Axiomatic Economics by Victor Aguilar: Are You an Austrian, Axiomatic or Mainstream Economist?

The Mises Institute has distributed a list of 25 questions which purport to sort out Austrians, Keynesians, monetarists and Marxists. Apparently, in their world view, axiomatic economists do not exist. Many people have taken this test and almost all of them have been told that they are 80 to 90% Austrian. This would imply either that Austrianism is far more prevalent in society than hitherto suspected, or that the test takers were hoodwinked.

Actually, it is the latter. The Mises Institute is conflating Austrianism with libertarianism. Most of their questions are about jurisprudence, not economics, and are really just asking if one is libertarian. The 80 to 90% represents the prevalence of libertarianism in society, or at least among people who visit their site. The purpose of the Mises Institute’s test is to convince libertarians that there is no other economic theory compatible with their beliefs, not to convert mainstream or Marxist economists, who are assumed to be irredeemable.

In contrast to the Mises Institute, my test asks only theoretical, not ideological, questions. I assume that everybody taking it is more or less supportive of capitalism and the free market. (If you are a Marxist, you might want to read my Critique of Montagne rather than take this test.) I intend to sort out followers of the axiomatic, Austrian and mainstream schools of economic thought. By “mainstream” I mean concepts that are widely taught in the universities, not just Keynesianism. Austrians tend to assume that the two terms are synonymous, which is not true.

In the following questions, when I ask which quotation you agree with, you may also interpret this as, which is most useful. For instance, if you are an Austrian and I define a term widely used by mainstream economists, I am not asking if you agree with the definition, in the sense that you feel that it is accurate, but if you agree that the concept is a productive one. If you agree with more than one quotation, choose the quotation that is more definitive of your viewpoint. In cases where axiomatic economics extends, but does not contradict, mainstream economics, I myself supplied the quotations representative of both the mainstream and the axiomatic position.

You may only take this quiz once a day.
Click here for the short version, 6 questions only.

Question 1
Which of these quotations about supply and demand do you agree with?

a) "Demand creates its own supply."

b) "Price and stock are more important than supply and demand."

c) "Supply creates its own demand."

Question 2
Which of these statements about interest rates do you agree with?

a) Interest rates are unimportant; it is credit limits that affect the business cycle.

b) Interest rates are anti-cyclical; they are down in good times and up in bad.

c) Interest rates are pro-cyclical; they are up in good times and down in bad.

Question 3
What mathematical function best describes time preference; that is, the value of phenomena received in the future, relative to its current value?

a) v = e^-rt is the basis for my economic theory, though v = 1/r²t² would also produce a consistent theory.

b) v = e^-rt

c) v = -rt

Question 4
Which of these quotations about price indexes do you agree with?

a) "Almost everybody watches the rate of inflation. It is a major indicator of how the economy is doing, and changes in inflation are closely related to fluctuations in real GNP. The rate of inflation is defined as the percentage rate of change in the general price level from one period to the next. The general price level is a measure of the purchasing power of the dollar, or the amount of goods and services the dollar can buy."

b) "As the consumers' goods are present goods, while the factors of production are means for the production of future goods, and as present goods are valued higher than future goods of the same kind and quality, the sum thus apportioned, even in the imaginary construction of the evenly rotating economy, falls behind the present price of the consumers' goods concerned. This difference is the originary interest."

c) "The assertion that the average level of prices in an economy is a meaningful statistic has done more damage to the credibility of economists than any other assertion they have made.... Such an average is not just ludicrous but it is definitionally without meaning, for one need only ask in what units the result is expressed and one has found a contradiction."

Question 5
Is economic theory about wealth or income? Or are these concepts interchangeable, so the same graph can represent both?

a) "The distinction between wealth and income is not just one of semantics. Most people define poverty to be low income, not a lack of wealth. It is unemployment figures, not asset figures, that are printed in the news media and it is national income that is maximized in IS-LM analysis� GNP is the flow of new products during the year or the quarter. A yearly flow of products represents a nation's income, not their wealth. This is why macroeconomics is referred to as 'income theory.'"

b) "The area of the triangle shows the totality of the successive stages through which the several units of original means of production pass before they become ripe for consumption. It also shows the total amount of intermediate products which must exist at any moment of time in order to secure a continuous output of consumers' goods� The time dimension that makes an explicit appearance on the horizontal leg of the Hayekian triangle has a double interpretation. First, it can depict goods in process moving through time from the inception to the completion of the production process. Second, it can represent the separate stages of production, all of which exist in the present, each of which aims at consumption at different points in the future."

c) "I assert that the stock of phenomena is more important than the supply because all of the decisions made regarding a phenomenon are based on its stock (how much of it is in existence), and not on how much of it happened to be produced in some arbitrary time period. Phenomena are the same whether they are produced in one time period or another. Most people do not know and none care what the supply of phenomena is, they are concerned with the stock; this week's or month's supply is only a small part of the available stock."

