are, on the eve of what could be the most decisive primary break
out in gold yet, and the bears are still kicking around old tires.
Oh where's the deflation? How come the war premium has deflated
and gold prices are still making new highs?
Let's bring you back a little shall
December 2000: Gold trades
towards $260 low - bears call for $180 gold; Prechter says next
$100 could go either way, but leans on bearish view. Bulls give
it to him, and gold prices reverse a downtrend.
2001: Gold bounces around $270, just above the 200-day moving
average and wants to trade up - bears say gold's rise is fool's
gold; Cheryl Strauss Einhorn (Barron's writer) says gold move is
temporary in an article titled "Fool's Gold."
Gold prices broke out shortly afterwards,
and went to new highs.
June 2002: Gold trades up
to $330ish; Barclays says it's a bubble, and tells clients to buy
the homebuilders instead. They were right for a month.
August 2002: Gold trades back
up to $320 area and bumps up against the old 1999 high (key
reversal area) once more. The bears call it a double top, and immediately
call for a $100 plunge. Forbes writer Mark Lewis titles his overtly
bearish article Fool's Gold, in Strauss Einhorn's tradition. We
nailed them both for it, shortly after the date of their articles.
But we didn't have to, the market
did it for us. Gold prices went to new highs shortly thereafter.
January 2003: Gold spikes
up to $390 in two months, finally putting in its first bullish primary
sequence in two decades - bears say it's only temporary, owing to
a war premium. They were right for two months. But it turned out
that the correction was temporary.
By April 2003, the climax of war
anxiety dissipated, and gold recovered, steadily.
The bears said it is going to be
a double top, citing bearish COT reports. But the commercials have
been increasingly short and wrong all along.
Meanwhile, gold shares exploded and
broke out of 1 year consolidation this summer. They tend to lead
bullion. And now bullion prices are at new seven year highs.
The bulls on the other hand say we're
about to signal a major primary bull market in the precious metals.
And they've been right as rain for three years so far!
Are the bulls going to be right again?
Well, we don't know anything for
sure really. But we're still waiting for Prechter to get bullish
before we agree with the bears. Don't take it too personally Bob,
it's not like we don't like you. Just get off the deflation bandwagon
already. The only way you'll have deflation is if the powers at
be deliberate it.
Irrational Exuberance is an Oxymoron
in the Field of Economics
Is buying tech stocks at
300 times earnings rational?
Is stealing from thy neighbor rational,
particularly if the punishment is severe?
Is buying tulip bulbs for the price
of a house rational?
Is it rational to dance around a
fire and sing prayers in the hope of calling rain?
Is it rational to kill, mame, and
drive a nation to war?
Was Hitler's choice to start a holocaust
Is it rational to drive across a
big town to save $5 on a $15 pair of underwear?
The answer is unequivocally yes,
in every case. The choice of means may be faulty, and the ends may
be downright mad. But in every case, the decision-maker is certainly
weighing various costs and benefits, thus making value judgments
and choices about which means are best to achieve certain ends,
whatever they may be, and under whatever uncertainty there always
To that end all human action is indeed
Economic activity consists of individual
actions, not mere thoughts, incentives, or by what goes on in the
subconscious. Expressing a thought, however, could be an action.
Even not doing anything in a particular set of circumstances is
considered an action in economics because it involves a choice,
and has an impact.
Only actions impact on the economy,
and hence only actions are relevant to the field of economics. What
drives or causes those actions can at this point in time only be
hypothesized, and so that's where Mises drew the line between economics
Whether a particular end is moral
or not is outside of the realm of economics. Whether a particular
end is suited to the critic's idea of what is reasonable from his
point of view is irrelevant to the field of economics. Economics
is the science of means, not ends, Mises long ago established.
There is nothing irrational about
the markets unless one forgets to ground their views in individual's
actions, or unless they think they know better than anyone else.
More than 100 years ago economic
science took a wrong turn; it ignored the doctrine of sound money
in favor of progressive era (big government and central banking)
policies. It did it again in the early part of the 20th century
when Ludwig von Mises' treatise on the economic theory of money
was translated into English.
Today, it is taking yet another wrong
turn, as Frank Shostak pointed out about last year's Nobel Prize
winners: Daniel Kahneman and Vernon Smith, in his article Behavioral,
Experimental, and Austrian Economics.
And thus, Ludwig von Mises' attempt to keep psychology separate
from economics was betrayed, by Hayek (the only Austrian to ever
win a Nobel Prize) in fact.
On this Rothbard wrote:
"This emphasis on human reason and will, in the
noblest traditions of rationalism, contrast sharply to the Hayekian
or Scottish Enlightenment emphasis on society or the market as
the product of some sort of tropism or instinct, e.g. Hayek’s
emphasis on the tropistic, unwilled emergence of “spontaneous
order,” or Adam Smith’s conjuring up of a spurious instinct, or
“propensity to truck and barter,” as an explanation of exchange."
