I have been interested to see how Professor Leeson would organize his two Austrian courses this semester. Well, the syllabi are now online, and can be accessed here.
Econ 403 aims to discuss the work of Menger, Bohm-Bawerk, and Hayek, yet Mises' Human Action is the only book assigned, and it appears to be the only book that will be read in class. If I taught this class, I would assign Menger's Principles of Economics and Vaughn's Austrian Economics in America. Menger would introduce the students to Austrian economics by placing it in the context of the marginalist revolution. Vaughn's book would then provide a historical account of the evolution of Austrian economics. I would supplement Vaughn's book with various journal articles, making sure to include the most important articles by Kirzner and Lachmann.
Econ 881 is what I have feared: Applied Anarchy! And it is called Austrian economics! This class is not Austrian economics. It is Rothbardian anarcho-capitalism, with supplemental readings from Bruce Benson, Lysander Spooner, and Robert Ellickson. Leeson has also assigned a lot of articles by the younger Austrians, people like Coyne, Stringham and Powell.
Again, if I taught this class, I would focus on the literature and debates in which the Austrians were involved. I might start with the methodenstreit between Menger and Schmoller, then move onto market socialism, with readings coming from Mises, the three socialist articles by Hayek in his 1948 book, along with other articles by the proponents of market socialism. I would also make available some chapters in Don Lavoie's book on socialism. Next I would discuss the debate between Hayek and Keynes, and from there move onto a brief discusssion of Post Keynesian economics, and assign readings from economists who are familiar with both approaches, namely, Greg Hill, Fiona Maclachlan, Ludwig Lachmann, and, of course, G. L. S. Shackle. I might then discuss the knowledge/calculation debate among Austrians between people like Yeager, Salerno, Hoppe, Herbener, etc. These readings would provide students with a solid grounding in Austrian economics.
It is no secret that Pete Leeson will soon be the new Austrian guru at George Mason. Students faint and cry when they see him. I thought Pete Boettke's syllabi on Austrian economics were very good. I don't like Leeson's too much. Students new to Austrian economics will come to George Mason and get a good grounding in Mises' Human Action, which can be taught in many different ways, and then jump to the 1990's and read people like Stringham, Powell, and Coyne. I just think many important things are being left out here.
Econ 403 aims to discuss the work of Menger, Bohm-Bawerk, and Hayek, yet Mises' Human Action is the only book assigned, and it appears to be the only book that will be read in class. If I taught this class, I would assign Menger's Principles of Economics and Vaughn's Austrian Economics in America. Menger would introduce the students to Austrian economics by placing it in the context of the marginalist revolution. Vaughn's book would then provide a historical account of the evolution of Austrian economics. I would supplement Vaughn's book with various journal articles, making sure to include the most important articles by Kirzner and Lachmann.
Econ 881 is what I have feared: Applied Anarchy! And it is called Austrian economics! This class is not Austrian economics. It is Rothbardian anarcho-capitalism, with supplemental readings from Bruce Benson, Lysander Spooner, and Robert Ellickson. Leeson has also assigned a lot of articles by the younger Austrians, people like Coyne, Stringham and Powell.
Again, if I taught this class, I would focus on the literature and debates in which the Austrians were involved. I might start with the methodenstreit between Menger and Schmoller, then move onto market socialism, with readings coming from Mises, the three socialist articles by Hayek in his 1948 book, along with other articles by the proponents of market socialism. I would also make available some chapters in Don Lavoie's book on socialism. Next I would discuss the debate between Hayek and Keynes, and from there move onto a brief discusssion of Post Keynesian economics, and assign readings from economists who are familiar with both approaches, namely, Greg Hill, Fiona Maclachlan, Ludwig Lachmann, and, of course, G. L. S. Shackle. I might then discuss the knowledge/calculation debate among Austrians between people like Yeager, Salerno, Hoppe, Herbener, etc. These readings would provide students with a solid grounding in Austrian economics.
It is no secret that Pete Leeson will soon be the new Austrian guru at George Mason. Students faint and cry when they see him. I thought Pete Boettke's syllabi on Austrian economics were very good. I don't like Leeson's too much. Students new to Austrian economics will come to George Mason and get a good grounding in Mises' Human Action, which can be taught in many different ways, and then jump to the 1990's and read people like Stringham, Powell, and Coyne. I just think many important things are being left out here.
Sunday, January 11, 2009
My interpretation of Mises comes mainly from this quote:
"For action presupposes some uneasiness felt, as its only aim can be the removal of uneasiness. The analogy with the state of perfection is obvious. The fully satisfied individual is purposeless; he does not act, he has no incentive to think, he spends his days in leisurely enjoyment of life. Whether such a fairly-like existence is desirable may be left undecided."
I have decided against the desirability of such a "fairly-like existence" --- see here and here.
I think this is the quote one should use in trying to understand what Misesian economics is all about. Human action is central. Human action is aimed at the removal of felt uneasiness. When all uneasiness is removed, there no longer is any action (as in equilibrium). A situation without human action is not desirable because it would turn us into vegetables. See Mises on this:
"Life in a perfect frame would reduce man to a purely vegetative existence."
These quotes are taken from Mises' book "Theory and History," pages 363, 367 (Arlington House, 1969). No Austrian has explicitly emphasized this point, although some have come close. The Boettke, Prychitko and Horwitz 1986 paper "Beyond Equilibrium Economics" hinted at this, as well as the Cowen and Fink paper on ERE. I think this should be made more explicit. What becomes of equilibrium economics if it is believed to destory men? Many people like equilibrium because they see it as a world of consistent action. It is nothing of the sort! It is a world without action. As I like to say, Equilibrium is a death sentence.
"For action presupposes some uneasiness felt, as its only aim can be the removal of uneasiness. The analogy with the state of perfection is obvious. The fully satisfied individual is purposeless; he does not act, he has no incentive to think, he spends his days in leisurely enjoyment of life. Whether such a fairly-like existence is desirable may be left undecided."
I have decided against the desirability of such a "fairly-like existence" --- see here and here.
I think this is the quote one should use in trying to understand what Misesian economics is all about. Human action is central. Human action is aimed at the removal of felt uneasiness. When all uneasiness is removed, there no longer is any action (as in equilibrium). A situation without human action is not desirable because it would turn us into vegetables. See Mises on this:
"Life in a perfect frame would reduce man to a purely vegetative existence."
These quotes are taken from Mises' book "Theory and History," pages 363, 367 (Arlington House, 1969). No Austrian has explicitly emphasized this point, although some have come close. The Boettke, Prychitko and Horwitz 1986 paper "Beyond Equilibrium Economics" hinted at this, as well as the Cowen and Fink paper on ERE. I think this should be made more explicit. What becomes of equilibrium economics if it is believed to destory men? Many people like equilibrium because they see it as a world of consistent action. It is nothing of the sort! It is a world without action. As I like to say, Equilibrium is a death sentence.
I am reading an excellent book now: Max Horkheimer's Eclipse of Reason. After slugging through Dialectic of Enlightenment (which, admittedly, I did not fully understand), this book is really a joy to read. The author argues that our current conception of reason is dangerous and tyrannical.
He calls this subjective reason: "It attaches little importance to the question whether the purposes [ends] as such are reasonable. ... The idea that an aim can be reasonable for its own sake --- on the basis of virtues that insight reveals it to have in itself --- without reference to some kind of subjective gain or advantage, is utterly alien to subjective reason. ... There is no reasonable aim as such, and to discuss the superiority of one aim over another in terms of reason becomes meaningless. From the subjective approach, such a discussion is possible only if both aims serve a third and higher one, that is, if they are means, no ends."
This is the Austrian (Misesian, really) conception of rationality. Ends must be taken as given, because there is no way we can arbitrate between them. We can only speak of the appropriateness (rationality) of the employment of means in relation to given ends. Here we can say, for example, that one set of means is more reasonable than an alternative one in fulfilling a given end. But ends must be taken as given.
Horkheimer thinks this system of rationality is tyrannical. Here he is:
"The formalization of reason has far-reaching theoretical and practical implications. If the subjectivist view holds true, thinking cannot be of any help in determining the desirability of any goal in itself. The acceptability of ideals, the criteria for our actions and beliefs, the leading principles of ethics and politics, all our ultimate decisions are made to depend upon factors other than reason. They are supposed to be matters of choice and predilection, and it has become meaningless to speak of truth in making practical, moral, or esthetic decisions."
Now Horkheimer believes in an objective reason. But I will come to this later. Let us first see just what is so tyrannical about subjective (Misesian) reason. Here are some examples:
1.) It puts ethics in a different category from science.
2.) It prohibits passing judgment on man's actions and thereby contributes to cultural relativism.
3.) It emasculates critical inquiry (see this example:)
"Today, when you are summoned into a traffic court, and the judge asks you whether your driving was reasonable, he means: Did you do everything in your power to protect your own and other people's lives and property, and to obey the law? He implicitly assumes that these values must be respected. What he questions is merely the adequacy of your behavior in terms of these generally recognized standards. In most cases, to be reasonable means not to be obstinate, which in turn points to conformity with reality as it is.
4.) It actually destroys rationalism (in the tradition of Spinoza et al.) and privileges empiricism, whereby "Reason has liquidated itself as an agency of ethical, moral, and religious merit."
5.) Similarly, it turns reason into a mere instrument: "Meaning is supplanted by function or effect in the world of things and events. ... Truth is no end in itself." Also:
"What are the consequences of the formalization of reason? Justice, equality, happiness, tolerance, all the concepts that, as mentioned, were in preceding centuries supposed to be inherent in or sanctioned by reason, have lost their intellectual roots. They are still aims and ends, but there is no rational agency authorized to appraise and link them to an objective realty. ... According to the philosophy of the average modern intellectual, there is only one authority, namely, science, conceived as the classification of facts adn the calculation or probabilities. The statement that justice and freedom are better in themselves than injustice and oppression is scientifically unverifiable and useless."
6.) It creates the possiblity (and increases the liklihood) of political tyrrany:
"Since ends are no longer determined in the light of reason, it is also impossible to say that one economic or political system, no matter how cruel and despotic, is less reasonable than another. According to formalized [subjective] reason, despotism, cruelty, oppression are not bad in themselves; no rational agency would endorse a verdict against dictatorship if its sponsors were likely to profit by it [because it is useful to them in a purely instrumental sense]."
I could go on, but I think you get the idea. Now against this model of reason is presented a different kind of reason, what the author calls "objective reason." He defines it in the following way:
"This view asserted the existence of reason as a force not only in the individual mind but also in the objective world. ... The emphasis was on ends rather than means. ... [For example,] freedom by nature is not identical with freedom in fact. His political doctrine is based on rational insight and deduction rather than on empirical research.."
And here:
"Less and less is anything done for its own sake. A hike that takes a man out of the city to the banks of a river or a mountain top would be irrational and idiotic, judged by utilitarian standards; he is devoting himself to a silly or destructive pastime. In the view of formalized reason, an activity is reasonable only if it serves another purpose, e.g. health or relaxation, which helps to replenish his working power. In other words, an activity is merely a tool, for it derives its meaning only through its connection with other ends."
I like this contrast, and think it has a lot to tell Austrians. Where does praxeology, natural rights, etc. fit into all this? One thing I cannot yet accept, however, is the claim that this system "calls for a specific mode of behavior in each specific case ... there are more comprehensive structures demanding other lines of action equally independent of personal wishes and interests. "
In this sense, objective reason prescribes ends, while presumably subjective reason creates scope for the arbitrary selection of them. For this reason I think that objective reason also facilitates "the emergence of barbarism" if misused. Also, if two sides are making philosophical statements of absolute truth founded on reason, how do we arbitrate between them? Cannot subjective reason help us here? It seems that it would have to because the discovery of universal truths still remains fundamentall a subjective experience, and is therefore subject to variations in its interpretation and material application.
Now Austrians may wish to stick to their subjectivism and criticize "objective reason" for its emphasis on an "objective reality," but I think that Horkheimer attacks instrumental (subjective) reason quite effectively in this little book. He criticizes positivism, empiricism, pragmatism, and many other schools founded on subjective reason. I am inclined to agree that it is very dangerous to transform reason into a mere tool in the service of useful activities. We first have to rationally deduce the appropriate ends. Subjective reason cannot help us here.
He calls this subjective reason: "It attaches little importance to the question whether the purposes [ends] as such are reasonable. ... The idea that an aim can be reasonable for its own sake --- on the basis of virtues that insight reveals it to have in itself --- without reference to some kind of subjective gain or advantage, is utterly alien to subjective reason. ... There is no reasonable aim as such, and to discuss the superiority of one aim over another in terms of reason becomes meaningless. From the subjective approach, such a discussion is possible only if both aims serve a third and higher one, that is, if they are means, no ends."
This is the Austrian (Misesian, really) conception of rationality. Ends must be taken as given, because there is no way we can arbitrate between them. We can only speak of the appropriateness (rationality) of the employment of means in relation to given ends. Here we can say, for example, that one set of means is more reasonable than an alternative one in fulfilling a given end. But ends must be taken as given.
Horkheimer thinks this system of rationality is tyrannical. Here he is:
"The formalization of reason has far-reaching theoretical and practical implications. If the subjectivist view holds true, thinking cannot be of any help in determining the desirability of any goal in itself. The acceptability of ideals, the criteria for our actions and beliefs, the leading principles of ethics and politics, all our ultimate decisions are made to depend upon factors other than reason. They are supposed to be matters of choice and predilection, and it has become meaningless to speak of truth in making practical, moral, or esthetic decisions."
Now Horkheimer believes in an objective reason. But I will come to this later. Let us first see just what is so tyrannical about subjective (Misesian) reason. Here are some examples:
1.) It puts ethics in a different category from science.
2.) It prohibits passing judgment on man's actions and thereby contributes to cultural relativism.
3.) It emasculates critical inquiry (see this example:)
"Today, when you are summoned into a traffic court, and the judge asks you whether your driving was reasonable, he means: Did you do everything in your power to protect your own and other people's lives and property, and to obey the law? He implicitly assumes that these values must be respected. What he questions is merely the adequacy of your behavior in terms of these generally recognized standards. In most cases, to be reasonable means not to be obstinate, which in turn points to conformity with reality as it is.
4.) It actually destroys rationalism (in the tradition of Spinoza et al.) and privileges empiricism, whereby "Reason has liquidated itself as an agency of ethical, moral, and religious merit."
5.) Similarly, it turns reason into a mere instrument: "Meaning is supplanted by function or effect in the world of things and events. ... Truth is no end in itself." Also:
"What are the consequences of the formalization of reason? Justice, equality, happiness, tolerance, all the concepts that, as mentioned, were in preceding centuries supposed to be inherent in or sanctioned by reason, have lost their intellectual roots. They are still aims and ends, but there is no rational agency authorized to appraise and link them to an objective realty. ... According to the philosophy of the average modern intellectual, there is only one authority, namely, science, conceived as the classification of facts adn the calculation or probabilities. The statement that justice and freedom are better in themselves than injustice and oppression is scientifically unverifiable and useless."
6.) It creates the possiblity (and increases the liklihood) of political tyrrany:
"Since ends are no longer determined in the light of reason, it is also impossible to say that one economic or political system, no matter how cruel and despotic, is less reasonable than another. According to formalized [subjective] reason, despotism, cruelty, oppression are not bad in themselves; no rational agency would endorse a verdict against dictatorship if its sponsors were likely to profit by it [because it is useful to them in a purely instrumental sense]."
I could go on, but I think you get the idea. Now against this model of reason is presented a different kind of reason, what the author calls "objective reason." He defines it in the following way:
"This view asserted the existence of reason as a force not only in the individual mind but also in the objective world. ... The emphasis was on ends rather than means. ... [For example,] freedom by nature is not identical with freedom in fact. His political doctrine is based on rational insight and deduction rather than on empirical research.."
And here:
"Less and less is anything done for its own sake. A hike that takes a man out of the city to the banks of a river or a mountain top would be irrational and idiotic, judged by utilitarian standards; he is devoting himself to a silly or destructive pastime. In the view of formalized reason, an activity is reasonable only if it serves another purpose, e.g. health or relaxation, which helps to replenish his working power. In other words, an activity is merely a tool, for it derives its meaning only through its connection with other ends."
I like this contrast, and think it has a lot to tell Austrians. Where does praxeology, natural rights, etc. fit into all this? One thing I cannot yet accept, however, is the claim that this system "calls for a specific mode of behavior in each specific case ... there are more comprehensive structures demanding other lines of action equally independent of personal wishes and interests. "
In this sense, objective reason prescribes ends, while presumably subjective reason creates scope for the arbitrary selection of them. For this reason I think that objective reason also facilitates "the emergence of barbarism" if misused. Also, if two sides are making philosophical statements of absolute truth founded on reason, how do we arbitrate between them? Cannot subjective reason help us here? It seems that it would have to because the discovery of universal truths still remains fundamentall a subjective experience, and is therefore subject to variations in its interpretation and material application.
Now Austrians may wish to stick to their subjectivism and criticize "objective reason" for its emphasis on an "objective reality," but I think that Horkheimer attacks instrumental (subjective) reason quite effectively in this little book. He criticizes positivism, empiricism, pragmatism, and many other schools founded on subjective reason. I am inclined to agree that it is very dangerous to transform reason into a mere tool in the service of useful activities. We first have to rationally deduce the appropriate ends. Subjective reason cannot help us here.
Saturday, January 10, 2009
I have a "friend" who spends most of his time reading the bible. In fact, it is the only book he reads! He is deeply religious, and has a nice and affable air about him. But I have never been able to understand how a person could spend so much time with the same book without growing tired of its message. When I read, I read passionately. I get tremendously excited about the ideas and messages of books and papers. I like to think about these ideas while I walk my dog. Sometimes I even dream of them. But once the book is finished, I move on to a new one. And after a few weeks have passed, I cannot even remember the old book. Learning is insatiable. It is a mistake to think that you are feeding it by limiting yourself to one "good" book.
To Austrians: Ideology is destructive. It deadens the imagination, and destroys our natural propensity to inquiry. This religious man, for example, is deeply learned, but he is rather dull. He is convinced that he has everything figured out.
To Austrians: Ideology is destructive. It deadens the imagination, and destroys our natural propensity to inquiry. This religious man, for example, is deeply learned, but he is rather dull. He is convinced that he has everything figured out.
Okay, we'll see how this goes. I want to do this mainly to see how my own close reading of an important Austrian paper differs from and is similar to the readings of others similarly interested in Austrian economics. So please participate if you have the time!
An earlier blog post took a vote on what Boettke paper we should read, and it was agreed that we should read Boettke's "Where did Economics go Wrong" paper. This is one of Mr. Boettke's most impressive and ambitious contributions to the Austrian literature. The link to the paper can be found here:
"Where Did Economics Go Wrong: Modern Economics as a Flight From Reality," Critical Review, 11, no. 1 (Winter 1997): 11-64.
I will create a blog post for this article next Sunday-Monday (January 18/19). It is expected that the participants will have done the reading by that time. I will open up with a few general thoughts, but the idea is that the discussion will really take off in the comments section.
Please participate if you have the time. This is a very good and important paper that all Austrians should be familiar with. Make plenty of notes while you read! And then type them all out on here! I am interested to read what you think of this paper.
See you then...
An earlier blog post took a vote on what Boettke paper we should read, and it was agreed that we should read Boettke's "Where did Economics go Wrong" paper. This is one of Mr. Boettke's most impressive and ambitious contributions to the Austrian literature. The link to the paper can be found here:
"Where Did Economics Go Wrong: Modern Economics as a Flight From Reality," Critical Review, 11, no. 1 (Winter 1997): 11-64.
I will create a blog post for this article next Sunday-Monday (January 18/19). It is expected that the participants will have done the reading by that time. I will open up with a few general thoughts, but the idea is that the discussion will really take off in the comments section.
Please participate if you have the time. This is a very good and important paper that all Austrians should be familiar with. Make plenty of notes while you read! And then type them all out on here! I am interested to read what you think of this paper.
See you then...
Wednesday, January 7, 2009
A libertarian is someone who tolerates and permits immoral behavior. A libertine is someone who practices and participates in immoral behavior. This makes the libertarian a conservative, and the libertine a liberal. The libertarian is opposed to liberalism because his own moral compass abhors what his practical philosophy permits.
Wednesday, January 7, 2009
What is a dandy? A dandy is someone given to excess in dress and leisure. He appears sophisticated and well-mannered on the exterior, but is consumed in immoral conduct and vice when in private. The dandy is hated by the public, and derided by the sociologist. This strange combination makes him both a rebel and a conformist, for the sociologist is concerned with matters relating to societal behavior, and sees in the dandy all the errors and inanities of contemporary culture (e.g. consumerism).
Thorstein Veblen possessed the wit of a dandy, but maintained the arrogance of the social reformer. His engineering mentality corrupted his intellectual libertinage. This makes for an interesting study for anyone willing to entertain the positive philosophy of dandyism. Veblen was critical of the leisure class because his own thought privileged work over pleasure. This led him to mistake leisure for unhappiness. The dandy revels in leisure and fine art because it provides him scope for the exercise of the imagination without the austere barriers of custom. The dandy is the true rebel, and is everything Veblen's technological utopia is not.
Thorstein Veblen possessed the wit of a dandy, but maintained the arrogance of the social reformer. His engineering mentality corrupted his intellectual libertinage. This makes for an interesting study for anyone willing to entertain the positive philosophy of dandyism. Veblen was critical of the leisure class because his own thought privileged work over pleasure. This led him to mistake leisure for unhappiness. The dandy revels in leisure and fine art because it provides him scope for the exercise of the imagination without the austere barriers of custom. The dandy is the true rebel, and is everything Veblen's technological utopia is not.
In an earlier post Grant asks a question concerning Professor Maclachlan's treatment of savings and the interest rate:
"How could additional savings not affect rates of interest if they do affect bond prices? By definition, the price of a bond reflects its interest rate. Or was Maclachlan only referring to the safe rate of interest (T-bills), and if so, why is that rate necessarily more important in intertemporal coordination than the other rates of interest in bond markets?"
First, Maclachlan states what she means in the chapter entitled "Methodology and Definitions." She there writes that she is concerned with the rate on long-term bonds since "short-term rates can be seen as derivatives from long-term rates." She also argues that it is incorrect to conceive of the real (natural) interest rate apart from money and that it is useful to abstract from default risk, and brokerage (transaction) costs, in addition to the inflationary premium. Recognizing all the problems that follow these assumptions, Maclachlan concludes that "we seek to explain the nominal rate of interest that would exist if the inflationary premia were all zero." This enables Maclachlan to focus on "The theory of interest from an 'essentialist' perspective." Her work is theoretical.
As to the nexus between new savings and the interest rate, let me quote Maclachlan's best passage on this subject:
"On any given trading day, a certain number of bonds are sold to raise money to purchase investment goods and a certain number are bought to serve as a vehicle for new saving. But then there are trades that are unrelated to the current flows of investment and saving. Existing bonds are bought and sold by wealth-holders who are only rearranging their existing portfolios. It is customary to think of the latter type of trading as speculation. The primary motivation behind much of the trading is the expectation of securing a profit from future price changes. ... In an economy in where there are a large number of speculative trades between cash and bonds, there arises the possibility that, in any period, the non-speculative trades arising from saving and investment are overwhelmed to such an extent that they exert little effect. Such a situation could arise when speculators are highly responsive to small changes in the interest rate. Suppose, for instance, that there is a sharp increase in corporate investment causing an influx of new bonds into the loanable funds market. Traditional theory would predict a rise in the interest rate. But if speculators are active, they may see a small change in the interest rate arising from the new bond issues and immediately respond by selling or buying bonds: those who think that the small rise is an indication that bond prices have peaked will sell and those who think that it is an indication that they are on an upward trend will buy. No-one can say a priori whether the bulls or the bears will dominate but what one can say is that the resulting level of the interest rate will probably be different from what it would be if the speculators were not involved."
What a great passage, one of the best available. Maclachlan then spends the next few pages qualifying her statement by introducing several consideration involving elasticity, responsiveness the the state of financial markets. But the message is clear and direct: the loanable funds model is not as simple as it seems.
Other Post Keynesians have written on this subject, and let me quote a few passages:
Greg Hill:
"There is, however, another important dimension to the problem, for the market in which new bonds are issued is the same market in which existing bonds are traded. And the very same scheme of interest rates that must balance the supply and demand for new bonds must also balance the supply and demand for old bonds. What would happen, then, if there were a conflict between (1) the rate of interest that would balance the flows of new saving and investment and (2) the rate of interest that would balance the supply and demand for existing bonds? According to Keynes's account, the outcome will be determined by decisions concerning the existing stock of bonds because, at any given moment in time, the quantity of old bonds that can be released onto the market dwarfs the quantity of new bonds entering the market. ... Against the massive, preexisting stocks of old bonds and of money poised to enter the market in response to a change in the interest rate, the relatively small flows of new lending and borrowing can have little effect."
In another article (one in response to Professor Horwitz), Greg Hill writes:
"If a preponderance of those who hold these assets decide to sell bonds because they believe interest rates are going to rise and bond prices are going to fall, their fears will overwhelm any increase in the flow of saving. Horwitz does not come to grips with this problem (he does not even mention it), but as long as the interest rate remains tethered to the expectations of those who hold the pre-existing stock of financial assets, it cannot effectively carry out the task assigned to it by the neoclassical and Austrian schools." (my emphasis).
Another great economist, Victoria Chick, similarly writes:
"only sales of new issues represents borrowing and lending; the rest is transactions amongst current savers and existing security-holders. ... So long as there are existing as well as new assets, the direct link between saving and lending is broken. ... savings as money-flows were swamped in their effect on the rate of interest by transactions amongst existing wealth-holders."
Is anyone aware of how Austrians have responded to this challenge? I think it is a powerful argument. Greg Hill accuses Horwitz of not even mentioning it in their exchange.
"How could additional savings not affect rates of interest if they do affect bond prices? By definition, the price of a bond reflects its interest rate. Or was Maclachlan only referring to the safe rate of interest (T-bills), and if so, why is that rate necessarily more important in intertemporal coordination than the other rates of interest in bond markets?"
First, Maclachlan states what she means in the chapter entitled "Methodology and Definitions." She there writes that she is concerned with the rate on long-term bonds since "short-term rates can be seen as derivatives from long-term rates." She also argues that it is incorrect to conceive of the real (natural) interest rate apart from money and that it is useful to abstract from default risk, and brokerage (transaction) costs, in addition to the inflationary premium. Recognizing all the problems that follow these assumptions, Maclachlan concludes that "we seek to explain the nominal rate of interest that would exist if the inflationary premia were all zero." This enables Maclachlan to focus on "The theory of interest from an 'essentialist' perspective." Her work is theoretical.
As to the nexus between new savings and the interest rate, let me quote Maclachlan's best passage on this subject:
"On any given trading day, a certain number of bonds are sold to raise money to purchase investment goods and a certain number are bought to serve as a vehicle for new saving. But then there are trades that are unrelated to the current flows of investment and saving. Existing bonds are bought and sold by wealth-holders who are only rearranging their existing portfolios. It is customary to think of the latter type of trading as speculation. The primary motivation behind much of the trading is the expectation of securing a profit from future price changes. ... In an economy in where there are a large number of speculative trades between cash and bonds, there arises the possibility that, in any period, the non-speculative trades arising from saving and investment are overwhelmed to such an extent that they exert little effect. Such a situation could arise when speculators are highly responsive to small changes in the interest rate. Suppose, for instance, that there is a sharp increase in corporate investment causing an influx of new bonds into the loanable funds market. Traditional theory would predict a rise in the interest rate. But if speculators are active, they may see a small change in the interest rate arising from the new bond issues and immediately respond by selling or buying bonds: those who think that the small rise is an indication that bond prices have peaked will sell and those who think that it is an indication that they are on an upward trend will buy. No-one can say a priori whether the bulls or the bears will dominate but what one can say is that the resulting level of the interest rate will probably be different from what it would be if the speculators were not involved."
What a great passage, one of the best available. Maclachlan then spends the next few pages qualifying her statement by introducing several consideration involving elasticity, responsiveness the the state of financial markets. But the message is clear and direct: the loanable funds model is not as simple as it seems.
Other Post Keynesians have written on this subject, and let me quote a few passages:
Greg Hill:
"There is, however, another important dimension to the problem, for the market in which new bonds are issued is the same market in which existing bonds are traded. And the very same scheme of interest rates that must balance the supply and demand for new bonds must also balance the supply and demand for old bonds. What would happen, then, if there were a conflict between (1) the rate of interest that would balance the flows of new saving and investment and (2) the rate of interest that would balance the supply and demand for existing bonds? According to Keynes's account, the outcome will be determined by decisions concerning the existing stock of bonds because, at any given moment in time, the quantity of old bonds that can be released onto the market dwarfs the quantity of new bonds entering the market. ... Against the massive, preexisting stocks of old bonds and of money poised to enter the market in response to a change in the interest rate, the relatively small flows of new lending and borrowing can have little effect."
In another article (one in response to Professor Horwitz), Greg Hill writes:
"If a preponderance of those who hold these assets decide to sell bonds because they believe interest rates are going to rise and bond prices are going to fall, their fears will overwhelm any increase in the flow of saving. Horwitz does not come to grips with this problem (he does not even mention it), but as long as the interest rate remains tethered to the expectations of those who hold the pre-existing stock of financial assets, it cannot effectively carry out the task assigned to it by the neoclassical and Austrian schools." (my emphasis).
Another great economist, Victoria Chick, similarly writes:
"only sales of new issues represents borrowing and lending; the rest is transactions amongst current savers and existing security-holders. ... So long as there are existing as well as new assets, the direct link between saving and lending is broken. ... savings as money-flows were swamped in their effect on the rate of interest by transactions amongst existing wealth-holders."
Is anyone aware of how Austrians have responded to this challenge? I think it is a powerful argument. Greg Hill accuses Horwitz of not even mentioning it in their exchange.
Tuesday, January 6, 2009
I propose that readers of this blog participate in a reading group on the most popular papers published by contemporary Austrian scholars. The reading group would be organized on this blog. This would be great because most Austrian scholars working today have made available nearly all of their published work. We could vote on what paper we would like to read by the Austrian, and then come back to discuss it and share our thoughts.
I suggest that we begin with Pete Boettke. He has a lot of published material. (Next, we can come to Leeson, Coyne, Horwitz, etc.). Here is a link to his published work. In the comments section, please vote for the article you would like to read and discuss for this project.
If nobody replies to this post, then I will forget about it --- but I think it could be a lot of fun.
Some suggestions:
"Institutional Stickiness & the New Development Economics," American Journal of Economics & Sociology, 2008, Vol. 67, No. 2, 331-358. (Co-authored with Peter Leeson and Chris Coyne).
Was Mises Right?,” Review of Social Economy, 2006, Vol. 64, No. 2, pp. 247-265 (Co-authored with Peter Leeson).
Does the Market Self Correct?,” Review of Political Economy, 2006, Vol 18, No. 1, pp. 79-90 (Co-authored with Chris Coyne and Peter Leeson).
“Methodological Individualism, Spontaneous Order and the Research Program of the Workshop in Political Philosophy and Policy Analysis,” Journal of Economic Behavior and Organization 57 (2) 2005, 145-158. (Co-authored with Chris Coyne).
“The Forgotten Contribution: Murray Rothbard on Socialism in Theory and Practice,” Quarterly Journal of Austrian Economics, 7 (2) 2004: 71-89. (Co-authored with Christopher Coyne).
“The Subjectivist Methodology of Austrian Economics and Dewey's Theory of Inquiry,” Pragmatism and Economic Methodology, Elias Khalil, ed., Dewey, (London: Routledge, 2004): 327-356. (Co-authored with Don Lavioe and Virgil Storr).
“Information and Knowledge,” Review of Austrian Economics, 15 (4) 2002: 263-274..
"Knight and the Austrians on Capital and the Problem of Socialism," History of Political Economy, 34 (1) 2002: 153-174. (Co-authored with Karen Vaughn).
"Economic Calculation: The Austrian Contribution to Political Economy," Advances in Austrian Economics, Vol. 5 (1998): 131-158.
"Where Did Economics Go Wrong: Modern Economics as a Flight From Reality," Critical Review, 11, no. 1 (Winter 1997): 11-64.
Any of these articles would be great for this reading group. Place your votes now! I predict that roughly 6-8 people will vote, so please make your selection carefully.
I suggest that we begin with Pete Boettke. He has a lot of published material. (Next, we can come to Leeson, Coyne, Horwitz, etc.). Here is a link to his published work. In the comments section, please vote for the article you would like to read and discuss for this project.
If nobody replies to this post, then I will forget about it --- but I think it could be a lot of fun.
Some suggestions:
"Institutional Stickiness & the New Development Economics," American Journal of Economics & Sociology, 2008, Vol. 67, No. 2, 331-358. (Co-authored with Peter Leeson and Chris Coyne).
Was Mises Right?,” Review of Social Economy, 2006, Vol. 64, No. 2, pp. 247-265 (Co-authored with Peter Leeson).
Does the Market Self Correct?,” Review of Political Economy, 2006, Vol 18, No. 1, pp. 79-90 (Co-authored with Chris Coyne and Peter Leeson).
“Methodological Individualism, Spontaneous Order and the Research Program of the Workshop in Political Philosophy and Policy Analysis,” Journal of Economic Behavior and Organization 57 (2) 2005, 145-158. (Co-authored with Chris Coyne).
“The Forgotten Contribution: Murray Rothbard on Socialism in Theory and Practice,” Quarterly Journal of Austrian Economics, 7 (2) 2004: 71-89. (Co-authored with Christopher Coyne).
“The Subjectivist Methodology of Austrian Economics and Dewey's Theory of Inquiry,” Pragmatism and Economic Methodology, Elias Khalil, ed., Dewey, (London: Routledge, 2004): 327-356. (Co-authored with Don Lavioe and Virgil Storr).
“Information and Knowledge,” Review of Austrian Economics, 15 (4) 2002: 263-274..
"Knight and the Austrians on Capital and the Problem of Socialism," History of Political Economy, 34 (1) 2002: 153-174. (Co-authored with Karen Vaughn).
"Economic Calculation: The Austrian Contribution to Political Economy," Advances in Austrian Economics, Vol. 5 (1998): 131-158.
"Where Did Economics Go Wrong: Modern Economics as a Flight From Reality," Critical Review, 11, no. 1 (Winter 1997): 11-64.
Any of these articles would be great for this reading group. Place your votes now! I predict that roughly 6-8 people will vote, so please make your selection carefully.
Any serious student of Austrian economics should be familiar with the arguments made by its critics. A sustained and honest attempt at intellectual engagement should be made in addressing their arguments, and efforts should be taken in effecting a possible synthesis between different views. As an example, I will use the work of three important critics of F. A. Hayek of late, and show that Austrian economics has failed to confront their criticisms directly.
1.) Ted Burczak. Ted Burczak has published in many areas related to Austrian economics (Keynes and uncertainty, Kirznerian entrepreneurship, and Hayekian subjectivism), but I think his most important contribution has been his critique of Hayek's incomplete subjectivism. Burczak describes Hayek as a postmodernist, but criticizes him for extending his subjectivism to the area of law and jurisprudence. Burczak shows that Hayek's own subjectivism prevents him from defending the principle of the rule of law. Common law is, according to Burczak, non-neutral, and depends on subjective knowledge and interpretation of the facts. Moreover, rules are indeterminate and do not invariably follow the rule of precedent.
Austrians have not addressed this argument. And it is an important argument. It is true that the SDAE has recognized this book as important, but no serious discussion has taken place. Steven Horwitz wrote a review of the book for Reason, but the central themes are not addressed. Horwitz instead makes a libertarian defense of what he sees as the free society. Austrians need to decide whether Hayek's subjectivism is incomplete and flawed, or complete and immune from this criticism. As yet, no serious discussion has occurred.
2.) Fiona Maclachlan. Professor Maclachlan's book "Keynes' General Theory of Interest" is one of the best books on Austrian interest rate theory I have ever read. Maclachlan is the economist responsible for taking me into the fascinating field of Post Keynesian economics. She is a serious scholar, and is deeply knowledgeable about both Austrian and Post Keynesian economics. It is a shame she is not more widely recognized. Two basic points are made in her book: (1) the stock vs. flow debate is important to Austrian economics; and (2) Hayek's Ricardo Effect theory is seriously flawed. On the first point, Professor Maclachlan shows that the link between new savings (flows) and movements in the natural interest rate is impeded by the movement of existing bonds (stocks). Any new addition of savings will influence existing bonds in ways that overwhelm the effects new savings would have on the interest rate. This is an important criticism of Austrian economics. On the second point, Maclachlan shows that while increases in consumer demand lead typically to a fall in investment, decreases in consumer demand will not lead to an increase in investment.