Question 6
Which of these quotations about capital accounting do you agree with?

a) "The date of manufacture is irrelevant since value is determined entirely by considerations of the future. By the subjective theory of value, all goods are valued for their contribution towards future consumption, not for their past costs of production."

b) "Capital goods manufactured prior to the current year are not incorporated in the Aggregate Production Structure even though they may be used in the production of current goods and services."

c) "GNP refers to production during a particular time period, which is usually taken to be a year, or a quarter of a year. GNP is the flow of new products during the year or the quarter."

Question 7
Which of these diagrams best describes the capital structure?

Question 8
Which of these quotations about the capital structure do you agree with?

a) "The perspective that we want is from right now, at time zero, looking forward into the future. Thus, the Distribution of Wealth over the Capital Structure is defined from zero to positive infinity."

b) "The consumer's good is always the 1st order, regardless of how far back we push the analysis, even if we go back to axes carved by prehistoric men."

c) "There is no clear basis for the choice of weights for the PPI, comparable to the market basket that gives the weights for the CPI. As a result, there is much less interest in the monthly value of the PPI."

Question 9
Which of these quotations about the average period of production do you agree with?

a) "The Distribution of Wealth over the Capital Structure (DWCS) is the exponential distribution scaled up by A, the wealth of the nation. That is, the DWCS is the function
f(t) = Are^-rt for 0 ≤ t < ∞ . Is the mean the central/boundary point of Rothbard, Garrison, O'Driscoll, Rizzo and Skousen? Is it the point where the function pivots like a lever on a fulcrum? This is an easy question to answer: Differentiate Are-rt with respect to r, set this derivative equal to zero and solve for t. Thus,

= Ae^-rt - Atre^-rt. The exponential function is always nonzero so, having set the derivative to zero, we can divide Ae-^-rt out of both sides to get 1 = tr. Hence, the central/boundary point is at t =

, the mean. Q.E.D."

b) "As the average time interval between the application of the original means of production and the completion of the consumers' goods increases, production becomes more capitalistic, and vice versa. In the case we are contemplating in which the original means of production are applied at a constant rate throughout the whole process of production, this average time is exactly half as long as the time which elapses between the application of the first unit of original means of production and the completion of the process."

c) "The average period of production is not a part of my theory. GNP refers to production during a particular time period, which is usually taken to be a year, or a quarter of a year. GNP is the flow of new products during the year or the quarter. There is nothing in this definition about how long production usually takes. Anyway, there is little interest in the investment component of national income, partly because it is volatile due to animal spirits and partly because it is so small � consumption expenditures account for two thirds of GNP and they are the focus of economists' attention."

Question 10
Which of these quotations about gold do you agree with?

a) "Gold has provided a return of almost 17.9% in seven months, or an annualized return of over 30% � on something real, of intrinsic value, and which has been used as a store of value for 5,000 years� Gold is history's oldest and most stable currency� Since your dollars have no intrinsic value, they are subject to currency market fluctuations."

b) "Gold bullion has only recently served as money; certainly not throughout the last 5000 years. For most of that time, cattle were money. Gold coins were certificates for cows in a rancher's herd but only the mint, not merchants, accepted bullion � and the mint did not pay anywhere close to a full cow for a coin bearing the mark of a defunct cattle ranch. This is theoretically identical to how, thousands of years later, banknotes were certificates for gold coins in a bank's vault. In the context of the cow standard, gold coins became fiat money when they began circulating without any cattle backing just as, in the context of the gold standard, dollars became fiat money when they began circulating without any gold backing."

c) "Gold is mostly used in the manufacture of electronic devices. But, after being mined, the metal must be refined, the devices manufactured, shipped across the Pacific ocean, distributed to consumer electronics stores and finally sold to consumers. This takes considerable time, making gold one of the most volatile commodities. Its value plunges up and down as investors try to predict years into the future how many electronic devices will be needed."

