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I just read that over at MR. Perhaps you could chime in and respond to the second comment from a student who made a remark about the authenticity and uniqueness of the Austrian view on this matter.

BTW, I'm considering an MA in Econ next fall but do not have prerequisite levels of micro and macroecon and I'd rather avoid formal classes if possible. Is Heyne's or Mankiw's book as a self study book over the next year sufficient to not be lost? If not, do you have any advice?

I just read that over at MR. Perhaps you could chime in and respond to the second comment from a student who made a remark about the authenticity and uniqueness of the Austrian view on this matter.

BTW, I'm considering an MA in Econ next fall but do not have prerequisite levels of micro and macroecon and I'd rather avoid formal classes if possible. Is Heyne's or Mankiw's book as a self study book over the next year sufficient to not be lost? If not, do you have any advice?

I just read that over at MR. Perhaps you could chime in and respond to the second comment from a student who made a remark about the authenticity and uniqueness of the Austrian view on this matter.

BTW, I'm considering an MA in Econ next fall but do not have prerequisite levels of micro and macroecon and I'd rather avoid formal classes if possible. Is Heyne's or Mankiw's book as a self study book over the next year sufficient to not be lost? If not, do you have any advice?

Dear John,

First, the student on Marginal Revolution is just misinformed, and also caught in a contradiction. If Phelps wants to introduce something in the textbooks because it is absent, then how can it already be in there? Granted some textbooks at the very basic level --- even Stiglitz --- have discussions of adjustment processes. But they have no formal theory of adjustment processes. This is explicitly discussed in Franklin Fisher's wonderful book The Disequilibrium Foundations of Equilibrium Economics. I like the language introduced by Richard Nelson (Phelps's colleague at Columbia) where he talks about the difference between formal theory, and appreciative theory. Very few neoclassical economists have a full grasp of appreciative theory, and even less of a grasp of the fact that appreciative theory can often out pace formal theory in terms of understanding the market economy. But these are technical issues in economic theory and not necessarily at the level of the discourse on the blogosphere.

On preparation for an MA --- Heyne or Mankiw's books are great places to start, but you will not be prepared if you stop there. I'd recommend 3 sets of readings for you to prepare you:

Neoclassical:

Mankiw, Principles
Hal Varian, Intermediate Micro

New Institutional:

Alchian and Allen, University Economics
Jack Hirschleifer, Price Theory and its Applications

Austrian/Market Process:

Heyne, Boettke, and Prychitko, The Economic Way of Thinking.
Rothbard, Man, Economy and State.
Kirzner, Market Theory and the Price System.
Kirzner, Competition and Entrepreneurship

Hayek, Individualism and Economic Order.
Mises, Human Action.


If you engage in this course of study, you will be well prepared to tacke the ECONOMICS of a graduate program. However, you may still be underprepared for the technical aspects of the arguments used in economics. For this I would recommend A. Chiang's Fundamental Methods of Mathematical Economics (http://www.amazon.com/Fundamental-Methods-Mathematical-Economics-Chiang/dp/0071238239)

Read alongside the course of study I gave you above, Chiang's book will be very helpful. Read apart from that, I fear, the student is often left with the impression that mathematics is the master and economics is the servant when in reality it is the other way around. To get a good idea of my own view on mathematical economics see Alfred Marshall's plea to "burn the mathematics" or Kenneth Boulding's warning about the flawless precision of mathematical economics in his JPE review of Samuelson's Foundations in 1947. Neither Marshall nor Boulding are self-identified Austrians, but both raised very wise objections to the preoccupation with mathematics as the only language with which to write economics.

Still you need to know math and statistics if you hope to become conversant with modern economics, so don't stop your studies short in these disciplines.

Good luck.

Pete

Dear John,

First, the student on Marginal Revolution is just misinformed, and also caught in a contradiction. If Phelps wants to introduce something in the textbooks because it is absent, then how can it already be in there? Granted some textbooks at the very basic level --- even Stiglitz --- have discussions of adjustment processes. But they have no formal theory of adjustment processes. This is explicitly discussed in Franklin Fisher's wonderful book The Disequilibrium Foundations of Equilibrium Economics. I like the language introduced by Richard Nelson (Phelps's colleague at Columbia) where he talks about the difference between formal theory, and appreciative theory. Very few neoclassical economists have a full grasp of appreciative theory, and even less of a grasp of the fact that appreciative theory can often out pace formal theory in terms of understanding the market economy. But these are technical issues in economic theory and not necessarily at the level of the discourse on the blogosphere.

On preparation for an MA --- Heyne or Mankiw's books are great places to start, but you will not be prepared if you stop there. I'd recommend 3 sets of readings for you to prepare you:

Neoclassical:

Mankiw, Principles
Hal Varian, Intermediate Micro

New Institutional:

Alchian and Allen, University Economics
Jack Hirschleifer, Price Theory and its Applications

Austrian/Market Process:

Heyne, Boettke, and Prychitko, The Economic Way of Thinking.
Rothbard, Man, Economy and State.
Kirzner, Market Theory and the Price System.
Kirzner, Competition and Entrepreneurship

Hayek, Individualism and Economic Order.
Mises, Human Action.