I am not aware of any Austrian attempt to address these concerns.
3.) And finally I come to the economist who has done more than any other in attacking Austrian economics: Greg Hill. Greg Hill has published several important articles in Jeffrey Friedman's Critical Review. Students of Austrian economics must read his two articles "G. L. S. Shackle and the Economics of Ignorance" and "Keynes' Moral Critique of Capitalism" (these are not the exact titles), in addition to the two exchanges he had with Professor Horwitz. Greg Hill follows Shackle in showing that radical uncertainty prevents markets from achieving intertemporal coordination. Greg Hill has been influenced by Paul Davidson and Victoria Chick (and also, I would argue, Fiona Maclachlan), and has used this to great effect in challenging Austrian economics. The exchange he had with Steven Horwitz will show readers how far behind Austrians are in coming to grips with these important criticisms. For example, Professor Horwitz spends most of the space in his replies making the distinction between neo-classical economics and Austrian economics, while it is clear that Professor Hill already recognizes this distinction. He thus fails to address the more important criticisms of Professor Hill. Greg Hill attacks Austrian economics on the subject of capital and time, and also attacks both neo-classical and Austrian economics on the areas in which they are similar (loanable funds model and marginal productivity theory).
Three Austrian critics to read:
1.) Ted Burczak
2.) Fiona Maclachlan
3.) Greg Hill
Am I missing anyone?
1.) Ted Burczak. Ted Burczak has published in many areas related to Austrian economics (Keynes and uncertainty, Kirznerian entrepreneurship, and Hayekian subjectivism), but I think his most important contribution has been his critique of Hayek's incomplete subjectivism. Burczak describes Hayek as a postmodernist, but criticizes him for extending his subjectivism to the area of law and jurisprudence. Burczak shows that Hayek's own subjectivism prevents him from defending the principle of the rule of law. Common law is, according to Burczak, non-neutral, and depends on subjective knowledge and interpretation of the facts. Moreover, rules are indeterminate and do not invariably follow the rule of precedent.
Austrians have not addressed this argument. And it is an important argument. It is true that the SDAE has recognized this book as important, but no serious discussion has taken place. Steven Horwitz wrote a review of the book for Reason, but the central themes are not addressed. Horwitz instead makes a libertarian defense of what he sees as the free society. Austrians need to decide whether Hayek's subjectivism is incomplete and flawed, or complete and immune from this criticism. As yet, no serious discussion has occurred.
2.) Fiona Maclachlan. Professor Maclachlan's book "Keynes' General Theory of Interest" is one of the best books on Austrian interest rate theory I have ever read. Maclachlan is the economist responsible for taking me into the fascinating field of Post Keynesian economics. She is a serious scholar, and is deeply knowledgeable about both Austrian and Post Keynesian economics. It is a shame she is not more widely recognized. Two basic points are made in her book: (1) the stock vs. flow debate is important to Austrian economics; and (2) Hayek's Ricardo Effect theory is seriously flawed. On the first point, Professor Maclachlan shows that the link between new savings (flows) and movements in the natural interest rate is impeded by the movement of existing bonds (stocks). Any new addition of savings will influence existing bonds in ways that overwhelm the effects new savings would have on the interest rate. This is an important criticism of Austrian economics. On the second point, Maclachlan shows that while increases in consumer demand lead typically to a fall in investment, decreases in consumer demand will not lead to an increase in investment.
I am not aware of any Austrian attempt to address these concerns.
3.) And finally I come to the economist who has done more than any other in attacking Austrian economics: Greg Hill. Greg Hill has published several important articles in Jeffrey Friedman's Critical Review. Students of Austrian economics must read his two articles "G. L. S. Shackle and the Economics of Ignorance" and "Keynes' Moral Critique of Capitalism" (these are not the exact titles), in addition to the two exchanges he had with Professor Horwitz. Greg Hill follows Shackle in showing that radical uncertainty prevents markets from achieving intertemporal coordination. Greg Hill has been influenced by Paul Davidson and Victoria Chick (and also, I would argue, Fiona Maclachlan), and has used this to great effect in challenging Austrian economics. The exchange he had with Steven Horwitz will show readers how far behind Austrians are in coming to grips with these important criticisms. For example, Professor Horwitz spends most of the space in his replies making the distinction between neo-classical economics and Austrian economics, while it is clear that Professor Hill already recognizes this distinction. He thus fails to address the more important criticisms of Professor Hill. Greg Hill attacks Austrian economics on the subject of capital and time, and also attacks both neo-classical and Austrian economics on the areas in which they are similar (loanable funds model and marginal productivity theory).
Three Austrian critics to read:
1.) Ted Burczak
2.) Fiona Maclachlan
3.) Greg Hill
Am I missing anyone?
Friday, January 2, 2009
Here is a link to a post by Boettke over at the Austrian Economists blog. It is nice to see that Shackle is being discussed by Austrians, but I don't think they have it quite right. My response appears in the bottom in the comments. Shackle is not a Hayekian; he is a Keynesian.
Thursday, January 1, 2009
I am now making my way through several back issues of Critical Review, the journal edited by Jeffrey Friedman. I just finished reading a very good article on Karl Popper written by Fred Eidlin. I have never heard of him before, but it is clear that he understands Popper, although his interpretation of Popper's work differs from my own. I know that there are some readers on here who are similarly interested in Popper, so I thought I would discuss the areas in which I believe my views on Popper differ from those of Eidlin.
1.) Eidlin spends most of the early part of the essay talking about Popper's failure in effecting a paradigm shift within the sciences. He believes this is because Popper was misunderstood (more on this later). Here is Eidlin:
"Outside the advanced natural sciences, however, there is seldom anything analogous to a crucial experiment that would tip the scales in favor of a new paradigm. Hence, in the "softer" disciplines it is far more difficult to upset dominant approaches by means of evidence or rational argument. The emergence, survival, and death of traditions of inquiry in these fields have a great deal to do with such factors as reputation, personalities, and the politics of academic professions."
Eidlin concludes by arguing that Popper's "personality" is responsible for his failure in establishing a "Popperian" school. Now just some thoughts on the quoted passage. Is it true that it is more difficult to effect a paradigm shift in the social sciences than in the natural sciences? One would have to argue, inter alia, that (1) the natural sciences operate by means of "crucial experiments"; (2) the natural sciences are not subject to "academic politics"; and (3) paradigm shifts do not occur in the social sciences (e.g. postmodern literary criticism in English departments?).
2.) Now the author connects this discussion to his conclusion, which is quite controversial. Eidlin argues basically that Popper has been misunderstood chiefly because his key followers have failed to consistently follow Popper's own philosophy. He writes:
"Popperians, no less than their adversaries, can be (and have been) dogmatic, insensible to falsification, and prone to identify themselves personally with their theories. This suggests that there may be a utopian aspect to Popperian norms. ... If we reflect on Popperian norms, it becomes clear how difficult they are to practice."
Now it may be true that falsificationism is difficult to practice, but have his key followers also failed to practice them consistently? Do Popperians avoid criticism and the discovery of mistakes in the explication of their own philosophy?
3.) I really enjoyed Eidlin's discussion of Popper's political philosophy. The author agrees with Bryan Magee (who wrote an excellent book on Popper) that Popper's political philosophy is a theory of "democratic socialism." He does this by arguing that in criticizing Marx and Plato, Popper was actually trying to improve their work, rather than "undermining" it. Now this was not my reading of The Open Society and its Enemies. It was quite clear to me that Popper selected Plato and Marx for criticism because he rejected their theories, not because he wanted to improve them. In fact, in the preface to the first volume, Popper writes that he has chosen to focus on Plato because of his positive reputation. Why "improve" a theory that is already revered? Popper, I believe, was trying instead to "raze it to the ground."
But Eidlin is not concerned with this. He takes it for granted that Popper was trying to improve the theories of Plato and Marx, and then uses this interpretation to attack conservatives who sympathize with Popper's work. Eidlin argues that Popper followed Marx in viewing economic freedom as unjust and inhumane. Eidlin writes:
"It is also a philosophy requiring that we do something to bring about a better society, and that we not rely upon something outside ourselves (whether the 'invisible hand' of the market or the 'inexorable laws of history') to do it for us. ... Even violent means may be permissible in the pursuit of just ends provided that sufficient consideration has been given to such questions as the liklihood that these means will actually lead to the expected ends."
I would have never thought that such an interpretation of Popper's political work would be possible. It has been some time since I read his Open Society, but I remember it as being the most sophisticated defense of a free and "open" society available.
It seems to come down to the interpretation of "piecemeal engineering." Now Eidlin wants to use this theory to positively implement "democratically socialist" policies. The problem I have with this argument is that it smacks too much of "utopian engineering." For Popper, the point never was to "make society better," but to "remove evils." This is more consistent with his falsificationist approach. A writer (I can't remember who) once used the example of public schooling: Our goal should not be to build the best school we can, but rather to improve the schools that are currently worst off. That is what "piecemeal engineering" is all about as I see it.
Anyway, this was an excellent paper. I would encourage anyone else interested in Popper to read it.
Source:
Fred Eidlin "Karl Popper, 1902-1994: Radical Fallibilism, Political Theory, and Democracy, Critical Review 10, no. 1 (winter 1996): 135-153.
1.) Eidlin spends most of the early part of the essay talking about Popper's failure in effecting a paradigm shift within the sciences. He believes this is because Popper was misunderstood (more on this later). Here is Eidlin:
"Outside the advanced natural sciences, however, there is seldom anything analogous to a crucial experiment that would tip the scales in favor of a new paradigm. Hence, in the "softer" disciplines it is far more difficult to upset dominant approaches by means of evidence or rational argument. The emergence, survival, and death of traditions of inquiry in these fields have a great deal to do with such factors as reputation, personalities, and the politics of academic professions."
Eidlin concludes by arguing that Popper's "personality" is responsible for his failure in establishing a "Popperian" school. Now just some thoughts on the quoted passage. Is it true that it is more difficult to effect a paradigm shift in the social sciences than in the natural sciences? One would have to argue, inter alia, that (1) the natural sciences operate by means of "crucial experiments"; (2) the natural sciences are not subject to "academic politics"; and (3) paradigm shifts do not occur in the social sciences (e.g. postmodern literary criticism in English departments?).
2.) Now the author connects this discussion to his conclusion, which is quite controversial. Eidlin argues basically that Popper has been misunderstood chiefly because his key followers have failed to consistently follow Popper's own philosophy. He writes:
"Popperians, no less than their adversaries, can be (and have been) dogmatic, insensible to falsification, and prone to identify themselves personally with their theories. This suggests that there may be a utopian aspect to Popperian norms. ... If we reflect on Popperian norms, it becomes clear how difficult they are to practice."
Now it may be true that falsificationism is difficult to practice, but have his key followers also failed to practice them consistently? Do Popperians avoid criticism and the discovery of mistakes in the explication of their own philosophy?
3.) I really enjoyed Eidlin's discussion of Popper's political philosophy. The author agrees with Bryan Magee (who wrote an excellent book on Popper) that Popper's political philosophy is a theory of "democratic socialism." He does this by arguing that in criticizing Marx and Plato, Popper was actually trying to improve their work, rather than "undermining" it. Now this was not my reading of The Open Society and its Enemies. It was quite clear to me that Popper selected Plato and Marx for criticism because he rejected their theories, not because he wanted to improve them. In fact, in the preface to the first volume, Popper writes that he has chosen to focus on Plato because of his positive reputation. Why "improve" a theory that is already revered? Popper, I believe, was trying instead to "raze it to the ground."
But Eidlin is not concerned with this. He takes it for granted that Popper was trying to improve the theories of Plato and Marx, and then uses this interpretation to attack conservatives who sympathize with Popper's work. Eidlin argues that Popper followed Marx in viewing economic freedom as unjust and inhumane. Eidlin writes:
"It is also a philosophy requiring that we do something to bring about a better society, and that we not rely upon something outside ourselves (whether the 'invisible hand' of the market or the 'inexorable laws of history') to do it for us. ... Even violent means may be permissible in the pursuit of just ends provided that sufficient consideration has been given to such questions as the liklihood that these means will actually lead to the expected ends."
I would have never thought that such an interpretation of Popper's political work would be possible. It has been some time since I read his Open Society, but I remember it as being the most sophisticated defense of a free and "open" society available.
It seems to come down to the interpretation of "piecemeal engineering." Now Eidlin wants to use this theory to positively implement "democratically socialist" policies. The problem I have with this argument is that it smacks too much of "utopian engineering." For Popper, the point never was to "make society better," but to "remove evils." This is more consistent with his falsificationist approach. A writer (I can't remember who) once used the example of public schooling: Our goal should not be to build the best school we can, but rather to improve the schools that are currently worst off. That is what "piecemeal engineering" is all about as I see it.
Anyway, this was an excellent paper. I would encourage anyone else interested in Popper to read it.
Source:
Fred Eidlin "Karl Popper, 1902-1994: Radical Fallibilism, Political Theory, and Democracy, Critical Review 10, no. 1 (winter 1996): 135-153.
I have blogged a few times about the paper I had in mind that would attempt to link economics with the discussions that have occurred between theologians on the metaphysical implications of omniscience. After editing (chopping it, really), the paper resulted in a three-page "Note." I submitted it to a journal whose name I will keep secret (for obvious reasons). Anyway, I received an email a few days ago from the editor informing me that the paper was rejected.
The editor wrote that the paper does not "advance understanding of the issues," which I took to mean that he didn't quite understand what I was trying to say. He also quoted a few of my sentences, arguing that they are "questionable." That was basically all he wrote. I replied with an email attempting to clarify the purpose and aim of the paper. My basic position was that these problems are difficult and opaque largely because economists are ignorant of philosophy. For the economic philosopher, there are basically three routes open to him: (1) formal theory (which isn't really philosophy; (2) ethics; and (3) economic methodology (which concerns itself primarily with issues germane to the philosophy of science. My paper clearly does not fit into any of these three categories. I also argued that my paper was influenced by Spinoza and Bishop Berkeley, and that their arguments have a lot to teach us. This is obvious once we take time to reflect upon the evolution of economic theory. As one example, I quote Oskar Morgenstern. Here is an excerpt from the paper:
"The economist has made a serious mistake in conceiving of rationality as the means by which choice is successfully exercised. Indeed, this error is responsible for many unfortunate developments and difficulties in the economic literature. A good example of this can be found in the work on game theory, which was begun by Oskar Morgenstern in an attempt to find a solution to the problem of "reciprocal dependencies." Professor Morgenstern believed that no equilibrium is possible when more than one individual is in the possession of perfect foresight, for then there would ensue an infinite regress of anticipatory behavior. This argument is wrong for at least two reasons. First, nothing can be separate from or lie outside of complete rationality. Therefore, an individual supremely infinite in knowledge is quite literally in the possession of everything, including other people. And second, it follows as a matter of logic that an infinitely knowledgeable person is incapable of choice. This is true because choice conditions effects to follow a different order than they would have otherwise; but this cannot hold if rationality is still understood as the single, all-inclusive cause on which everything else is dependent. Hence nothing can be contingent if the rationality postulate is maintained as certain. "
After this response of mine, the editor replied by writing that the paper lacks "maturity and depth." I did not know how to respond to this, so I decided to give up. He wrote in the first email that my arguments were "questionable," and then after I carefully defended each argument in my reply email, he writes back saying the paper is not sufficiently mature. You would think he would have said this in the beginning! Oh, and another thing that got me worried. I submitted the paper anonymously under "XYZ." The editor replied and said he was considering the paper. Then two weeks later, I receive an email from the editor saying that he will not consider the paper any further until I reveal my identity. Once it was shown that I was an undergraduate, the editor promptly rejected it.
The whole process of submitting papers to journals is a game of suspense. It seems that editors care more about the identity of the authors rather than the arguments, and, in so far as the argument is concerned, care more for familiar arguments than with radical ones. My future is looking bleak....
Here is the introduction to the paper, which introduces the basic argument:
"The purpose of this essay is to demonstrate how the economic theory of general equilibrium fails to satisfy its own requirements. This determination comes from the very nature of its presuppostions, whereon the rationality postulate stands pre-eminent. The central aim of this theory appears in the attempt to connect choice with the existence of various ends whose material application is limited and scarce. We must bear in mind however that choice in concert with rationality is ultimately contradictory since choice implies contingency. It has commonly been overlooked that from rationality there must follow an infinite order of certain and determinate effects that are entirely dependent on a single, all-inclusive cause. This cause is best understood as representing the substance of rationality, and as such it can have no boundaries or limitations. The important point is that economic analysis is undermined by the introduction of the rationality postulate; if all things follow from their determinate nature, then choice and scarcity can no longer exist."
Does anyone else have any experiences in the secret and not-so-secret world of journal submissions?
The editor wrote that the paper does not "advance understanding of the issues," which I took to mean that he didn't quite understand what I was trying to say. He also quoted a few of my sentences, arguing that they are "questionable." That was basically all he wrote. I replied with an email attempting to clarify the purpose and aim of the paper. My basic position was that these problems are difficult and opaque largely because economists are ignorant of philosophy. For the economic philosopher, there are basically three routes open to him: (1) formal theory (which isn't really philosophy; (2) ethics; and (3) economic methodology (which concerns itself primarily with issues germane to the philosophy of science. My paper clearly does not fit into any of these three categories. I also argued that my paper was influenced by Spinoza and Bishop Berkeley, and that their arguments have a lot to teach us. This is obvious once we take time to reflect upon the evolution of economic theory. As one example, I quote Oskar Morgenstern. Here is an excerpt from the paper:
"The economist has made a serious mistake in conceiving of rationality as the means by which choice is successfully exercised. Indeed, this error is responsible for many unfortunate developments and difficulties in the economic literature. A good example of this can be found in the work on game theory, which was begun by Oskar Morgenstern in an attempt to find a solution to the problem of "reciprocal dependencies." Professor Morgenstern believed that no equilibrium is possible when more than one individual is in the possession of perfect foresight, for then there would ensue an infinite regress of anticipatory behavior. This argument is wrong for at least two reasons. First, nothing can be separate from or lie outside of complete rationality. Therefore, an individual supremely infinite in knowledge is quite literally in the possession of everything, including other people. And second, it follows as a matter of logic that an infinitely knowledgeable person is incapable of choice. This is true because choice conditions effects to follow a different order than they would have otherwise; but this cannot hold if rationality is still understood as the single, all-inclusive cause on which everything else is dependent. Hence nothing can be contingent if the rationality postulate is maintained as certain. "
After this response of mine, the editor replied by writing that the paper lacks "maturity and depth." I did not know how to respond to this, so I decided to give up. He wrote in the first email that my arguments were "questionable," and then after I carefully defended each argument in my reply email, he writes back saying the paper is not sufficiently mature. You would think he would have said this in the beginning! Oh, and another thing that got me worried. I submitted the paper anonymously under "XYZ." The editor replied and said he was considering the paper. Then two weeks later, I receive an email from the editor saying that he will not consider the paper any further until I reveal my identity. Once it was shown that I was an undergraduate, the editor promptly rejected it.
The whole process of submitting papers to journals is a game of suspense. It seems that editors care more about the identity of the authors rather than the arguments, and, in so far as the argument is concerned, care more for familiar arguments than with radical ones. My future is looking bleak....
Here is the introduction to the paper, which introduces the basic argument:
"The purpose of this essay is to demonstrate how the economic theory of general equilibrium fails to satisfy its own requirements. This determination comes from the very nature of its presuppostions, whereon the rationality postulate stands pre-eminent. The central aim of this theory appears in the attempt to connect choice with the existence of various ends whose material application is limited and scarce. We must bear in mind however that choice in concert with rationality is ultimately contradictory since choice implies contingency. It has commonly been overlooked that from rationality there must follow an infinite order of certain and determinate effects that are entirely dependent on a single, all-inclusive cause. This cause is best understood as representing the substance of rationality, and as such it can have no boundaries or limitations. The important point is that economic analysis is undermined by the introduction of the rationality postulate; if all things follow from their determinate nature, then choice and scarcity can no longer exist."
Does anyone else have any experiences in the secret and not-so-secret world of journal submissions?
Monday, December 29, 2008
After reading the debates between Adorno and Benjamin over the nature of reproducible art, Harold Bloom's dictum jumped out at me: "reading as a solitary praxis." In other words, "The pleasures of reading indeed are selfish rather than social." This always puzzled me. I have always thought that learning was important because education is necessary for the preservation of a humane civilization. Michael Polanyi, for example, spoke of a community of scientists, and believed that a theory is credible only in so far as it is accepted by the scientific community. But reading Bloom brought to view a whole new way of looking at the nature of learning. It is fundamentally selfish; it is done to strengthen the self, the imagination, and the ability to reason critically. Here is Bloom:
"Do not attempt to improve your neighbor or your neighborhood by what or how you read. ... You need not fear that the freedom of your development as a reader is selfish."
Bloom's opinions hold great weight with me. (He is the most erudite person I have ever watched on youtube!) But is this right? Is learning solitary and selfish? We can perhaps understand this better by putting it in the context of the Adorno and Benjamin debate to which I alluded earlier.
Adorno believed that the "mechanical reproduction" of art robs it of its aesthetic power and authenticity. Art ceases to be meaningful when it is easily reproducible. For this reason he laments the invention of the camera and film because it eliminates the "criterion of authenticity" (who, for instance, wants to procure the authentic print of a photograph?). Walter Benjamin however was immensely optimistic about the advent of film and photography. He believed that these media "brough images of the contemporary world to the masses, and would help raise political consciousness ... the discussion of issues which viewing films encouraged ... produced ... a new sort of social and political experience of art, which eroded the private, solitary and contemplative aesthetic experience."
I am inclined to object to Benjamin's analysis, but for reasons slightly different from those of Adorno. Learning (aesthetic pleasure) is a selfish experience, and should remain so if it is to remain "authentic."
But maybe Harold Bloom is wrong? Is learning actually communal and democratic as Polanyi understood it? Based on my own experience, I can say that I have taken away more from my own private library in my house than from four years at one of the most prestigious univerities in the United States (Washington University, St. Louis). In fact, it has reached the point now where I see school as a sort of waste of time (it gets in the way). I have actually committed myself to the search for those electives that are least demanding and rigorous (this leaves me more time for independent study). And it is not just the environment; it is also the medium. Again, based on my own experience, I would much rather read Douglass North than attend the lectures of Douglass North. My good friend agrees with this, and has aptly remarked that "people are never as good as their books."
I am convinced that Harold Bloom is right, but I would like to hear what others think about this.
"Do not attempt to improve your neighbor or your neighborhood by what or how you read. ... You need not fear that the freedom of your development as a reader is selfish."
Bloom's opinions hold great weight with me. (He is the most erudite person I have ever watched on youtube!) But is this right? Is learning solitary and selfish? We can perhaps understand this better by putting it in the context of the Adorno and Benjamin debate to which I alluded earlier.
Adorno believed that the "mechanical reproduction" of art robs it of its aesthetic power and authenticity. Art ceases to be meaningful when it is easily reproducible. For this reason he laments the invention of the camera and film because it eliminates the "criterion of authenticity" (who, for instance, wants to procure the authentic print of a photograph?). Walter Benjamin however was immensely optimistic about the advent of film and photography. He believed that these media "brough images of the contemporary world to the masses, and would help raise political consciousness ... the discussion of issues which viewing films encouraged ... produced ... a new sort of social and political experience of art, which eroded the private, solitary and contemplative aesthetic experience."
I am inclined to object to Benjamin's analysis, but for reasons slightly different from those of Adorno. Learning (aesthetic pleasure) is a selfish experience, and should remain so if it is to remain "authentic."
But maybe Harold Bloom is wrong? Is learning actually communal and democratic as Polanyi understood it? Based on my own experience, I can say that I have taken away more from my own private library in my house than from four years at one of the most prestigious univerities in the United States (Washington University, St. Louis). In fact, it has reached the point now where I see school as a sort of waste of time (it gets in the way). I have actually committed myself to the search for those electives that are least demanding and rigorous (this leaves me more time for independent study). And it is not just the environment; it is also the medium. Again, based on my own experience, I would much rather read Douglass North than attend the lectures of Douglass North. My good friend agrees with this, and has aptly remarked that "people are never as good as their books."
I am convinced that Harold Bloom is right, but I would like to hear what others think about this.
Sunday, December 28, 2008
I have spent the last week reading the literature on Critical Theory. This is a neo-Marxist school of thought that was established initially in Germany at the Frankfurt University (also known as the Frankfurt School). The most important thinkers of this tradition include Theodor Adorno, Max Horheimer, Marcuse, Jurgen Habermas, Fromm, and the economist Friedrich Pollock. I find this entire literature fascinating. When I begin with a new literature, I start first by speed reading several survey works, then after I have enough notes, I read the primary sources carefully. I am in the process of reading through Adorno's and Horkheimer's Dialectic of Enlightenment now after having read Martin Jay's excellent history book of the school and Douglas Kellner's Critical Theory, Marxism, and Modernity. I will summarize what I believe to be the important points, although I am certain that these opinions will change as my study of this school proceeds.
The school began initially as an offshoot of the burgeoning literature on Marxism and theoretical socialism. The Critical Theorists were some of the unorthodox Marxists that challenged a lot of the claims that were advanced by more orthodox Marxists like Karl Kautsky and Hilferding, although many of them disagreed with the work of other important unorthodox Marxists (Lucaks and Korsch). For one thing, the Critical Theorists believe that Marx is best understood in terms of Hegelian idealism, and for this reason they rejected the idea that Marxism was a scientific law revealing the inevitability of socialism. They saw history --- and social processes --- as open-ended and contingnent, depending on the relevant socio-historical reality and cultural context. The aim of the School was actually to discover the laws of social change. Along the way they made some important contributions, including the critique of Mannheim's theory of ideology, and the synthesis of Marx and Freud (a theme which has dominated deconstructionism and postmodern psychoanalysis).
An important contribution apposite for Austrians is the identification of fascism with capitalism. Any good Austrian has grown up with the view that fascism is really the same thing as communism, as they are both in opposition to the free market. This is not so for the Critical Theorists, although their vantage point is somewhat different. They desire the socialist state, and do not consider fascism a proximate step towards the realization of such a society. They argued in fact that under fascism there still is the profit motive even though the state assumes important roles in the capitalist means of production. The Critical Theorists acknowledge the existence of crisis and capitalist instablity, but they believe that these obstacles can be overcome by capitalist means and therefore the collapse of capitalism is not automatic (as Marx believed). Therefore, they believe that fascism is the "logical process by which capitalist development proceeds from severe economic crisis to state management of the economy." "What is coming to an end is not capitalism, but its liberal phase."
This was basically the research project of the school during the 1920's and early 1930's. However, the rise of Nazism and the "mixed" results of the Soviet Union created a sense of disillusionment among many of the Critical Theorists. They wanted to understand why history developed in this way, which clearly was deleterious to human progress. This led to the most interesting period of the school: The years in exile. This is when all the classic work was written: The Dialectic of Enlightenment, The Eclipse of Reason, Horkheimer's Critical Theory, etc. The basic point is that science and technology are responsible for oppression and tyranny. This is because science is synonymous with power. Science has as its aim the control of nature and men. Therefore, science, by creating a logical system of order, coniditions society to evolve into a totalitarian state. The works are written as histories (philosophy of histories), and they trace the origins of Enlightenment thinking (rationality) to this idea. The whole project is really fascinating.
Jurgen Habermas took Critical Theory in a different direction by attempting to rescue science and technology from the onslaught of the previous generation of Critical Theorists. As I am still working my way through the critique of science, I haven't yet made my way to the work of Habermas, but my impression is that he is an important thinker and member of this school.
I am not sure if anyone on here is familiar with this school of thought? Two weeks ago I certainly wasn't. The general consensus on this school is that while they had many important things to say, it is unfortunate that in their criticisms, they failed to offer any positive account of their own approach. Indeed, all of the great works read as giant critiques. No positive doctrine is found anywhere (in fact, Adorno was quite explicit about this, and believed it to be a good thing!).
As I am going to attend UMKC, I plan to specialize in Institutional Economics. I think Critical Theory has many important things to say about Institutional Economics, and will try in my graduate research work to completely transform the way Institutional economics is understood and practiced. So much of what Critical Theory is about has direct implications for the entire body of Institutional Economics.
What have you heard about Critical Theory?
The school began initially as an offshoot of the burgeoning literature on Marxism and theoretical socialism. The Critical Theorists were some of the unorthodox Marxists that challenged a lot of the claims that were advanced by more orthodox Marxists like Karl Kautsky and Hilferding, although many of them disagreed with the work of other important unorthodox Marxists (Lucaks and Korsch). For one thing, the Critical Theorists believe that Marx is best understood in terms of Hegelian idealism, and for this reason they rejected the idea that Marxism was a scientific law revealing the inevitability of socialism. They saw history --- and social processes --- as open-ended and contingnent, depending on the relevant socio-historical reality and cultural context. The aim of the School was actually to discover the laws of social change. Along the way they made some important contributions, including the critique of Mannheim's theory of ideology, and the synthesis of Marx and Freud (a theme which has dominated deconstructionism and postmodern psychoanalysis).
An important contribution apposite for Austrians is the identification of fascism with capitalism. Any good Austrian has grown up with the view that fascism is really the same thing as communism, as they are both in opposition to the free market. This is not so for the Critical Theorists, although their vantage point is somewhat different. They desire the socialist state, and do not consider fascism a proximate step towards the realization of such a society. They argued in fact that under fascism there still is the profit motive even though the state assumes important roles in the capitalist means of production. The Critical Theorists acknowledge the existence of crisis and capitalist instablity, but they believe that these obstacles can be overcome by capitalist means and therefore the collapse of capitalism is not automatic (as Marx believed). Therefore, they believe that fascism is the "logical process by which capitalist development proceeds from severe economic crisis to state management of the economy." "What is coming to an end is not capitalism, but its liberal phase."
This was basically the research project of the school during the 1920's and early 1930's. However, the rise of Nazism and the "mixed" results of the Soviet Union created a sense of disillusionment among many of the Critical Theorists. They wanted to understand why history developed in this way, which clearly was deleterious to human progress. This led to the most interesting period of the school: The years in exile. This is when all the classic work was written: The Dialectic of Enlightenment, The Eclipse of Reason, Horkheimer's Critical Theory, etc. The basic point is that science and technology are responsible for oppression and tyranny. This is because science is synonymous with power. Science has as its aim the control of nature and men. Therefore, science, by creating a logical system of order, coniditions society to evolve into a totalitarian state. The works are written as histories (philosophy of histories), and they trace the origins of Enlightenment thinking (rationality) to this idea. The whole project is really fascinating.
Jurgen Habermas took Critical Theory in a different direction by attempting to rescue science and technology from the onslaught of the previous generation of Critical Theorists. As I am still working my way through the critique of science, I haven't yet made my way to the work of Habermas, but my impression is that he is an important thinker and member of this school.
I am not sure if anyone on here is familiar with this school of thought? Two weeks ago I certainly wasn't. The general consensus on this school is that while they had many important things to say, it is unfortunate that in their criticisms, they failed to offer any positive account of their own approach. Indeed, all of the great works read as giant critiques. No positive doctrine is found anywhere (in fact, Adorno was quite explicit about this, and believed it to be a good thing!).
As I am going to attend UMKC, I plan to specialize in Institutional Economics. I think Critical Theory has many important things to say about Institutional Economics, and will try in my graduate research work to completely transform the way Institutional economics is understood and practiced. So much of what Critical Theory is about has direct implications for the entire body of Institutional Economics.
What have you heard about Critical Theory?
Wednesday, December 24, 2008
I am having some very good discussions with someone who is similarly interested in the "potential" of Austrian economics. For obvious reasons I will keep his identity concealed, but he is free to reveal it in the comments if he so chooses.
The correspondence began with his query concerning my increasingly dismissive tone towards and about the Austrians. I wrote to him that Austrian economics emerged with much promise; Menger arguably is the most interesting and insightful of the three revolutionaries of the marginalist discovery --- an opinion that is confirmed by nearly all of the contemporary scholars who have devoted themselves to a study of this period. Wieser and Bohm-Bawerk each made important contributions in their development of Menger's work, but these would soon be eclipsed by the more profound writings of Ludwig von Mises. Mises is today remembered chiefly for his argument against the viability of socialism. This research project has been very important to the Austrian school, as it was continued by people like Hayek, Kirzner and Don Lavoie. Things began to change, however, when libertarian political theory was introduced into this literature. The scholars toady at FEE and Mises Institute have, in my view, changed Austrian economics from a dynamic research project into a sterile mouthpiece for the libertarian dogma. While one may find difficulties in discerning this in their professional writings, their more informal blog discussions leave no doubt as to the certainty with which they remain committed to their dogma. (An interesting exercise: See how long you can stomach the blog postings at the Mises Institute website.)
Today, Austrian economics is defined by the following precepts: (1) methodological individualism, which is as naive as it is incosistent with their presumed commitment to market process theory. For example, what anthropologist or sociologist really believes that one can understand the cultural/economic context in which individuals act by focusing exclusively on indvidual choice? (2) anarcho-capitalism: This commitment has increasingly become obvious in the work of the most recent generation, namely of people like Stringham, Leeson and Coyne. It is hardly controversial to state that today Austrian economics is basically an avenue for applied research in anarcho-capitalism; (3) faith in the free market: this precept is related and depenent upon the previous two. Austrians seem almost violently unwilling to consider the possibility that markets cannot coordiante economic activity through time. I believe that this results from their commitment to the "village fair paradigm" rather than the more relevant "wall street paradigm." Austrians still think that individuals should exchange goods with gold pieces at local markets that are free of government taxation. This is why they are utterly incompetent to speak about matters relating to finance theory and investment. And when discussions relevant to these matters are presented to the Austrians, they will resort to libertarian arguments, saying, for example, that "moral hazard" is to blame, or things like "regime uncertainty" and "political rent-seeking."
Now there are some scholars who have an interest in the writings of people like F. A. Hayek, and who are without the stain of the libertarian dogma. These writers should be considered by the Austrians. Their work strikes me as immensely more sophisticated than the simple triangle models of the libertarian Austrians, as they are not afraid to relate these concepts to the more recent developments in macroeconomic theory and Keynesian economics (heterodox and orthodox).
With all that being said, I would like to ask of you one question: Is Austrian economics a lost cause? Explain your answer. What, in your view, is the most period in Austrian economics? How has it developed and changed? Has this change been for the better or for the worse?
The correspondence began with his query concerning my increasingly dismissive tone towards and about the Austrians. I wrote to him that Austrian economics emerged with much promise; Menger arguably is the most interesting and insightful of the three revolutionaries of the marginalist discovery --- an opinion that is confirmed by nearly all of the contemporary scholars who have devoted themselves to a study of this period. Wieser and Bohm-Bawerk each made important contributions in their development of Menger's work, but these would soon be eclipsed by the more profound writings of Ludwig von Mises. Mises is today remembered chiefly for his argument against the viability of socialism. This research project has been very important to the Austrian school, as it was continued by people like Hayek, Kirzner and Don Lavoie. Things began to change, however, when libertarian political theory was introduced into this literature. The scholars toady at FEE and Mises Institute have, in my view, changed Austrian economics from a dynamic research project into a sterile mouthpiece for the libertarian dogma. While one may find difficulties in discerning this in their professional writings, their more informal blog discussions leave no doubt as to the certainty with which they remain committed to their dogma. (An interesting exercise: See how long you can stomach the blog postings at the Mises Institute website.)
Today, Austrian economics is defined by the following precepts: (1) methodological individualism, which is as naive as it is incosistent with their presumed commitment to market process theory. For example, what anthropologist or sociologist really believes that one can understand the cultural/economic context in which individuals act by focusing exclusively on indvidual choice? (2) anarcho-capitalism: This commitment has increasingly become obvious in the work of the most recent generation, namely of people like Stringham, Leeson and Coyne. It is hardly controversial to state that today Austrian economics is basically an avenue for applied research in anarcho-capitalism; (3) faith in the free market: this precept is related and depenent upon the previous two. Austrians seem almost violently unwilling to consider the possibility that markets cannot coordiante economic activity through time. I believe that this results from their commitment to the "village fair paradigm" rather than the more relevant "wall street paradigm." Austrians still think that individuals should exchange goods with gold pieces at local markets that are free of government taxation. This is why they are utterly incompetent to speak about matters relating to finance theory and investment. And when discussions relevant to these matters are presented to the Austrians, they will resort to libertarian arguments, saying, for example, that "moral hazard" is to blame, or things like "regime uncertainty" and "political rent-seeking."
Now there are some scholars who have an interest in the writings of people like F. A. Hayek, and who are without the stain of the libertarian dogma. These writers should be considered by the Austrians. Their work strikes me as immensely more sophisticated than the simple triangle models of the libertarian Austrians, as they are not afraid to relate these concepts to the more recent developments in macroeconomic theory and Keynesian economics (heterodox and orthodox).