Question 11
Which of these quotations about Mises' Regression Theorem do you agree with?

a) "Mises' Regression Theorem traces the value of money back to when it had value primarily for its use. But that is as far as he got; not being a mathematician, he had no way of knowing that the distribution of people's valuations of their first unit of the monetary unit is log-normally distributed. One can go beyond Mises by recognizing that his Regression Theorem is not a theorem but an axiom and that it applies to all phenomena, not just money."

b) "What does the term 'regression theorem' refer to? I am familiar with Mises' critique of socialism, but I read the articles on Mises in Wikipedia, Answers.com and the New World Encyclopedia and none of them mention a regression theorem. Neither is there any entry for 'regression theorem' in the economist.com or about.com. Does it have something to do with linear regression?"

c) "Economic research? What research? All the research has already been done by Mises. All that is left is to explain Mises to the public� The theory of money virtually begins and ends with Ludwig von Mises' monumental Theory of Money and Credit, published in 1912� Before then it seemed that any attempt to apply marginal utility theory to money was inextricably caught in a circular trap� Mises, however, succeeded in solving this problem in 1912 by developing his so-called Regression Theorem."

Question 12
Which of these quotations about intrinsic value do you agree with?

a) "There was never a 100% reserve requirement; the monetary system was always fiduciary. Before paper receipts for gold coins were issued, the gold coins were themselves receipts for cows and, like banknotes and then checking accounts, it is probably true that more coins were issued than there were actual cows in the herd."

b) "Investors seek the intrinsic value of gold to protect themselves from inflation� Basic economic axiom: Money must originate from a commodity with intrinsic value... Gold and silver are money made by God. He created them."

c) "Gold never had any more use value than paper. It is a soft metal and is easy to stamp, which makes it useful in the same way that paper's ability to absorb ink makes it useful. It is back to this use, the minting of cow-certificates, that Mises' Regression Theorem traces the value of gold, not to the making of pretty necklaces."

Question 13
Which of these quotations about fiat money do you agree with?

a) "The continuance of confidence in the banks after going off the gold standard is something of a psychological marvel."

b) "Fiat money has value because it had value yesterday and people assume that it still has value today. It had value yesterday because it had value the day before yesterday, and so on. This is described by Mises' Regression Theorem."

c) "When we refer to fiat money, we are referring to money that exists because the government declares it into existence."

Question 14
Which of these quotations about the origin of money do you agree with?

a) "If money is primarily a commodity; which is convenient for making trades; which obtains its value out of 'intrinsic' qualities; then it can be more a creature of merchants than of governments. It becomes possible to regard its evolution as some unconscious process, not involving human planning or institutional decision. For example no decision would have been made that wheat, or apples were valuable as food � they simply were, and over time it would have become apparent to all, either through experience or example."

b) "The one point the socialists miss is the keystone, without which their whole thesis collapses: Cow-certificates were issued by the people who owned the cows. The church elders did not just write the equation �130 grains of gold = one cow' on the bulletin board at their temple and expect people to obey it. How could that work? The only reason someone would accept a gold coin is because the issuer was known to have a herd of cattle and to have proclaimed that anybody who brought one of his coins back to him would get a cow. Merchants accept coins because the issuer is alive, which is taken as evidence that he has survived the latest clearing house meeting. Socialists are right that the merchants in town did not issue the coins, but they did not look far enough when they decided that the city government did. The coins were issued by a rural cattle baron. They circulated in the city, but they were not issued by any entity, public or private, in the city."

c) "If money in its origins and development, or even just in its most perfect forms, is properly an abstract social institution embodied in law � i.e. a legal institution, then it is more a creature of governments than of merchants. Its evolution and possible even its origin would have been matters of conscious decision, whether by ancient temple cults, governments, or merchants. It would have been one of the greatest human inventions."

Question 15
Do all short-term credit instruments issued by unassailable parties function as money?

a) Yes. "So long as a bank issues its notes only in the discount of good bills, at not more than sixty days' date, it cannot go wrong in issuing as many as the public will receive from it."

b) Maybe. "Existence alone is not a sufficient condition for credit instruments to be included in the stock of money; there must be an active secondary market for them."

c) No. "Investors seek the intrinsic value of gold to protect themselves from inflation. When we refer to fiat money, we are referring to money that exists because the government declares it into existence. History has shown that fiat money, or 'faith-based currency' always fails."

