In a recent survey on interest theory, Professor Sennholz (1996, p. 127) reminded his readers that, as “was the case a century ago, the phenomenon of interest income continues to be enmeshed in much controversy, which makes it one of the most open and demanding subjects of economic inquiry.” What is this controversial phenomenon of interest income? In the most general way, it can be described as follows: Successful business is characterized by a positive spread between the sum total of prices paid for its factors of production and the sum total of prices received as proceeds for its products. The entrepreneur earns more money by selling his products than he spends on the factors of production that bring these products into being. The customers pay more money for his products than he pays for the factors of production of these products. This phenomenon raises the fundamental question whether the entire spread between selling proceeds and cost expenditure can be “arbitraged away” through entrepreneurial competition, or whether at least a part of this spread cannot be so arbitraged away (see Kirzner 1993, p. 167f.). In other words, does the entire spread consist of entrepreneurial profit, which can be eliminated as a consequence of the competition of other entrepreneurs, or does it contain a component that cannot be so eliminated—does it also contain an interest component? And if it does contain an interest component, what is its cause? All theories of interest seek to answer these questions. In the present article, we will criticize the established time preference theory and then give the outlines of a realist explanation of interest.

A theory of interest

Government interventions have always played a central role in the production of money. Invariably, they have been justified by invoking the common good. More than in other applications of virtue ethics, it is therefore necessary to examine the causal nexus between concrete individual actions (monetary interventions) and the common good. The groundwork for this analysis has been laid by Nicolas Oresme in the fourteenth century. In the light of his approach, the main monetary institutions of our present day – fractional-reserve banking and fiat money – appear to be questionable practices that undermine the political, economic, and moral foundations of society.

The Ethics of Money Production

ion may occur in two ways. First . . . we may understand that one thing does not exist in some other, or that it is separate from it. Secondly . . . we understand one thing without considering another. Thus, for the intellect to abstract one from another things which are not really abstract from one another, does, in the first mode of abstraction, imply falsehood. But, in the second mode of abstraction, for the intellect to abstract things which are not really abstract from one another, does not involve falsehood. . . . If, therefore, the intellect is said to be false when it understands a thing otherwise than as it is, that is so, if the word otherwise refers to the thing understood. . . . Hence, the intellect would be false if it abstracted the species of a stone from its matter in such a way as to think that the species did not exist in matter, as Plato held. But it is not so, if otherwise be taken as referring to the one who understands. (Summa Theologiæ I. 85. 1 ad 1; Aquinas 1999, p. 157) Aquinas is here distinguishing between two different ways in which we might consider, say, a horse in abstraction from its color. We may consider the horse as not having a determinate color, or else we may consider the horse not as having a determinate color. To consider the horse as not having a determinate color is to hold, or attempt to hold, as the object of our thought a horse that simply has no determinate color—a creature never encountered in physical reality, and having its home either in Platonic heaven or nowhere. This sort of abstraction falsifies and contradicts the concretes on which it is based. But to consider the horse not as having a determinate color is simply to consider the horse as a horse without considering its color one way or the other; and here no falsification is involved. These two types of abstraction are often referred to as precisive and nonprecisive. As Armand Maurer explains: Precision is a mode of abstraction by which we cut off or exclude something from a notion. Abstraction is the consideration of something without either including or excluding from its notion characteristics joined to it in reality. Abstraction without precision does not exclude anything from what it abstracts, but includes the whole thing, though implicitly and indeterminately. (Note to Aquinas 1968, p. 39n) In short, a precisive abstraction is one in which certain actual characteristics are specified as absent, while a nonprecisive abstraction is one in which certain actual characteristics are absent from specification.3 Plato failed to see REALISM AND ABSTRACTION IN ECONOMICS 7 3For further discussion of this distinction see Long (2001, pp. 406–17, and 2002, pp. 404–15). how abstract concepts could apply strictly to physical reality because he failed to see that abstraction could be nonprecisive; one might say that he mistook an indeterminate way of thinking about something for a way of thinking about something indeterminate. This is very much how the Austrian Aristotelean Franz Brentano (18381917) describes the contrast between Plato and Aristotle: Plato thought that we recognize flesh and the being of flesh by apprehending two different things. . . . Aristotle teaches the exact opposite of this. . . . For it would obviously be a ridiculous assertion that someone who wanted to know something and instead apprehended something else with his intellect thereby reached the knowledge he desired. For example, a scientist wants to come to know the crystals and the plants and the other bodies that he finds here on earth; hence if he apprehended the concepts of tetrahedrons and octahedrons, and of trees and grasses belonging to another world, he would not reach his aim in any way. (Brentano 1977, pp.