With all that being said, I would like to ask of you one question: Is Austrian economics a lost cause? Explain your answer. What, in your view, is the most period in Austrian economics? How has it developed and changed? Has this change been for the better or for the worse?
Saturday, December 20, 2008
It has become clear to me in my reading in economics that the only area of philosophy in which eocnomics takes an interest is that of Ethics. The most obvious example can be found in Marshall's Utilitarianism. Also, Frank Knight, arguably one of the most philosophically minded economists, spoke almost exclusively of ethical theory when he was given to philosophic musings.
And let me be clear as to what I mean when I use the word philosophy. I mean by philosophy "metaphyics" --- inquiries into the ultimate reality. Economists are entirely ignorant of this tradition. For example, what have economists to say of naive realism or idealism? What about nominalism and atomism? Qualities and Substance? etc. etc.
I am convinced that these difficulties in philosophy have important implications for the nature of economic science. Two questions:
1.) Why have economists' ignored metaphysics?
2.) What, if anything, can economists expect to gain from a serious study of metaphysics?
Right now I am reading George (Bishop) Berkeley's Three Dialogues. Berkeley was a very interesting thinker. He denied the existence of any mind-independent reality. In other words, a thing cannot exist unless it is perceived by the senses. I think this has important implications for the economists' understanding of scarcity. It is true that the entire theory of economics is based on the idea of scarcity, viz. rational disposal of scarce resources among competing alternatives. But if there is no such thing as "matter" in the means of economizing activity, then what becomes of scarcity? Berkely contends that all ideas --- factors of production --- exist only in the mind. Therefore, the contents of any "means" for the satisfaction of human wants cannot be scarce because they are the product of mental ideas reflected in the sensory qualities of smell, taste, sight, and sound. Whatever is conceivable is necessarily perceived and thus absorbed entirely by the perceiving individual. There is no scarcity.
I plan on reading David Hume once I finish with Berkeley. He even went further than Berkeley and denied the existence of any underlying order in the perceived world. For example, he rejected the idea that every effect has a cause. More on this later...
And let me be clear as to what I mean when I use the word philosophy. I mean by philosophy "metaphyics" --- inquiries into the ultimate reality. Economists are entirely ignorant of this tradition. For example, what have economists to say of naive realism or idealism? What about nominalism and atomism? Qualities and Substance? etc. etc.
I am convinced that these difficulties in philosophy have important implications for the nature of economic science. Two questions:
1.) Why have economists' ignored metaphysics?
2.) What, if anything, can economists expect to gain from a serious study of metaphysics?
Right now I am reading George (Bishop) Berkeley's Three Dialogues. Berkeley was a very interesting thinker. He denied the existence of any mind-independent reality. In other words, a thing cannot exist unless it is perceived by the senses. I think this has important implications for the economists' understanding of scarcity. It is true that the entire theory of economics is based on the idea of scarcity, viz. rational disposal of scarce resources among competing alternatives. But if there is no such thing as "matter" in the means of economizing activity, then what becomes of scarcity? Berkely contends that all ideas --- factors of production --- exist only in the mind. Therefore, the contents of any "means" for the satisfaction of human wants cannot be scarce because they are the product of mental ideas reflected in the sensory qualities of smell, taste, sight, and sound. Whatever is conceivable is necessarily perceived and thus absorbed entirely by the perceiving individual. There is no scarcity.
I plan on reading David Hume once I finish with Berkeley. He even went further than Berkeley and denied the existence of any underlying order in the perceived world. For example, he rejected the idea that every effect has a cause. More on this later...
Thursday, December 18, 2008
My studies in economics move in fits and starts. Typically, an idea seizes my attention and imagination, leading me to read more about it, and then I end by turning away from it. I don't have the persistence to make a substantive contribution to pure technical economic theory. I deal in generalities and walk on abstract planes of radical inquiry. My professors at Wash U. who have noticed this about me do not like it. And I rarely get along with other students of economics. They like to talk about the shapes of cost curves and the effects of budget deficits. I like to talk about uncertainty and philosophy.
Economics is a fascinating subject, and I think everyone would be better off if they understood price theory (this does not mean that they have to accept everything in price theory, just that they understand it). But here is the problem. A true contribution to economics is understood or recognized as consisting only of a refinement of the basic theory. Little to no scope is provided for real creativity. Just look at the great economists --- people ranging everywhere from Debreu and Arrow, to James Buchanan and Demsetz and Alchian --- these are people who have simply extended the basic neoclassical framework. This does not mean that these people are not talented; just that they haven't yet fully realized the potential in economics.
This is why I have been so fascinated by the work of economists like Thorstein Veblen, G. L. S. Shackle, and Frank Knight. They were truly imaginative. And this is proabably why they have been almost entirely forgotten in the economic literature. All of this has led me to conclude that I will never be a good economist. I face many difficulties: I don't have the formal acumen, and I am not good at specializing in a certain field of study.
For this reason I have decided to move into other areas related to economics but hitherto ignored by professional economists. I am going to study, among other things, Critical Theory, Enlightenment Literature of the 18th and 19th century, and Cultural Studies.
This blog will likely reflect this change in outlook. I apologize for any of the readers who have enjoyed the posts on Austrian and Post Keynesian economics. But I have decided to turn my attention elsewhere, at least for a little while, if only to see what comes of it.
Economics is a fascinating subject, and I think everyone would be better off if they understood price theory (this does not mean that they have to accept everything in price theory, just that they understand it). But here is the problem. A true contribution to economics is understood or recognized as consisting only of a refinement of the basic theory. Little to no scope is provided for real creativity. Just look at the great economists --- people ranging everywhere from Debreu and Arrow, to James Buchanan and Demsetz and Alchian --- these are people who have simply extended the basic neoclassical framework. This does not mean that these people are not talented; just that they haven't yet fully realized the potential in economics.
This is why I have been so fascinated by the work of economists like Thorstein Veblen, G. L. S. Shackle, and Frank Knight. They were truly imaginative. And this is proabably why they have been almost entirely forgotten in the economic literature. All of this has led me to conclude that I will never be a good economist. I face many difficulties: I don't have the formal acumen, and I am not good at specializing in a certain field of study.
For this reason I have decided to move into other areas related to economics but hitherto ignored by professional economists. I am going to study, among other things, Critical Theory, Enlightenment Literature of the 18th and 19th century, and Cultural Studies.
This blog will likely reflect this change in outlook. I apologize for any of the readers who have enjoyed the posts on Austrian and Post Keynesian economics. But I have decided to turn my attention elsewhere, at least for a little while, if only to see what comes of it.
Wednesday, December 17, 2008
I finally got around to reading Cowen and Fink's great article on the "Inconsistent Equilibrium Construct" of Mises and Rothbard's Evenly Rotating Economy (ERE). This short piece is really great, and, in my view, strikes a death blow to the Austrian model of equilibrium.
Cowen and Fink describe the model accurately: (1) it is used to predict the direction of change; (2) it freezes all the data so that it can be used as a first step toward an analysis of complex change; and (3) it is used as a foil.
The paper makes three important criticisms of this model. First, Cowen and Fink claim that there is no tendency for a market to move toward equilibrium because "sequential transactions are not consistent with the notion of an intertemporal general equilibrium." In other words, for a tendency toward equilibrium to prevail, the equilibrium system must already be pre-ordained.
Second, and perhaps most important, is the idea that there can be no prices in equilibrium because "prices are institutions that have evolved over time in order to help coordinate the plans of market participants. [Therefore,] in a world in which all plans are already coordinated, and actors possess all relevant information, prices would not serve any function." This is an excellent point, and illustrates the absurdity of the Austrian ERE model. Technical general equilibrium theorists (for example, Frank Hahn) have recognized that money cannot exist in equilibrium, and have rightly excluded it from their analyses of equilibria.
And third, the ERE cannot be used as a foil because in equilibrium there is no human action. "If, as Mises claims, the ERE has no human action, then we cannot claim there is a tendency towards equilibrium, since this would imply the nonsensical conclusion that there is a tendency for human action (and human institutions) to disappear."
I thought this short article was really great. For anyone familiar with this literature, has there been any Austrian responses to this piece? Have Austrians accepted these criticisms, or simply ignored them? My impression is that Austrians have still retained the ERE as a model for analyzing change, although they are quick to admit its real world inapplicability. I would be very interested in reading any Austrian responses to this article.
Reference: Tyler Cowen and Richard Fink "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard" The American Economic Review, vol. 75, no. 4 (September 1985), pp. 866-869.
Cowen and Fink describe the model accurately: (1) it is used to predict the direction of change; (2) it freezes all the data so that it can be used as a first step toward an analysis of complex change; and (3) it is used as a foil.
The paper makes three important criticisms of this model. First, Cowen and Fink claim that there is no tendency for a market to move toward equilibrium because "sequential transactions are not consistent with the notion of an intertemporal general equilibrium." In other words, for a tendency toward equilibrium to prevail, the equilibrium system must already be pre-ordained.
Second, and perhaps most important, is the idea that there can be no prices in equilibrium because "prices are institutions that have evolved over time in order to help coordinate the plans of market participants. [Therefore,] in a world in which all plans are already coordinated, and actors possess all relevant information, prices would not serve any function." This is an excellent point, and illustrates the absurdity of the Austrian ERE model. Technical general equilibrium theorists (for example, Frank Hahn) have recognized that money cannot exist in equilibrium, and have rightly excluded it from their analyses of equilibria.
And third, the ERE cannot be used as a foil because in equilibrium there is no human action. "If, as Mises claims, the ERE has no human action, then we cannot claim there is a tendency towards equilibrium, since this would imply the nonsensical conclusion that there is a tendency for human action (and human institutions) to disappear."
I thought this short article was really great. For anyone familiar with this literature, has there been any Austrian responses to this piece? Have Austrians accepted these criticisms, or simply ignored them? My impression is that Austrians have still retained the ERE as a model for analyzing change, although they are quick to admit its real world inapplicability. I would be very interested in reading any Austrian responses to this article.
Reference: Tyler Cowen and Richard Fink "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard" The American Economic Review, vol. 75, no. 4 (September 1985), pp. 866-869.
Sunday, December 14, 2008
I have been following Professor Cowen's discussion of Keynes' General Theory with some interest, and found his post on chapter 4 particularly provocative. Cowen claims that this chapter attempts to address the problems raised by Hayek concerning capital theory. A few thoughts:
(1) I am not sure how this chapter destroys Austrian capital theory; Keynes' more immediate concerns appear to me to be quite different.
(2) Keynes is concerned in this chapter rather with the volume of current output, and not its money value. This is important because in chapter 6 (Income, Saving, Investment) Keynes shows that value is not difficult to measure; only volume is. (Thus the equation A + G - A1. G measures the value of equipment.)
(3) With volume thus occupying a predominant position, Keynes next concerns himself with the question of net output (viz. physical additions to the capital stock). This of course is difficult to calculate because capital is heterogeneous. Thus Keynes proposes that we deal with this "as for example when all the items of one output are included in the same proportions in another output."
(4) The measures proposed by Keynes concerning the problem of net output are "quantities of money-value" and "quantities of employment." For Keynes, money-value is "strictly homogeneous," and labor "can be made so."
(5) Now in trying to understand how Keynes attempts to make labor homogeneous, it is important to refer back to his chapter 2 (postulates of classical economics). It will be recalled that Keynes abandoned only one of the postulates, namely, "the utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment." Keynes shows this to be false. However, Keynes retained the presumed validity of the first postulate, namely, "the wage is equal to the marginal product of labour." We can see now why he chose to do this. Keynes' unwillingness to abandon postulate 1 in the classical theory can be traced to his need to measure changes in output, and he could do this only by assuming that labor is homogeneous. In support of this view, please consider this passage:
"This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great differences in teh specialised skill of individual workers and in their suitability for different occupations. For, if the remuneration of the workers is proportional to their efficiency, the differences are dealt with by our having regarded individuals as contributing to the supply of labour in proportion to their remuneration. ... We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment" (pages 41-42, emphasis mine).
However, I follow Shackle in his abandonment of both of the postulates of classical economics, and I think Keynes was wrong in retaining the first postulate. But we can see why Keynes chose to do so; it was essential for chapter 4.
I think Tyler Cowen missed the whole point of this chapter. But this is just my reading. I would urge Professor Cowen to try to tie in the various arguments from different chapters into the one he is currently considering; you cannot read chapter 4 in isolation. It is very important to know how it relates to chapters 2 and 6, and possibly many others.
(1) I am not sure how this chapter destroys Austrian capital theory; Keynes' more immediate concerns appear to me to be quite different.
(2) Keynes is concerned in this chapter rather with the volume of current output, and not its money value. This is important because in chapter 6 (Income, Saving, Investment) Keynes shows that value is not difficult to measure; only volume is. (Thus the equation A + G - A1. G measures the value of equipment.)
(3) With volume thus occupying a predominant position, Keynes next concerns himself with the question of net output (viz. physical additions to the capital stock). This of course is difficult to calculate because capital is heterogeneous. Thus Keynes proposes that we deal with this "as for example when all the items of one output are included in the same proportions in another output."
(4) The measures proposed by Keynes concerning the problem of net output are "quantities of money-value" and "quantities of employment." For Keynes, money-value is "strictly homogeneous," and labor "can be made so."
(5) Now in trying to understand how Keynes attempts to make labor homogeneous, it is important to refer back to his chapter 2 (postulates of classical economics). It will be recalled that Keynes abandoned only one of the postulates, namely, "the utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment." Keynes shows this to be false. However, Keynes retained the presumed validity of the first postulate, namely, "the wage is equal to the marginal product of labour." We can see now why he chose to do this. Keynes' unwillingness to abandon postulate 1 in the classical theory can be traced to his need to measure changes in output, and he could do this only by assuming that labor is homogeneous. In support of this view, please consider this passage:
"This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great differences in teh specialised skill of individual workers and in their suitability for different occupations. For, if the remuneration of the workers is proportional to their efficiency, the differences are dealt with by our having regarded individuals as contributing to the supply of labour in proportion to their remuneration. ... We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment" (pages 41-42, emphasis mine).
However, I follow Shackle in his abandonment of both of the postulates of classical economics, and I think Keynes was wrong in retaining the first postulate. But we can see why Keynes chose to do so; it was essential for chapter 4.
I think Tyler Cowen missed the whole point of this chapter. But this is just my reading. I would urge Professor Cowen to try to tie in the various arguments from different chapters into the one he is currently considering; you cannot read chapter 4 in isolation. It is very important to know how it relates to chapters 2 and 6, and possibly many others.
In this first Book, Marshall introduces the reader to (1) the problem(s) of economics; (2) the measure(s) used in economics; and (3) the status of economic laws (generalizations). Marshall's book is very carefully written. What makes it interesting is that Marshall seems torn between the apparent precision and objectivity of economic analysis, and the inherent ambiguity and complexity of its major features as a result of its chief concern with human action.
(1) There are two major, yet related problems that are introduced in the first chapter of Book 1 : the effects of poverty, and the natural character of man as he is, and not as he "ought" to be.
Marshall points out that economics is important because it has the most direct bearing on the character of man. Therefore, people who suffer from poverty are doomed to live a life without sufficient scope for intellectual exploration and moral improvement. But Marshall is optimistic about the increasing elimination of poverty largely because of his reliance on the powerful forces of progress and enterprise. He contrasts progress explicitly with what he calls "custom" and seems thereby to attribute all social evils to the "yoke of custom." Custom refers to what we would recognize as "institutional habits," "social norms," and "codes of conduct." These difficulties carry naturally into Marshall's discusson of the natural character of man, and in the process he finds occasion also to connect this to the competing visions of "competition" and "co-operation." In other words, in speaking of the progress of industry and economics, it is misleading to attribute this either to competition or co-operation (state organization) because what is important is the character of man. Here is Marshall:
"There is no one term that will express these characteristics adequately. They are, as we shall presently see, a certain independence and habit of choosing one's own course for oneself, a self-reliance, a deliberation and yet a promptness of choice and judgment, and a habit of forecasting the future and of shaping one's course with reference to distant aims." (page 5).
According to Marshall, this is the behavior and character of man in industrial society, and consequently the shape of industry depends in large part on policies that either promote or inhibit the exercise of these characteristics (e.g., self-reliance, choice, judgment, forecasting, etc.). For example, competition can be either "social" or "anti-social." Anti-social competition consists of the efforts by a few privileged business men in preventing the entrepreneurial actions of newer, more competitive businessmen. However, Marshall is also critical of complete free competition, which he describes as a "huge unrestrained monster." Marshall always seems to seek the safe middle ground.
(2) The measure Marshall proposes for the study of economics is to be found in Chapter 2 of Book 1: that of "the sum of money." Now Marshall is very emphatic about drawing a distinction between the force of a person's motives, and the motives themselves. Marshall argues that the sum of money measure is applicable only to the former. Here is Marshall's clearest defintion of "the sum of money" as a measure of economics:
"the force of a person's motives ... can be approximately measured by the sum of money, which he will give up in order to secure a desired satisfaction; or again by the sum which is just required to induce him to undergo a certain fatigue." (page 15).
Another way of putting this is that the economist studies the "manifestation" of a person's "mental states" rather than those mental states themselves. In this way Marshall avoids the difficult ethical question of the correct ends, and proposes to deal only with the "means towards ends. ... Money is general purchasing power, and is sought as a means to all kinds of ends, high as well as low, spiritual as well as material."
Now Marshall is clear in pointing out that this measure is not perfectly exact or accurate; such measurements can only be made "indirectly" and "conjecturally." This is because people view things differently, and the same person may view the same thing differently through time. However, Marshall makes two points on this matter. (1) This problem of inexact measurement can be dispensed with if we deal in large enough aggregates; and (2) it is true that the poor are affected more by money than the rich are.
(3) The chapter on economics laws is very interesting, and is probably my favorite one in Book 1. Marshall begins by arguing that both induction (collection of facts) and deduction (careful reasoning) should be used in economic analysis. When both of these methods satisfy a certain hypothesis, that hypothesis then becomes a "law." A law describes the effect of a certain cause provided there is no interference. Now this is important because in this way Marshall speaks of "laws" as "tendencies" only, and not as necessities. Most philosophers however would conceive of laws as necessary and eternal.
Next Marshall notes how complicated economics is because it studies Man. Marshall writes: "The science of man is complex and its laws are inexact." This leads Marshall to speak of economics laws as "social laws" rather than "physical laws." These social laws are again measured by a "money price."
Finally, Marshall for some strange reason devotes many pages to the discussion of "normal tendencies." The word "normal" is very important for Marshall. Here he is: "In the same way every use of the term normal implies the predominance of certain tendencies which appear likely to be more or less steadfast and persistent in their action over those which are relatively exceptional and intermittent. ... Normal results are those which may be expected as the outcome of those tendencies which the context suggests." (page 34).
(4) Chapter 4 summarizes the contents of Book 1. We are reminded that (1) the laws of economics are social and necessarily inexact, the best measure being that of money; (2) laws express tendencies of certain causes and effects; (3) "imagination" (or what Marshall in chapter 1 described as self-reliance, choice, judgment, etc.) is what is important for economic analysis; and (4) economics is a subject concerned with the real world, and should therefore aim to provide men with practical means for the achievement of various ends.
-----
This is an excellent introduction to a systematic treatise on economics. We learn about its importance, complexity, and infinite possibility. Economics has a lot to say about the world, and also a lot it cannot say.
I am very curious to see how the rest of the treatise unfolds.
(1) There are two major, yet related problems that are introduced in the first chapter of Book 1 : the effects of poverty, and the natural character of man as he is, and not as he "ought" to be.
Marshall points out that economics is important because it has the most direct bearing on the character of man. Therefore, people who suffer from poverty are doomed to live a life without sufficient scope for intellectual exploration and moral improvement. But Marshall is optimistic about the increasing elimination of poverty largely because of his reliance on the powerful forces of progress and enterprise. He contrasts progress explicitly with what he calls "custom" and seems thereby to attribute all social evils to the "yoke of custom." Custom refers to what we would recognize as "institutional habits," "social norms," and "codes of conduct." These difficulties carry naturally into Marshall's discusson of the natural character of man, and in the process he finds occasion also to connect this to the competing visions of "competition" and "co-operation." In other words, in speaking of the progress of industry and economics, it is misleading to attribute this either to competition or co-operation (state organization) because what is important is the character of man. Here is Marshall:
"There is no one term that will express these characteristics adequately. They are, as we shall presently see, a certain independence and habit of choosing one's own course for oneself, a self-reliance, a deliberation and yet a promptness of choice and judgment, and a habit of forecasting the future and of shaping one's course with reference to distant aims." (page 5).
According to Marshall, this is the behavior and character of man in industrial society, and consequently the shape of industry depends in large part on policies that either promote or inhibit the exercise of these characteristics (e.g., self-reliance, choice, judgment, forecasting, etc.). For example, competition can be either "social" or "anti-social." Anti-social competition consists of the efforts by a few privileged business men in preventing the entrepreneurial actions of newer, more competitive businessmen. However, Marshall is also critical of complete free competition, which he describes as a "huge unrestrained monster." Marshall always seems to seek the safe middle ground.
(2) The measure Marshall proposes for the study of economics is to be found in Chapter 2 of Book 1: that of "the sum of money." Now Marshall is very emphatic about drawing a distinction between the force of a person's motives, and the motives themselves. Marshall argues that the sum of money measure is applicable only to the former. Here is Marshall's clearest defintion of "the sum of money" as a measure of economics:
"the force of a person's motives ... can be approximately measured by the sum of money, which he will give up in order to secure a desired satisfaction; or again by the sum which is just required to induce him to undergo a certain fatigue." (page 15).
Another way of putting this is that the economist studies the "manifestation" of a person's "mental states" rather than those mental states themselves. In this way Marshall avoids the difficult ethical question of the correct ends, and proposes to deal only with the "means towards ends. ... Money is general purchasing power, and is sought as a means to all kinds of ends, high as well as low, spiritual as well as material."
Now Marshall is clear in pointing out that this measure is not perfectly exact or accurate; such measurements can only be made "indirectly" and "conjecturally." This is because people view things differently, and the same person may view the same thing differently through time. However, Marshall makes two points on this matter. (1) This problem of inexact measurement can be dispensed with if we deal in large enough aggregates; and (2) it is true that the poor are affected more by money than the rich are.
(3) The chapter on economics laws is very interesting, and is probably my favorite one in Book 1. Marshall begins by arguing that both induction (collection of facts) and deduction (careful reasoning) should be used in economic analysis. When both of these methods satisfy a certain hypothesis, that hypothesis then becomes a "law." A law describes the effect of a certain cause provided there is no interference. Now this is important because in this way Marshall speaks of "laws" as "tendencies" only, and not as necessities. Most philosophers however would conceive of laws as necessary and eternal.
Next Marshall notes how complicated economics is because it studies Man. Marshall writes: "The science of man is complex and its laws are inexact." This leads Marshall to speak of economics laws as "social laws" rather than "physical laws." These social laws are again measured by a "money price."
Finally, Marshall for some strange reason devotes many pages to the discussion of "normal tendencies." The word "normal" is very important for Marshall. Here he is: "In the same way every use of the term normal implies the predominance of certain tendencies which appear likely to be more or less steadfast and persistent in their action over those which are relatively exceptional and intermittent. ... Normal results are those which may be expected as the outcome of those tendencies which the context suggests." (page 34).
(4) Chapter 4 summarizes the contents of Book 1. We are reminded that (1) the laws of economics are social and necessarily inexact, the best measure being that of money; (2) laws express tendencies of certain causes and effects; (3) "imagination" (or what Marshall in chapter 1 described as self-reliance, choice, judgment, etc.) is what is important for economic analysis; and (4) economics is a subject concerned with the real world, and should therefore aim to provide men with practical means for the achievement of various ends.
-----
This is an excellent introduction to a systematic treatise on economics. We learn about its importance, complexity, and infinite possibility. Economics has a lot to say about the world, and also a lot it cannot say.
I am very curious to see how the rest of the treatise unfolds.
Friday, December 12, 2008
Some of my favorite economists have repeatedly emphasized the importance of understanding price theory. Pete Boettke always tells his students this, and Dierdre McCloskey believes that one cannot be a proper economist without sufficient understanding of the theory of price (microeconomics). I have taken this advice to heart and have tried to read widely in this area. I have read all of the major papers of Armen Alchian. Every serious economist should do the same. In addition, the important textbooks in this field include the one by Alchian & Allen, McCloskey's Applied Theory of Price, Stigler's Price Theory textbook, and the one by Milton Friedman. A good introduction to economics was written by Paul Heyne (The Economic Way of Thinking).
During the break, I plan to read Alfred Marshall's "The Principles of Economics," largely because all of these great economists speak so highly of it, and quote from it often. I propose a sort of book forum discussion of this book here on this blog. The Great Minds series has it available on Amazon for $12. Books IV and VI have been removed, making the book 300 pages long. I will summarize the Books content and attempt to provide commentary on many of the arguments presented therein. Students interested in participating in this discussion should quickly secure for themselves a copy. I will be posting my thoughts on Book I around Sunday or Monday.
It is rumored that Joan Robinson once remarked, "It's all in Marshall." Let us see how true this statement is, and whether Marshall merits careful study even today.
During the break, I plan to read Alfred Marshall's "The Principles of Economics," largely because all of these great economists speak so highly of it, and quote from it often. I propose a sort of book forum discussion of this book here on this blog. The Great Minds series has it available on Amazon for $12. Books IV and VI have been removed, making the book 300 pages long. I will summarize the Books content and attempt to provide commentary on many of the arguments presented therein. Students interested in participating in this discussion should quickly secure for themselves a copy. I will be posting my thoughts on Book I around Sunday or Monday.
It is rumored that Joan Robinson once remarked, "It's all in Marshall." Let us see how true this statement is, and whether Marshall merits careful study even today.
Monday, December 8, 2008
Pete Boettke wrote an interesting paper on Institutional (Evolutionary) Economics here. The basic argument is that Austrians have come closest to what Veblen meant by Evolutionary Economics, and in that way have also met his call for an Evolutionary Science of Economics. I am not sure this is right, and the reason is because I don't think Mr. Boettke really understands what Veblen was arguing in that article, or what Institutional Economics is all about. Let me make some brief points that follow the outline of Mr. Boettke's paper.
(1) Institutional Economics is not so much about "change" as it is about "instrumental technological development;" this is why Institutional Economics is known for the famous Veblenian dichotomy between technology (instrumental) and institutions (ceremonial). Now past-binding, taboo-stricken institutions commonly resist change, but there are also instances in which these same institutions can use technological development to increase its own power, and/or perceived hegemony. Thus the Institutionalists do emphasize change, just like Boettke points out, but the reader is likely to miss what Institutionalist Economics is all about if he doesn't then draw the further distinction between "ceremonial" and "instrumental" change. Instrumental change is real change because it is operationally useful in a way that culturally conditioned institutional change is not.
(2) Mr. Boettke then connects this discussion to the Austrian theory of spontaneous order --- institutions are the result of human action but not of human design. Now Institutional Economists are very critical of this spontaneous order theory of individualism. The basic point here is that individuals are culturally conditioned to behave and act in certain ways, and therefore human freedom and creativity in action is limited by the institutions that surround human action. So while "human action" creates the spontaneously emergent institutions we observe today, it is also important that individuals are born into these institutional structures, and their behavior is consequently shaped a great deal by them. This is why Institutionalists put so much stress on "technology." They see "instrumental technology" as the only escape from institutions, since they believe that science is objectively true and universally applicable. (I have my doubts about this.)
(3) Next we come to Mr. Boettke's discussion of Veblen's paper "Why is Economics not an Evolutionary Science?". Mr. Boettke argues that Veblen's description of individual action is similar to the Austrian theory of praxeology. He also makes a big deal about the structural dynamism of Menger's theory of economics vis-a-vis those of Walras and Jevons. It is true that Veblen criticized the Austrian school for its reliance on hedonism, which for Veblen meant "inert and immutably given human nature." Veblen also goes on to write about the Austrian school's discussion of individualism:
"He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another."
Boettke is careful to point out that the scholarship on Menger and the Austrian School has revealed important differences between it and the other marginalist theories (Walras, Marshall, etc.). Menger, Boettke argues, spoke of "time" and "man's inherent fallibility." This is all good. But does it answer Veblen's question in his famous paper? Here is how Boettke concludes this section:
"This emphasis on the evolution of institutions, in addition to the Mengerian emphasis on time and ignorance in economic theory, provides the foundation for later Austrians to develop their process-oriented institutionalism."
Now the mistake here is that Veblen did not really speak of Evolutionary Economics as "process-oriented." For Veblen, Evolutionary Economics was more like the physical sciences with its emphasis on "causal relations" and "quantitative sequence." Here is Veblen:
"He [the evolutionary scientist] wants to reduce his solution of all problems to terms of the conservation of energy or the persistence of quantity. This is his last recourse. And this last recourse has in our time been made available for the handling of schemes of development and theories of a comprehensive process by the notion of a cumulative causation."
This, it must be added, throws "the impersonal character of the sequence of events more and more into the foreground," and forces us to understand economics as the "phenomenon of sequence as contrasted with that of propensity" --- i.e., "of dispassionate cumulative causation."
We can now see what Veblen meant by an Evolutionary Science of Economics. It takes us away from the social sciences, and its "ancient" theories of human behavior, and into the area of the physical sciences with its understanding of cumulative causation. Human action, in other words, is not spontaneous or creative, but entirely dependent upon causal forces.
Now Mr. Boettke is correct in quoting David Seckler as saying that there are really two sides to Veblen; one being "humanistic" and the other "behavioristic." But there is no question today that Institutionalists see Veblen and his work as leaning more on the side of Behaviorism --- indeed, this is why Institutionalists are so emphatic about the Institutonal and Technology dichotomy. Institutions represent the ancient and no longer useful humanistic enterprise, while techology points in the direction of the infinitely more progressive, behavioristic future.
In short, I don't think Mr. Boettke understands Institutional Economics, or what Veblen was arguing in his famous paper.
(1) Institutional Economics is not so much about "change" as it is about "instrumental technological development;" this is why Institutional Economics is known for the famous Veblenian dichotomy between technology (instrumental) and institutions (ceremonial). Now past-binding, taboo-stricken institutions commonly resist change, but there are also instances in which these same institutions can use technological development to increase its own power, and/or perceived hegemony. Thus the Institutionalists do emphasize change, just like Boettke points out, but the reader is likely to miss what Institutionalist Economics is all about if he doesn't then draw the further distinction between "ceremonial" and "instrumental" change. Instrumental change is real change because it is operationally useful in a way that culturally conditioned institutional change is not.
(2) Mr. Boettke then connects this discussion to the Austrian theory of spontaneous order --- institutions are the result of human action but not of human design. Now Institutional Economists are very critical of this spontaneous order theory of individualism. The basic point here is that individuals are culturally conditioned to behave and act in certain ways, and therefore human freedom and creativity in action is limited by the institutions that surround human action. So while "human action" creates the spontaneously emergent institutions we observe today, it is also important that individuals are born into these institutional structures, and their behavior is consequently shaped a great deal by them. This is why Institutionalists put so much stress on "technology." They see "instrumental technology" as the only escape from institutions, since they believe that science is objectively true and universally applicable. (I have my doubts about this.)
(3) Next we come to Mr. Boettke's discussion of Veblen's paper "Why is Economics not an Evolutionary Science?". Mr. Boettke argues that Veblen's description of individual action is similar to the Austrian theory of praxeology. He also makes a big deal about the structural dynamism of Menger's theory of economics vis-a-vis those of Walras and Jevons. It is true that Veblen criticized the Austrian school for its reliance on hedonism, which for Veblen meant "inert and immutably given human nature." Veblen also goes on to write about the Austrian school's discussion of individualism:
"He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another."
Boettke is careful to point out that the scholarship on Menger and the Austrian School has revealed important differences between it and the other marginalist theories (Walras, Marshall, etc.). Menger, Boettke argues, spoke of "time" and "man's inherent fallibility." This is all good. But does it answer Veblen's question in his famous paper? Here is how Boettke concludes this section:
"This emphasis on the evolution of institutions, in addition to the Mengerian emphasis on time and ignorance in economic theory, provides the foundation for later Austrians to develop their process-oriented institutionalism."
Now the mistake here is that Veblen did not really speak of Evolutionary Economics as "process-oriented." For Veblen, Evolutionary Economics was more like the physical sciences with its emphasis on "causal relations" and "quantitative sequence." Here is Veblen:
"He [the evolutionary scientist] wants to reduce his solution of all problems to terms of the conservation of energy or the persistence of quantity. This is his last recourse. And this last recourse has in our time been made available for the handling of schemes of development and theories of a comprehensive process by the notion of a cumulative causation."
This, it must be added, throws "the impersonal character of the sequence of events more and more into the foreground," and forces us to understand economics as the "phenomenon of sequence as contrasted with that of propensity" --- i.e., "of dispassionate cumulative causation."
We can now see what Veblen meant by an Evolutionary Science of Economics. It takes us away from the social sciences, and its "ancient" theories of human behavior, and into the area of the physical sciences with its understanding of cumulative causation. Human action, in other words, is not spontaneous or creative, but entirely dependent upon causal forces.
Now Mr. Boettke is correct in quoting David Seckler as saying that there are really two sides to Veblen; one being "humanistic" and the other "behavioristic." But there is no question today that Institutionalists see Veblen and his work as leaning more on the side of Behaviorism --- indeed, this is why Institutionalists are so emphatic about the Institutonal and Technology dichotomy. Institutions represent the ancient and no longer useful humanistic enterprise, while techology points in the direction of the infinitely more progressive, behavioristic future.
In short, I don't think Mr. Boettke understands Institutional Economics, or what Veblen was arguing in his famous paper.
Thursday, December 4, 2008
An interesting discussion has started in the comments section to a post I wrote in response to Paul Davidson. Jeffrey Friedman is again seen leading the charge, and this time the problem concerns the relative superiority of entrepreneurs vis-a-vis regulators. This passage by Mr. Friedman is central to the discussion:
"With epistemic uncertainty, *if* there's an empirical, credible argument for market participants doing better, overall, than regulators, then generally libertarian conclusions do follow ... when coupled with a view of entrepreneurs and investors that sees them as not wise, relative to regulators, because of the profit motive; but as being weeded out by losing money if they are relatively unwise, compared to other entrepreneurs and investors."
The point here is that entrepreneurs are not performing optimally relatively to regulators, but only that comparatively they are more efficient. Now TGGP was correct in noting that this discussion is similar to Armen Alchian's 1950 paper and the now famous "Alchian Thesis." However, there is a difference here between Alchian's 1950 paper and the "Alchian Thesis" --- the latter being put forward by Milton Friedman in his 1953 essay. The Alchian Thesis does hold that, as TGGP says, "Armen Alchian relied on the elimination of inefficient firms to explain why businesses will tend to maximize profits." But in fact this is not what Alchian argued. Alchian said that firms realizing any "positive" profits will succeed, and those who fail to make positive profits will disappear. This is true, Alchian believed, because in an uncertain world there is no way to know what conditions are required for maximizing profits. I also think this is what Jeffrey Friedman was getting at. Markets are not more efficient than regulation because they maximize profits, but only that they are more successful at realizing positive profits.
Next we come to Professor Steve Miller's interesting comment. My argument here is that Professor Miller is mistaken in believing that knowledge and incentives are responsible for the market's success relatively to that of government regulation. Even if everyone was ignorant of the relevant knowledge and completely lacking in incentives, there would still be competition in the realization of positive profits. As Alchian said "Even in a world of stupid men there would still be profits." He also argued that the greater the uncertainty, the more likely it is that the "lucky" ones will be those that succeed, and not the logical and prudent ones. Also his comment here:
"Only with experience do entrepreneurs develop heuristics that give them a fighting chance over the long term. Does Warren Buffet really know nothing? He may have biases, but the most dangerous of those biases have been shed... or at least diminished, no?"
indicates that through trial and error one can learn from his mistakes and survive "over the long term." Again, the conscious elimination of bias is immaterial. Intentions do not matter in competition; only those who behave in accordance with the requisite conditions for success will succeed --- not because they "wanted to," but because their behavior was favorable to survival. Also, trial and error procedures do not work because, as Alchian noted, it is (1) difficult to specify a success and a failure; and (2) trial and error does not work in a changing environment.
Alchian's 1950 paper is very important because, in my reading, it takes "knowledge" and "incentives" off the table. One can "try" to succeed all one wants, in the same way that plants can "try" to grow. But if they are not positioned in such a way as to receive the necessary sunlight, then they simply will not survive, no matter how much they "try" to. Could a defense of libertarianism and free markets be made from this analysis? Why or why not?