"Indeed, seizing the occasion of writing a
foreword to a reprint of Socialism published years after Mises’s
death, F.A. Hayek significantly altered the unalloyed praise of
the book that he had lavished at a tribute dinner to Mises over
twenty years earlier. Now he severely criticized Mises’s reference
in Socialism to “social cooperation [in particular, the market-economy]
as an emanation of rationally recognized utility,” as an example
of “extreme rationalism” and as factually incorrect. He went on
to the insulting “explanation” that Mises had not been able to
“escape from” such rationalism “as a child of his time”— a curious
statement since Mises’s “time” was one of pervasive irrationalism.
Hayek, in contrast, strongly asserts that “it certainly was not
rational insight into its general benefits that led to the spreading
of the market economy.” - Mises' Biography by Murray Rothbard
- Ludwig von Mises: Scholar, Creator, Hero online edition 2002;
Mr. Kahneman is a pioneer in the
field of behavioral economics. He seems to assume every individual
is the same:
"People have a lot of difficulty figuring out they
are just like everybody else, and what they see, everybody else
can see. And making allowances for the fact that you're one of
many people looking at the same time" (from a 2002 interview with
Vernon Smith (Nobel prize winner
2002 - for conjuring up a lab to test real world economic theories)
openly criticizes Mises for not giving enough consideration to emotions
and irrational wants in human action.
But Smith precisely misses the point;
that economics is not concerned with determining ends as reasonable,
but only that the action which results is made with the incentive
to improve the decision maker's conditions or increase his satisfaction,
and the means he chooses is always made by weighing alternatives.
Ludwig von Mises showed that all
human action is purposeful, with meaning... as opposed to the unconscious
reaction of cells in the body to stimuli, or of an animal to food.
While scientists like Smith and Kahneman prefer to reduce humans
to simple organisms or abstract mathematical
formulae, von Mises showed humans were more.
The idea that human action is anything
but rational is absurd. It's what distinguishes us from beasts in
the first place.
What's more, Mises did consider emotions:
"He who acts under an emotional impulse also
acts. What distinguishes an emotional action from other actions
is the valuation of input and output. Emotions disarrange valuations.
Inflamed with passion, man sees the goal as more desirable and
the price he has to pay for it as less burdensome than he would
in cool deliberation. Men have never doubted that even in the
state of emotion means and ends are pondered and that it is possible
to influence the outcome of this deliberation by rendering more
costly the yielding to the passionate impulse. To punish criminal
offenses committed in a state of emotional excitement or intoxi-cation
more mildly than other offenses is tantamount to encouraging such
excesses. The threat of severe retaliation does not fail to deter
even people driven by seemingly irresistible passion." -
Human Action PP 16
He just wasn't concerned with the
rationality of the emotion, only of the choices over the possible
course of action. Moreover,
"Many champions of the instinct school are convinced
that they have proved that action is not determined by reason,
but stems from the profound depths of innate forces, impulses,
instincts, and dispositions which are not open to any rational
elucidation. They are certain they have succeeded in exposing
the shallowness of rationalism and disparage economics as "a tissue
of false conclusions drawn from false psychological assumptions."
Yet rationalism, praxeology, and economics do not deal with the
ultimate springs and goals of action, but with the means applied
for the attainment of an end sought. However unfathomable the
depths may be from which an impulse or instinct emerges, the means
which man chooses for its satisfaction are determined by a rational
consideration of expense and success." - HA, PP 16
We hardly need to add anything to
that. But we will.
In the above passage Mises is saying
that it doesn't matter whether the action is born of instinct, emotion,
or some other deep seated unconscious factor. What matters to the
field of rationalism or economics is that the course of action chosen,
however unfathomable to other people, is arrived at rationally.
It may seem nonsensical to expect
the stock market to rise each and every year from here to eternity,
but if that is what is thought, the means that are chosen to exploit
that end are determined reasonably. Even if they are wrong headed,
they are ground in reason within the scope of the individual's imperfect
knowledge about events.
If the investor thought the Dow was
going to go to 35000, buying stocks at Dow 10000 is rational. But
it may very well be ground in an incorrect interpretation of the
state of affairs. All people are rational in their actions within
the sphere of their knowledge of events, facts, and understanding.
They do the best with what they have.
It only looks like irrational exuberance
to those of us who think we know better.
But what of self-destructive behavior?
Is everything humans do aimed at achieving more satisfactory conditions
for themselves? I'd say so. But if someone subconsciously is out
to punish themselves, they're still making decisions as to the best
actions to take.
At any rate, it's doubtful everyone
else sees what we all see, as Kahneman says, and certainly individuals
don't all possess equal knowledge. Hence,
even if they do see the same things, it is impossible for equal
Don't believe me? Get 20 technical
analysts in a room and show them the same graph.
