And, under Bitcoin, if a person decides not to pay a tax, there is no way the government can confiscate his Bitcoins. The normal government processes don't work, processes like freezing a person's bank account, taking his stuff through asset forfeitures and so on.

The government can get its mitts on a person's physical property, but Bitcoin is math, not thing. Maybe a government can take the person to a torture room and get the person's hashes out of him that way. Or it can trick the hashes out of him the way a hacker cons a person into giving up a password. Other than that, the government cannot confiscate his Bitcoins.

A person can be in an oppressive country under a new brutal dictatorship that confiscates all private property. With Bitcoin, the person, if he can get out of the country, can leave with only the clothes on his back. And he can take all his money with him. It will be available instantly to him in another country as soon as he gets there. All he needs to do is memorize his hashes or find a way to hide them (with an encrypted email to someone, or a hidden piece of paper, or something like that--there are many ways).

Math, not guns, protect his Bitcoin property.

 

Why are the shitcoins (all the other cryptocurrencies) different than Bitcoin? They all (including Ethereum) have owners who can issue new coins at whim, just like the Treasury Department can issue new Treasury Bills at whim. These owners are called fancy names like "board of governance," "stakeholder committee" and the like, but they are the literal owners of the coin system itself. That means they can increase or diminish, or even shut down, the coins on the market by unilateral decision. And that means, if a government gets to them, say, with imprisonment, fines, or other coercive measures, it gets power over all the coins within that system.

This is impossible with Bitcoin. There is no one at the top who can make decisions. The government would have to hack all of the computers all over the world in order to hack Bitcoin. And note, with cold wallets, these computers do not need to be connected to the Internet. And if one computer out of all those gazillions of computers escapes the hack, the hack will not work.

 

Getting back to Reisman's Capitalism, I have a personal story. When Kat and I visited Barbara Branden, she had a well-worn copy of this book. The cover was practically off the book and man was it ragged from use. This was the paperback version. She gushed about it. I own it in PDF form. I have found it too dry to keep my interest going (I always want the good guy to kick the ass of the bad guy and get the girl in the end  ), but it is one hell of a research product. I believe it is made for skimming and consulting specific items more than reading it straight through, much like an encyclopedia. In fact, I consider it to be an encyclopedia of the history of capitalism.

 

Man, just when I think I have no time, I go off and do something like this.  

But this stuff is important. 

It doesn't ring my ding-a-ling like the neuroscience of story does, but it does jingle.

Jingle me, you fool. Jingle me hard.

 

Michael

[James Heaps-Nelson]

Hi Michael,

No problem with you prioritizing your time just glad you found this compelling enough to capture your attention. I view Reisman as a great middle-level communicator of economic ideas. I attended a couple of his public lectures while I was in college. He must have been a fantastic professor for the students at Pepperdine. 

I think that the introduction most people need to Austrian Economics is something like Henry Hazlitt's Economics in One Lesson or even better Hayek's groundbreaking paper The Use of Knowledge in Society. The methodology (praxeology for one) is just too foreign for most people. The other issue is that the communication style is more like old political economists. It's like reading Adam Smith or Karl Marx. I took Larry Sechrest's course on Hayek at the 1994 IOS(TAS) Seminar and that helped but I still have a ways to go in understanding Austrian Economics.

Jim