"With epistemic uncertainty, *if* there's an empirical, credible argument for market participants doing better, overall, than regulators, then generally libertarian conclusions do follow ... when coupled with a view of entrepreneurs and investors that sees them as not wise, relative to regulators, because of the profit motive; but as being weeded out by losing money if they are relatively unwise, compared to other entrepreneurs and investors."
The point here is that entrepreneurs are not performing optimally relatively to regulators, but only that comparatively they are more efficient. Now TGGP was correct in noting that this discussion is similar to Armen Alchian's 1950 paper and the now famous "Alchian Thesis." However, there is a difference here between Alchian's 1950 paper and the "Alchian Thesis" --- the latter being put forward by Milton Friedman in his 1953 essay. The Alchian Thesis does hold that, as TGGP says, "Armen Alchian relied on the elimination of inefficient firms to explain why businesses will tend to maximize profits." But in fact this is not what Alchian argued. Alchian said that firms realizing any "positive" profits will succeed, and those who fail to make positive profits will disappear. This is true, Alchian believed, because in an uncertain world there is no way to know what conditions are required for maximizing profits. I also think this is what Jeffrey Friedman was getting at. Markets are not more efficient than regulation because they maximize profits, but only that they are more successful at realizing positive profits.
Next we come to Professor Steve Miller's interesting comment. My argument here is that Professor Miller is mistaken in believing that knowledge and incentives are responsible for the market's success relatively to that of government regulation. Even if everyone was ignorant of the relevant knowledge and completely lacking in incentives, there would still be competition in the realization of positive profits. As Alchian said "Even in a world of stupid men there would still be profits." He also argued that the greater the uncertainty, the more likely it is that the "lucky" ones will be those that succeed, and not the logical and prudent ones. Also his comment here:
"Only with experience do entrepreneurs develop heuristics that give them a fighting chance over the long term. Does Warren Buffet really know nothing? He may have biases, but the most dangerous of those biases have been shed... or at least diminished, no?"
indicates that through trial and error one can learn from his mistakes and survive "over the long term." Again, the conscious elimination of bias is immaterial. Intentions do not matter in competition; only those who behave in accordance with the requisite conditions for success will succeed --- not because they "wanted to," but because their behavior was favorable to survival. Also, trial and error procedures do not work because, as Alchian noted, it is (1) difficult to specify a success and a failure; and (2) trial and error does not work in a changing environment.
Alchian's 1950 paper is very important because, in my reading, it takes "knowledge" and "incentives" off the table. One can "try" to succeed all one wants, in the same way that plants can "try" to grow. But if they are not positioned in such a way as to receive the necessary sunlight, then they simply will not survive, no matter how much they "try" to. Could a defense of libertarianism and free markets be made from this analysis? Why or why not?
Wednesday, December 3, 2008
Paul Davidson makes a most welcome appearance on this blog by commenting on an old post here. He summarizes his position by writing:
"But recent history shows that leaving it to the unfettered market almost always ends in a collapse of the system -- not necessarily immediate but potentially some time in the future."
I agree with this. In fact, Professor Davidson's work is directly responsbile for my belief in this statement. Markets are inherently unstable for the reason that "In order for a market to be efficient it must be possible to reliably predict the future (at least in a statistcally reliable sense)". This is true not because of the complexity of the relevant data, but of the ontologically uncertain environment in which entrepreneurs have to calculate prospective returns. I am on board here, and I think Mr. Davidson makes a mistake in writing of me that:
"I am afraid tht you neither understand my argument or the importance of the difference between ontological uncertainty and eistomological uncertainty, where complexity wopuld be an example of the latter."
My point was that I think Mr. Davidson makes a mistake in believing that government institutions can control and reduce uncertainty. There is no reason to believe that they can. Here is Mr. Davidson again:
"If the future is nonergodic and not reliably predictable without government institutions that constrain possible future outcomes, then market economies are inhenerently volatile, if market outcomes are not regulated or are under regulated. Government has a role in stablizing potentially unstable markets and therefore providing some market benefits to all the population."
Now markets are unstable. This is a fact we must learn to live with. But it does not follow that governments have a role in taming them through appropriate regulation. The first question that comes to mind would be: How would they go about doing this?
If the source of market instability comes from ontological uncertainty (and not complexity), then we should expect government to be helpless in this matter. And this is precisely what Professor Davidson's analysis implies, his theory of uncertainty being in this order: (1) ontological uncertainty; (2) a non-ergodic (i.e., unpredictable) choice environment; and (3) a transmutable reality. The inapplicability of "probabilities calculated from historical data" also supports my argument the economy is not sufficiently stable to provide scope for positive regulation.
For example, if aggregate demand falls on account of an increase in saving, Mr. Davidson believes that government should act to increase its expenditure on goods and services produced by the private sector in order to "increase the sales of industries, thereby, encouraging entrepreneurs to increase employment especially in the industries from which the government directly purchases, e.g., military hardware." For this reason he dismisses the view that there exists an "automatic mechanism that ensures that private spending on consumption will be just sufficient to assure full employment." The stimulus to employment provided by government expenditure must wipe out, according to Mr. Davidson, any unfavorable positions in industry and promptly establish a new equilibrium at full employment. Mr. Davidson thus regards government fiscal policy as a "balancing wheel" that is responsible for keeping aggregate demand at its full-employment level, in spite of the argument he advances in favor of a "transmutable reality."
Mr. Davidson's explanation is that the aggregate demand function, which represents total spending on producibles at every level of employment, will not have "the same values as the value of aggregate supply function at each level of employment, i.e., the aggregate supply function and the aggregate demand function would not be identical for all possible levels of employment." From this, in his view, all the rest follows. But this not correct.
Now, in so far as the direct effect of government expenditure is concerned, its influence depends largely on the ability of policy makers to determine the areas that have been most affected by falling demand. The government can, of course, consult the "historical data" gathered by the Bureau of Labor Statistics. This option is useful however only in an ergodic world, e.g., if "the outcome at any future date is the statistical shadow of past and current market data." The existence of a non-ergodic world, which was used by Mr. Davidson to demonstrate that "unregulated financial markets" cannot optimally allocate resources at the full-employment level, transforms every act into a crucial decision, e.g., that decision which is made "changes forever the economic environment so that the identical decision conditions are never to be repeated."
This is why I believe Professor Davidson has failed to extend the implications of his theory to government regulation. Take, for example, this passage: "For Keynes and the Post Keynesians, long-run uncertainty is associated with a nonergodic and transmutable reality concept. A fundamental tenet of Keynes's Revolution ... is that probabilistic risks must be distinguished from uncertainty where, for the latter, probabilities calculated from historical data are not reliable guides to future performance." The consequence of this is that the optimal level of income and activity is ontologically indeterminate.
-----
Paul Davidson makes a powerful concession here: "Keynes did not think everything occuring in the economy was uncertain in the nonergodic sense. But he emphasize that decisions that will result in possible payoffs five years or ten years from now were an act of faith -- relying on animal spirits -- gambles that could result, in an unfettered market, in the possibility of huge mistakes."
I would like to know what things are not uncertain in a non-ergodic sense? What of Shackle's crucial decision theory, or the idea that all knowledge claims are mere conventions that are designed to mask the reality of uncertainty? What of the transmutable reality of which Mr. Davidson spoke earlier?
Mr. Davidson concludes his post by suggesting that I have failed to distinguish non-ergodic uncertainty from complexity. In fact, however, I believe myself to be completeing Professor Davidson's non-ergodic uncertainty paradigm.
----
With all that being said, let me conclude by saying that I really admire Professor Davidson's work. He has been one of the most influential people on my thinking. Shackle was great on uncertainty, but Professor Davidson actually put this to use in his analysis of financial markets and industry. Everyone should read his 1972 book "Money and the Real World" to get an idea of what Post Keynesian Economics is all about.
"But recent history shows that leaving it to the unfettered market almost always ends in a collapse of the system -- not necessarily immediate but potentially some time in the future."
I agree with this. In fact, Professor Davidson's work is directly responsbile for my belief in this statement. Markets are inherently unstable for the reason that "In order for a market to be efficient it must be possible to reliably predict the future (at least in a statistcally reliable sense)". This is true not because of the complexity of the relevant data, but of the ontologically uncertain environment in which entrepreneurs have to calculate prospective returns. I am on board here, and I think Mr. Davidson makes a mistake in writing of me that:
"I am afraid tht you neither understand my argument or the importance of the difference between ontological uncertainty and eistomological uncertainty, where complexity wopuld be an example of the latter."
My point was that I think Mr. Davidson makes a mistake in believing that government institutions can control and reduce uncertainty. There is no reason to believe that they can. Here is Mr. Davidson again:
"If the future is nonergodic and not reliably predictable without government institutions that constrain possible future outcomes, then market economies are inhenerently volatile, if market outcomes are not regulated or are under regulated. Government has a role in stablizing potentially unstable markets and therefore providing some market benefits to all the population."
Now markets are unstable. This is a fact we must learn to live with. But it does not follow that governments have a role in taming them through appropriate regulation. The first question that comes to mind would be: How would they go about doing this?
If the source of market instability comes from ontological uncertainty (and not complexity), then we should expect government to be helpless in this matter. And this is precisely what Professor Davidson's analysis implies, his theory of uncertainty being in this order: (1) ontological uncertainty; (2) a non-ergodic (i.e., unpredictable) choice environment; and (3) a transmutable reality. The inapplicability of "probabilities calculated from historical data" also supports my argument the economy is not sufficiently stable to provide scope for positive regulation.
For example, if aggregate demand falls on account of an increase in saving, Mr. Davidson believes that government should act to increase its expenditure on goods and services produced by the private sector in order to "increase the sales of industries, thereby, encouraging entrepreneurs to increase employment especially in the industries from which the government directly purchases, e.g., military hardware." For this reason he dismisses the view that there exists an "automatic mechanism that ensures that private spending on consumption will be just sufficient to assure full employment." The stimulus to employment provided by government expenditure must wipe out, according to Mr. Davidson, any unfavorable positions in industry and promptly establish a new equilibrium at full employment. Mr. Davidson thus regards government fiscal policy as a "balancing wheel" that is responsible for keeping aggregate demand at its full-employment level, in spite of the argument he advances in favor of a "transmutable reality."
Mr. Davidson's explanation is that the aggregate demand function, which represents total spending on producibles at every level of employment, will not have "the same values as the value of aggregate supply function at each level of employment, i.e., the aggregate supply function and the aggregate demand function would not be identical for all possible levels of employment." From this, in his view, all the rest follows. But this not correct.
Now, in so far as the direct effect of government expenditure is concerned, its influence depends largely on the ability of policy makers to determine the areas that have been most affected by falling demand. The government can, of course, consult the "historical data" gathered by the Bureau of Labor Statistics. This option is useful however only in an ergodic world, e.g., if "the outcome at any future date is the statistical shadow of past and current market data." The existence of a non-ergodic world, which was used by Mr. Davidson to demonstrate that "unregulated financial markets" cannot optimally allocate resources at the full-employment level, transforms every act into a crucial decision, e.g., that decision which is made "changes forever the economic environment so that the identical decision conditions are never to be repeated."
This is why I believe Professor Davidson has failed to extend the implications of his theory to government regulation. Take, for example, this passage: "For Keynes and the Post Keynesians, long-run uncertainty is associated with a nonergodic and transmutable reality concept. A fundamental tenet of Keynes's Revolution ... is that probabilistic risks must be distinguished from uncertainty where, for the latter, probabilities calculated from historical data are not reliable guides to future performance." The consequence of this is that the optimal level of income and activity is ontologically indeterminate.
-----
Paul Davidson makes a powerful concession here: "Keynes did not think everything occuring in the economy was uncertain in the nonergodic sense. But he emphasize that decisions that will result in possible payoffs five years or ten years from now were an act of faith -- relying on animal spirits -- gambles that could result, in an unfettered market, in the possibility of huge mistakes."
I would like to know what things are not uncertain in a non-ergodic sense? What of Shackle's crucial decision theory, or the idea that all knowledge claims are mere conventions that are designed to mask the reality of uncertainty? What of the transmutable reality of which Mr. Davidson spoke earlier?
Mr. Davidson concludes his post by suggesting that I have failed to distinguish non-ergodic uncertainty from complexity. In fact, however, I believe myself to be completeing Professor Davidson's non-ergodic uncertainty paradigm.
----
With all that being said, let me conclude by saying that I really admire Professor Davidson's work. He has been one of the most influential people on my thinking. Shackle was great on uncertainty, but Professor Davidson actually put this to use in his analysis of financial markets and industry. Everyone should read his 1972 book "Money and the Real World" to get an idea of what Post Keynesian Economics is all about.
Tuesday, December 2, 2008
Ludwig Lachmann is probably most responsible for sustaining my interest in Austrian economics. His writings are powerful, and his thought is very unorthodox. He writes like a true gentleman. One can trace the development of his thinking from (1) trade cycle theory, (2) capital theory, (3) subjectivism and expectations, (4) the history of Austrian economics, and finally (5) the philosophy of hermeneutics.
Most contemporary Austrians study his work by using (3) to understand (5). Now I have to admit that I haven't been very interested in the hermeneutic aspect of Lachmann's work. What I have found most challenging and insightful in Lachmann's work is his discussion of capital theory (2). I think this is an underappreciated aspect of his work, although admittedly a few Austrians make frequent mention of it (for example, Peter Lewin and Steven Horwitz). Lachmann does a lot with capital theory, and I cannot discuss it all here. Some points that stand out:
1.) It is impossible to measure capital because relative prices are incorrect in situations outside equilibrium. From this it follows that it is also impossible to measure a country's GDP or the history of its productivity.
2.) The law of diminishing marginal utility is false for the reason that capital is always being re-shuffled in new complementary ways. BTW, this is probably one of the most powerful criticisms of Keynes' theory of investment in relation to the marginal efficiency of capital (and the assumption of a falling rate of profit in conditions of capital accumulation).
3.) Since capital cannot be measured, then neither can investment. This is a point that is generally overlooked by Austrians, and Lachmann said as much in an article entitled "Reflections on Hayekian Capital Theory." In support of this view, Lachmann quotes Hayek saying:
"if we cannot determine the size of either saving or investment by any reference to changes in the quantity of capital, then with the abandonment of this basis for the distinction there must go the economists' habitual practice of separating out the part of general investment activity which happens to leave the capital stock in some sense constant, as something different from activities which add to that stock."
But if investment cannot be measured, can malinvestment be? And if not, what then becomes of the Austrian theory of the business cycle? The many critical remarks by Professor Lachmann of this theory boils down essentially to this point. Capital heterogeneity precludes talk of capital measurement in terms of either investment or malinvestment.
What have others made of Lachmann's work on capital theory?
Also, to Rober Vienneau: Does Lachmann's theory have anything to say of the Cambridge (UK) theory of capital? Lachmann mentions this literature several times in his work, but only briefly and in passing. Here is an example:
"Everybody seems to agree today that the stock of capital cannot be measured outside equilibrium, viz. outside entirely artificial conditions. But there are two reasons for it of which we may call one the 'Ricardian' or 'objectivist', the other the 'Austrian' or 'subjectivist' reason. We may also say that the one is backward looking, the other forward looking. The former rests on the fact that any change in the mode of income distribution, in rate of profit or wage rate, will affect relative prices and thus deprive us of any solid yardstick. It is particularly germane to any view of capital which links the present value of capital resources to their current cost of reproduction, a 'backward looking' view."
Most contemporary Austrians study his work by using (3) to understand (5). Now I have to admit that I haven't been very interested in the hermeneutic aspect of Lachmann's work. What I have found most challenging and insightful in Lachmann's work is his discussion of capital theory (2). I think this is an underappreciated aspect of his work, although admittedly a few Austrians make frequent mention of it (for example, Peter Lewin and Steven Horwitz). Lachmann does a lot with capital theory, and I cannot discuss it all here. Some points that stand out:
1.) It is impossible to measure capital because relative prices are incorrect in situations outside equilibrium. From this it follows that it is also impossible to measure a country's GDP or the history of its productivity.
2.) The law of diminishing marginal utility is false for the reason that capital is always being re-shuffled in new complementary ways. BTW, this is probably one of the most powerful criticisms of Keynes' theory of investment in relation to the marginal efficiency of capital (and the assumption of a falling rate of profit in conditions of capital accumulation).
3.) Since capital cannot be measured, then neither can investment. This is a point that is generally overlooked by Austrians, and Lachmann said as much in an article entitled "Reflections on Hayekian Capital Theory." In support of this view, Lachmann quotes Hayek saying:
"if we cannot determine the size of either saving or investment by any reference to changes in the quantity of capital, then with the abandonment of this basis for the distinction there must go the economists' habitual practice of separating out the part of general investment activity which happens to leave the capital stock in some sense constant, as something different from activities which add to that stock."
But if investment cannot be measured, can malinvestment be? And if not, what then becomes of the Austrian theory of the business cycle? The many critical remarks by Professor Lachmann of this theory boils down essentially to this point. Capital heterogeneity precludes talk of capital measurement in terms of either investment or malinvestment.
What have others made of Lachmann's work on capital theory?
Also, to Rober Vienneau: Does Lachmann's theory have anything to say of the Cambridge (UK) theory of capital? Lachmann mentions this literature several times in his work, but only briefly and in passing. Here is an example:
"Everybody seems to agree today that the stock of capital cannot be measured outside equilibrium, viz. outside entirely artificial conditions. But there are two reasons for it of which we may call one the 'Ricardian' or 'objectivist', the other the 'Austrian' or 'subjectivist' reason. We may also say that the one is backward looking, the other forward looking. The former rests on the fact that any change in the mode of income distribution, in rate of profit or wage rate, will affect relative prices and thus deprive us of any solid yardstick. It is particularly germane to any view of capital which links the present value of capital resources to their current cost of reproduction, a 'backward looking' view."
I was emailed earlier today by a reader of this blog who alerted me to a comment made by Peter Boettke. Here is the passage:
"BTW, and this is directed at Matt Mueller, you made a claim earlier -- Shackle taught us that scarcity doesn't apply in the 1930s because of expectations, I wrote back and gave you a citation from 1959 in which Shackle fully embraces not only scarcity, but the importance of relative price movements (Economics for Pleasure [Cambridge University Press]) and you remained silent --- why? The Shackle you present us with, is not the G. L. S. Shackle who actually made contributions to ECONOMICS. Why should we value your Shackle over the real Shackle? I also might recommend to you Shackle's Expectation, Enterprise and Profit ... I don't agree with all the economics in this book, but it is Economics and that means that there are preferences and constraints, prices and profits, and systemic forces and equilibrating tendencies. Words such as uncertainty and process, cannot substitute for economic analysis, they have to instead be part of the analysis."
Economics for Pleasure is a book that was directed at a popular audience, and the book on the firm to which Mr. Boettke refers is a contribution of Shackle's that never really received much attention save for a few close British colleagues of his like Professors Ford and Earl (see in particular the interview of Shackle conducted by Peter Earl entitled "Coping with Uncertainty in Economics"). I cannot believe that Mr. Boettke is quite seriously of this opinion. It is like saying the real Mises is the one who wrote "Marxism Unmasked" and that the Mises of Human Action and The Ultimate Foundation of Economic Science is just a caricature. This is the position Mr. Boettke has taken in his assessment of Shackle's work. Shackle's most important and enduring works have been those that have expounded most clearly and cogently the imporance and necessity of uncertainty in economics. He used this insight to great effect in demonstrating the absurdity of rationality.
Pete Boettke is a strong defender of price theory, and I like that about him. I too enjoy reading about and learning price theory. Last summer I actually read through the textbooks written by Alchian & Allen, and Stigler. I also plan to read through Donald McCloskey's textbook on price theory this summer. But this sort of economics must not be accepted as the necessary and universal criterion by which all other insights and discoveries are judged. Economists set themselves too easy a task if they wish this to be their sole aim.
To give just one example. Shackle showed that uncertainty destroys the theory of marginal productivity, for if the value of a marginal unit can only be ascertained once the product sells for a price in the future, then how do we go about pricing that marginal unit today? Now Mr. Boettke is making the mistake in using standard price theory as the criterion in judging this contribution of Professor Shackle. He wishes to argue that "uncertainty ... cannot substitute for economic analysis." I am afraid that Mr. Boettke has shut himself off to possible new developments in theory with an attitude like this. The whole point to Shackle's 1967 book was to show that in the 1930's economic theory moved beyond the economics of scarcity and into the realm of expectation. Does Mr. Boettke wish to suggest that one's understanding of price theory can stop at 1920?
"BTW, and this is directed at Matt Mueller, you made a claim earlier -- Shackle taught us that scarcity doesn't apply in the 1930s because of expectations, I wrote back and gave you a citation from 1959 in which Shackle fully embraces not only scarcity, but the importance of relative price movements (Economics for Pleasure [Cambridge University Press]) and you remained silent --- why? The Shackle you present us with, is not the G. L. S. Shackle who actually made contributions to ECONOMICS. Why should we value your Shackle over the real Shackle? I also might recommend to you Shackle's Expectation, Enterprise and Profit ... I don't agree with all the economics in this book, but it is Economics and that means that there are preferences and constraints, prices and profits, and systemic forces and equilibrating tendencies. Words such as uncertainty and process, cannot substitute for economic analysis, they have to instead be part of the analysis."
Economics for Pleasure is a book that was directed at a popular audience, and the book on the firm to which Mr. Boettke refers is a contribution of Shackle's that never really received much attention save for a few close British colleagues of his like Professors Ford and Earl (see in particular the interview of Shackle conducted by Peter Earl entitled "Coping with Uncertainty in Economics"). I cannot believe that Mr. Boettke is quite seriously of this opinion. It is like saying the real Mises is the one who wrote "Marxism Unmasked" and that the Mises of Human Action and The Ultimate Foundation of Economic Science is just a caricature. This is the position Mr. Boettke has taken in his assessment of Shackle's work. Shackle's most important and enduring works have been those that have expounded most clearly and cogently the imporance and necessity of uncertainty in economics. He used this insight to great effect in demonstrating the absurdity of rationality.
Pete Boettke is a strong defender of price theory, and I like that about him. I too enjoy reading about and learning price theory. Last summer I actually read through the textbooks written by Alchian & Allen, and Stigler. I also plan to read through Donald McCloskey's textbook on price theory this summer. But this sort of economics must not be accepted as the necessary and universal criterion by which all other insights and discoveries are judged. Economists set themselves too easy a task if they wish this to be their sole aim.
To give just one example. Shackle showed that uncertainty destroys the theory of marginal productivity, for if the value of a marginal unit can only be ascertained once the product sells for a price in the future, then how do we go about pricing that marginal unit today? Now Mr. Boettke is making the mistake in using standard price theory as the criterion in judging this contribution of Professor Shackle. He wishes to argue that "uncertainty ... cannot substitute for economic analysis." I am afraid that Mr. Boettke has shut himself off to possible new developments in theory with an attitude like this. The whole point to Shackle's 1967 book was to show that in the 1930's economic theory moved beyond the economics of scarcity and into the realm of expectation. Does Mr. Boettke wish to suggest that one's understanding of price theory can stop at 1920?
Monday, December 1, 2008
I am now in the process of writing a grand critique of rational choice theory in economics. What makes this critique exceptional is that it departs from all the rest in ridiculing "realism." Most economists are critical of rational choice and equilibrium because they see it as an excessive abstraction from reality. As I put it: "These are those same people who rebuke pure theory for failing to verify the "realism" of its assumptions (e.g., Kaldor 1972, p. 1238)." Anyway, I am showing that the very idea of rational choice is incoherent because it is inconsistent with economics. Here is the introduction:
Introduction: "It is clear that economics has suffered much too long from a neglect of the basic principles of philosophy. This determination comes from the very nature of its presupossitions, whereon our thesis rests. The relation of economics to philosophy here described can further be understood in the fact that the questions of interest in philosophy are quite foreign to the conclusions established by economics. For example, economists commonly suppose that all men act in order to achieve some end, and dismiss as immaterial the causes by which these men are disposed to pursue such ends. Yet philosophers have troubled themselves a great deal on the question of the nature of causation, and might therefore very well view this development in economics as a retreat to the "sanctuary of ignorance.""
Basically, my paper makes three points: The assumption of rationality, if consistently applied, eliminates (1) choice, (2) time, and (3) separate entities.
Separate Entities So much confusion has resulted from this in economics. Oskar Morgenstern introduced the problem, found that it was irreconcilable with equilibrium theory, and chose instead to focus on "game theory" as a possible solution to this dilemma. F. A. Hayek also recognized this problem in his 1937 paper. The problem, however, is that it is logically absurd to assume the existence of numerous individuals each exercising perfect foresight. This would introduce limitations and impose boundaries on the exercise of rationality, and rationality would thus cease to exist. If we use rationality consistently, what we arrive at is this: "
"In Nature there cannot be two or more substances of the same nature or attribute. Dem: If there were two or more distinct substances, they would have to be distinguished from one another either by a difference in their attributes, or by a difference in their affections. If only by a difference in their attributes, then it will be conceded there there is only one of the same attribute. But if by a difference in their affections, then since a substance is prior in nature to its affections, if the affections are put to one side and the substance is considered in itself, that is, considered truly, one cannot be conceived to be distinguished from another, that is, there cannot be many, but only one ... q.e.d." (Spinoza 1996, p. 3)."
Choice Now Shackle and others have already hinted at this problem. In a world of perfect knowledge, there no longer is any choice. But there also is no longer any economic problem (choice among competing alternatives, pursuit of ends, scarcity, etc.). Perfect knowledge removes all these difficulties.
Time The distinction is often made between history and equilibrium (real time vs. logical time). This also is logically absurd. There can be no logical time but only eternity with no before, after, or during. Much of the Post Keynesian criticism of general equilibrium fails on this score.
The basic thesis of my paper is that economists have failed to recognize the true implications of rationality, and this has led to much confusion in the development of their science. For example, if rationality implies the existence of one individual only, then what is left of things such as: specialization, economic coordination, division of labor, division of knowledge, etc.?
Here is my conclusion "Many writers who decry the implications of rationality rightly abandon its teachings. But those who find themselves fascinated at its mysteries can only be faulted for failing to pursue to completion its logical connections. This is why I am surprised that economists have been blind to the many ramifications of rationality for their subject. I am afraid that there is very little romance in the whole affair. The development is properly seen rather as one of the great tragedies in intellectual thought."
-----
And one final point. A good economist friend of mine has remarked that some will object that you are failing to distinguish complete knowledge from relevant knowledge. Rational choice theory, after all, only requires relevant knowledge. I will also show this to be false by again going back to Spinoza: "the knowledge of an effect depends on, and involves, the knowledge of its cause" (Spinoza 1996, p. 2)." This reasoning goes back ad infinitum until we arrive at perfect and complete knowledge.
In short: All of economics is wrong and all of the criticisms leveled against it have been misguided and confused.
Introduction: "It is clear that economics has suffered much too long from a neglect of the basic principles of philosophy. This determination comes from the very nature of its presupossitions, whereon our thesis rests. The relation of economics to philosophy here described can further be understood in the fact that the questions of interest in philosophy are quite foreign to the conclusions established by economics. For example, economists commonly suppose that all men act in order to achieve some end, and dismiss as immaterial the causes by which these men are disposed to pursue such ends. Yet philosophers have troubled themselves a great deal on the question of the nature of causation, and might therefore very well view this development in economics as a retreat to the "sanctuary of ignorance.""
Basically, my paper makes three points: The assumption of rationality, if consistently applied, eliminates (1) choice, (2) time, and (3) separate entities.
Separate Entities So much confusion has resulted from this in economics. Oskar Morgenstern introduced the problem, found that it was irreconcilable with equilibrium theory, and chose instead to focus on "game theory" as a possible solution to this dilemma. F. A. Hayek also recognized this problem in his 1937 paper. The problem, however, is that it is logically absurd to assume the existence of numerous individuals each exercising perfect foresight. This would introduce limitations and impose boundaries on the exercise of rationality, and rationality would thus cease to exist. If we use rationality consistently, what we arrive at is this: "
"In Nature there cannot be two or more substances of the same nature or attribute. Dem: If there were two or more distinct substances, they would have to be distinguished from one another either by a difference in their attributes, or by a difference in their affections. If only by a difference in their attributes, then it will be conceded there there is only one of the same attribute. But if by a difference in their affections, then since a substance is prior in nature to its affections, if the affections are put to one side and the substance is considered in itself, that is, considered truly, one cannot be conceived to be distinguished from another, that is, there cannot be many, but only one ... q.e.d." (Spinoza 1996, p. 3)."
Choice Now Shackle and others have already hinted at this problem. In a world of perfect knowledge, there no longer is any choice. But there also is no longer any economic problem (choice among competing alternatives, pursuit of ends, scarcity, etc.). Perfect knowledge removes all these difficulties.
Time The distinction is often made between history and equilibrium (real time vs. logical time). This also is logically absurd. There can be no logical time but only eternity with no before, after, or during. Much of the Post Keynesian criticism of general equilibrium fails on this score.
The basic thesis of my paper is that economists have failed to recognize the true implications of rationality, and this has led to much confusion in the development of their science. For example, if rationality implies the existence of one individual only, then what is left of things such as: specialization, economic coordination, division of labor, division of knowledge, etc.?
Here is my conclusion "Many writers who decry the implications of rationality rightly abandon its teachings. But those who find themselves fascinated at its mysteries can only be faulted for failing to pursue to completion its logical connections. This is why I am surprised that economists have been blind to the many ramifications of rationality for their subject. I am afraid that there is very little romance in the whole affair. The development is properly seen rather as one of the great tragedies in intellectual thought."
-----
And one final point. A good economist friend of mine has remarked that some will object that you are failing to distinguish complete knowledge from relevant knowledge. Rational choice theory, after all, only requires relevant knowledge. I will also show this to be false by again going back to Spinoza: "the knowledge of an effect depends on, and involves, the knowledge of its cause" (Spinoza 1996, p. 2)." This reasoning goes back ad infinitum until we arrive at perfect and complete knowledge.
In short: All of economics is wrong and all of the criticisms leveled against it have been misguided and confused.
Sunday, November 30, 2008
Pete Boettke has recently written a post on the failed policies and intellectual legacy of Lord Keynes. I did not like it. The Austrians are probably the least charitable readers of "the economics of Lord Keynes" --- and this is different from "Keynesian economics." In fact, Austrians often fail to explictly note this difference!
What is so remarkable about Keynes is that he anticipated much of the criticism that has been directed at his "general" theory, and, in my opinion, that he was very effective at refuting much of the prevailing orthodoxy. To give one example, Mr. Boettke writes that: "But what of Knight's judgment that "what is new isn't true, and what is true isn't new?" --- In fact, in the preface to The General Theory, Keynes actually writes that many orthodox economists will say just that ---- "Those, who are strongly wedded to what I shall call 'the classical theory', will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new." Lord Keynes took the words right out of Frank Knight's mouth!
Moreover, Mr. Boettke also makes a mistake by writing as though economic policy is the only "revolutionary" message in Keynes' General Theory. Those who have followed Keynes' work very closely are quick to point out that these policies are not even understood by Keynesians themselves because these economists have failed to grasp the true message of the General Theory: uncertainty, liquidity preference, and effective demand.
And the last thing young Austrians should do, if they really want to understand what Keynes said, is read Henry Hazlitt or Robert Higgs. There is much more to Keynes than what we today call public works and deficit spending. The good interpreters of Keynes's message have been: Paul Davidson (and nearly every Post Keynesian who has followed him), Hyman Minsky, Alan Meltzer, Victoria Chick, Greg Hill, Fiona Maclachlan, among others.
Before Austrians make any progress on this front, they first have to understand what the economics of Lord Keynes is all about. And they should know this by now. People like Steve Horwitz, Roger Koppl, William Butos, and David Prychitko have all debated with some of the best followers of Keynes, and yet they have failed to recognize the limitations Keynes' message imposes on the continued validity (and relevance!) of Austrian economics.
In fact, these same followers of Keynes have been equally critical of "Keynesian economics." Paul Davidson, for example, in commenting on the neoclassical Keynesian synthesis, wrote that this literature "robbed Keynes's message of its theoretical bite."
Mr. Boettke is writing here more as the libertarian and not the economist. Austrians have a great deal to learn from Keynes regarding pure economic theory. Chapters 13 and 14 of The General Theory present an accurate picture of the Austrian theory of the loanable funds model, followed by a devastating critique of its main assumptions. Chapters 12 and 17, moreover, are probably the two best chapters any young economist can read (supplemented, of course, by the writings and commentary of Paul Davidson and G. L. S. Shackle).
What is so remarkable about Keynes is that he anticipated much of the criticism that has been directed at his "general" theory, and, in my opinion, that he was very effective at refuting much of the prevailing orthodoxy. To give one example, Mr. Boettke writes that: "But what of Knight's judgment that "what is new isn't true, and what is true isn't new?" --- In fact, in the preface to The General Theory, Keynes actually writes that many orthodox economists will say just that ---- "Those, who are strongly wedded to what I shall call 'the classical theory', will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new." Lord Keynes took the words right out of Frank Knight's mouth!
Moreover, Mr. Boettke also makes a mistake by writing as though economic policy is the only "revolutionary" message in Keynes' General Theory. Those who have followed Keynes' work very closely are quick to point out that these policies are not even understood by Keynesians themselves because these economists have failed to grasp the true message of the General Theory: uncertainty, liquidity preference, and effective demand.
And the last thing young Austrians should do, if they really want to understand what Keynes said, is read Henry Hazlitt or Robert Higgs. There is much more to Keynes than what we today call public works and deficit spending. The good interpreters of Keynes's message have been: Paul Davidson (and nearly every Post Keynesian who has followed him), Hyman Minsky, Alan Meltzer, Victoria Chick, Greg Hill, Fiona Maclachlan, among others.
Before Austrians make any progress on this front, they first have to understand what the economics of Lord Keynes is all about. And they should know this by now. People like Steve Horwitz, Roger Koppl, William Butos, and David Prychitko have all debated with some of the best followers of Keynes, and yet they have failed to recognize the limitations Keynes' message imposes on the continued validity (and relevance!) of Austrian economics.
In fact, these same followers of Keynes have been equally critical of "Keynesian economics." Paul Davidson, for example, in commenting on the neoclassical Keynesian synthesis, wrote that this literature "robbed Keynes's message of its theoretical bite."
Mr. Boettke is writing here more as the libertarian and not the economist. Austrians have a great deal to learn from Keynes regarding pure economic theory. Chapters 13 and 14 of The General Theory present an accurate picture of the Austrian theory of the loanable funds model, followed by a devastating critique of its main assumptions. Chapters 12 and 17, moreover, are probably the two best chapters any young economist can read (supplemented, of course, by the writings and commentary of Paul Davidson and G. L. S. Shackle).
Tuesday, November 25, 2008
Jeffrey Friedman has for some time now managed one of the most exciting journals I have come across: Critical Review. Austrian themes are developed, rational choice theory attacked, and, most importantly, the theory of public ignorance is discussed and analyzed. Jeffrey Friedman is the leader of this movement. The idea is that democracy is incoherent because the public are woefully ignorant of politics and government. Most decisions involving important political questions are made on account of "extremely ill-informed judgments about 'the nature of the times' (prosperity? peace?)" and so leaves democracy open to the "manipulation and manufacture" of public opinion by effective demagogues. For example, it has been shown that close to 90% of voters do not know which party currently controls Congress, or what issues are being discussed, and bills introduced, or the reasons various people have for supporting and/or rejecting them.
This theory is very important for at least two reasons. First of all, it challenges the idea of democratic sovereignty because such an idea "presupposes the existence of a public will." But without well-informed voters, there is no "will" to exercise. And secondly, democratic instrumentalism is also challenged because not only can the outcome no longer be considered good by virtue of its preservation of core democratic principles, but such an appeal to public opinion as a criteria of the public interest is inherently incoherent.
Jeffrey Friedman's arguments are always good, and very subtle. One can read Jeffrey Friedman's movement as a direct attack against democracy. I would like to focus on one issue, however, and that is the issue of the "ideology/public ignorance" continuum. Jeffrey Friedman argues that:
"the alternative to sheer ignorance is reliance on ideology ... to organize one's knowledge. The cognitive elite knows more about politics than the masses, but its superior knowledge is both enabled and "constrained" by the very belief systems, left and right, of which the masses are largely ignorant. ... Ideologies are, in fact, simply more sophisticated heuristics than the primitive judgments of the 'nature of the times' or 'group interests' that guide the mass public."