Question 16
Which of these quotations best describes the foundations of economics?

a) "This axiom, the proposition that humans act, fulfills the requirements precisely for a true synthetic a priori proposition. It cannot be denied that this proposition is true, since the denial would have to be categorized as an action � and so the truth of the statement literally cannot be undone"

b) "A single point in time at which all production and exchange for all time is determined; a set of commodities � including those which will be produced in the distant future � which is known to all consumers; producers who know all the inputs that will ever be needed to produce their commodities; a vision of 'uncertainty' in which the possible states of the future are already known, so that certainty and uncertainty are formally identical."

c) "Axiom #1: One's value scale is totally (linearly) ordered. It is transitive, reflexive, anti-symmetric and total. Axiom #2: Marginal (diminishing) utility has three characteristics. It is independent of first-unit demand, negative monotonic and there is a limit to how slowly utility can diminish. Axiom #3: First-unit demand conforms to proportionate effect. Proportionate effect describes things that gradually increase over time, but as a proportion (percentage) of their current value."

Question 17
Which of these quotations about General Equilibrium Theory do you agree with?

a) "The GE framework, given sufficient mathematical complexity, is actually a grand narrative on the fragility and implausibility of perfect market equilibrium. Successive mathematical torturing has outlined an extensive list of unlikely conditions required to demonstrate general market efficiency. For an economic system that failed to satisfy such assumptions, there seemed a need for government intervention. General equilibrium theory provides a sort of checklist for market critics� In most respects, profit-oriented market socialism would closely mimic contemporary market capitalism. The basis of the comparison is a small-scale but comprehensive computable general equilibrium model."

b) "GE Theory is the death of capitalism. Our only compensation is that, like a condemned prisoner who gets to choose the firing squad or the hangman, we get to choose inefficiency or tyranny. How did free-market economists respond to this dreadful choice? Milton Friedman invoked his famous 'assumptions don't matter' dictum to avoid having to admit that he could not untie the Gordian knot of GE Theory � but that is cowardice. Surely there must be a better way! Instead of attempting to untie it, I would cut the Gordian knot of GE Theory by throwing all of Walras' and Pareto's assumptions overboard and starting from scratch with a new set of axioms. As Hannibal Barca said, 'we will either find a way, or make one.' The same goes for libertarians; we will never accept socialism."

c) "A socialist writes, 'As a tool of capitalist hegemony the doctrine of general equilibrium is very useful. It assumes that the normal condition of society is for the state to play as little a role in economic life as possible, because the market is part of human nature and the most efficient form of economic organization. The theory, therefore, has a role in legitimizing capitalist hegemony.' I am not a socialist and would not use provocative words like 'tool' or 'capitalist hegemony,' but I otherwise agree with this assessment of GE Theory � it is the defining characteristic of free-market economists."

Question 18
Which of these quotations about the marginal utility of commodities to you agree with?

a) "Marginal (diminishing) utility is independent of first-unit demand, negative monotonic and there is a limit to how slowly it can diminish. Specifically, its integral from zero to infinity is finite. This axiom applies to all phenomena; gold is no exception. (Cattle served as money for thousands of years and nobody ever claimed that they have constant marginal utility.) During boom times, industrial metals have very slowly diminishing utility (the mines could not keep up with electricians' demand for copper wire during the recent housing boom) but it is always true that the integral of their utility from zero to infinity is finite. During bad times, the utility of industrial metals diminishes very rapidly � the mines can hardly give it away. Gold is no more hoardable than oil. Proven reserves of commodities such as oil and copper are a hoard; hoarding oil does not require drilling for it, putting it in barrels and then re-burying it in caverns."

b) "Gold is much too volatile to function well as commodity money. Both its first-unit demand and its rate of diminishing utility have historically been quite erratic. Goldbugs do not like to admit it, but there were periods of boom and bust even for countries that were on the gold standard. Specifically, the discovery of gold in the New World created a boom that profoundly altered the social structure of Europe. For the first time ever, Europeans witnessed the phenomenon of the impoverished aristocrat. Sharecropping contracts were just not worth as much anymore; there were tradesmen in town making several times more than their lord on his country estate."

c) "I do not believe that oil, or anything else for that matter, could displace gold as money. In particular, oil is not hoardable. Gold is money because it has constant marginal utility (or, if you will, its marginal utility declines at a slower rate than that of anything else.) As a result gold has been hoarded since time immemorial and it has an accumulated store in the order of 50 or more years of production at present rates. Any contender would have to beat that, but it would take, obviously, at least fifty years to do it. Latecomers (like oil or platinum) need not apply."

Question 19
Which of these aphorisms is your guiding principle in life?

a) Molon labe!

b) Don't count your chickens until they're hatched.

c) Fun is fun and done is done.

Question 20
Do you like the poem, Ode to an Economics Troll?

a) No

b) Yes

c) Go to hell!!