If you engage in this course of study, you will be well prepared to tacke the ECONOMICS of a graduate program. However, you may still be underprepared for the technical aspects of the arguments used in economics. For this I would recommend A. Chiang's Fundamental Methods of Mathematical Economics (http://www.amazon.com/Fundamental-Methods-Mathematical-Economics-Chiang/dp/0071238239)

Read alongside the course of study I gave you above, Chiang's book will be very helpful. Read apart from that, I fear, the student is often left with the impression that mathematics is the master and economics is the servant when in reality it is the other way around. To get a good idea of my own view on mathematical economics see Alfred Marshall's plea to "burn the mathematics" or Kenneth Boulding's warning about the flawless precision of mathematical economics in his JPE review of Samuelson's Foundations in 1947. Neither Marshall nor Boulding are self-identified Austrians, but both raised very wise objections to the preoccupation with mathematics as the only language with which to write economics.

Still you need to know math and statistics if you hope to become conversant with modern economics, so don't stop your studies short in these disciplines.

Good luck.

Pete

Prof. Boettke,

Well, I don’t believe it would be a contradiction if I also believed that Phelps was overstating his own “radicalness”.

But, at any rate, I believe my characterization was correct. Ludwig Lachman talks explicitly in several essays (including the one linked below) about how the “market process” is simply how markets reach equilibrium. He acknowledges that “mainstream” economists have their own stories of how this process takes place, he simply contends that Austrians tell a different story. Of course, the differences must be very subtle, because I have a hard time telling the difference between the story he tells and the story found in textbooks like David Friedman’s Price Theory (link also below).

In any case, even if the Austrian story is slightly different, theirs is only one among many. Walrasian, Marshallian, Cobb-Webb. There are plenty of stories already out there. The claim that Austrians focus on market process while the "mainstream" ignores it in favor of equilibrium is 100% false advertising.

http://www.econlib.org/LIBRARY/NPDBooks/Dolan/dlnFMA7.html#Part 3, Essay 1

http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_7/PThy_Chapter_7.html

Prof. Boettke,

Well, I don’t believe it would be a contradiction if I also believed that Phelps was overstating his own “radicalness”.

But, at any rate, I believe my characterization was correct. Ludwig Lachman talks explicitly in several essays (including the one linked below) about how the “market process” is simply how markets reach equilibrium. He acknowledges that “mainstream” economists have their own stories of how this process takes place, he simply contends that Austrians tell a different story. Of course, the differences must be very subtle, because I have a hard time telling the difference between the story he tells and the story found in textbooks like David Friedman’s Price Theory (link also below).

In any case, even if the Austrian story is slightly different, theirs is only one among many. Walrasian, Marshallian, Cobb-Webb. There are plenty of stories already out there. The claim that Austrians focus on market process while the "mainstream" ignores it in favor of equilibrium is 100% false advertising.

http://www.econlib.org/LIBRARY/NPDBooks/Dolan/dlnFMA7.html#Part 3, Essay 1

http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_7/PThy_Chap

Dear student,

In all seriousness, please read Franklin Fisher's book --- it was originally his Presidential Address to the Econometric Society. In addition, please read Arrow's paper on the Theory of Price Adjustment. It is at this point that you will see that there is a fundamental problem with the theory of the "path to equilibrium" in standard theory. As Joan Robinson often said, the only way to get into equilibrium in the standard model is to already be in equilibrium. The theory has its problems. Austrians (and others) sought to provide an answer --- however successful or not is an issue you would have to judge. But to claim that there is no distinction between market process theory and the equilibrium theory of neoclassical economics is I would contend false.

As a final point, I would not point to David Friedman's work as standard neoclassicalism, he tends to escape the analytical straightjacket on his own terms, but not in a way that would satisfy (in my opinion) either the neoclassical purest (say Arrow/Hahn/Debreu) or the neoclassical revisionist (say Stiglitz).

Don't get me wrong, I like Friedman's work a lot and learn from it all the time. But it is not addressing these questions in pure theory (instead he is more an applied price theorist). Again, I do think the blogosphere is not the place for these sort of discussions.

Good luck in your studies.

Pete

Dear Prof. Boettke,

Thanks for the response and thank you very much the recommended reading. That's quite a list.

Having only read a "Portable Professor" intro course, "Econ in One Lesson" (Hazlitt), "Basic Economics" (Sowell) and The Law (Bastiat) while being the middle of reading "Road to Serfdom", I know my knowledge is still far from adequate and is mainly shallow and theoretical and lacking math. I will indeed start to tackle these starting with Mankiw's and then Heyne's (yours).