I think this argument is good. But it introduces a problem to the argument. Ideology cannot be considered knowledge as such. Rather, as Jeffrey Friedman notes, it is simply "a more sophisticated heuristic." This theory is therefore not just one of public ignorance, but instead one of genuine ignorance. The public is ignorant of politics; this much is true. But in our attempt to escape ignorance, and in our search for a means by which we can organize our knowledge, we necessarily become ideological. One is either ignorant or ideological in varying degrees. But one is never truly informed or in possession of knowledge.
I am not sure if Jeffrey Friedman would agree with this, but this is the point I always take away from his articles. Anyway, I attribute my political views to the theory of public ignorance developed by Mr. Friedman. His ideas are very important, and should be read by anyone with an interest in politics and ignorance.
This theory is very important for at least two reasons. First of all, it challenges the idea of democratic sovereignty because such an idea "presupposes the existence of a public will." But without well-informed voters, there is no "will" to exercise. And secondly, democratic instrumentalism is also challenged because not only can the outcome no longer be considered good by virtue of its preservation of core democratic principles, but such an appeal to public opinion as a criteria of the public interest is inherently incoherent.
Jeffrey Friedman's arguments are always good, and very subtle. One can read Jeffrey Friedman's movement as a direct attack against democracy. I would like to focus on one issue, however, and that is the issue of the "ideology/public ignorance" continuum. Jeffrey Friedman argues that:
"the alternative to sheer ignorance is reliance on ideology ... to organize one's knowledge. The cognitive elite knows more about politics than the masses, but its superior knowledge is both enabled and "constrained" by the very belief systems, left and right, of which the masses are largely ignorant. ... Ideologies are, in fact, simply more sophisticated heuristics than the primitive judgments of the 'nature of the times' or 'group interests' that guide the mass public."
I think this argument is good. But it introduces a problem to the argument. Ideology cannot be considered knowledge as such. Rather, as Jeffrey Friedman notes, it is simply "a more sophisticated heuristic." This theory is therefore not just one of public ignorance, but instead one of genuine ignorance. The public is ignorant of politics; this much is true. But in our attempt to escape ignorance, and in our search for a means by which we can organize our knowledge, we necessarily become ideological. One is either ignorant or ideological in varying degrees. But one is never truly informed or in possession of knowledge.
I am not sure if Jeffrey Friedman would agree with this, but this is the point I always take away from his articles. Anyway, I attribute my political views to the theory of public ignorance developed by Mr. Friedman. His ideas are very important, and should be read by anyone with an interest in politics and ignorance.
Sunday, November 23, 2008
I think Joseph Salerno is an important member of the contemporary Austrian movement. He is a serious historian of Austrian economics, and has contributed some excellent papers to the literature. Although I find his writing style somewhat difficult to engage and understand, he is clearly the most learned expositor of the Rothbardian economic tradition.
Israel Kirzner also considers Mr. Salerno an important member of Austrian economics. In defending his theory of entrepreneurship, Kirzner repeatedly makes mention of the criticisms of both Ludwig Lachmann and Joseph Salerno. When I first read this, I was shocked to see Kirzner compare the work of Lachmann with that of Mr. Salerno. I resolved immediately to read everything I could find by Professor Salerno. I found a lot of his work really good. I think Salerno is better when it comes to interpreting the historical development of Austrian economics. (His papers "The Place of Human Action in the Development of Modern Economic Thought" and "The Rebirth of Austrian Economics" are excellent.) However, I found his other important paper, "Mises and Hayek Dehomgenized" more difficult, partly because the exposition is executed poorly. But Kirzner has much respect for the ideas contained in this essay. Here is his assessment of Professor Salerno's work:
"Although their position is a relatively new one and has not yet generated sustained debate within the Austrian camp, it has already elicited a good deal of attention, and seems likely to stir up vigorous discussion in the immediate future. Rothbard and Salerno's understanding of the market process sees it not as a continual process of knowledge acquisition, but as a continual process of entrepreneurial decision making which, at each moment, encourages the most perceptive entrepreneurs to make their best judgments in a world of incessant change, through the use of monetary calculation of estimated profits and losses."
Kirzner then goes on to argue that Salerno's entrepreneur does not bring the market into coordination through the acquisiton of knowledge, but rather through his ability to consult market prices. Moreover, according to Mr. Salerno, there is no long run tendency toward equilibrium; "exogenous changes are continually frustrating any tendencies toward eventual equilibration."
A few thoughts. When Kirzner writes that this argument has "already elicited a good deal of attention," I take him to be referring to the debate over economic calculation between Leland Yeager on the one hand, and Hoppe/Herberner/Salerno on the other. Yeager's position is that there is no real substantial difference between Hayek and Mises on the possibility of economic calculation. Salerno et al want to argue that there is.
I have to admit that I have never really understood this argument. Does Salerno reject the idea of market equilibration? If so, then perhaps we should welcome him as a Post Austrian! But I am not so sure he does. It seems that he is simply substituting price calculation for knowledge acquisiton in his understanding of the market process, with the additional assumption of incessant change frustrating any systematic movements toward equilibrium. But how then are we to judge the efforts of the perceptive entrepreneur? What standard are we to use in measuring success against failure? The obvious answer would seem to be profits and losses. Does it not then follow that profits represent systematic market equilibration? If this is not the case, then why?
Any help in these matters would be greatly appreciated. I understand Lachmann's position very well. But I could use a little more help with Salerno's position.
Israel Kirzner also considers Mr. Salerno an important member of Austrian economics. In defending his theory of entrepreneurship, Kirzner repeatedly makes mention of the criticisms of both Ludwig Lachmann and Joseph Salerno. When I first read this, I was shocked to see Kirzner compare the work of Lachmann with that of Mr. Salerno. I resolved immediately to read everything I could find by Professor Salerno. I found a lot of his work really good. I think Salerno is better when it comes to interpreting the historical development of Austrian economics. (His papers "The Place of Human Action in the Development of Modern Economic Thought" and "The Rebirth of Austrian Economics" are excellent.) However, I found his other important paper, "Mises and Hayek Dehomgenized" more difficult, partly because the exposition is executed poorly. But Kirzner has much respect for the ideas contained in this essay. Here is his assessment of Professor Salerno's work:
"Although their position is a relatively new one and has not yet generated sustained debate within the Austrian camp, it has already elicited a good deal of attention, and seems likely to stir up vigorous discussion in the immediate future. Rothbard and Salerno's understanding of the market process sees it not as a continual process of knowledge acquisition, but as a continual process of entrepreneurial decision making which, at each moment, encourages the most perceptive entrepreneurs to make their best judgments in a world of incessant change, through the use of monetary calculation of estimated profits and losses."
Kirzner then goes on to argue that Salerno's entrepreneur does not bring the market into coordination through the acquisiton of knowledge, but rather through his ability to consult market prices. Moreover, according to Mr. Salerno, there is no long run tendency toward equilibrium; "exogenous changes are continually frustrating any tendencies toward eventual equilibration."
A few thoughts. When Kirzner writes that this argument has "already elicited a good deal of attention," I take him to be referring to the debate over economic calculation between Leland Yeager on the one hand, and Hoppe/Herberner/Salerno on the other. Yeager's position is that there is no real substantial difference between Hayek and Mises on the possibility of economic calculation. Salerno et al want to argue that there is.
I have to admit that I have never really understood this argument. Does Salerno reject the idea of market equilibration? If so, then perhaps we should welcome him as a Post Austrian! But I am not so sure he does. It seems that he is simply substituting price calculation for knowledge acquisiton in his understanding of the market process, with the additional assumption of incessant change frustrating any systematic movements toward equilibrium. But how then are we to judge the efforts of the perceptive entrepreneur? What standard are we to use in measuring success against failure? The obvious answer would seem to be profits and losses. Does it not then follow that profits represent systematic market equilibration? If this is not the case, then why?
Any help in these matters would be greatly appreciated. I understand Lachmann's position very well. But I could use a little more help with Salerno's position.
Friday, November 21, 2008
One of the most fascinating exchanges I have read has been that of G. L. S. Shackle and Alan Coddington. Shackle wrote a great big book, Epistemics and Economics, in 1972. This prompted a very thoughtful response by Mr. Coddington in 1975 in the form of a lenghty review essay. From these events there ensued a lively and insightful exchange between these two theorists that led to, among other things, the coining of the phrase "Chapter 12 Keynesian" and the distinction between the syntactic and the semantic aspects of formal economic theory.
Both authors thought very highly of one another. In a review article of Coddington's book Keynesian Economics, Shackle writes of Mr. Coddington in the following way:
"Coddington was sometimes present at the seminars of untrammelled thought organised by Professor Littlechild at Birmingham, where the ultimate questions could be broached and long thoughts entertained. Littlechild himself, Jack Wiseman, Brian Loasby, Israel Kirzner, Murray Rothbard, Terence Hutchison, Professor Mahoney and others set going a discussion oriented to subjectivism, and Coddington of course was fully in the swim of such high-powered explorations."
What a great discussion this must have been! However, Shackle continues on, "Yet in his book he has by implication somewhat reproved us." This is true, as any reader of Mr. Coddington's book well knows. Mr. Coddington took a very different attitude to Shackle and his idea of radical uncertainty in the 1983 book from that which he entertained in the 1975 article. Here is Coddington in his later book:
"Although I have come to take a far more critical attitude than was evident in this review article to Shackle's interpretation of Keynes's work, the experience of getting to grips with Shackle's ideas has nevertheless left its traces."
Indeed, later in the book he even refers to Shackle's work as "analytically nihilistic." But this is different from the view Coddington advanced in the 1975 review article. There Coddington understood and appreciated Shackle's work greatly. In summarizing Shackle's work, Mr. Coddington quotes him saying "the theoretician is confronted with a stark choice. He can reject rationality or time." Reason, in other words, is incapable of application due to the existence of time. This is because all conduct is concerned with future affairs, and these do not yet exist. Moreover, an understanding of these future state of affairs requires the knowledge of the actions that will be performed by others because the future is the product of the conduct of everyone's actions. Here is Mr. Coddington:
"To be 'fully informed' about the consequences of one's own decision, one would have to know what everyone else is deciding at the same time. ... There is thus a simultaneity problem."
This is Shackle for you, in all his glory. Reading Shackle is like reading no other economist; it is quite a ride. Shackle forever changed the way I approach economics. But how does one get around this? How can one still do "economics" after admitting the radical uncertainty of the future and the consequent impossibility of rational decision making? Well, the later Coddington (1983 book) would argue that this cannot be done. Coddington argues in his later book that once the Shacklean succeeds in convincing the rest of the profession as to the veracity of this claim, "there would be nothing left but for the whole profession to shut up shop." This is surprising, because the earlier Coddington (1975 review) had an answer to this: abandon formalization as an ideal. Here is Mr. Coddington in his earlier review article:
"carefully imprecise concepts [radical uncertainty] can give a more accurate expression of the economic world than precise ones. On these grounds, the kind of precision aimed at by the axiomatisers can be seen to be quite artificial in that to increase the precision of formalisms in no way contributes to a clarification of the mode of correspondence between the formalism adn the economic world it is supposed to represent."
This is an excellent defense of Shackle's economics. In fact, it is consistent with Aristotle's warning that "it is the mark of an educated man to look for precision in each class of things just so far as the nature of the subject admits." The existence of uncertainty does not permit the precise formalization of economic concepts, precisely because human conduct involves creativity and daring, not probable estimates of likely consequences.
Austrians interested in uncertainty should give this literature a careful and close reading. Here are the references:
1.) Alan Coddington "Creaking Semaphore and beyond: A Consideration of Shackle's 'Epistemics and Economics' " The British Journal of the Philosophy of Science, 26 (2), June 1975.
2.) G. L. S. Shackle "The Romantic Mountain and the Classic Lake: Alan Coddington's Keynesian Economics" reprinted in Shackle, Business, Time and Thought: Selected Papers of G. L. S. Shackle.
3.) G. L. S. Shackle "Sir John Hicks's 'IS-LM': an explanation'; a Comment" reprinted in Shackle, Business, Time and Thought.
4.) Alan Coddington Keynesian Economics: The Search for First Principles, George Allen & Unwin, 1983.
Both authors thought very highly of one another. In a review article of Coddington's book Keynesian Economics, Shackle writes of Mr. Coddington in the following way:
"Coddington was sometimes present at the seminars of untrammelled thought organised by Professor Littlechild at Birmingham, where the ultimate questions could be broached and long thoughts entertained. Littlechild himself, Jack Wiseman, Brian Loasby, Israel Kirzner, Murray Rothbard, Terence Hutchison, Professor Mahoney and others set going a discussion oriented to subjectivism, and Coddington of course was fully in the swim of such high-powered explorations."
What a great discussion this must have been! However, Shackle continues on, "Yet in his book he has by implication somewhat reproved us." This is true, as any reader of Mr. Coddington's book well knows. Mr. Coddington took a very different attitude to Shackle and his idea of radical uncertainty in the 1983 book from that which he entertained in the 1975 article. Here is Coddington in his later book:
"Although I have come to take a far more critical attitude than was evident in this review article to Shackle's interpretation of Keynes's work, the experience of getting to grips with Shackle's ideas has nevertheless left its traces."
Indeed, later in the book he even refers to Shackle's work as "analytically nihilistic." But this is different from the view Coddington advanced in the 1975 review article. There Coddington understood and appreciated Shackle's work greatly. In summarizing Shackle's work, Mr. Coddington quotes him saying "the theoretician is confronted with a stark choice. He can reject rationality or time." Reason, in other words, is incapable of application due to the existence of time. This is because all conduct is concerned with future affairs, and these do not yet exist. Moreover, an understanding of these future state of affairs requires the knowledge of the actions that will be performed by others because the future is the product of the conduct of everyone's actions. Here is Mr. Coddington:
"To be 'fully informed' about the consequences of one's own decision, one would have to know what everyone else is deciding at the same time. ... There is thus a simultaneity problem."
This is Shackle for you, in all his glory. Reading Shackle is like reading no other economist; it is quite a ride. Shackle forever changed the way I approach economics. But how does one get around this? How can one still do "economics" after admitting the radical uncertainty of the future and the consequent impossibility of rational decision making? Well, the later Coddington (1983 book) would argue that this cannot be done. Coddington argues in his later book that once the Shacklean succeeds in convincing the rest of the profession as to the veracity of this claim, "there would be nothing left but for the whole profession to shut up shop." This is surprising, because the earlier Coddington (1975 review) had an answer to this: abandon formalization as an ideal. Here is Mr. Coddington in his earlier review article:
"carefully imprecise concepts [radical uncertainty] can give a more accurate expression of the economic world than precise ones. On these grounds, the kind of precision aimed at by the axiomatisers can be seen to be quite artificial in that to increase the precision of formalisms in no way contributes to a clarification of the mode of correspondence between the formalism adn the economic world it is supposed to represent."
This is an excellent defense of Shackle's economics. In fact, it is consistent with Aristotle's warning that "it is the mark of an educated man to look for precision in each class of things just so far as the nature of the subject admits." The existence of uncertainty does not permit the precise formalization of economic concepts, precisely because human conduct involves creativity and daring, not probable estimates of likely consequences.
Austrians interested in uncertainty should give this literature a careful and close reading. Here are the references:
1.) Alan Coddington "Creaking Semaphore and beyond: A Consideration of Shackle's 'Epistemics and Economics' " The British Journal of the Philosophy of Science, 26 (2), June 1975.
2.) G. L. S. Shackle "The Romantic Mountain and the Classic Lake: Alan Coddington's Keynesian Economics" reprinted in Shackle, Business, Time and Thought: Selected Papers of G. L. S. Shackle.
3.) G. L. S. Shackle "Sir John Hicks's 'IS-LM': an explanation'; a Comment" reprinted in Shackle, Business, Time and Thought.
4.) Alan Coddington Keynesian Economics: The Search for First Principles, George Allen & Unwin, 1983.
Thursday, November 20, 2008
I have benefited greatly from the close reading of several of Mr. Rosenstein-Rodan's essays. The two essays of his that have been most infuential on my thinking are "The Coordination of the General Theories of Money and Price" and "The Role of Time in Economic Theory." The last essay in particular, published in 1934, has challenged me to think about time in new and challenging ways.
Rosenstein-Rodan discusses the concept of time from every angle, and leaves no area unexamined. He is also an excellent essayist. The three problems Mr. Rosenstein-Rodan identifies are (1) the economic period; (2) time as an economic good (the disposition of it); and (3) the actual process of change through time. While the last problem is the most interesting, I found the first one the most important.
For one thing, the equilibrium values of wants in relation to goods depend on the period of time under consideration. This subtle point is sometimes lost in the minds of professional economists. An optimal distribution of resources will obtain with every new change in the period of time for which one is economizing. This implies that there is no single equilibrium value in a market process involving time. This problem is heightened when imperfect foresight is introduced as an ancillary assumption to the main analysis. The presence of uncertainty makes the specific character of goods demanded in the future unknowable. Consequently, no exact planning as to the procurement of these goods can be made; people can only estimate these goods en bloc. It follows from this that the farther one looks into the future, the more uncertain the character of goods demanded becomes. As Rosenstein-Rodan puts it, "these wants cannot be foreseen concretely."
I found all this intensely interesting. I even have some notes in scholia. I will reproduce them for you to read. Comments are welcome:
"the role of time in the Austrian theory of production raises important problems concerning the relationship between productivity and human foresight. If, as a general rule, uncertainty increases as the "time element" expands outward, then, as a consequence, the nexus between productivity and capital intensity is destroyed. In other words, uncertainty and productivity via increasing stages of production cannot rise together because the proportion of wants affected are forced to move in two directions in response to the conflicting forces of production and ignorance. It is true that the Austrian production process has as its aim the satisfaction of future wants, but the "time element" introduces uncertainty into the model so that now no direct nexus can exist between capital productivity and time."
It is very rare for an article to cause me to write so much! Rosenstein-Rodan is a neglected Austrian. But his work is very important. Just look at what it has done to the Austrian theory of capital!
Rosenstein-Rodan discusses the concept of time from every angle, and leaves no area unexamined. He is also an excellent essayist. The three problems Mr. Rosenstein-Rodan identifies are (1) the economic period; (2) time as an economic good (the disposition of it); and (3) the actual process of change through time. While the last problem is the most interesting, I found the first one the most important.
For one thing, the equilibrium values of wants in relation to goods depend on the period of time under consideration. This subtle point is sometimes lost in the minds of professional economists. An optimal distribution of resources will obtain with every new change in the period of time for which one is economizing. This implies that there is no single equilibrium value in a market process involving time. This problem is heightened when imperfect foresight is introduced as an ancillary assumption to the main analysis. The presence of uncertainty makes the specific character of goods demanded in the future unknowable. Consequently, no exact planning as to the procurement of these goods can be made; people can only estimate these goods en bloc. It follows from this that the farther one looks into the future, the more uncertain the character of goods demanded becomes. As Rosenstein-Rodan puts it, "these wants cannot be foreseen concretely."
I found all this intensely interesting. I even have some notes in scholia. I will reproduce them for you to read. Comments are welcome:
"the role of time in the Austrian theory of production raises important problems concerning the relationship between productivity and human foresight. If, as a general rule, uncertainty increases as the "time element" expands outward, then, as a consequence, the nexus between productivity and capital intensity is destroyed. In other words, uncertainty and productivity via increasing stages of production cannot rise together because the proportion of wants affected are forced to move in two directions in response to the conflicting forces of production and ignorance. It is true that the Austrian production process has as its aim the satisfaction of future wants, but the "time element" introduces uncertainty into the model so that now no direct nexus can exist between capital productivity and time."
It is very rare for an article to cause me to write so much! Rosenstein-Rodan is a neglected Austrian. But his work is very important. Just look at what it has done to the Austrian theory of capital!
Wednesday, November 19, 2008
TGGP, a participant on this blog, has recently called my attention to the Austrian view of the relationship between economic theory and theology. See here and here. This was prompted by a comment I made on the Austrian economists blog concerning the importance of theology for the development and revision of economic theory. Austrians, however, wish to assert that economists have very little to learn from the theological literature.
I think there is some confusion here. Walter Block, for example, in his assessment of theology, relates economics to the concern of theologians with issues like "the just price" or "fairness." This is not what I meant. I am concerned rather with the philosophical implications of theology for the science of economics. It seems like Walter Block is simply picking up on Rothbard's discussion of the "just price" in his Power and Market, and wishes to argue that theologians do not understand economics.
But I think theology has a lot to teach us. I am by no means an expert on the subject, but I am currently reading the secondary literature on the philosophy of Baruch Spinoza with an eye to its relevance for economic theory. Spinoza is concerned primarily with the implications of God's omniscience. He argues that this fact reduces all phenomena --- mental and physical --- to God himself. Thus, omniscience guarantees the existence of only one entity, namely, God. To have perfect information of something is to have knowledge of that thing directly, rather than having knowledge of a representation of it. In other words, to have perfect knowledge of everything is the same thing as saying that everything is a part of me. There no longer is any distinction either in terms of temporality or space/extension. God is all and everything because he is omniscient.
This is all well and good you might say, but how does this relate to economics? Well, economists also use the concept of "perfect information" to justify the operation of a perfectly decentralized market economy. In fact, equilibrium in the economy requires the assumption of perfect knowledge. But for Spinoza, perfect knowledge would destroy the economy because it would preclude the existence of multiple individuals and exchange. Social cooperation and the division of labor are impossible under conditions of perfect knowledge. But for economic theory, perfect knowledge is required for social cooperation and the division of labor to operate optimally!
A lot follows from this if we accept Spinoza's logic (and what economist could deny it?). First of all, Hayek's notion of equilibrium as mutual plan coordination is incorrect because all plans are the product of a single agent in conditions of equilibrium. Also, one could also use this to attack Coase's theory of private property and externalities with zero transaction costs (perfectly available information).
I plan on spending the next semester (Spring 2009) reading up on Spinoza and the literature that surrounds his mature work to better understand this idea of omniscience. All the economist has to do is substitute the economy for God, and everything falls into place. Spinoza had a lot to say about knowledge and omniscience, and I think a lot of it is germane to the study and theory of economics.
This is what I meant when I said that economists should start reading the literature in theology. I also believe that John Duns Scotus had many important things to say on these matters. Someday I hope to write all this up in the form of a paper that will conclusively refute the entire corpus of economic theory (and the assumption of equilibrium as a prerequisite for economic optimality).
I think there is some confusion here. Walter Block, for example, in his assessment of theology, relates economics to the concern of theologians with issues like "the just price" or "fairness." This is not what I meant. I am concerned rather with the philosophical implications of theology for the science of economics. It seems like Walter Block is simply picking up on Rothbard's discussion of the "just price" in his Power and Market, and wishes to argue that theologians do not understand economics.
But I think theology has a lot to teach us. I am by no means an expert on the subject, but I am currently reading the secondary literature on the philosophy of Baruch Spinoza with an eye to its relevance for economic theory. Spinoza is concerned primarily with the implications of God's omniscience. He argues that this fact reduces all phenomena --- mental and physical --- to God himself. Thus, omniscience guarantees the existence of only one entity, namely, God. To have perfect information of something is to have knowledge of that thing directly, rather than having knowledge of a representation of it. In other words, to have perfect knowledge of everything is the same thing as saying that everything is a part of me. There no longer is any distinction either in terms of temporality or space/extension. God is all and everything because he is omniscient.
This is all well and good you might say, but how does this relate to economics? Well, economists also use the concept of "perfect information" to justify the operation of a perfectly decentralized market economy. In fact, equilibrium in the economy requires the assumption of perfect knowledge. But for Spinoza, perfect knowledge would destroy the economy because it would preclude the existence of multiple individuals and exchange. Social cooperation and the division of labor are impossible under conditions of perfect knowledge. But for economic theory, perfect knowledge is required for social cooperation and the division of labor to operate optimally!
A lot follows from this if we accept Spinoza's logic (and what economist could deny it?). First of all, Hayek's notion of equilibrium as mutual plan coordination is incorrect because all plans are the product of a single agent in conditions of equilibrium. Also, one could also use this to attack Coase's theory of private property and externalities with zero transaction costs (perfectly available information).
I plan on spending the next semester (Spring 2009) reading up on Spinoza and the literature that surrounds his mature work to better understand this idea of omniscience. All the economist has to do is substitute the economy for God, and everything falls into place. Spinoza had a lot to say about knowledge and omniscience, and I think a lot of it is germane to the study and theory of economics.
This is what I meant when I said that economists should start reading the literature in theology. I also believe that John Duns Scotus had many important things to say on these matters. Someday I hope to write all this up in the form of a paper that will conclusively refute the entire corpus of economic theory (and the assumption of equilibrium as a prerequisite for economic optimality).
Tuesday, November 18, 2008
Karl Popper is the father of "falsificationism," the idea that a hypothesis must be falsifiable if it is to be scientific. Scientific theories are tentative and speculative "conjectures" that, through careful testing, are "refuted" as we systematically learn from our mistakes. Science progresses by trial and error. This process continues indefinitely. Therefore, no theory can ever really be "true;" it can only mean that a theory is currently superior to its predecessors in the sense that it can withstand the tests that "falisified" those predecessors.
That is Karl Popper's theory of falsificationism. How does this relate to Mises? I will show you. For Karl Popper, if a theory is to be scientific (and have informative content), it must be falfisifiable, ---i.e., it must be capable of refutation. Karl Popper gave several examples of theories that were posing as "scientific" ---- Marx's theory of history, Freudian psychanalysis, and Adlerian psychology. It is impossible to refute any of these theories. For example, a Marxist can open the newspaper and read everything as a confirmation of his theory of history.
In other words, in their concern to explain everything, the Marxists really explain nothing. A theory must be capable of refutation. Now to this list I would add the work of Mises. Mises started from the a priori (infallible) dictum of human action: "Human action is purposeful behavior." This for Mises was irrefutable. And from this it followed that the entire corpus of economic theory could be deduced. Very well; but how scientific is this theory? According to Popper, it is not scientific at all. It is a poser, like the theories of Marx and Freud. For a theory to be scientific, it must be falsifiable; but Mises' approach precludes even the consideration of this requirement. We do not have to find a flaw in the logic in order to challenge Mises' system of praxeology. We need only show that a theory that is not falsifiable is not scientific.
Is it possible to reformulate Mises' system of praxeology to make it consistent with Popper's concept of falsificationism, or is it rather Popper's theory that is incorrect? As it stands, I don't think Mises' system holds. How is it any different from Freudian psychology or Adlerian psychology?
That is Karl Popper's theory of falsificationism. How does this relate to Mises? I will show you. For Karl Popper, if a theory is to be scientific (and have informative content), it must be falfisifiable, ---i.e., it must be capable of refutation. Karl Popper gave several examples of theories that were posing as "scientific" ---- Marx's theory of history, Freudian psychanalysis, and Adlerian psychology. It is impossible to refute any of these theories. For example, a Marxist can open the newspaper and read everything as a confirmation of his theory of history.
In other words, in their concern to explain everything, the Marxists really explain nothing. A theory must be capable of refutation. Now to this list I would add the work of Mises. Mises started from the a priori (infallible) dictum of human action: "Human action is purposeful behavior." This for Mises was irrefutable. And from this it followed that the entire corpus of economic theory could be deduced. Very well; but how scientific is this theory? According to Popper, it is not scientific at all. It is a poser, like the theories of Marx and Freud. For a theory to be scientific, it must be falsifiable; but Mises' approach precludes even the consideration of this requirement. We do not have to find a flaw in the logic in order to challenge Mises' system of praxeology. We need only show that a theory that is not falsifiable is not scientific.
Is it possible to reformulate Mises' system of praxeology to make it consistent with Popper's concept of falsificationism, or is it rather Popper's theory that is incorrect? As it stands, I don't think Mises' system holds. How is it any different from Freudian psychology or Adlerian psychology?
Monday, November 17, 2008
Austrian economics certainly has had moments of tremendous productivity and development; several edited volumes (Advances in Austrian Economics; Method, Process, and Austrian Economics, etc.) in the literature are still worth re-visiting and exploring. However, I cannot help but feel disappointed at the state of the contemporary Austrian movement. Now to the extent that it is not either ignored or dismissed entirely, it is today regarded as the chief "libertarian-conservative laissez faire" ideology in economic theory. Austrian economists devote almost the whole of their efforts to defending the laissez faire ideology, and this has come, I believe, at the expense of further developments in methodology and pure theory. One of the leading thinkers in this tradition, for example, has abandoned the Lachmannian paradigm in order to criticize "behavioral economics" and "libertarian paternalism." A promising new blog, created by several of the leading Austrian thinkers, has persisted in its treatment of libertarian themes. And the leading Austrian blog has, I am afraid, been corrupted by the libertarian dogma.
This "market fundamentalism" has also found its way, with the support of the Austrians, into other areas of social theory, including, inter alia, Political Philosophy (Robert Nozick, for example), and Political Science (Public Choice and rational choice theory). More serious works that are commonly associated with these traditions have also been co-opted by this movement and rigidly interpreted as being consistent with this dogma (Douglass North, for example).
I think that students will appreciate the evolution of this laissez faire movement once they understand the development and history of economic thought. An excellent paper by John Henry exploring this theme can be found here. Henry identifies several concepts that made possible the theory of laissez faire: exchange (rather than production), rational utility maximization, optimal resource allocation, perfect competition, welfare theory, etc. Note that the origin of Austrian economics (Carl Menger) did not seek to refine any of these concepts (save for exchange, but even here the emphasis was still on its implications for production), and was in fact quite hostile to many of them. So why is Austrian economics today regarded as the chief exponent of the laissez faire ideology? This is a difficult question. I don't think it very controversial a thing to state that Menger, Bohm-Bawerk and Wieser were not libertarians. But Mises and Hayek today are remembered as libertarians, and probably the leading members of the libertarian philosophy. But the case of Mises is more a story of historical accident, and that of Hayek confusion in interpretation. If Mises did not emigrate to America, I think that he would not today be remembered as a libertarian who wrote Omnipotent Government, Interventionism, Bureaucracy, etc. (These books were, after all, written in the United States and commissioned by libertarian organizations.) And more importantly, Murray Rothbard would have never been introduced to his work, and thus the whole Austro-libertarian movement could have been avoided. The case of Hayek is also interesting (and more difficult). Hayek raised epistemological objections to government involvement in economic activity. He showed that central planning is impossible because knowledge is necessarily diffuse and tacit. But this criticsm does not imply the efficacy of laissez faire. One can accept Hayek's argument without being driven inexorably to the laissez faire dogma (just look at Post-Austrian economics!).
What I find interesting about John Henry's paper (cited above) is that he argues that the success of laissez faire is to be explained on sociological grounds. Here is Henry:
"What is not generally recognized, however, is that the current ascendancy of laissez faire theory in modern economic thinking is not the outcome of superior theory, but the consequence of a long, well-considered, well-organized, and well-orchestrated campaign begun in the 1930s in response to the government interventionist programs of the depression period that enveloped a host of celebrated figures of the post-WWII era. Hayek, Robbins, Karl Popper, Michael Oakeshott, Raymond Aaron, Ludwig von Mises, Aaron Director, Milton Friedman, Henry Hazlitt and others organized themselves as a floating center for the exchange of free-market ideas and a publishing program that advanced the theoretical justification for laissez faire. Politicians, media magnates, and public officials were recruited into a number of organizations (the Mont Pelerin society; Institute of Economic Affairs; ... Cato Institute, etc.), that established the institutional framework within which the laissez faire counter-offensive succeeded."
This is a great paragraph. John Henry is right. These institutions have arrested real Austrian economics, and has transformed it into a small part of the laissez faire "institutional framework." And even more interesting, the leading Austrian economists today are themselves products of this movement. In fact, their political commitments often guide their economic analyses. Before anything happens, we know their answer to any economic problem: Markets are not being allowed to work! If the above paragraph didn't convince you of the scandal of the whole affair, consider this passage:
"Perhaps more important than the total monies expended by free-market oriented foundations is their well conceived project to organize the development and propagation of the laissez faire program. ... Thus individual academics and specific academic programs such as those at George Mason University, Boston University, and Hillsdale College are targeted for funding."
Now while Mr. Henry is trying to show that the success of laissez faire can only be explained on sociological grounds (and not superiority in theory), I find this whole analysis disconcerting because it implicitly suggests that Austrian economics (as I understand it) was essentially bought by these libertarian organizations. Ausrtian economics sold itself for cozy academic appointments and small publicity (sort of like the Indians with cheap booze and bacon).
What needs to be done? Well, if Austrian economics is to have a real future, I think that it must explicitly abandon any connection to the libertarian movement. I think that it also must embrace heterodoxy. It would pay Austrians to read the literature on the Post Keynesian interpretation of financial markets, and the work that has been (and is now being) done in Institutional Economics. Austrians have many interesting things to say about knowledge, subjectivism, equilibrium, etc., but these profound insights have been perverted by the libertarian dogma. The libertarians destroyed Mises; now is the time to stop them from killing the school!
This "market fundamentalism" has also found its way, with the support of the Austrians, into other areas of social theory, including, inter alia, Political Philosophy (Robert Nozick, for example), and Political Science (Public Choice and rational choice theory). More serious works that are commonly associated with these traditions have also been co-opted by this movement and rigidly interpreted as being consistent with this dogma (Douglass North, for example).
I think that students will appreciate the evolution of this laissez faire movement once they understand the development and history of economic thought. An excellent paper by John Henry exploring this theme can be found here. Henry identifies several concepts that made possible the theory of laissez faire: exchange (rather than production), rational utility maximization, optimal resource allocation, perfect competition, welfare theory, etc. Note that the origin of Austrian economics (Carl Menger) did not seek to refine any of these concepts (save for exchange, but even here the emphasis was still on its implications for production), and was in fact quite hostile to many of them. So why is Austrian economics today regarded as the chief exponent of the laissez faire ideology? This is a difficult question. I don't think it very controversial a thing to state that Menger, Bohm-Bawerk and Wieser were not libertarians. But Mises and Hayek today are remembered as libertarians, and probably the leading members of the libertarian philosophy. But the case of Mises is more a story of historical accident, and that of Hayek confusion in interpretation. If Mises did not emigrate to America, I think that he would not today be remembered as a libertarian who wrote Omnipotent Government, Interventionism, Bureaucracy, etc. (These books were, after all, written in the United States and commissioned by libertarian organizations.) And more importantly, Murray Rothbard would have never been introduced to his work, and thus the whole Austro-libertarian movement could have been avoided. The case of Hayek is also interesting (and more difficult). Hayek raised epistemological objections to government involvement in economic activity. He showed that central planning is impossible because knowledge is necessarily diffuse and tacit. But this criticsm does not imply the efficacy of laissez faire. One can accept Hayek's argument without being driven inexorably to the laissez faire dogma (just look at Post-Austrian economics!).
What I find interesting about John Henry's paper (cited above) is that he argues that the success of laissez faire is to be explained on sociological grounds. Here is Henry:
"What is not generally recognized, however, is that the current ascendancy of laissez faire theory in modern economic thinking is not the outcome of superior theory, but the consequence of a long, well-considered, well-organized, and well-orchestrated campaign begun in the 1930s in response to the government interventionist programs of the depression period that enveloped a host of celebrated figures of the post-WWII era. Hayek, Robbins, Karl Popper, Michael Oakeshott, Raymond Aaron, Ludwig von Mises, Aaron Director, Milton Friedman, Henry Hazlitt and others organized themselves as a floating center for the exchange of free-market ideas and a publishing program that advanced the theoretical justification for laissez faire. Politicians, media magnates, and public officials were recruited into a number of organizations (the Mont Pelerin society; Institute of Economic Affairs; ... Cato Institute, etc.), that established the institutional framework within which the laissez faire counter-offensive succeeded."
This is a great paragraph. John Henry is right. These institutions have arrested real Austrian economics, and has transformed it into a small part of the laissez faire "institutional framework." And even more interesting, the leading Austrian economists today are themselves products of this movement. In fact, their political commitments often guide their economic analyses. Before anything happens, we know their answer to any economic problem: Markets are not being allowed to work! If the above paragraph didn't convince you of the scandal of the whole affair, consider this passage:
"Perhaps more important than the total monies expended by free-market oriented foundations is their well conceived project to organize the development and propagation of the laissez faire program. ... Thus individual academics and specific academic programs such as those at George Mason University, Boston University, and Hillsdale College are targeted for funding."
Now while Mr. Henry is trying to show that the success of laissez faire can only be explained on sociological grounds (and not superiority in theory), I find this whole analysis disconcerting because it implicitly suggests that Austrian economics (as I understand it) was essentially bought by these libertarian organizations. Ausrtian economics sold itself for cozy academic appointments and small publicity (sort of like the Indians with cheap booze and bacon).
What needs to be done? Well, if Austrian economics is to have a real future, I think that it must explicitly abandon any connection to the libertarian movement. I think that it also must embrace heterodoxy. It would pay Austrians to read the literature on the Post Keynesian interpretation of financial markets, and the work that has been (and is now being) done in Institutional Economics. Austrians have many interesting things to say about knowledge, subjectivism, equilibrium, etc., but these profound insights have been perverted by the libertarian dogma. The libertarians destroyed Mises; now is the time to stop them from killing the school!