Realism and abstraction in economics: Aristotle and Mises versus Friedman

Current version: July 26, 1999Do Entrepreneurs Make Predictable Mistakes?Evidence from Corporate DivestituresPeter G. KleinSandra K. KleinDepartment of EconomicsTerry College of BusinessUniversity of GeorgiaAthens, GA 30602-6254(706) 542-1311 (voice)(706) 542-3376 (fax)snohlqCwhuu|1xjd1hgxvnohlqCwhuu|1xjd1hgxAbstract: This paper assesses the argument that corporate acquisitions are driven mainly byagency considerations. This argument holds that certain kinds of mergers—mergers betweenfirms in unrelated industries, mergers between firms with large differences in price-earningsratios, and mergers financed with stock swaps, for example—will consistently fail, eventuallybeing reversed in a divestiture. We argue instead that divestitures of previously acquired assetsusually result from experimentation and learning, healthy attributes of a market economy. First,we explain that the agency view of divestitures is inconsistent with the Misesian theory of entre-preneurship. Second, we present empirical evidence that the long-term success or failure ofcorporate acquisitions cannot, in general, be predicted by measures of agency conflicts. Finally,we show that mistaken acquisitions are more likely under certain circumstances, namely duringperiods of intense, industry-specific regulatory activity. This is consistent with the view, ex-pressed repeatedly in the Austrian literature, that entrepreneurial error is associated with govern-ment intervention—in particular, with government ownership of property and interference withthe price system.JEL Classifications: D84, G34, G38

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Do Entrepreneurs Make Predictable Mistakes? Evidence from Corporate Divestitures

‘On Austrian Methodology’ is eloquent testimony to the functioning of the interdisciplinary approach, for its author, philosopher Robert Nozick, nonetheless tackles an economic school of thought. Its thoroughness, its insight, its sheer brilliance, are proof positive that the boundaries that have been erected between the various academic disciplines are needless and artificial. Although I shall have many critical remarks to make about the article, none of them can be fairly attributed to the fact that it was penned by a philosopher and not an economist.

On Robert Nozick’s ‘On Austrian Methodology’

For more than forty years, economists have routinely rejected the postulate that economic theory should be realistic. Ever since Milton Friedman (1953) sketchily outlined a positivistic methodology for economics, most students of our science have come to endorse Friedman’s view and have claimed that the only quality standard of economic reasoning was its predictive power. Good theories yield fairly correct predictions whereas bad theories yield wrong predictions.

Economic science and neoclassicism

Toward a general theory of error cycles

One of the great achievements of economic science is the explanation of the benefits of the division of labor in market economies. However, despite its merits this utilitarian explanation is insufficient as an account for the widespread division of labor. This insufficiency stems from the normative shortcomings of the harmony-of-interests doctrine, which cannot justify the respect of private-property titles and, therefore, cannot explain on purely utilitarian grounds the fact that the division of labor is as widespread as it in fact is. Mariam Thalos has recently provided a partial solution to this problem by arguing that religious belief in God performs a public function that facilitates human cooperation. In critical elaboration of her thesis, the division of labor is explained by taking into account a different aspect of human reason, namely, discursive rationality.

Jörg Guido Hülsmann

Papers

Economic science and neoclassicism

Toward a general theory of error cycles

Discursive rationality and the division of labour: How cooperation emerges