Moreover, there is always a degree
of uncertainty. But it is wrong to assume that economic decisions
aren't made by weighing the available choices just because there
All choice involves reason, particularly
in man's case because the faculties exist so.
Economics does not attempt to classify
the goals of human action as good or bad, or logical or irrational.
It is simply concerned with choices involving goods and services
that are scarce; forgoing one
thing in favor of another in order to acquire something that makes
one happier, or increase satisfaction, period.
Nonetheless, according to my dictionary,
reason is an "intellectual faculty by which conclusions are drawn
from premises; sense, sensible conduct." The word irrational
is defined as "unreasonable, illogical; not endowed with reason."
You can probably tell that this definition
doesn't quite mesh with the theory of human action that Mises established.
Indeed, it is slightly different. While there is no question Mises
would concede that the word irrational is valid, it is important
to understand that with regard to human action it doesn't exist.
But that's precisely the point that
his critics failed to grasp.
In trying to separate economic theory
from the field of psychology, and build a solid foundation for the
former, Mises identified a methodological dualism.
Simply put, he separated the causes
of human action from the subjective laws of reason governing it.
He did this by recognizing
that the world does not yet have the knowledge to determine the
definitive causes of any human action, and that therefore,
human action is itself the "ultimate given;" the starting
point for economics.
It is self evident that human action
exists, and that it is always rational relative to the desired end
- involving choices about how to best achieve the end.
Thus the definition of the term offered
by my pocket oxford is meaningless because it suggests making a
judgment that is impossible to make for anyone but one self. To
know whether someone else's actions are sensible, one would have
to know all of the factors in that person's interest; all their
desires; all their emotions; all of their fears.
According to Frank Shostak's rejoinder
in "Behavioral, Experimental, and Austrian Economics (see link
"Psychology was smuggled into economics on the
ground that human action and psychology are inter-related disciplines.
However, there is a distinct difference between economics and
psychology. Psychology deals with the content of ends and values.
Economics, however, starts with the premise that people are pursuing
purposeful conduct. It doesn’t deal with the particular content
of various ends. According to Rothbard, A man's ends may be "egoistic"
or "altruistic", "refined" or "vulgar". They may emphasize the
enjoyment of "material goods" and comforts, or they may stress
the ascetic life. Economics is not concerned with their content,
and its laws apply regardless of the nature of these ends.
Whereas, Psychology and ethics deal with the content of human
ends; they ask, why does the man choose such and such ends, or
what ends should men value? Therefore, economics deals with
any given end and with the formal implications of the fact that
men have ends and utilise means to attain these ends. Consequently,
economics is a separate discipline from psychology. By introducing
psychology into economics one obliterates the generality of the
theory, and renders it useless. This is precisely what Daniel
Kahneman, the recipient of this year's Nobel in economics, and
his followers are doing" - F. Shostak; Behavioral, Experimental,
and Austrian Economics, 29 Oct 03
Mises made a point of crediting the
psychology profession precisely for proving that even the most absurd
desires are rooted in some kind of meaning for the individual, personally.
But he also said, that it is for that reason that a line needs to
be drawn between psychology and praxeology (the study of human action
as regards exchange):
"The term “unconscious” as used by praxeology and
the terms “subcon-scious” and “unconscious” as applied by psychoanalysis
belong to two different systems of thought and research. Praxeology
no less than other branches of knowledge owes much to psychoanalysis.
The more necessary is it then to become aware of the line which
separates praxeology from psychoanalysis." - HA, PP 12
So what can we make of the challenge
to Mises' doctrine?
Very little in my opinion. It's
another renascence, backwards in time, to the days when magic was
the preferred explanation for real world events few understood.
Perhaps it's a sign of the times
that people prefer abstract economic theories, created within the
confines a laboratory, or by mathematical formula by scientists
who criticize rationalism for not being real world, ironically.
For I can't imagine anything
more real world than theories ground in the reality of individual's
actions, particularly since they have been among the only theories
that have proven correct in forecasting market events in recent
The reason stock markets went far
beyond reality in the past decade has nothing to do with irrational
behavior. Rather, it is ground in the fact that most participants
did not understand the impact of the Fed's money and credit balloon
on individual's "valuation of input and output." The vast
majority still don't. Certainly these Nobel laureates don't.
It only proves to us there is a strong
socialist undercurrent in academia. By arguing that markets are
irrational, and prone to failure, they can argue for bigger government
and more regulation. As Frank Shostak put it:
"In particular Vernon Smith openly casts doubt
on the notion that reason is the main faculty that navigates human
actions. For him the main driving force are emotions. By casting
doubt on peoples' capacity for exercising their brains the Nobel
laureates may have unintentionally laid the foundations for the
introduction of government controls to "protect" individuals from
their own irrational behaviour"
Edmond J. Bugos