Sunday, November 16, 2008
My decision to attend UMKC for graduate school has brought with it a recent change in my research interests. I will always consider myself an Austrian economist, but mine will be a Post-Austrian economics. I am going to learn everything I can in the heterodox tradition and attempt, gradually, to synthesize this literature with my interpretation of Austrian economics. A big part of the program at UMKC is Institutional Economics, and I have been reading lately a lot of survey articles on the subject. In particular, I have been reading a lot of stuff written by Warren Samuels, Geoffrey Hodgson, William Dugger, and Marc Tool.
Institutional Economics is a very rich field of thought without much scope for concrete application (or so it seems at this stage of my reading). The basic idea is that economic structures (institutions) are fluid and evolutionary entities that mold and shape human behavior, and are themselves determined and influenced by the interactions of individual agents. Therefore, it is wrong to take the individual as given, rationally purusing certain aims, purposes, and ends.
Into this mix a lot is added. We have Veblen and his emphasis on the effects of pecuniary culture. A very powerful implication of his analysis is the denial of downward sloping demand curves (Take that Pete Boettke!). Basically, people attempt to outperform one another in the demonstration of wealth. I find this whole discussion remarkably accurate. Veblen was a serious social theorist, and his work should be re-visited by Austrian scholars.
Veblen also took pains to distance himself from both neoclassical economics and Marxism/German Historicism. Veblen represents everything that I would want to be as a scholar. He carefully and brilliantly attacks everything without endorsing anything!
Clarency Ayres is another interesting figure. I just finished reading a paper of his entitled "The Role of Technology in Economic Theory." Ayres attempts to explain human behavior --- and cultural evolution --- in terms of its "tools and gimmicks." This reminds me of Lachmann's work on capital theory. Consider this passage:
"All culture derives from past experience. But because technology is objectified in physical tools and apparatus, it is always capable of progressive development. Every tool contains ... the possibility of being applied in new situations to different materials and in different ways from its historic use. This process is the universal pattern of invention and discovery."
Institutional Economics is a very rich field of thought without much scope for concrete application (or so it seems at this stage of my reading). The basic idea is that economic structures (institutions) are fluid and evolutionary entities that mold and shape human behavior, and are themselves determined and influenced by the interactions of individual agents. Therefore, it is wrong to take the individual as given, rationally purusing certain aims, purposes, and ends.
Into this mix a lot is added. We have Veblen and his emphasis on the effects of pecuniary culture. A very powerful implication of his analysis is the denial of downward sloping demand curves (Take that Pete Boettke!). Basically, people attempt to outperform one another in the demonstration of wealth. I find this whole discussion remarkably accurate. Veblen was a serious social theorist, and his work should be re-visited by Austrian scholars.
Veblen also took pains to distance himself from both neoclassical economics and Marxism/German Historicism. Veblen represents everything that I would want to be as a scholar. He carefully and brilliantly attacks everything without endorsing anything!
Clarency Ayres is another interesting figure. I just finished reading a paper of his entitled "The Role of Technology in Economic Theory." Ayres attempts to explain human behavior --- and cultural evolution --- in terms of its "tools and gimmicks." This reminds me of Lachmann's work on capital theory. Consider this passage:
"All culture derives from past experience. But because technology is objectified in physical tools and apparatus, it is always capable of progressive development. Every tool contains ... the possibility of being applied in new situations to different materials and in different ways from its historic use. This process is the universal pattern of invention and discovery."
Recently, however, new institutional scholars (Tool, Dugger, Swaney, etc.) have abandoned Ayres' analysis and its emphasis on the progressive nature of technology by affirming the importance of resistance to technological development and the inherent power structure exercised through it. Dugger's work is really good on this.
The work of John Commons and Wesley Mitchell is also of tremendous importance in Institutional Economics.
Does anyone else have any experience with Institutional Economics? If so, how would you define/describe it, and who has most influenced you and why?
Let me paraphrase Keynes: "I am studying Institutional Economics with the belief that I am not wasting my time."
I sure hope I am not. Institutional Economics has a lot of interesting things to say, but it just doesn't have that special kind of rigor that is found in traditional economic theory. It ain't like reading Harold Demsetz! I feel like I am being shown the world when I read Institutionalist writers (especially the old ones). It is so rich and abundant with implications, yet it remains so ambiguous and vague.
I am sure my attitude will change in the coming months, and I look forward to re-reading this post at that time to see exactly in what way my attitude has changed. But for the meantime, I will be reading up on Institutional Economics. I want to enter UMKC as a scholar on Institutional Economics. (This is no easy task, considering the literature and subject matter.)
Thursday, November 13, 2008
Steve Horwitz, a contemporary Austrian economist, had an exchange with Greg Hill in the pages of Critical Review over the merits of the Post Keynesian challenge to the "self-correcting" properties of capitalism. Mr. Horwitz makes it quite clear that the loanable funds model guarantees that all savings will be invested save for that which is hoarded. Savings and investment are, of course, in this model coordinated through changes in the interest rate. This requires flexibility not only in interest rate changes, but also in prices and wages. But Keynes argued that an economy with perfect wage/price flexibility will still produce unemployment. And this is because there is no direct relationship between decisions to save and decisions to invest. Now Mr. Horwitz recognizes this point and seeks to refute it. Now, Post Keynesians do not mean by savings "hoarding under the mattress." Horwitz is mistaken when he attributes to Post Keynesians this view of savings. For Post Keynesians, the income earner has two decisions to make: (1) how much to consume; and (2) in what liquid forms to store that which is not consumed (i.e. saved). This saving can take a variety of forms: bank deposits, bonds, mutual funds, equities, etc. Horwitz summarizes his position by writing:
"The key to a more appreciative vision of the market's intertemporal coordination powers is recognizing that what is not "spent" does not disappear into oblivion but must be devoted to some other use; indeed, it is not spending but saving that drives economic growth."
Two things. First of all, Horwitz is accepting as true what he must first prove. That saving does generate investment and economic growth. This is not as easy as he makes it out to be. And secondly, and somewhat related, is the claim that what is not spent must, according to Post Keynesians, "disappear into oblivion." Post Keynesians have never argued this. What they say is that savings will never finds its way into the industrial sector because the industrial sector provides no liquidity, and this is what savers demand. Instead, savings find their way into the financial sector, because financial assets possess a great deal of liquidity. And depending on one's appetite for risk, one can attempt to sacrifice a little liquidity for the possibility of capital gains (speculation); but because most financial assets have orderly markets, it is relatively easy to sell these assets for money. Capital goods, however, are not easily resalable (liquid).
For Post Keynesians, the financial sector is very different from the industrial sector. The financial sector deals principally with liquidity, and aims to provide people with liquidity (savers). The industrial sector, on the other hand, deals with real tangible (not easily substitutable) capital goods. These goods do not provide liquidity, because they cannot easily be sold. People who deal with capital goods must therefore look to its prospective yield and not its liquidity properties. These people are generally capitalists, and not savers.
Next, Mr. Horwitz argues that interest rates coordinate savings and investment (loanable funds model).
"The interest rates banks charge and pay serve as signals about the apparent willingness of savers to lend and borrowers to borrow. High interest rates suggest that savers are relatively reluctant to wait for the future ... and/or that borrowers are pushing relatively hard for funds. Low interest rates suggest that savers are comparatively patient ... and/or that borrowers are comparatively uninterested in investing in projects that will not produce output until the future."
Now what Mr. Horwitz is overlooking here is the importance of speculation in financial markets. Many people in the financial world deal in short-term speculation in the hopes of realizing capital gains. And they look to the interest rate in making their decisions. So, taking up from Mr. Horwitz's example, if savers are "comparatively patient" and interest rates are expected to fall, what is stopping bondholders, for example, from buying bonds now in order to realize capital gains when their price goes up? Nothing is stopping them, and this is what usually happens. But this interrupts the smooth picture Mr. Horwitz has presented us with. Any new savings will likely be swamped by changes in assets among existing wealth-holders.
Austrians have pushed this simplistic loanable funds model theory of financial markets for as long as I can remember. This has prevented them from "appreciating" (to use Mr. Horwitz's phrase) the complexities of the financial world. Speculation triumphs over "industry", and the financial sector is very different from the industrial sector.
Post Keynesian economics has an interesting history in the context of Keynesian economics more generally. For roughly the first 25 years after the publication of the General Theory, there was little controversy over how to interpret it. But, beginning in the 1960's, several different interpretations began to surface, and the battle over Keynesian economics was now underway. Two interpretations that eventually found their way into what would later become Post Keynesian economics were those of G. L. S. Shackle and Sidney Weintraub. Shackle, of course, emphasized the primacy of uncertainty in Keynes' message, while Weintraub attempted to elucidate the concept of the aggregate supply curve and its impact on wage-induced inflation. We can see both these influences in all of Paul Davidson's work. Paul Davidson talks about money and uncertainty in the same way as did Shackle, and he almost always includes a chapter on inflation and the Z-D model in all of his published books.
Paul Davidson's most recent book is entitled "John Maynard Keynes" and was published in 2007. Paul Davidson summarizes his life work on Keynes in this short book. The basic message is that, while Bastard Keynesian had economic policy right, they failed to understand the underlying theory behind it. Davidson then proceeds to explain what Keynes' new theory was all about. When it comes to economic policy, Post Keynesians are Keynesians; on matter of pure theory, however, they are radically different.
Thus Paul Davidson argues that government should occupy a central place in economic policy. Here are some quotes:
"the inability of the enrpreneurial system to provide full employment can be ameliorated by developing corrective fiscal policies and regulatory institutions for stabilizing financial markets."
"Keynes's rejection of the ergodic axiom meant that realistic theories cannot demonstrate that unregulated financial markets can optimally allocate investment funds into those projects that in the future will earn the greatest return."
Now, for Davidson, this is true because the world is non-ergodic (i.e. unpredictable). But Davidson's insistence on a "transmutable" reality seems to me to defeat and undermine any principled advocacy of government fiscal policy and regulation. Just because markets cannot cope with an uncertain future does not mean that governments can fare any better. Davidson spends several pages attacking (Austrians included) economic theories that rely on an immutable reality with epistemic ignorance. Davidson, however, believes, with Shackle, that the world is "ontologically uncertain," that it "remains to be written," and depends on the choices we make today.
Does it make sense to take this radical view of the world and then argue that governments should play a central role in increasing (stabilizing) effective demand? Shackle didn't think so. In his 1967 book, he argued quite forcefully that uncertainty "is beyond the reach of legislation."
Post Keynesians have the "theory" right; but their economic policies are all confused. Their own theory doesn't even permit them to defend "Keynesian policies." I get the impression when reading Davidson and others that Post Keynesians haven't yet fully traced out all the implications of "ontological uncertainty" and "transmutable reality." They are basically Keynesians who have enjoyed reading Shackle.
Paul Davidson's most recent book is entitled "John Maynard Keynes" and was published in 2007. Paul Davidson summarizes his life work on Keynes in this short book. The basic message is that, while Bastard Keynesian had economic policy right, they failed to understand the underlying theory behind it. Davidson then proceeds to explain what Keynes' new theory was all about. When it comes to economic policy, Post Keynesians are Keynesians; on matter of pure theory, however, they are radically different.
Thus Paul Davidson argues that government should occupy a central place in economic policy. Here are some quotes:
"the inability of the enrpreneurial system to provide full employment can be ameliorated by developing corrective fiscal policies and regulatory institutions for stabilizing financial markets."
"Keynes's rejection of the ergodic axiom meant that realistic theories cannot demonstrate that unregulated financial markets can optimally allocate investment funds into those projects that in the future will earn the greatest return."
Now, for Davidson, this is true because the world is non-ergodic (i.e. unpredictable). But Davidson's insistence on a "transmutable" reality seems to me to defeat and undermine any principled advocacy of government fiscal policy and regulation. Just because markets cannot cope with an uncertain future does not mean that governments can fare any better. Davidson spends several pages attacking (Austrians included) economic theories that rely on an immutable reality with epistemic ignorance. Davidson, however, believes, with Shackle, that the world is "ontologically uncertain," that it "remains to be written," and depends on the choices we make today.
Does it make sense to take this radical view of the world and then argue that governments should play a central role in increasing (stabilizing) effective demand? Shackle didn't think so. In his 1967 book, he argued quite forcefully that uncertainty "is beyond the reach of legislation."
Post Keynesians have the "theory" right; but their economic policies are all confused. Their own theory doesn't even permit them to defend "Keynesian policies." I get the impression when reading Davidson and others that Post Keynesians haven't yet fully traced out all the implications of "ontological uncertainty" and "transmutable reality." They are basically Keynesians who have enjoyed reading Shackle.
Wednesday, November 12, 2008
I am taking this semester a course on Western Civilization. Every week we are given reading (reactionary paper) assignments that asks us to contextualize certain events from history. My Professor does not care too much for either my thoughts or my humor. Historians are so serious!
Anyway, after receiving low B's on the most recent paper assignments, I decided to write my Professor an email. I have reproduced the email in its entirety here for my readers. Please enjoy!
Hello,
The study of history is quickly becoming more complicated than I had at first imagined. A good social scientist knows how to ask questions, and this is what I try to do. I especially enjoy challenging received wisdom and advancing heterodox views. But in my first paper, I was rebuked for failing to take history on its own terms. I took, as you put it, a "decidedly argumentative position" --- an approach which contravenes the principal object of historical study, viz., analyzing the specifics of histortical epochs. You concluded your comment to my first paper by writing,
"For this type of assignment, however, it is necessary to approach the document(s) you examine in their own right, taking into account the specifics of (among other things) their prejudices, worldviews, etc. Be sure to develop this component into you subsequent assignments. ... [M]ore work needs to be done in the realm of grounding the discussion more concretely in its original context."
This is what I have tried to accomplish with my second paper, i.e. "historical objectivity." But now I have been faulted for not providing "much argument." What a difficult rope the historian treads!
Now, I should make clear that I am not upset by your comments. I enjoy reading them very much, and agree with what you have to say. I am just trying to decide on what side I should err --- argument (generalization) or objectivity (summary) --- for my final paper.
I have an idea of what I would like to address with my final paper (the meaning of Western Civilization). I am going to develop more fully a comment you made in class --- my notes read "Instructor's thesis: Religion (deity) is that which we are not." I am going to argue that religion has destroyed our humanity by condemning man's natural proclivities. Indeed, I will show that we can read history as a gradual evolution of this thinking. We begin with the Greeks who saw in their Gods the indulgence of human vice. They reveled in their natural proclivities (lust, greed, warfare, etc.). But with Plato, and subsequent religious thinkers, we see that Man as he is begins to fall into disrepute, and Western Civilization is now premissed on the idea that Man should resemble everything that is alien to his humanity.
I hope this thesis appears to you most satisfactory. I have been reading the assigned documents mostly in this context.
I look forward to reading your thoughts.
All the best,
Matthew Mueller
Anyway, after receiving low B's on the most recent paper assignments, I decided to write my Professor an email. I have reproduced the email in its entirety here for my readers. Please enjoy!
Hello,
The study of history is quickly becoming more complicated than I had at first imagined. A good social scientist knows how to ask questions, and this is what I try to do. I especially enjoy challenging received wisdom and advancing heterodox views. But in my first paper, I was rebuked for failing to take history on its own terms. I took, as you put it, a "decidedly argumentative position" --- an approach which contravenes the principal object of historical study, viz., analyzing the specifics of histortical epochs. You concluded your comment to my first paper by writing,
"For this type of assignment, however, it is necessary to approach the document(s) you examine in their own right, taking into account the specifics of (among other things) their prejudices, worldviews, etc. Be sure to develop this component into you subsequent assignments. ... [M]ore work needs to be done in the realm of grounding the discussion more concretely in its original context."
This is what I have tried to accomplish with my second paper, i.e. "historical objectivity." But now I have been faulted for not providing "much argument." What a difficult rope the historian treads!
Now, I should make clear that I am not upset by your comments. I enjoy reading them very much, and agree with what you have to say. I am just trying to decide on what side I should err --- argument (generalization) or objectivity (summary) --- for my final paper.
I have an idea of what I would like to address with my final paper (the meaning of Western Civilization). I am going to develop more fully a comment you made in class --- my notes read "Instructor's thesis: Religion (deity) is that which we are not." I am going to argue that religion has destroyed our humanity by condemning man's natural proclivities. Indeed, I will show that we can read history as a gradual evolution of this thinking. We begin with the Greeks who saw in their Gods the indulgence of human vice. They reveled in their natural proclivities (lust, greed, warfare, etc.). But with Plato, and subsequent religious thinkers, we see that Man as he is begins to fall into disrepute, and Western Civilization is now premissed on the idea that Man should resemble everything that is alien to his humanity.
I hope this thesis appears to you most satisfactory. I have been reading the assigned documents mostly in this context.
I look forward to reading your thoughts.
All the best,
Matthew Mueller
In several of his essays ("Ethics and the Economic Interpretation," in particular), Knight attacks markets on account of their inability to satisfy consumer wants. Now this is an assumption that undergirds the entire laissez-faire philosophy -- competition (rivalrous or perfect) drives the market to respond efficiently to consumer demands. But Knight objects to this by arguing that ends (desires and wants) cannot be taken as given because they are not the ultimate source of action. Individuals do not actually try to satisfy given wants. They are concerned instead with the discovery and pursuit of higher, more enlightened wants. This is a remarkable insight. The market relies for its defense on the principle of efficiency in want satisfaction. And Knight does not question this. He goes much further and questions the very nature of the wants themselves, and arrives at the conclusion that an individualistic competitive market order creates wants that have as their aim emulation and rivarly rather than personal satisfaction and the promotion of happiness. This applies to production as well, with businessmen engaged in a "game" where the goal is to dominate your opponent much like you would in a game of chess.
Another important theme in this book concerns the ethical character of economics. Knight argues that economics is more than a branch of mechanics. And although ethical judgments can never claim to possess the status of objectivity, there is a very real sense in which the actions and motives to which they give rise are influenced by "social ideals." From here, Knight also argues that these social ideals can be used to criticize the outcomes generated by a laissez-faire economic arragement, even if all available alternative economic systems fare no better. Ethical judgment is never "a purely relative matter", but is instead concerned with the question of "ideals."
Now, traditional debates surrounding the virtues of competing economic systems have focused on the way in which resources are most efficiently allocated in direction of the satisfaction of wants. But Knight undermines this literature by observing that "wants" are never simply given; they are constantly changing and are inherently dynamic in character. Here is Knight:
" The individual who is acting deliberately is not merely and perhaps not mainly trying to satisfy given desires; there is always really present and operative, though in the background of consciousness, the idea of and desire for a new want to be striven for when the present objective is out of the way. ... [A]ll intelligently conscious activity is directed forward, onward, upward, indefinitely."
Knight also questions the traditional conception of "happiness." Consider this passage: "A man who has nothing to worry about immediately busies himself in creating something, gets into some absorbing game, falls in love, prepares to conquer some enemy, or hunt lions or the North Pole or what not."
This is all perfectly consistent with my (quite radical) interpretation of Mises and equilibrium (see earlier post "Austrians on Equilibrium"). Knight is saying everything that was already in my mind. I will end with one final quote by Knight: "It is a stock and conclusive objection to utopias that men simply will not live in a world where everything runs smoothly and life is free from care." This is exactly what Mises was getting at. Men who live vegetative existences are not really men; men are insatiable, erring, and explorative creatures. To put them in equilibrium is to deny them their humanity.
Frank Knight as a Post-Austrian!
Monday, November 10, 2008
Pete Boettke has recently written an excellent blog post on the "epistemic turn" in Austrian economics. It was F. A. Hayek, according to Mr. Boettke, who introduced the idea of competitive entrepreneurial market discovery, and in so doing challenged standard economic theory's understanding of "knowledge." This is classic Boettke:
"The Austrian understanding of the market process explicitly rejects the mechanical interpretation of human behavior, and instead sees man as imperfect in perception, biased and often in error of judgment. Rather than a lightening calculator of pleasure and pain, man within the Austrian "model" is caught between alluring hopes and haunting fears. The importance of the "Epistemic Turn" is that it is precisely by taking this step that we switch the argumentative burden from behavioral assumptions to institutional coping devices for our ignorance."
Subsequent generations of Austrian scholars have followed this conception of knowledge, and have used it to great effect in developing a more refined model of competition and entrepreneurship. Market imperfection creates the possibility for entrepreneurial discovery, according to the Austrians. This is quite different from other theories of laissez-faire (Chicago/UCLA, for example) which argue that "whatever is is best" due to the existence of information and transaction costs. Austrians, on the other hand, emphasize sheer ignorance and market imperfection as a precondition for the emergence of market processes.
However, contra Mr. Boettke, I would instead interpret the "epistemic turn" as the moment when Austrian economics moved in two different directions. Mr. Boettke hints at this when he writes:
"The Behavioral critic would do well to read both Mises and Hayek on their rejection of "economic man". But they do retain a model of man as a purposeful being (admittedly Mises more so than Hayek, but I would argue both maintain a commitment to human action)."
In fact, the theory of Mises is quite different from that of Hayek. Mises spoke of human action, while Hayek spoke of market coordination. Now indeed these theories are complementary, and exhibit considerable overlap, but, in my opinion, the fundamental assumptions are profoundly different. Take equilibrium for example. According to Hayek, equilibrium can be understood only in connection to the mutual compatibility of individual plans (i.e. market coordination). For Mises, however, equilibrium signifies the destruction of the science of economics (i.e. human action). Conceiving of market activity as a competitive discovery procedure that gradually eliminates imperfection is tantamount to believing that the economy is perennially moving towards a system without institutions and purpose (see the paper by Boettke, Prychitko, and Horwitz 1986). For Hayek (and most other Austrians), the entrepreneur is responsible for correcting market imperfection. But for Mises, the entrepreneur, as understood by contemporary Austrians, is responsible for destroying human action. Economics must preserve purpose in human action. But equilibrium is the state without purposeful action. All men are vegetables in equilibrium. Therefore, economics, for Mises, is the science of non-equilibrium (and not the science of disequilibration or market equilibration).
Austrians have failed to identify this difference in outlook between the two leaders of the contemporary Austrian movement. Mises took economics down an entirely different path from the one created by Hayek. Austrians have continued to speak of market coordination as increasing plan coordination. But this is not Misesian economics. Austrians need to decide if they want to define Austrian economics as "Hayekian" or "Misesian."
Post-Austrian economics picks up and revives Mises' project, and conceives of economics as purposeful human action. Once this is understood, all references to equilibrium suddenly lose meaning. Equilibrium is the enemy of human action. Equilibrium should be used only to illustrate the importance of human action for economics. Arguing that competitive market proceeses are an imperfect representation of equilibrium destroys Mises' main project. Economics is the science of human action. This is what Post-Austrian economics is all about. Basically, the Hayekians (i.e. contemporary Austrians) are wrong.
So, to answer Mr. Boettke's question, viz.,:
"What do you think are the most effective ways we deal with the "constitutional limitations of man's knowledge and interests" and what are the best papers out there that attempt to address the limitations?"
I would say this is it. Mises was right on in his conception of economics as human action. Purposeful action is possible only in a world of uncertainty. With uncertainty removed, e.g., equilibrium, human action becomes impossible because choice is no longer necessary. This is how we should deal with the "constitutional limitations of man's knowledge and interests." And as for papers, I have one addressing this topic currently under review. Mr. Boettke has read it.
"The Austrian understanding of the market process explicitly rejects the mechanical interpretation of human behavior, and instead sees man as imperfect in perception, biased and often in error of judgment. Rather than a lightening calculator of pleasure and pain, man within the Austrian "model" is caught between alluring hopes and haunting fears. The importance of the "Epistemic Turn" is that it is precisely by taking this step that we switch the argumentative burden from behavioral assumptions to institutional coping devices for our ignorance."
Subsequent generations of Austrian scholars have followed this conception of knowledge, and have used it to great effect in developing a more refined model of competition and entrepreneurship. Market imperfection creates the possibility for entrepreneurial discovery, according to the Austrians. This is quite different from other theories of laissez-faire (Chicago/UCLA, for example) which argue that "whatever is is best" due to the existence of information and transaction costs. Austrians, on the other hand, emphasize sheer ignorance and market imperfection as a precondition for the emergence of market processes.
However, contra Mr. Boettke, I would instead interpret the "epistemic turn" as the moment when Austrian economics moved in two different directions. Mr. Boettke hints at this when he writes:
"The Behavioral critic would do well to read both Mises and Hayek on their rejection of "economic man". But they do retain a model of man as a purposeful being (admittedly Mises more so than Hayek, but I would argue both maintain a commitment to human action)."
In fact, the theory of Mises is quite different from that of Hayek. Mises spoke of human action, while Hayek spoke of market coordination. Now indeed these theories are complementary, and exhibit considerable overlap, but, in my opinion, the fundamental assumptions are profoundly different. Take equilibrium for example. According to Hayek, equilibrium can be understood only in connection to the mutual compatibility of individual plans (i.e. market coordination). For Mises, however, equilibrium signifies the destruction of the science of economics (i.e. human action). Conceiving of market activity as a competitive discovery procedure that gradually eliminates imperfection is tantamount to believing that the economy is perennially moving towards a system without institutions and purpose (see the paper by Boettke, Prychitko, and Horwitz 1986). For Hayek (and most other Austrians), the entrepreneur is responsible for correcting market imperfection. But for Mises, the entrepreneur, as understood by contemporary Austrians, is responsible for destroying human action. Economics must preserve purpose in human action. But equilibrium is the state without purposeful action. All men are vegetables in equilibrium. Therefore, economics, for Mises, is the science of non-equilibrium (and not the science of disequilibration or market equilibration).
Austrians have failed to identify this difference in outlook between the two leaders of the contemporary Austrian movement. Mises took economics down an entirely different path from the one created by Hayek. Austrians have continued to speak of market coordination as increasing plan coordination. But this is not Misesian economics. Austrians need to decide if they want to define Austrian economics as "Hayekian" or "Misesian."
Post-Austrian economics picks up and revives Mises' project, and conceives of economics as purposeful human action. Once this is understood, all references to equilibrium suddenly lose meaning. Equilibrium is the enemy of human action. Equilibrium should be used only to illustrate the importance of human action for economics. Arguing that competitive market proceeses are an imperfect representation of equilibrium destroys Mises' main project. Economics is the science of human action. This is what Post-Austrian economics is all about. Basically, the Hayekians (i.e. contemporary Austrians) are wrong.
So, to answer Mr. Boettke's question, viz.,:
"What do you think are the most effective ways we deal with the "constitutional limitations of man's knowledge and interests" and what are the best papers out there that attempt to address the limitations?"
I would say this is it. Mises was right on in his conception of economics as human action. Purposeful action is possible only in a world of uncertainty. With uncertainty removed, e.g., equilibrium, human action becomes impossible because choice is no longer necessary. This is how we should deal with the "constitutional limitations of man's knowledge and interests." And as for papers, I have one addressing this topic currently under review. Mr. Boettke has read it.
Sunday, November 9, 2008
I have decided to read Thaler and Sunstein's (T&S) recent book Nudge because I have been told that this is the direction in which big government liberalism will likely be moving.
The arguments are very subtle, and the implications powerful. Central to the argument is the idea of a "choice environment" --- i.e. the non-neutrality of the decision milieu (p. 3). Consumers make choices, but, according to T&S, there is no neutral way to frame the environment in which choices are made. Moreover, behavior is easily manipulated according to the way available choices are framed and advertised. Therefore, it is up to "choice architects" (libertarian paternalists) to try to make people "best off, all things considered." The standard libertarian position that decisions should be made so as to allow people to choose options they "would choose on their own" is misleading because this suggests that "choice environments" can be neutral. But available options must be framed (advertised) in some way, and the results will invariably have important consequences for how people behave. People are not rational maximizers. People suffer from biases, experience frequent self-control problems, and are subject to social influences. In short, people are Homer Simpsons, and not Mr. Spocks (p. 42).
That is the basic argument. And it is an interesting one. Now how should the true libertarian respond to this? Well, the libertarian might say that attempts to improve the "choice environment" will have adverse unintended consequences, and will lead to a dangerous slippery slope. But the analysis T&S are employing is very subtle. The central idea in the book is that all choices are non-neutral. We are never free to make our own choices. This is an implicit (yet very powerful) attack on libertarianism and laissez-faire. All choices must be framed and advertised in some way, and each proposal and option will affect behavior differently. This is a very powerful argument. Libertarianism collapses. How can we be in favor of freedom from government regulation and control if it is ontologically impossible to possess autonomy in our decision-making? There is no such thing as a "neutral" market.
Now an ancillary thesis to the argument of the non-neutrality of "choice environments" is the idea that private markets have recognized the existence of non-neutrality (and the concomitant manipulability of individual behavior) and have proceeded to exploit this to their own advantage. Private companies are acutely aware "of the power of social influences" and might try to make money by "enlisting conformity" (pp. 62, 64). T&S write:
"Frequently they [private companies] emphasize that 'most people prefer' their own product, or that 'growing numbers of people' are switching from another brand, which was yesterday's news, to their own, which represents the future. They try to nudge you by telling you what most people are now doing. ... The key point here is that for all their virtues, markets often give companies a strong incentive to cater to (and profit from) human frailties, rather than to try to eradicate them or to minimize their effects" (pp. 64-65, 72).
Can you think of a commercial on television that does not do this? Moreover, S&T anticipate objections to this analysis by arguing against the efficacy of market competition in writing that "[y]ou might think that firms could educate people not to buy [goods], and indeed they might. But why should firms do that? If you are buying something that you shouldn't, how do I make any money persuading you not to buy it?" (p. 79). The basic idea behind this book is that "social nudging" should try to offset (and possibly eliminate) the efforts of private companies in manipulating the the "humanness" of individual decision-making.
One final point I would like to make, and this applies to the field of "behavioral economics" generally. I think that something is being lost here in focusing almost exclusively on human psychology. The entire argument is based on research that has been done by psychologists, and not economists. We learn about "representativeness," various "self-control strategies," "spotlight effects," "priming," and many other things that seem to have no direct connection to economics. I think that we are missing something by diverting attention away from economic phenomena. Human behavior is best understood by trying to explain human plans in relation to incentives, scarcity, and opportunity cost. This book reads more like a treatise in psychology rather than in economics. Lachmann had it exactly right in his essay "Economics as a Social Science."
The arguments are very subtle, and the implications powerful. Central to the argument is the idea of a "choice environment" --- i.e. the non-neutrality of the decision milieu (p. 3). Consumers make choices, but, according to T&S, there is no neutral way to frame the environment in which choices are made. Moreover, behavior is easily manipulated according to the way available choices are framed and advertised. Therefore, it is up to "choice architects" (libertarian paternalists) to try to make people "best off, all things considered." The standard libertarian position that decisions should be made so as to allow people to choose options they "would choose on their own" is misleading because this suggests that "choice environments" can be neutral. But available options must be framed (advertised) in some way, and the results will invariably have important consequences for how people behave. People are not rational maximizers. People suffer from biases, experience frequent self-control problems, and are subject to social influences. In short, people are Homer Simpsons, and not Mr. Spocks (p. 42).
That is the basic argument. And it is an interesting one. Now how should the true libertarian respond to this? Well, the libertarian might say that attempts to improve the "choice environment" will have adverse unintended consequences, and will lead to a dangerous slippery slope. But the analysis T&S are employing is very subtle. The central idea in the book is that all choices are non-neutral. We are never free to make our own choices. This is an implicit (yet very powerful) attack on libertarianism and laissez-faire. All choices must be framed and advertised in some way, and each proposal and option will affect behavior differently. This is a very powerful argument. Libertarianism collapses. How can we be in favor of freedom from government regulation and control if it is ontologically impossible to possess autonomy in our decision-making? There is no such thing as a "neutral" market.
Now an ancillary thesis to the argument of the non-neutrality of "choice environments" is the idea that private markets have recognized the existence of non-neutrality (and the concomitant manipulability of individual behavior) and have proceeded to exploit this to their own advantage. Private companies are acutely aware "of the power of social influences" and might try to make money by "enlisting conformity" (pp. 62, 64). T&S write:
"Frequently they [private companies] emphasize that 'most people prefer' their own product, or that 'growing numbers of people' are switching from another brand, which was yesterday's news, to their own, which represents the future. They try to nudge you by telling you what most people are now doing. ... The key point here is that for all their virtues, markets often give companies a strong incentive to cater to (and profit from) human frailties, rather than to try to eradicate them or to minimize their effects" (pp. 64-65, 72).
Can you think of a commercial on television that does not do this? Moreover, S&T anticipate objections to this analysis by arguing against the efficacy of market competition in writing that "[y]ou might think that firms could educate people not to buy [goods], and indeed they might. But why should firms do that? If you are buying something that you shouldn't, how do I make any money persuading you not to buy it?" (p. 79). The basic idea behind this book is that "social nudging" should try to offset (and possibly eliminate) the efforts of private companies in manipulating the the "humanness" of individual decision-making.
One final point I would like to make, and this applies to the field of "behavioral economics" generally. I think that something is being lost here in focusing almost exclusively on human psychology. The entire argument is based on research that has been done by psychologists, and not economists. We learn about "representativeness," various "self-control strategies," "spotlight effects," "priming," and many other things that seem to have no direct connection to economics. I think that we are missing something by diverting attention away from economic phenomena. Human behavior is best understood by trying to explain human plans in relation to incentives, scarcity, and opportunity cost. This book reads more like a treatise in psychology rather than in economics. Lachmann had it exactly right in his essay "Economics as a Social Science."
Thursday, November 6, 2008
Most Austrians consider Tomas Sowell's Knowledge and Decisions book an excellent statement of the Austrian (Hayekian) theory of prices and knowledge. In fact, Kirzner spoke of this book as "the most extensive and wide-ranging development of the implications of the Hayekian insights." In this book, Sowell described prices as "knowledge surrogates," because "nobody needs to know the whole story in order for the economy to convey the relevant information through prices and secure the same adjustments as if everyone had known." The Austrians have seized on this idea of prices as "knowledge surrogates" or summaries of information, and have used this to re-interpret the market process as a system that responds to conditions of disequilibrium by attempting to realize profit.
This recapitulation of the Austrian theory of prices will strike many readers as familiar and old-hat. But this theory was subtly, yet savagely, attacked by a great scholar who wrote a book in 1992 that tried to rescue the Austrian theory of the market process from this misleading interpretation of prices and knowledge. I am referring, of course, to Esteban Thomsen's Prices and Knowledge, a short book that accomplishes many great things. I will limit this post to Thomsen's critique of Sowell's account of the Austrian theory of the market process because I think it is important in view of how this interpretation has captured the minds of nearly every working Austrian.
The author is quite clear that it is wrong to interpret prices as summaries or "surrogates" of knowledge and information. He does this by distinguishing between the "discovery" of knowledge and its subsequent summarization. The Austrians, according to Mr. Thomsen, are making a mistake by eliding the discovery role in their emphasis on the role prices play in conserving information. The author makes this point clearly when he writes,
"Kirzner's emphasis is more on the discovery of knowledge than on its summarization or its transmission. ... The difference appears to stem from the dissimilar views held of ignorance and discovery, and from the difference between interpreting prices as only 'information-saving' devices and interpreting them as part of an entrepreneurial discovery procedure."
The author proceeds in the next chapter to a discussion of Herbert Simon's concept of bounded rationality. The author finds common ground between Herbert Simon's account of "satificing" and the Austrian theory of prices as "knowledge surrogates." In Simon's model, for example, prices work for individuals because they are a simplifying device in a complex world. Individuals, according to Simon, can infer market conditions from prices without having to know all the details of every event. But this is exactly what Austrians have been arguing! The author concludes by stressing the "discovery" role of prices, and not its "information-saving" role.
This is an important distinction because the author correctly points out that reliance on the "information-saving" role of prices defeats the purpose the market process. Thus Mr. Thomsen writes,
"This enables him [Simon] to imply that with the aid of computers man gets (even if only slightly) closer to (neoclassical) optimizing and that he may achieve objective rationality in 'simple problem situations,' in which case the neoclassical agent may be appropriate. In the market-process approach, on the other hand, facts, even if they were few and simple [and thus no longer need to be 'summarized'], have to be noticed, discovered, by alert, active agents."
I think this interpretation is very good. Austrians should be mindful of the implications of their analysis. By arguing that prices are "knowledge surrogates," other economists are likely to respond by arguing that advances in technology can aid the market in translating prices into "knowledge surrogates." In other words, if all prices do is "save" on the information individuals need to know in their decision-making, then the market should be arranged in a way that maximizes this "knowledge surrogate" function. However, this attention to prices as "knowledge surrogates," in Mr. Thomsen's view, ignores the more entrepreneurial role of "discovery."
