Economics In The Movies

Popular films, such as Batman Begins, demonstrate misunderstanding about how the field of economics is defined. In that film, the lead member of the League of Shadows (a group responsible for toppling entire societies at their decadent pinnacles) claims to have invented economics to destroy Gotham. As Henri Ducard explains to Bruce Wayne,

“Over the ages our weapons have grown more sophisticated, with Gotham we tried a new one, economics.”

These continuing apprehensions have not changed much over more than half a century. To progress beyond equivocation, reading more of Human Action is critical. In the first two chapters, Mises attempts to broaden the field’s scope, calling the resulting discipline ‘praxeology’. (A term credited to Alfred Espinas.) It was not successfully socialized, and ambiguity surrounding whether economics as more than just the study of market prices remains.

The textbook definition of economics I learned was ‘the study of human choices made given unlimited wants and limited resources (scarcity)’. When asked to define economics in the Count of Monte Cristo (2002), Edmond responds, “Economics is a science that deals with the production, distribution, and consumption of commodities.” Mises wants to expand this definition, suggesting that,

“It is much more than merely a theory…of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions…No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.” (3)

Grab a dictionary

Mises uses many words that were initially foreign to me, to list a few:

catallactic
categorial
homunculus
pleonastic
polylogism
praxeology
ratiocination

Human Action by Ludwig von Mises

One of my goals for this blog is to digest and present some of the ideas from Ludwig von Mises‘ seminal work, Human Action. And if you think about it, human action is seminal work. Pun intended.

“The ultimate goal of human action is always the satisfaction of the acting man’s desire. There is no standard of greater or lesser satisfaction other than individual judgments of value, different for various people and for the same people at various times…Nobody is in a position to decree what should make a fellow man happier.” – p.14

Inflation Is A Progressive Tax

The example that follows merely serves to illustrate the importance of a stable currency. I agree with Milton Friedman, who said (in A Monetary History of the United States 1867 – 1960) that “Inflation is always and everywhere a monetary phenomenon”, and define inflation as an increase in the money supply that exceeds the growth in economic output. Only in very recent history have human societies not been on a bimetallic standard – for which Friedman argues primarily because changes in the supply of two precious metals is almost always more stable than the supply of one alone. (Money Mischief: Episodes in Monetary History)

In a society with a progressive tax structure, inflation will result in a nominal and real increase in the effective tax rate, providing a bias towards inflationary monetary policy.

Ex: Ten people make the following incomes in year one (50, 50, 100, 100, 100, 100, 100, 100, 150, 150). There are two tax rates. Income 100 or under is taxed at 10%, income over 100 is taxed at 15%. This constitutes a progressive tax system. The next year, the money supply is increased by 100 (10%) in proportion to income in year one. Incomes in year two are (55, 55, 110, 110, 110, 110, 110, 110, 165, 165). The nominal taxes collected in both years are 115 and 159.5, respectively. Adjusting for inflation (159.5 / (1.00 + 0.10) ), the real value of taxes collected in year two is 145. Therefore, this progressive tax structure results in an effective tax rate that is 3.0% higher when the money supply is increased by 10%.