Now if Austrians do not see this as a problem worth correcting, it is at least one that deserves further clarification. I also understand this to be one of the more important themes in Mr. Thomsen's book, so I would encourage every student to give this book a close and careful reading.
Wednesday, November 5, 2008
Frederic Sautet has written an interesting post over at the Austrian blog. He seems to be suggesting that the people do not yet realize what they have done. Obama will not be able to deliver on his promise of change because politics, as Sautet writes,
"is all about promises made and promises broken, vote trading, bureaucracy capture, self-interest, ignorance, and perverse incentives. Politics is done by interest, not by principles."
In other words, the people do not yet understand Public Choice theory, according to Mr. Sautet.
I think Mr. Sautet is completely wrong. I can't stand reading these kinds of arguments, largely because nearly every Austrian thinks like this. Lachmann certainly would have never said something like this. It does not make sense to say that self-interested politicians can accomplish whatever they want; human behavior is not that simple (and knowledge is not that perfect!). Public Choice is so terribly naive. And we can prove this by making explicit Mr. Sautet's suggestion that the "public" does not yet realize that "politics without romance is impossible."
Let me give you an example in connection to Obama's victory. Implicit in the assertion that "politics without romance is impossible" is the assumption of public ignorance. The public does not understand the niceties of politics. This is all the more amazing upon observing how emotionally involved people become in something (presidential elections) while remaining so woefully ignorant of it --- and even ignorant of their own ignorance! Voters actually think that they are making the right choice; in most cases they are convinced of it. But the truth is that voters typically do not know what is going on. (They know the color of Mrs. Obama's dress, but are ignorant of the minute details of Mr. Obama's policy proposals.) And it is funny to hear commenators on the news repeatedly lament that other commentators are not sticking to the issues, issues that people want to hear! I would be willing to bet that if popular news outlets began discussing the "issues" in great detail, the people's interest in politics, and their participation in it, would quickly end.
But what makes Austrians think that this ignorance stops with voters? This ignorance cuts both ways. Politicians cannot know the effects of any political exchange (vote trading). Public Choice Theory relies on the principle of omniscience for its validity. And it is deeply disturbing to find that not only are Austrians not the most vigorous critics of this approach, but that they actually support it! Austrians are doing great injustice to Hayek and Mises in believing that politicians can accomplish whatever they want by acting in their own self-interest. The effects of any action in politics are terribly complicated, and its unintended consequences too numerous to assess and evaluate intelligently.
Here is the irony. Obama campaigned on the promise of Change and Hope. Austrians, as good Public Choice theorists, are for this reason afraid of an Obama presidency. But Obama does not actually know what he needs to do to bring about this Change. If Austrians abandoned Public Choice theory, they would be able to see this, and begin to worry more about the unintended consequences of positive action, and not about the effects of the "vote trading" that will result from Obama's empty promises.
Tuesday, November 4, 2008
I am convinced that the most powerful expositor of laissez-faire is Harold Demsetz. His writings are just so damn good. No economist, to my knowledge, has ever attempted to challenge his arguments. How could you? Here are some quotes from one of my favorite papers of his:
"The allegation is that even perfectly competetive markets fail to achieve efficiency. But, this reasoning generally fails to take account of the fact that the provision of a market (for the side effect) is itself a valuable and costly service."
"The allegation is that even perfectly competetive markets fail to achieve efficiency. But, this reasoning generally fails to take account of the fact that the provision of a market (for the side effect) is itself a valuable and costly service."
"In asking the implications of the nonexistence of some markets, we seem to have fogotten the cost of providing market services or their government equivalent."
This is such a clever argument. Any situation can be justified by invoking the theory of transaction costs. In other words, what appears undesirable is really efficient once sufficient account is taken of the costliness of any proposed alternative for remedying it. How can you get around this? Demsetz gives several examples to illustrate his thesis:
1.) Free parking. "But while we have reduced the resources committed to constructing parking spaces, we have increased resources devoted to market exchange. We may end up by allocating more resources to the provision and control of parking than had we allowed free parking because of the resources needed to conduct transactions. By insisting that the commodity be priced, we may become less efficient than had we allowed persons to ration spaces on a first come, first serve basis."
1.) Free parking. "But while we have reduced the resources committed to constructing parking spaces, we have increased resources devoted to market exchange. We may end up by allocating more resources to the provision and control of parking than had we allowed free parking because of the resources needed to conduct transactions. By insisting that the commodity be priced, we may become less efficient than had we allowed persons to ration spaces on a first come, first serve basis."
2.) Use of nectar by bees. "A valuable and costly good, nectar, is provided free of charge because it would be too costly to take account of the indirect benefits to beekeepers."
3.) Public goods. "If the cost of policing the benefits derived from the use of these goods is low, there is an excellent reason for excluding those who do not pay from using these goods."
The logic in these arguments is really great. First of all, the argument acknowledges the existence of market imperfection. Markets are imperfect and usually do not work. But every activity involves a cost, even government regulation. Therefore, the reason why we haven't seen the elimination of costly and imperfect market arrangements is because every possible alternative (government regulation, for example) is more costly.
Carl J. Dahlman summarized this position beautifully: "If you do not like the smell of the air, seek comfort in the knowledge that it would cost you more than it is worth to you to do away with the stench, for, otherwise, would you not do it?"
Forget about the Austrians. This is real laissez-faire economics. This theory is much more sophisticated than Austrian libertarianism. In fact, Austrian economics was never intended to serve as a defense for the market. Menger, Bohm-Bawerk, and others in Austria were concerned mainly with methodological questions. It was only with Mises' arrival in New York that Austrian economics became identified as libertarian. Had Mises remained in Switzerland, it is likely that the American libertarian movement would have never encountered Mises and the Austrian tradition. Mises' decision to leave for the United States was a disaster for Austrian economics; it brought an end to the Mengerian tradition, and transformed Austrian economics into libertarian anarcho-capitalism.
The economics of Ronald Coase, Harold Demsetz, and Armen Alchian (on information cost and unemployment theory) is the real theory of laissez-faire, and I think this is the body of work that economists hostile to free market capitalism should be attacking. This, however, is not going to be an easy task. Harold Demsetz has easily one of the sharpest minds in the profession. But this is the guy to beat. No doubt about it.
Sources:
Armen Alchian "Information Costs, Pricing and Resource Unemployment" Economic Inquiry, 1969.
Carl J. Dahlman "The Problem of Externality" Journal of Law and Economics, 1979.
Harold Demsetz "The Exchange and Enforcement of Property Rights" Journal of Law and Economics, 1964.
I enjoy reading, but I dislike school. I like exploring things on my own, but I hate having to complete course assignments. For me, school has been in the way for the last three years. It has impeded my independent reading, because each week I have had to set aside a certain number of hours to complete course related work.
I have a friend at Washington University who is majoring in philosopy that shares these sentiments. Both of our majors require a certain number of courses, but both departments provide great flexibility in electives. We have managed to get the electives down to a science. We register for courses that require the least amount of reading and coursework. These courses are mainly to be found in Art History and Introduction to Music Theory classes. Art History classes require little more than writing "reaction papers" to paintings the instructor shows on large screens in auditoriums. And Music Theory courses are similar; we have only to listen to the work of great composers and discuss the feelings it evokes in us. These classes leave a lot of free time for independent reading and study.
I have taken away very little at Washington University. The standard micro-macro sequence has been a bore, and the math has been a drag. But I have learned a great deal reading on my own. There is a big difference between "education" and "learning." Learning occurs outside the classroom, while education consists of succeeding in school. Those who are educated typically do not enjoy "learning." As the great literary critic Harold Bloom once wrote, learning and reading is a selfish exercise.
And in selecting electives, the course to stay away from are: History, Philosophy, Political Science, and Women and Black Studies. These classes throw tons of readings on the students, leaving them little to no time for independent study. My friend and I both learned this lesson early in our "education."
My experience at Washington University has consisted mainly in learning which courses to take so that my independent reading time can be maximized.
I have a friend at Washington University who is majoring in philosopy that shares these sentiments. Both of our majors require a certain number of courses, but both departments provide great flexibility in electives. We have managed to get the electives down to a science. We register for courses that require the least amount of reading and coursework. These courses are mainly to be found in Art History and Introduction to Music Theory classes. Art History classes require little more than writing "reaction papers" to paintings the instructor shows on large screens in auditoriums. And Music Theory courses are similar; we have only to listen to the work of great composers and discuss the feelings it evokes in us. These classes leave a lot of free time for independent reading and study.
I have taken away very little at Washington University. The standard micro-macro sequence has been a bore, and the math has been a drag. But I have learned a great deal reading on my own. There is a big difference between "education" and "learning." Learning occurs outside the classroom, while education consists of succeeding in school. Those who are educated typically do not enjoy "learning." As the great literary critic Harold Bloom once wrote, learning and reading is a selfish exercise.
And in selecting electives, the course to stay away from are: History, Philosophy, Political Science, and Women and Black Studies. These classes throw tons of readings on the students, leaving them little to no time for independent study. My friend and I both learned this lesson early in our "education."
My experience at Washington University has consisted mainly in learning which courses to take so that my independent reading time can be maximized.
Monday, November 3, 2008
So I have returned from the Grove City ASSC somewhat disappointed (I did not win any money). But I did manage to meet an Austrian student that impressed me a great deal: David Howden. He is pursuing a PhD under Huerta de Soto at Rey Juan Carlos University, and is very knowledgeable about Austrian economics. Post-Austrians should keep an eye on him and his work. Our discussions consisted mainly of bouncing ideas, interpretations, and obscure Austrian references off one another. I enjoyed it a great deal. He was also very knowledgeable about Post Keynesian economics, and criticized it for all of the right reasons! (rather than simply dismissing it).
His paper concerned the topic of money and the Austrian focus on the medium of exchange function. He attempted to "dynamize" this idea by using the Austrian time-preference theory to re-interpret money as principally a store of value function. (I liked this a great deal).
Anyway, this presentation prompted a question by me concerning the state theory of money (also known as Chartalism). This theory holds that money acquires value by virtue of government management of the currency. Austrians have objected to this by resorting to Menger's discovery of the evolutionary theory of money, arguing that money must first have a use-value before it can be used (and accepted) as a medium of exchange. Mises extended this argument by introducing his famous "regression theorem."
I am interested in this question of the connection between the functions of money and the state theory of money largely because Ludwig Lachmann, early in his career, wrote a paper addressing this issue entitled "uncertainty and liquidity preference," published in 1937. Lachmann, in proto-Chartalist fashion, argued that a lot of confusion has been generated on this question as a result of failing to distinguish between the functions of money and money's exclusive function (i.e. between what money does and what only money can do). Lachmann is basically taking a state theory of money approach by arguing that it is wrong to identify money as being either a medium of exchange or a store of value, because other commodities can and do assume these roles in varying degrees and under a variety of circumstances. What makes money unique is its "debt-discharging quality." Here is Lachmann:
"Now, money is the legal means of payment, i.e. its owner can use it for discharging debts. This is the only use in which it has no substitutes, for its very institutional character excludes that. ... It therefore seems legitimate to infer that ... it is principally because of its debt-discharging quality that money is demanded."
This is a direct refutation of the Austrian theory of money (i.e. a useful commodity). With this framework, we can safely say that all that need be said is that tree bark be assigned legal tender, and money would suddenly acquire value, irrespective of any previous role it would have served in exchange. The fact that it discharges debt (by virtue of legal tender) is sufficient in bringing value to tree bark.
What does all this mean? Should Post-Austrins look to the State Theory of Money instead of Menger in their analysis of money? Was Lachmann really a Proto-Chartalist? Can Austrians use Menger to refute the State Theory of Money approach? If not, what does this imply for the Austrian theory of money (on which so much of Austrian economics rests)?
Thursday, October 30, 2008
Hello,
I will be away for the next few days attending a conference at which I will be presenting two papers. The details of the program can be found here.
With any luck, I will be coming home $1,000 richer.
While I am away, please feel free to view the blog and what has already been written. I always enjoy reading the comments, and love a good discussion.
I should be back on Monday, and will at that time have many new stories and thoughts to share.
I will be away for the next few days attending a conference at which I will be presenting two papers. The details of the program can be found here.
With any luck, I will be coming home $1,000 richer.
While I am away, please feel free to view the blog and what has already been written. I always enjoy reading the comments, and love a good discussion.
I should be back on Monday, and will at that time have many new stories and thoughts to share.
Attending college at one of the top ten schools in the country affords one the opportunity to study with the best researchers in the field --- even Nobel Prize winners! At Washington University I have been able to take Douglass North's seminar course on property rights. He is a great mind and a serious thinker. I have spent this semester reading nearly everything he has written, and feel confident that I can summarize his main contributions in a blog post. I want to do this because I think other students interested in economics should read his work. His work is very clearly written, and is also very controversial in a powerfully subtle sort of way. Moreover, I think libertarian economists --- Austrians, in particular --- have misunderstood a lot of what North has said and written. Here is what North is about:
Douglass North is an economic historian. But unlike other economic historians, he is very critical of how economists conduct historical investigations. He calls their work "applied neoclassical theory," which, if you are a neoclassical, is a good thing. But North is interested in change and evolution, and he thinks other economic historians should be too. Here is a quote that you can find in all of North's published work:
"I take it as the task of economic history to explain the performance and structure of economies through time."
That is the basic message to all of North's work. The rest of his work can be seen as an explication of this main point. By performance North means growth in output and technology. But "structure" is the essence of North's work. Structure refers to the political and economic institutions that determine the constraints of economies through time. But these constraints should never be taken as given. They are always evolving. This is where North attacks neoclassical theory. According to North, neoclassical theory has assumed as test conditions: "(1) perfectly competitive markets, (2) perfectly specified and costlessly enforced property rights, (3) neutral government, and (4) unchanging tastes." For North, this is all wrong. Not only are markets not perfectly competitive, but a lot of economic activity occurs outside of markets. Also, transaction costs are not zero. And what is interesting about North is that, contra Oliver Williamson and others, he believes that as economies become more wealthy and prosperous, transaction costs should rise! This is most interesting because most "transaction cost" economists believe that these costs are reduced as economies improve over time. North instead places transaction costs and production costs at opposite extremes, and argues that while primitive economies face neglible transaction costs, their production costs are very high; the converse applies to wealthy societies.
On the subject of neutral government, North is very critical of the Public Choice school. This should come as a shock to Austrian economists, because most Austrians consider themselves Public Choice theorists. North has nothing nice to say about this literature. He does this by giving "ideology" a central place in his theoretical framework. For North, transaction costs determine the structure of political and economic institutions. But underlying all this is the role of "ideology." North is very criticial of mainstream economic theory -- economic history included -- for ignoring this important factor. This is also how North connects "changing tastes" to his theory of economic growth. For North, changing tastes and ideology matter. Therefore, government institutions are not determined on the basis of "visible economic interests" (as Public Choice theorists would have it), but instead on the basis of a "straightforward liberal verses conservative attitude." Moreover, "The public good is nothing more nor less than the comprehensive system of cognitive and moral beliefs called ideology. Political and judicial conceptions of "the public good" have obviously changed in the past century."
Thus for North, all of economic change ultimately rests on the evolution of ideology. Public choice theory errs in attributing the decline of the market economy to a takeover of special interests groups in government. For North, "the past century bore witness to a fundamental change in ideological perspective. ... I see no way to account for this transformation without the systematic study of the sociology of knowledge."
Here is North more explicitly: "Public choice theory has extended neoclassical theory to the political process, but the results have been quite modest. There are some basic differences between the operation of markets and the political process, which so far defy effective modelling by the public choice theorist. The breakdown of the Madisonian system and the development of a new set of political controls over property rights, which is the dominant feature of a structural transformation over the past century and a half, requires more fundamental theorizing about the nature of the state than that achievable at the superficial level employed by public choice theory."
One last note that should surprise some Austrians on here. This insight has also led North to speak very favorably of "the Marxist school." For North, this school "cannot be faulted for ignoring the evolving structural aspects of economic systems. Property rights, the state, technology, and ideology have all been a part of Marxist economic history." I raised this point in class the other day and North agreed, much to the surprise of the rest of the class! After 25 years, North still sticks to his early assessment of Marxism.
Douglass North is a great economist. I have been very lucky to study under him (thanks mom and dad).
To conclude: Economic history is the study of change in the performance and structure of economies through time. Thus, theorizing about evolving neoclassical constraints should be the central object of analysis. And the most important "constraint" in determing the performance and structure of ecomomies is ideology. This should lead us, according to North, to Marxism.
Wednesday, October 29, 2008
Readers familiar with the Keynesian literature will notice that I have borrowed this title from one of Allan Coddington's famous papers that demarcated the different interpretations of Keynes into separate and distinct schools. The literature since Coddington has followed this classificatory scheme, and I will attempt to do the same with the literature that has emerged from Mises' work. Here is how I see Misesian economics.
1.) Fundamentalist Misesianism: For the fundamentalists, what is central to Misesian economics is Mises' unique methodology. Indeed, most fundamentalists concentrate almost exclusively on this aspect of Mises' work. For example, their interpretation of Mises' more applied work, e.g., business cycles and interventionism, is typically done through the lense of Mises' praxeological framework. Four books stand above the rest for the fundamentalists: Human Action, Epistemological Problems of Economics, Theory and History, and The Ultimate Foundation of Economic Science --- and for Human Action it is the first 150 pages only. Theorists and scholars in this school include Richard Ebeling, David Gordon, Jorg Guido Hulsmann, and Percy and Bettina Greaves. These scholars emphasize the a priori character of all propositions, and debase empiricism in favor of logic. Their audience is select and few.
2.) Libertarian Misesianism: During Mises' stay in New York, there gathered around him a small group of scholars associated with what would later become the libertarian movement. This was an American phenomenon that surrounded the works of people like Isabel Paterson, Albert Jay Nock, John T. Flynn, Rose Wilder Lane, Henry Hazlitt, Frank Chodorov, and Leonard Reed. The man most responsible for bringing this movement into Mises' orbit was Murray N. Rothbard. It was Murray Rothbard that gave libertarians the impression that Austrian economics was their mainstay. This movement culminated with the founding of the Mises Institute in Auburn Alabama, and has continued to gather young scholars who identify as libertarians first, and Misesians second. This movement has also come to supplant and absorb the other schools of Misesian economics, making it by far the most influential within Austrian economics.
3.) Organic Misesianism: This school borrows from the work of Hayek in their interpretation of Mises, and for this reason they have frequently come under heavy fire by the other schools for failing to limit their understanding of Mises to his work alone. This movement was begun by Israel Kirzner and, later, Don Lavoie. This school was further refined and developed through the contributions of important scholars like Pete Boettke, David Prychitko, Steven Horwitz, Mario Rizzo, and others associated with George Mason University and New York University. This school has enjoyed the greatest success outside of Austrian economics, making them the principal expositors of Misesian economics to others in the economics profession.
My own interpretation of Mises is different. I have a long-term project planned for a complete re-appraisal of of Mises' contributions to economics, and I hope someday to write a paper elucidating these differences I have identified in this post.
2.) Libertarian Misesianism: During Mises' stay in New York, there gathered around him a small group of scholars associated with what would later become the libertarian movement. This was an American phenomenon that surrounded the works of people like Isabel Paterson, Albert Jay Nock, John T. Flynn, Rose Wilder Lane, Henry Hazlitt, Frank Chodorov, and Leonard Reed. The man most responsible for bringing this movement into Mises' orbit was Murray N. Rothbard. It was Murray Rothbard that gave libertarians the impression that Austrian economics was their mainstay. This movement culminated with the founding of the Mises Institute in Auburn Alabama, and has continued to gather young scholars who identify as libertarians first, and Misesians second. This movement has also come to supplant and absorb the other schools of Misesian economics, making it by far the most influential within Austrian economics.
3.) Organic Misesianism: This school borrows from the work of Hayek in their interpretation of Mises, and for this reason they have frequently come under heavy fire by the other schools for failing to limit their understanding of Mises to his work alone. This movement was begun by Israel Kirzner and, later, Don Lavoie. This school was further refined and developed through the contributions of important scholars like Pete Boettke, David Prychitko, Steven Horwitz, Mario Rizzo, and others associated with George Mason University and New York University. This school has enjoyed the greatest success outside of Austrian economics, making them the principal expositors of Misesian economics to others in the economics profession.
My own interpretation of Mises is different. I have a long-term project planned for a complete re-appraisal of of Mises' contributions to economics, and I hope someday to write a paper elucidating these differences I have identified in this post.
Austrians familiar with Paul Davidson's review of The Economics of Time and Ignorance consider this one of the low points in the development of Austrian economics. Austrians, in other words, do not like to talk about this review, largely because in their view it was "wholly unsympathetic." This is true; Paul Davidson pokes fun at the Austrians at almost every turn in his 15-page review. Here is a sample of Davidson's cruel sarcasm:
"If two schools share the identical axiomatic foundation -- as the Austrians and mainstream neoclassical econmists do -- then if they ask the same questions, they should reach the same answers, unless one school has made a mistake in logic and/or has introduced as hoc constraints on the operation of the system. No wonder, then, that after 230 pages O & R [O'Driscoll and Rizzo] declare that 'it should not be surprising if there were substantial overlap between Austrian or subjectivist economics and neoclassical orthodoxy.'"
But I would like to summarize briefly the main substantive points of Davidson's review, because I think it sheds considerable light on "Post-Austrian" economics. As can be seen from the passage I quoted above, the spirit of Davidson's critique can be found in his claim that "both the Austrian and mainstream neoclassical models share many of the same fundamental axioms." He does this by proving the absurdity of "pattern coordination" in a world of uncertainty, real time, and money. For Davidson, belief in the existence of equilibrium, or systematic movements toward equilibrium, requires the elimination of real time, monetary contracts, and incalculable uncertainty.
Next, Paul Davidson accuses Austrians of following the same three fundamental axioms of neoclassical economics: (1) money neutrality, (2) gross substitution, and (3) ergodicity ---- axioms which Keynes destroyed in his 1936 book.
(1) O'Driscoll and Rizzo (O&R) "accept the Austrian Carl Menger's definition of money which 'involve[s] commitments in the form of commodity inventories.' This definition reduces money to a commodity basis -- and hence it is based on the money neutrality axiom, where the conditions of individual plans for the demand and supply of real goods and services is independent of the nominal supply of money.
(2) "O&R's use of Hayek's definition of equilibrium in terms of the compatibility of individual plans, even when they modify it to represent 'pattern coordination', means that there must exist a vector of market prices which is consistent with market equilibrium. A sufficient condition for this to occur is if all excess demadn curves are downward sloping and hence well-behaved -- a condition that implies the gross substitution axiom, where every good (and service) is a gross substitute for every other good (or service)." (We know, however, that liquid assets and real producible [illiquid] assets are not gorss substitutes.)
(3) "Finally, since O&R assert that there is no reason to believe that entrepreneurs will be systematically in error, they are accepting the rational expectations hypothesis of neoclassical economics, which is based on the axiom of ergodicity."
That is the essence of Davidson's critique of Austrian economics. I think he makes some excellent points. In particular, I found his conflation of Austrian entrepreneurship theory and the rational expectations hypothesis exceedingly compelling. To believe that entrepreneurs will discover profitable opportunities on the basis of past errors does invoke the axiom of ergodicity. Also, Davidson's claim that pattern coordination works only in a world of gross substitution is also very good.
Austrians have a lot to learn from Post Keynesian economics, and this article is the best place to begin.
SOURCE:
Paul Davidson "The Economics of Ignorance or Ignorance of Economics?" Critical Review, 3 (3-4), 1989, pp. 467-487.
Tuesday, October 28, 2008
"For a large subset of the participants at South Royalton, the relevant question for discussion was not so much 'What does all this imply that we don't yet understand?' as it was, 'What did Mises say about this?' This was certainly true of Rothbard who, at least on the subject of the use of mathematics in economics, refused even to elaborate on his pronouncement in response to a friendly question from a generally puzzled participant. His talk, he explained, was the final word on the subject. ... (I know for a fact that the question was friendly but puzzled since I posed it myself and was astonished by the hostility with which it was greeted.)" --- Karen Vaughn, "Austrian Economics in America" Cambridge University Press, 1994.
Karen Vaughn certainly stands as one of the leaders of "Post-Austrian" economics. Her work is insightful, challenging, and undogmatic. She remains one of the most informed critics of the work of Ludwig von Mises, Murray Rothbard, and Israel Kirzner. Central to her conception of Austrian economics is the denial of the orderliness of the market process. Time, uncertainty, entrepreneurship, and capital theory can only be understood, according to Mrs. Vaughn, by adopting a "kaleidic" view of economics which abandons the standard Austrian emphasis on market coordination.
I would urge all Austrian students to give her book a serious reading.
Karen Vaughn certainly stands as one of the leaders of "Post-Austrian" economics. Her work is insightful, challenging, and undogmatic. She remains one of the most informed critics of the work of Ludwig von Mises, Murray Rothbard, and Israel Kirzner. Central to her conception of Austrian economics is the denial of the orderliness of the market process. Time, uncertainty, entrepreneurship, and capital theory can only be understood, according to Mrs. Vaughn, by adopting a "kaleidic" view of economics which abandons the standard Austrian emphasis on market coordination.
I would urge all Austrian students to give her book a serious reading.
I entered the world of Austrian economics as a young cub who looked to Murray Rothbard for nurturing and training. My early years were happy ones. The world was made intelligible by the walls that were erected outside the comforts of my home. I was taught to be fearful of strangers who sometimes out of curiosity, and sometimes as a result of being lost, happened to find their way into our small community. I was told that these strange men entertained evil thoughts that, if left unchecked, would destory my happy home.
I was always urged to stick close to the pack, and can remember being scolded on many occassions for sneaking out at night and going beyond the city walls to see what others were talking about. Neighboring cities would talk about the costs of using the market and the wickedness of rulers. I found these ideas agreeable, and met with the reluctant approval of my parents for sharing with them these new ideas.
The years of rebellion quickly set in. The behavior of my parents and those living within the city walls soon became predictable and uninteresting. This attitude was reinforced by those adjacent towns who often spoke dismissively of my family. These towns, unlike my own, had large towers that allowed one to view the vast lanscape of ideas. I can remember being afraid at first to ascend the ladder. But eventually I made the climb and was struck by the richness of the world I was taught to fear and revile. Old ideas suddenly gained new meaning, and new ones made their appearance. Afraid of the punishment I might have endured at home for this act, I decided to run away to one of the big cities I saw through the telescope.
On my journey I found old and dirtied pages of familiar names on the ground, people like Ludwig Lachmann and G. L. S. Shackle. I would read them as I made my way to the big city. Their thoughts and teachings prepared me for this new world in a way my parents never did. They taught me that it was natural to be curious about big cities and strange people. I liked these teachings very much.
I have never looked back.....
I was always urged to stick close to the pack, and can remember being scolded on many occassions for sneaking out at night and going beyond the city walls to see what others were talking about. Neighboring cities would talk about the costs of using the market and the wickedness of rulers. I found these ideas agreeable, and met with the reluctant approval of my parents for sharing with them these new ideas.
The years of rebellion quickly set in. The behavior of my parents and those living within the city walls soon became predictable and uninteresting. This attitude was reinforced by those adjacent towns who often spoke dismissively of my family. These towns, unlike my own, had large towers that allowed one to view the vast lanscape of ideas. I can remember being afraid at first to ascend the ladder. But eventually I made the climb and was struck by the richness of the world I was taught to fear and revile. Old ideas suddenly gained new meaning, and new ones made their appearance. Afraid of the punishment I might have endured at home for this act, I decided to run away to one of the big cities I saw through the telescope.
On my journey I found old and dirtied pages of familiar names on the ground, people like Ludwig Lachmann and G. L. S. Shackle. I would read them as I made my way to the big city. Their thoughts and teachings prepared me for this new world in a way my parents never did. They taught me that it was natural to be curious about big cities and strange people. I liked these teachings very much.
I have never looked back.....
Mirowski advanced the thesis that the neo-classical revolution borrowed its ideas from nineteenth century physics, using the concept of "utility" in a way analogous to the way physics understood "energy," and that the assumption of "constrained maximization" was similar to the "conservation principle." The economists responsible for this "revolution" in economics were, according to Mirowski, people like Walras, Edgeworth, Pareto, and Jevons. But where does Menger fit into this?
Mainstream opinion seems to reluctantly classify Menger as one of the founders of the marginalist revolution, but are quick to add that since he was not mathematical, he was therefore not "scientific" like the others. According to Mirowski, however, "Menger cannot be considered a neoclassical economist because he rejected two basic pillars of that theory: the law of one price, ... and the concept that traded goods in some sense are related as equivalents in equilibrium."
Now most Austrians would agree with this assessment; they believe very strongly in a unique Austrian paradigm that is separate from mainstream equilibrium analysis. However, all Austrians, to my knowledge, still insist that Menger was one of the founders of the marginalist revolution. But for Mirowski, this is wrong. Here is Mirowski:
"Were it not for three historical accidents -- first the Grundsatze as first published in 1871; second, Menger's illustrious student Wieser promoted his claim to be a founder of neoclassical theory (and himself did adopt the new marginalist techniques from Laundhardt and Auspitz and Lieben); and third, Menger's works were largely unavailable outside the German-speaking world -- Menger would not today be considered as one of the marginalist revolutionaries."
I would add one more historical accident --- Menger's book went out of print shortly after it was published, and it consequently became very difficult for young students to secure a copy during the end of the nineteenth century, even in German speaking countries.
What does this mean for Austrians? If Menger did not publish in 1871, if his work was not promoted by Wieser, and if more students had access to his work, then perhaps Menger would not today be recognized as one of the three founders of the marginalist revolution.
I think this is right. Thoughts?
Mainstream opinion seems to reluctantly classify Menger as one of the founders of the marginalist revolution, but are quick to add that since he was not mathematical, he was therefore not "scientific" like the others. According to Mirowski, however, "Menger cannot be considered a neoclassical economist because he rejected two basic pillars of that theory: the law of one price, ... and the concept that traded goods in some sense are related as equivalents in equilibrium."
Now most Austrians would agree with this assessment; they believe very strongly in a unique Austrian paradigm that is separate from mainstream equilibrium analysis. However, all Austrians, to my knowledge, still insist that Menger was one of the founders of the marginalist revolution. But for Mirowski, this is wrong. Here is Mirowski:
"Were it not for three historical accidents -- first the Grundsatze as first published in 1871; second, Menger's illustrious student Wieser promoted his claim to be a founder of neoclassical theory (and himself did adopt the new marginalist techniques from Laundhardt and Auspitz and Lieben); and third, Menger's works were largely unavailable outside the German-speaking world -- Menger would not today be considered as one of the marginalist revolutionaries."
I would add one more historical accident --- Menger's book went out of print shortly after it was published, and it consequently became very difficult for young students to secure a copy during the end of the nineteenth century, even in German speaking countries.
What does this mean for Austrians? If Menger did not publish in 1871, if his work was not promoted by Wieser, and if more students had access to his work, then perhaps Menger would not today be recognized as one of the three founders of the marginalist revolution.
I think this is right. Thoughts?
Pete Boettke was so impressed by Richard Ebeling's comments on his blog that he decided to create a new post just for him. I think Richard Ebeling is largely correct, but he fails to see the implications of his argument for the study of history.
Here is the link to Richard Ebeling's post:
http://austrianeconomists.typepad.com/weblog/2008/10/too-important-for-the-comments-once-again----richard-ebeling.html
Basically, Richard Ebeling argues that accurate predictions of the future are difficult because they depend "upon the 'complex phenomena' of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time." Moreover, "All of our analysis, expectations and predictions should be implicitly framed with the inescapable humility of what our limited minds can know about the workings of our world. ... The working through the problem -- including an economy-wide economic crisis -- requires more knowledge about the present and the future than any one mind or group of minds can master or ever possess."
This is all great, and I am in agreement with the whole of what Richard Ebeling has to say on these matters. But Richard Ebeling errs when he then takes this attitude and applies it to history. Here is Richard Ebeling on history:
"We know how the Great Depression of the 1930s played out because it is now history. We know, for example, that FDR ran on a "conservative" platform of balancing the budget, cutting taxes, maintaining the gold standard, limiting Federal intrusiveness in state-level affairs, etc. And we know that he did the exact opposite of these things when actually in office. ... We will know all the answers -- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why."
This doesn't add up, and Richard Ebeling should have seen this. Why should "complex phenomena" and "ideological influences" operate only in our predictions of the future? Should not the "inescapable humility of what our limited minds can know about the workings of our world" also be applied to our understanding of history? In fact, I think it should. Too often social scientists confuse "the past" with "history." They are two entirely separate things. The past, of course, is that which has preceded us here in the present; but history is what "historians" do and write. And because these historians confront "complex phenomena" with "ideological influences," it is impossible for them to author an objectively true account of "the past" because "facts" must be selected in an infinitely rich and inexhaustible world, necessarily making those facts that come to be selected ideologically-laden. Moreover, there is no way to compare the relative merits of competing accounts of the past because the past itself is not an account, but a series of past events. Therefore, since there is no fundamentally correct "text" or account to which all other accounts can be compared, all we have are variations (interpretations) of the past, each equally groundless and ideological.
This is where Richard Ebeling makes a big mistake. On his own terms, all we have to do is wait for the present moment to pass before we try to make sense of it. But that does not reduce its inherent complexity and ideological influence; in fact, it magnifies it. Much to the chagrin of Austrians, the past is not "irrevocable" and the future "unknowable, though not unimaginable." The past and the future are both "unknowable, though not unimaginable."
Here is the link to Richard Ebeling's post:
http://austrianeconomists.typepad.com/weblog/2008/10/too-important-for-the-comments-once-again----richard-ebeling.html
Basically, Richard Ebeling argues that accurate predictions of the future are difficult because they depend "upon the 'complex phenomena' of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time." Moreover, "All of our analysis, expectations and predictions should be implicitly framed with the inescapable humility of what our limited minds can know about the workings of our world. ... The working through the problem -- including an economy-wide economic crisis -- requires more knowledge about the present and the future than any one mind or group of minds can master or ever possess."
This is all great, and I am in agreement with the whole of what Richard Ebeling has to say on these matters. But Richard Ebeling errs when he then takes this attitude and applies it to history. Here is Richard Ebeling on history:
"We know how the Great Depression of the 1930s played out because it is now history. We know, for example, that FDR ran on a "conservative" platform of balancing the budget, cutting taxes, maintaining the gold standard, limiting Federal intrusiveness in state-level affairs, etc. And we know that he did the exact opposite of these things when actually in office. ... We will know all the answers -- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why."
This doesn't add up, and Richard Ebeling should have seen this. Why should "complex phenomena" and "ideological influences" operate only in our predictions of the future? Should not the "inescapable humility of what our limited minds can know about the workings of our world" also be applied to our understanding of history? In fact, I think it should. Too often social scientists confuse "the past" with "history." They are two entirely separate things. The past, of course, is that which has preceded us here in the present; but history is what "historians" do and write. And because these historians confront "complex phenomena" with "ideological influences," it is impossible for them to author an objectively true account of "the past" because "facts" must be selected in an infinitely rich and inexhaustible world, necessarily making those facts that come to be selected ideologically-laden. Moreover, there is no way to compare the relative merits of competing accounts of the past because the past itself is not an account, but a series of past events. Therefore, since there is no fundamentally correct "text" or account to which all other accounts can be compared, all we have are variations (interpretations) of the past, each equally groundless and ideological.
This is where Richard Ebeling makes a big mistake. On his own terms, all we have to do is wait for the present moment to pass before we try to make sense of it. But that does not reduce its inherent complexity and ideological influence; in fact, it magnifies it. Much to the chagrin of Austrians, the past is not "irrevocable" and the future "unknowable, though not unimaginable." The past and the future are both "unknowable, though not unimaginable."
Monday, October 27, 2008
"Keynes sees in social facts manifestations of the human mind. While to Hayek it is the complexity of these facts, their multitude and diversity, that defies the attribution of numerical values to social concepts, to Keynes it is their mental character that does so. Rather to the surprise of some of us, Keynes emerges as being more deeply committed to subjectivism than is his Austrian opponent." --- Ludwig Lachmann "John Maynard Keynes: A view from an Austrian window" South African Journal of Economics, 1983.
Now while this quote gets me excited about the possible overlap between Keynes and Hayek with respect to subjectivism, it seems to get other Austrians worried and suspicious of Ludwig Lachmann. Let me share with you a story.
There was a time when I used to listen to audio lectures of Murray Rothbard in my car to and from school. I really enjoyed listening to Rothbard. He sounded like a quacking duck. Anyway, I can remember Rothbard in one of these lectures recounting a story frequently told by Ludwig Lachmann that went something like this:
"When I arrived in London in the early 1930's, it was safe to say that everyone at the London School of Economics was an Austrian. After the war, however, Hayek and I were the only Austrians left."
And after recounting this story of Lachmann's, Rothbard, in his characteristic way, quacked "I am not even so sure about Lachmann!" I can remember laughing out loud almost uncontrollably when I heard this because, in many respects, it is true. Lachmann always was interested in what the Cambridge school (Keynes, Robinson, Kaldor, Kalecki and Harrod) was up to, and a lot of his writings can be seen as responses to this literature. Austrians of the Rothbard persuasion have every reason to be suspicious of Ludwig Lachmann. But, being interested in the Cambridge economic tradition, I have every reason to look to Lachmann as the exemplar in creating an intellectual bridge between these two traditions.
Now while this quote gets me excited about the possible overlap between Keynes and Hayek with respect to subjectivism, it seems to get other Austrians worried and suspicious of Ludwig Lachmann. Let me share with you a story.
There was a time when I used to listen to audio lectures of Murray Rothbard in my car to and from school. I really enjoyed listening to Rothbard. He sounded like a quacking duck. Anyway, I can remember Rothbard in one of these lectures recounting a story frequently told by Ludwig Lachmann that went something like this:
"When I arrived in London in the early 1930's, it was safe to say that everyone at the London School of Economics was an Austrian. After the war, however, Hayek and I were the only Austrians left."
And after recounting this story of Lachmann's, Rothbard, in his characteristic way, quacked "I am not even so sure about Lachmann!" I can remember laughing out loud almost uncontrollably when I heard this because, in many respects, it is true. Lachmann always was interested in what the Cambridge school (Keynes, Robinson, Kaldor, Kalecki and Harrod) was up to, and a lot of his writings can be seen as responses to this literature. Austrians of the Rothbard persuasion have every reason to be suspicious of Ludwig Lachmann. But, being interested in the Cambridge economic tradition, I have every reason to look to Lachmann as the exemplar in creating an intellectual bridge between these two traditions.
In an earlier post of mine on Menger, Adam Smith makes some very good points in the comments. I think that all Austrians would agree with his claim that, although the distinction I make is compelling, "it seems like subjectivity is still doing the work." It is true that "value derived from scarcity" is dependent upon subjective needs and preferences. But I would repeat my claim that subjective needs only create the condition for value's emergence; it does not in any way determine its magnitude. Menger, in chapter three of his Principles book, is very clear on this: "The value of goods, accordingly, is a phenomenon that springs from the ... available quantities of goods." It is surprising that no Austrian has really picked up on this. Now I have been criticized for my watermelon example, but Menger makes exactly the same argument by using the examples of "wild fruit trees" and "pails of water." Moreover, the distinction Menger makes between "economic" and "non-economic" goods is determined solely on the available quantity of goods. I would continue to insist that the subjective (marginal) revolution as the Austrians understand it is confused and misguided. Subjective needs only tell a small part of the story of value.
Next, adam smith writes:
"I think a meatier argument to oppose Menger on is his distinction between imaginary and real goods. Imaginary goods are those like the paperclip, which do not actually perform the attribute I assign to them. But to distinguish between imaginary and real goods ex ante is to assume an objectively determined value."
Now this is something Ludwig von Mises picked up on and used in an attempt to extend subjectivism. For true subjectivists, Mises argued, there are no imaginary goods. If individuals believe goods to be of use, then they are valuable, regardless of their actual ability to satisfy the appropriate needs. Now I think this is a trivial example in light of my recent post on Menger, but it is a debate that has occurred in the Austrian literature. In particular, Bruce Caldwell and Greg Hill have argued over this point in the pages of Critical Review. Bruce Caldwell argues that "markets provide incentives both to generate such goods, and to identify them as such." Imaginary goods are thus created and destroyed all the time. Greg Hill, in his great and characteristic way, is seen firing back with this passage:
"I share Caldwell's view that markets provide incentives both to create 'imaginary goods' and to reveal their deficient nature, but I cannot resist the temptation to ask whether the balance of market forces favors the creation or the destruction of these goods. If Lexus advertises its luxury line of cars as symbols of 'success,' there may be gains in prospect for entrepreneurs who can show that such high-priced 'success symbols' are merely imaginary goods. But there are much greater gains awaiting entrepreneurs (other car sellers, in particular) who can persuade car buyers that possession of their vehicles signals even greater 'success.'"
Yes, I know, Greg Hill is great. But to respond to Adam Smith more directly, I would say that (1) the debate on imaginary goods has already happened; and (2) it is not as important, in my opinion, as my own post on Menger and the "subjective" revolution. What a paradox it would be indeed if the so-called marginalist (subjective) revolution actually sharpened our understanding of the objective nature of the determination of value.
Next, adam smith writes:
"I think a meatier argument to oppose Menger on is his distinction between imaginary and real goods. Imaginary goods are those like the paperclip, which do not actually perform the attribute I assign to them. But to distinguish between imaginary and real goods ex ante is to assume an objectively determined value."
Now this is something Ludwig von Mises picked up on and used in an attempt to extend subjectivism. For true subjectivists, Mises argued, there are no imaginary goods. If individuals believe goods to be of use, then they are valuable, regardless of their actual ability to satisfy the appropriate needs. Now I think this is a trivial example in light of my recent post on Menger, but it is a debate that has occurred in the Austrian literature. In particular, Bruce Caldwell and Greg Hill have argued over this point in the pages of Critical Review. Bruce Caldwell argues that "markets provide incentives both to generate such goods, and to identify them as such." Imaginary goods are thus created and destroyed all the time. Greg Hill, in his great and characteristic way, is seen firing back with this passage:
"I share Caldwell's view that markets provide incentives both to create 'imaginary goods' and to reveal their deficient nature, but I cannot resist the temptation to ask whether the balance of market forces favors the creation or the destruction of these goods. If Lexus advertises its luxury line of cars as symbols of 'success,' there may be gains in prospect for entrepreneurs who can show that such high-priced 'success symbols' are merely imaginary goods. But there are much greater gains awaiting entrepreneurs (other car sellers, in particular) who can persuade car buyers that possession of their vehicles signals even greater 'success.'"
Yes, I know, Greg Hill is great. But to respond to Adam Smith more directly, I would say that (1) the debate on imaginary goods has already happened; and (2) it is not as important, in my opinion, as my own post on Menger and the "subjective" revolution. What a paradox it would be indeed if the so-called marginalist (subjective) revolution actually sharpened our understanding of the objective nature of the determination of value.
First of all, it is important to understand what Post Keynesian economics is and is not. Post Keynesian economics is an American phenomenon that originated with the work of Paul Davidson, and which has been subsequently developed by people like Hyman Minsky, Victoria Chick, Fernando Carvalho, and Fiona Maclachlan. Post Keynesians are not Sraffians, Institutionalists, or Kaleckians (Marxists). Their relationship to these schools is observed only in connection to their opposition to neo-classical economics and their shared political leanings.
Post Keynesian economics is essentially the theory of the instability of financial markets. That is all. I will walk the readers through what I take to be the most important points, and then provide a list of readings at the end.
1.) A world of uncertainty gives money value beyond the utility it provides as a medium of exchange. Central to Post Keynesian economics is the use of money as a store of value.
2.) Now the properties of money, and its use as a store of value, have the potential to cause massive unemployment. The first property is a zero elasticity of productivity, which means that if individuals desire to hold money as a store of value, firms cannot employ labor to produce more money. Industry cannot meet this demand. The second property is a zero elasticity of substitution, which means that as the price of money rises in response to an increased demand, individuals cannot substitute other assets for money as a store of value. This destroys Say's Law. And the third property is a zero cost of transferring money from the medium of exchange function to the store of value function.
3.) Now different assets have different attributes, and the desire to maximize one's total yield depends on the relative values of these different assets. These attributes involve monetary yields minus carrying costs (q-c), capital gains (a), and the power of disposal of an asset during volatile and uncertain times, i.e. its "convenience yield" (l) --- this gives us the equation: a+q-c+l.
4.) Two sectors of capitalist economies can now be distinguished in terms of these different yields: the financial sector and the industrial sector. The basic idea here is that these two sectors rarely interact in the way neo-classicals believe. Speculators and savers deal on the financial side, while capitalists operate on the industrial side. Speculators, for example, while owning titles to capital goods, haven't the first clue as to how to use these capital goods or how long they will continue to be profitable. These are the concerns of the capitalist, who must rely on its expected profitability in the long-term since that is what affects his decision to invest. This creates a great deal of instability.
5.) As a consequence, the portfolio balance decisions of these two sectors are oriented towards different aims. For the financial sector, the aim is to achieve short-term capital appreciation via spot market purchases and sales (a) while seeking comfort in the fact that an organized market for securities exists if conditions should suddenly change (l). For the industrial sector, the aim is to earn profit from long-term income flows (q-c). This is also where the distinction between speculation and enterprise can be found. Transactions on the financial side occur independent of investment activity. Their aim is to profit from the change in interest rates. This is destabilizing because the different views of capitalists and speculators can cause massive instability in the system. If, for example, speculators continue to transact with the expectation of continued capital appreciation while capitalists (entrepreneurs) take a more pessimistic view of long-term investment, then, no matter how high stock prices rise, investment will not take place. If, on the other hand, speculators take a dim view of the possibility of capital gains in securities, then liquidity preference will rise and so will the interest rate, making the prospect of capital investment increasingly worse, drying up investment and causing unemployment.
6.) Finally, the existence of financial assets also serves to destory the link between saving and investment (represented by Austrians in the loanable funds model). The basic idea is that new savings are swamped in their effect on the rate of interest by transactions among existing wealth-holders in financial markets.
------
That is the essence of Post Keynesian economics. Needless to say, this is very different from Austrian economics. For Austrians, you have the loanable funds model, increases in the money supply causing disequilibrium in the loanable funds model, and then recession.
As for reading:
on (1), I would read anything by G. L. S. Shackle to get you in the mood of understanding and appreciating the role uncertainty plays in capitalist economies. In particular, I would recommend Shackle's chapter 12 in the Years of High Theory book.
On (2), anything by Paul Davidson is good. I would consult his several articles published in the Journal of Post Keynesian Economics.
On (3), Fernando Carvalho has an excellent book entitled "Mr. Keynes and the Post Keynesians." I would read chapter 5 very closely in that book.
On (4-5), Paul Davidson's book "Money and the Real World" is really good, in particular his chapters 4, 10, 11. Also, I would recommend Dudley Dillard's student-friendly "The Economics of John Maynard Keynes" book.
On (6), Fiona Maclachlan's "Keynes' General Theory of Interest" book is really good.
Post Keynesian economics is essentially the theory of the instability of financial markets. That is all. I will walk the readers through what I take to be the most important points, and then provide a list of readings at the end.
1.) A world of uncertainty gives money value beyond the utility it provides as a medium of exchange. Central to Post Keynesian economics is the use of money as a store of value.
2.) Now the properties of money, and its use as a store of value, have the potential to cause massive unemployment. The first property is a zero elasticity of productivity, which means that if individuals desire to hold money as a store of value, firms cannot employ labor to produce more money. Industry cannot meet this demand. The second property is a zero elasticity of substitution, which means that as the price of money rises in response to an increased demand, individuals cannot substitute other assets for money as a store of value. This destroys Say's Law. And the third property is a zero cost of transferring money from the medium of exchange function to the store of value function.
3.) Now different assets have different attributes, and the desire to maximize one's total yield depends on the relative values of these different assets. These attributes involve monetary yields minus carrying costs (q-c), capital gains (a), and the power of disposal of an asset during volatile and uncertain times, i.e. its "convenience yield" (l) --- this gives us the equation: a+q-c+l.
4.) Two sectors of capitalist economies can now be distinguished in terms of these different yields: the financial sector and the industrial sector. The basic idea here is that these two sectors rarely interact in the way neo-classicals believe. Speculators and savers deal on the financial side, while capitalists operate on the industrial side. Speculators, for example, while owning titles to capital goods, haven't the first clue as to how to use these capital goods or how long they will continue to be profitable. These are the concerns of the capitalist, who must rely on its expected profitability in the long-term since that is what affects his decision to invest. This creates a great deal of instability.
5.) As a consequence, the portfolio balance decisions of these two sectors are oriented towards different aims. For the financial sector, the aim is to achieve short-term capital appreciation via spot market purchases and sales (a) while seeking comfort in the fact that an organized market for securities exists if conditions should suddenly change (l). For the industrial sector, the aim is to earn profit from long-term income flows (q-c). This is also where the distinction between speculation and enterprise can be found. Transactions on the financial side occur independent of investment activity. Their aim is to profit from the change in interest rates. This is destabilizing because the different views of capitalists and speculators can cause massive instability in the system. If, for example, speculators continue to transact with the expectation of continued capital appreciation while capitalists (entrepreneurs) take a more pessimistic view of long-term investment, then, no matter how high stock prices rise, investment will not take place. If, on the other hand, speculators take a dim view of the possibility of capital gains in securities, then liquidity preference will rise and so will the interest rate, making the prospect of capital investment increasingly worse, drying up investment and causing unemployment.
6.) Finally, the existence of financial assets also serves to destory the link between saving and investment (represented by Austrians in the loanable funds model). The basic idea is that new savings are swamped in their effect on the rate of interest by transactions among existing wealth-holders in financial markets.
------
That is the essence of Post Keynesian economics. Needless to say, this is very different from Austrian economics. For Austrians, you have the loanable funds model, increases in the money supply causing disequilibrium in the loanable funds model, and then recession.
As for reading:
on (1), I would read anything by G. L. S. Shackle to get you in the mood of understanding and appreciating the role uncertainty plays in capitalist economies. In particular, I would recommend Shackle's chapter 12 in the Years of High Theory book.
On (2), anything by Paul Davidson is good. I would consult his several articles published in the Journal of Post Keynesian Economics.
On (3), Fernando Carvalho has an excellent book entitled "Mr. Keynes and the Post Keynesians." I would read chapter 5 very closely in that book.
On (4-5), Paul Davidson's book "Money and the Real World" is really good, in particular his chapters 4, 10, 11. Also, I would recommend Dudley Dillard's student-friendly "The Economics of John Maynard Keynes" book.
On (6), Fiona Maclachlan's "Keynes' General Theory of Interest" book is really good.
All students of Austrian economics should read Menger's Principles book very closely. It is beautifully written in a wonderfully systematic way.
Menger was concerned pre-eminently with the question of value. After reading the first chapter, it is clear why Austrians have regarded him as the founder of Austrian economics and the clearest and most foreful expositor of the subjectivist revolution.
However, Menger's theory of value has two components; one is subjective, and the other is objective. The subjective aspect of value derives from what Menger calls "requirements" or demands (needs). A good has value to the extent that it satisfies human requirements. Additionally, it is also necessary that individuals be aware of this causal connection and that they have sufficient power in bringing the good under their control in the satisfaction of human needs. Menger next discusses such things as: the intensity of needs, the duration of needs, and the ability of goods to sustain life, promote well-being and preserve health. This all falls under the subjective side of the determination of value.
However, and somewhat paradoxically, the objective aspect is a direct product of the "marginalist" revolution. Marginalism by definition refers to objective quantities of goods. Menger connected this to his principle of value in the use of these objective goods in satisfying human needs. Now it is clear that needs emanate from the individual. Without individuals, there would be no needs and thus no value. But the existence of such goods that acquire value by virtue of the existence of individuals with needs is objectively determined.
Next, Menger proceeds to a discussion involving "economic" and "noneconomic" goods. For Menger, the theory of value is derived from this categorical exposition. For example, a watermelon is valuable because it satisfies our hunger needs. But its "value" is determined, not by the intensity or duration of our wants, but by its physical and objective qualities. In this sense, value for Menger is still very much objective. If we require 10 watermelons a week, and the environment is such that it is capable of yielding 65 per week, then the value we attach to each unit of watermelon is nil. But if the number were suddenly reduced to 8, then each unit of watermelon would consequently be of immense value to us.
This problem has never even been addressed by Austrian economists! What are the implications of this reformulation of the subjective (marginal) revolution of economics? Well, value, while existing because of subjective needs, is determined objectively. Value is objective. Let me illustrate by using the watermelon example above. Value changed in that example not because the individual experienced any "change" in his needs, but only because the physical and objective environment (quantity of watermelons) experienced a change. How can value change if subjective needs have not changed? Well, this is possible only if value is objective. And for Menger, it was.
What have Austrians to say about this?!?!
Menger was concerned pre-eminently with the question of value. After reading the first chapter, it is clear why Austrians have regarded him as the founder of Austrian economics and the clearest and most foreful expositor of the subjectivist revolution.
However, Menger's theory of value has two components; one is subjective, and the other is objective. The subjective aspect of value derives from what Menger calls "requirements" or demands (needs). A good has value to the extent that it satisfies human requirements. Additionally, it is also necessary that individuals be aware of this causal connection and that they have sufficient power in bringing the good under their control in the satisfaction of human needs. Menger next discusses such things as: the intensity of needs, the duration of needs, and the ability of goods to sustain life, promote well-being and preserve health. This all falls under the subjective side of the determination of value.
However, and somewhat paradoxically, the objective aspect is a direct product of the "marginalist" revolution. Marginalism by definition refers to objective quantities of goods. Menger connected this to his principle of value in the use of these objective goods in satisfying human needs. Now it is clear that needs emanate from the individual. Without individuals, there would be no needs and thus no value. But the existence of such goods that acquire value by virtue of the existence of individuals with needs is objectively determined.
Next, Menger proceeds to a discussion involving "economic" and "noneconomic" goods. For Menger, the theory of value is derived from this categorical exposition. For example, a watermelon is valuable because it satisfies our hunger needs. But its "value" is determined, not by the intensity or duration of our wants, but by its physical and objective qualities. In this sense, value for Menger is still very much objective. If we require 10 watermelons a week, and the environment is such that it is capable of yielding 65 per week, then the value we attach to each unit of watermelon is nil. But if the number were suddenly reduced to 8, then each unit of watermelon would consequently be of immense value to us.
This problem has never even been addressed by Austrian economists! What are the implications of this reformulation of the subjective (marginal) revolution of economics? Well, value, while existing because of subjective needs, is determined objectively. Value is objective. Let me illustrate by using the watermelon example above. Value changed in that example not because the individual experienced any "change" in his needs, but only because the physical and objective environment (quantity of watermelons) experienced a change. How can value change if subjective needs have not changed? Well, this is possible only if value is objective. And for Menger, it was.
What have Austrians to say about this?!?!
Sunday, October 26, 2008
Interestingly, it was Bruce Caldwell's excellent "Hayek's Challenge" book that got me thinking about this important article of Hayek's.
I am referring, of course, to pages 211-212 of Caldwell's book where he quotes Hayek arguing that the concept of equilibrium implies essentially that everybody foresees the future correctly, this information consisting of both objective data and the behavior of other people.
This definition prompted a response by Oskar Morgenstern claiming that "perfect expectation and movements toward equilibrium are logically incompatible." Here is Caldwell on Morgensterm's criticism of Hayek's initial definition of equilibrium:
"If one assumes perfect foresight, one assumes, not only that one knows what all other people will do, now and in the future, but also that all other people know what you will do. This suggests either an infinite regress or that the world is always in equilibrium; either way, the concept of tatonnement ... is rendered superfluous."
Hayek, in response to this criticism by Morgensterm, promptly redefined equilibrium in terms of the compatibility of plans and by emphasizing correct foresight instead of perfect expectation.
----------
This is completely wrong, and I think the reasons stem from a lack of understanding with respect to what equilibrium implies in terms of omniscience.
1.) We can begin by arguing that with omniscience (equilibrium) there no longer is scarcity.
2.) Scarcity ceases to exist because there no longer is scarcity of information in equilibrium.
3.) This follows from Leibniz's principle of identity of indiscernibles, namely, that the greater knowledge you have of something, the closer you approximate it, rather than the representation of it.
4.) A thing is only a compilation of information, a complex of forms; therefore, anything of structure is a body of information. If knowledge has no limits (equilibrium), then the distinction between "thing" and "representation" collapses. You no longer have information about the thing; you have it directly.
5.) The logical implication of this argument is that it is incoherent to speak of multiple omniscient agents, i.e. Morgenstern's criticism is mistaken and confused.
These musings led me to arrive at another fundamental insight:
In Equilibrium, economics is destroyed. There would no longer be any social cooperation and specialization under the division of labor if we posit the existence of equilibrium (omniscience).
I am convinced that Hayek and Morgenstern had equilibrium completely wrong. Incidentally, these reflections are part of a larger project on the economics of Ludwig von Mises, which can be found here:
http://post-austrianeconomics.blogspot.com/2008/10/austrians-have-mises-all-wrong.html
Take away point:
Q1: Of what does economics consist?
A1: Rationality.
Q2: What does rationality imply?
A2: The destruction of economics.
(:
I am referring, of course, to pages 211-212 of Caldwell's book where he quotes Hayek arguing that the concept of equilibrium implies essentially that everybody foresees the future correctly, this information consisting of both objective data and the behavior of other people.
This definition prompted a response by Oskar Morgenstern claiming that "perfect expectation and movements toward equilibrium are logically incompatible." Here is Caldwell on Morgensterm's criticism of Hayek's initial definition of equilibrium:
"If one assumes perfect foresight, one assumes, not only that one knows what all other people will do, now and in the future, but also that all other people know what you will do. This suggests either an infinite regress or that the world is always in equilibrium; either way, the concept of tatonnement ... is rendered superfluous."
Hayek, in response to this criticism by Morgensterm, promptly redefined equilibrium in terms of the compatibility of plans and by emphasizing correct foresight instead of perfect expectation.
----------
This is completely wrong, and I think the reasons stem from a lack of understanding with respect to what equilibrium implies in terms of omniscience.
1.) We can begin by arguing that with omniscience (equilibrium) there no longer is scarcity.
2.) Scarcity ceases to exist because there no longer is scarcity of information in equilibrium.
3.) This follows from Leibniz's principle of identity of indiscernibles, namely, that the greater knowledge you have of something, the closer you approximate it, rather than the representation of it.
4.) A thing is only a compilation of information, a complex of forms; therefore, anything of structure is a body of information. If knowledge has no limits (equilibrium), then the distinction between "thing" and "representation" collapses. You no longer have information about the thing; you have it directly.
5.) The logical implication of this argument is that it is incoherent to speak of multiple omniscient agents, i.e. Morgenstern's criticism is mistaken and confused.
These musings led me to arrive at another fundamental insight:
In Equilibrium, economics is destroyed. There would no longer be any social cooperation and specialization under the division of labor if we posit the existence of equilibrium (omniscience).
I am convinced that Hayek and Morgenstern had equilibrium completely wrong. Incidentally, these reflections are part of a larger project on the economics of Ludwig von Mises, which can be found here:
http://post-austrianeconomics.blogspot.com/2008/10/austrians-have-mises-all-wrong.html
Take away point:
Q1: Of what does economics consist?
A1: Rationality.
Q2: What does rationality imply?
A2: The destruction of economics.
(:
Friday, October 24, 2008
There are two kinds of economists. On the one hand, there are those economists who discover something great and spend the whole of their professional careers repeating this important discovery; and on the other hand there are those who explore different areas after exhausting the implications of a certain field. With some justification we can refer to the former as hedgehogs and the latter as foxes. Now being a fox does not make one a "better" economist; it just makes one a different kind of economist. One can, after all, discover something "great" and have a very productive career reiterating this fundamental principle.
This list is by no means exhaustive, but here are some economists that come to mind:
1. Those who Bask
- Paul Davidson, for his discovery of Keynes's liquidity preference and the essential properties of money;
- Israel Kirzner, for his discovery of the theory of entrepreneurship in market processes;
- Oliver Williamson, for his efforts in "operationalizing" the theory of transaction costs;
- Hyman Minsky, for his discovery of the "financial instability hypothesis;"
- G. L. S. Shackle - for his discovery of the importance of uncertainty in human decision-making.
2. Those who Grow
- F. A. Hayek, technical economic theory to psychology to political philosophy to monetary economics;
- Ludwig Lachmann, capital theory to human expectations to hermeneutics;
- Douglass North, instititutional structures to economic growth to the role of ideology;
- Frank Knight, for his many contributions to the social sciences, human behavior, and technical economic theory;
- Nicholas Kaldor, Hayek scholar to Keynes scholar to income distribution to economic growth.
What other economists come to mind, and where would you put them?
This list is by no means exhaustive, but here are some economists that come to mind:
1. Those who Bask
- Paul Davidson, for his discovery of Keynes's liquidity preference and the essential properties of money;
- Israel Kirzner, for his discovery of the theory of entrepreneurship in market processes;
- Oliver Williamson, for his efforts in "operationalizing" the theory of transaction costs;
- Hyman Minsky, for his discovery of the "financial instability hypothesis;"
- G. L. S. Shackle - for his discovery of the importance of uncertainty in human decision-making.
2. Those who Grow
- F. A. Hayek, technical economic theory to psychology to political philosophy to monetary economics;
- Ludwig Lachmann, capital theory to human expectations to hermeneutics;
- Douglass North, instititutional structures to economic growth to the role of ideology;
- Frank Knight, for his many contributions to the social sciences, human behavior, and technical economic theory;
- Nicholas Kaldor, Hayek scholar to Keynes scholar to income distribution to economic growth.
What other economists come to mind, and where would you put them?
Thursday, October 23, 2008
"What sense does it make to assume perfect knowledge in a world where every morning's newspaper is opened in fear and scanned with foreboding?" --- G. L. S. Shackle
What gives uncertainty its meaning in economics? In speaking of uncertainty, Shackle continues on: "What can uncertainty mean, except either that it is determined in too complex and elusive a fashion for us to penetrate, or else indeed that it is the upshot of something spontaneous and originative, or 'random', at the very source of history."
Austrians seem to err on the side of complexity and elusiveness. Mises, addressing the same question as Shackle 10 years earlier, wrote: "Human knowledge is conditioned by the power of the human mind and by the extent of the sphere in which objects evoke human sensations. Perhaps there are in the universe things that our senses cannot perceive and relations that our minds cannot comprehend."
For Shackle, uncertainty is the "upshot of something spontaneous and originative," namely, human action and expectations. For Mises and the Austrians, however, uncertainty exists because the social world is complicated, and, to put it somewhat differently, human knowledge is limited. As our knowledge of the world increases, uncertainty should be reduced, according to the Austrians.
This is what divides the Austrians and Post Keynesians, political differences aside. Post Keynesians argue that an uncertain world requires the creation of certain "conventions" in order to permit scope for positive action. Observed reality is thus everywhere and always unstable, and the slightest change in the "news" will reveal quickly just how tenuous our knowledge claims really are.
Austrians take a different approach to the problem of uncertainty. Austrians respond to these "nihilistic" implications of radical uncertainty by invoking the "entrepreneurial element" and the system of order that is generated as a result of the observed tendencies to coordination. In this way Austrians point to existing bodies of knowledge as evidence of the frivolity of radical uncertainty. But it remains a fact that knowledge (conventions), however discovered, always emanates from a position of uncertainty, and must necessarily remain precarious and unpredictable.
It is obvious from experience that all economic activity is perennially subject to waves of optimism and pessimism owing to the conventional nature of the relevant data. We observe systemic market instability in capitalist economies because of the tendency to assume greater confidence in periods of perceived tranquility (on this, see Hyman Minsky). Knowledge (K) and market stability (MS) are thus inversely related, i.e. K = 1, MS = 0; K = 0, MS = 1; o < K < 1, 0 < MS < 1, which is to say that it is misleading to suggest that the process of knowledge acquisition a la Hayek produces a tendency towards equilibrium by causing expectations to become more and more correct. Knowledge is merely a convention that is used to deceive people into acting; without it we would be thrown into a state of paralysis. We would not act. But it is wrong to mistake these knoweldge conventions as resting on secure foundations that await entrepreneurial discovery. The Austrians have it entirely backwards. The only real discovery is the discovery that entrepreneurs must continually deceive themselves into acting if the economy is to avoid collapse.
What gives uncertainty its meaning in economics? In speaking of uncertainty, Shackle continues on: "What can uncertainty mean, except either that it is determined in too complex and elusive a fashion for us to penetrate, or else indeed that it is the upshot of something spontaneous and originative, or 'random', at the very source of history."
Austrians seem to err on the side of complexity and elusiveness. Mises, addressing the same question as Shackle 10 years earlier, wrote: "Human knowledge is conditioned by the power of the human mind and by the extent of the sphere in which objects evoke human sensations. Perhaps there are in the universe things that our senses cannot perceive and relations that our minds cannot comprehend."
For Shackle, uncertainty is the "upshot of something spontaneous and originative," namely, human action and expectations. For Mises and the Austrians, however, uncertainty exists because the social world is complicated, and, to put it somewhat differently, human knowledge is limited. As our knowledge of the world increases, uncertainty should be reduced, according to the Austrians.
This is what divides the Austrians and Post Keynesians, political differences aside. Post Keynesians argue that an uncertain world requires the creation of certain "conventions" in order to permit scope for positive action. Observed reality is thus everywhere and always unstable, and the slightest change in the "news" will reveal quickly just how tenuous our knowledge claims really are.
Austrians take a different approach to the problem of uncertainty. Austrians respond to these "nihilistic" implications of radical uncertainty by invoking the "entrepreneurial element" and the system of order that is generated as a result of the observed tendencies to coordination. In this way Austrians point to existing bodies of knowledge as evidence of the frivolity of radical uncertainty. But it remains a fact that knowledge (conventions), however discovered, always emanates from a position of uncertainty, and must necessarily remain precarious and unpredictable.
It is obvious from experience that all economic activity is perennially subject to waves of optimism and pessimism owing to the conventional nature of the relevant data. We observe systemic market instability in capitalist economies because of the tendency to assume greater confidence in periods of perceived tranquility (on this, see Hyman Minsky). Knowledge (K) and market stability (MS) are thus inversely related, i.e. K = 1, MS = 0; K = 0, MS = 1; o < K < 1, 0 < MS < 1, which is to say that it is misleading to suggest that the process of knowledge acquisition a la Hayek produces a tendency towards equilibrium by causing expectations to become more and more correct. Knowledge is merely a convention that is used to deceive people into acting; without it we would be thrown into a state of paralysis. We would not act. But it is wrong to mistake these knoweldge conventions as resting on secure foundations that await entrepreneurial discovery. The Austrians have it entirely backwards. The only real discovery is the discovery that entrepreneurs must continually deceive themselves into acting if the economy is to avoid collapse.
I will be presenting a paper at this year's Austrian Student Scholars Conference making this very point. Information about the program can be found here:
http://www2.gcc.edu/dept/econ/ASSC/#Schedule
My paper will argue that Austrian economics has developed in ways that contravene Mises' fundamental insights. Central to Mises is the concept of human action. Humans act because they wish to make their condition more tolerable, e.g., removing felt uneasiness. Now this conception of human action is fudamentally opposed to mainstream theorizing. For economists, optimizing behavior is desirable because it causes markets to approximate equilibrium. Now Austrians are no doubt critical of the mainstream's preoccupation with equlibrium states, but their crticisms take the form of "unrealism" and "inadequacy." In other words, mainstream economics doesn't tell the whole story. The market is a process that is always moving towards fleeting equilibria.
But Mises objected to equilibrium theory as a matter of principle. Mises attacked economics by rejecting the idea that equilibrium is a state towards which we should be tending; and he did this on two grounds. First of all, equilibrium is not an identifiable state. Therefore, approximations to and deviations from this "hypothetical" state cannot be measured or talked about intelligently. This is where the Austrians are wrong. How can we say that the market is a process approximating equilibrium if we can never know the definite monetary and quantity values of such a state? And secondly, equilibrium theorizing is fundamentally opposed to human action. Equilibrium reduces man to a vegetative existence. Human action would not exist in equilibrium.
This thesis effectively buries the debate among Austrians over whether the market is equilibrating or disequilibrating. Moreover, it also throws out most of what economics has accomplished in the way of scientific discovery. But most importantly, it turns Mises into a revolutionary --- a figure more radical than Marx, Veblen, or Keynes. To deny the desirability of equilibrium by explicating the meaning of human action is to fundamentally transform the nature and scope of economics.
The transition from Austrian economics to Misesian economics is made by dispensing with the assumed desirability of the equilibrium state.
http://www2.gcc.edu/dept/econ/ASSC/#Schedule
My paper will argue that Austrian economics has developed in ways that contravene Mises' fundamental insights. Central to Mises is the concept of human action. Humans act because they wish to make their condition more tolerable, e.g., removing felt uneasiness. Now this conception of human action is fudamentally opposed to mainstream theorizing. For economists, optimizing behavior is desirable because it causes markets to approximate equilibrium. Now Austrians are no doubt critical of the mainstream's preoccupation with equlibrium states, but their crticisms take the form of "unrealism" and "inadequacy." In other words, mainstream economics doesn't tell the whole story. The market is a process that is always moving towards fleeting equilibria.
But Mises objected to equilibrium theory as a matter of principle. Mises attacked economics by rejecting the idea that equilibrium is a state towards which we should be tending; and he did this on two grounds. First of all, equilibrium is not an identifiable state. Therefore, approximations to and deviations from this "hypothetical" state cannot be measured or talked about intelligently. This is where the Austrians are wrong. How can we say that the market is a process approximating equilibrium if we can never know the definite monetary and quantity values of such a state? And secondly, equilibrium theorizing is fundamentally opposed to human action. Equilibrium reduces man to a vegetative existence. Human action would not exist in equilibrium.
This thesis effectively buries the debate among Austrians over whether the market is equilibrating or disequilibrating. Moreover, it also throws out most of what economics has accomplished in the way of scientific discovery. But most importantly, it turns Mises into a revolutionary --- a figure more radical than Marx, Veblen, or Keynes. To deny the desirability of equilibrium by explicating the meaning of human action is to fundamentally transform the nature and scope of economics.
The transition from Austrian economics to Misesian economics is made by dispensing with the assumed desirability of the equilibrium state.
Edward Castronova, an economist at Indiana University, is perhaps the only academic who has seriously studied the economic implications of virtual reality. People, through avatars, have recently begun to conduct economic exchanges through games and other online media. Mr. Castronova has set himself the task of exploring the consequences of this new phenomenon.
Mr. Castronova observes that the actions that occur in these virtual worlds are real, although the means used for acting are not; teamwork, exchange, and contracts are all found in these virtual worlds. From this Mr. Castronova concludes that because people voluntarily choose to spend their time in these worlds, we must take them to be having fun; therefore, as a matter of practicality, we should aim to re-orient the real world to this virtual one so that people in their normal lives will no longer have cause for escape and, possibly, despair.
Mr. Castronova has also made some more substantive contributions to this area of his research, in particular the costs of inflation (mudflation) and the speed of reproducibility in "goods." But there is so much more to this virtual reality! For one thing, we notice that these worlds operate peacefully without the enforcement of explicit rules. Basic human motives, namely greed, avarice, and power, are still present in these worlds, but the desire to transplant these manners into the "image" of one's avatar results in a setting conducive to voluntary exchange.
More importantly, however, is the question of transaction costs; it would appear that they would be reduced considerably in a virtual world. What does this mean for economic efficiency? We know that these worlds are consciously designed, and that the ways in which people can conduct exchange are restricted by boundaries established in advance of any synthetic interaction. What does this imply for the impossibility of socialist calculation? A world with negligible (approximately zero) transaction costs in a centrally planned economy would seem to trivilialize the importance Austrians assign to the market process.
Mr. Castronova observes that the actions that occur in these virtual worlds are real, although the means used for acting are not; teamwork, exchange, and contracts are all found in these virtual worlds. From this Mr. Castronova concludes that because people voluntarily choose to spend their time in these worlds, we must take them to be having fun; therefore, as a matter of practicality, we should aim to re-orient the real world to this virtual one so that people in their normal lives will no longer have cause for escape and, possibly, despair.
Mr. Castronova has also made some more substantive contributions to this area of his research, in particular the costs of inflation (mudflation) and the speed of reproducibility in "goods." But there is so much more to this virtual reality! For one thing, we notice that these worlds operate peacefully without the enforcement of explicit rules. Basic human motives, namely greed, avarice, and power, are still present in these worlds, but the desire to transplant these manners into the "image" of one's avatar results in a setting conducive to voluntary exchange.
More importantly, however, is the question of transaction costs; it would appear that they would be reduced considerably in a virtual world. What does this mean for economic efficiency? We know that these worlds are consciously designed, and that the ways in which people can conduct exchange are restricted by boundaries established in advance of any synthetic interaction. What does this imply for the impossibility of socialist calculation? A world with negligible (approximately zero) transaction costs in a centrally planned economy would seem to trivilialize the importance Austrians assign to the market process.
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