Is this level of reading for the expected level of attainment for "Intermediate" by GMU's or NYU's higher-than-normal requested standards?...or is it pretty standard for other lesser known schools as well?

Thanks again. I'm a regular "GMU-family" blog reader and enjoy your writing.

Reading Alpha Chiang's book will be the minimum for a GMU type program (but will be a good start), but will underprepare you for NYU. NYU's program is very mathematically demanding. I taught there from 1990-1998, and I must say that the students who worked their way through that course of study have a very good grasp on economic theory, game theory, and econometrics. What they might not have as good a grasp on is the institutional analysis points that one finds in public choice or property rights economics or New Economic History. At GMU we tend to emphasize those aspects of your economic education over the technical aspects. But still you need to know how to talk and think like a modern economist, so make sure to master the material in Chiang's book even if ultimately you do not pursue that style of work in your own studies.

Good luck and I hope you will consider the new Mercatus program (contact Virgil Storr vstorr@gmu.edu) which will produce a GMU MA in economics.

All the best,

Pete

Not false advertising, but advertising nevertheless.

David Prychitko and I edited a two volume reference work (which as far as we can tell nobody has checked out of a library!) entitled Market Process Theories that was published in 1998. We emphasize the word theories because we survey and present samples of writings from the classics, to the development of general competitive equilibrium, to formal theories of the adjustment paths, to Swedes, Austrians, old Institutionalists, Marxists, etc. As was pointed out at Marginal Revolution, Phelps is not the first one to make these points about the nature of capitalism and the failure of the neoclassical model to grasp these subtle points about the capitalist system.

In fact, contrary to student's assertion --- Ostroy has a significant paper in the Journal of Economic Literature discussing the modifications in theory that would be required to address creativity that was published in the past 5 or 6 years, and Rob Axtell had a piece published in the Econ Journal just a year or so ago on the exchange processes that is also a breakthrough. Also look at Vernon Smith's understanding of what he was doing with regard to market experiments and his discussion of the adjustment path to equilibrium through experimental trials.

So we have two competiting hypotheses --- either all these economists and the journals they write for are deluded and standard price theory already has all the answers, or student is missing some fine points in theory and thus mistaken in the characterization of Austrians (and others) who are attempting to fix a fundamental lucuna in market theory and the price system ... btw, the word lucuna comes from Arrow, not me.

I think the weight of the evidence in terms of economic theory and its development sides against student. However, I will admit that for 99% of day to day problems for which economics can be useful in addressing standard price theory is a darn good first approximation and we would be mistaken to jettison its teachings. But it is not completely philosophically satisfying as a theoretical system and for the 1% of us who work in the area of theory, this matters. And it matters a lot. But again most people shouldn't worry about it --- see the advice Pete Leeson gives on the Austrian vices. As Pete knows however, he isn't doing fundamental theory at that point, but good applied political economy. Down the road, however, they do meet up and at that point these issues will all come rushing in again --- otherwise the welfare economics you are relying on will be nothing more than an intellectual illusion.

Prof. Boettke,

I am not sure we are disagreeing.

In all of my posts, I simply stressed the fact that Austrians are not the only ones that study the "market process". It now seems that you are agreeing with this proposition. Indeed, as you point out, there are many economists still studying the market process that are outside the Austrian school (including recent Nobel Laureates). So how can Austrians claim that their "emphasis" on "process" makes them unique or distinct from other schools? And how can Phelps say he is a "radical" for treading such well worn ground?

You are right that we have two competing hypotheses. Except I would characterize them a different way--either the study of the market process does not make the Austrian school unique, or we must ignore the contributions of non-Austrians like those you have just listed.

The Austrians represent a unique contribution to the general study of market processes. A contribution that emphasizes the entrepreneurial element in human action.

At a certain time in intellectual history, the Austrians did stand out for this emphasis (circa 1950-1975) and that is where you were quoting people from. BTW, the charge against Rothbard that you raised is one you could read in my own paper from my student-days entitled "Beyond Equilibrium Economics." I think we made some rather immature comments in that paper concerning Kirzner --- I became especially convinced of that after reading Kirzner's "Meaning of Market Process" around 1990.

However, as my book with Prychitko demonstrates there are several intellectual streams of thought that address the issue of market processes. So if all you are saying is that neoclassical economics suffers from this theoretical weakness, and that several economists from the non-Ricardian British economists such as Whatley to the Swedes such as Wicksell to the US economists such as J. M. Clark to the Austrians such as Mises, Schumpeter, Hayek and Kirzner _all_ identified this weakness and sought to rectify it ... we are in agreement. There are also German economists such as Eucken, and of course Post-Keynesians, etc. But in this list we do not see Chicago type economists such as Friedman (Milton or David), Stigler, Becker, etc. These Chicago economists are GREAT, but they have not contributed to our understanding of the way market forces work outside of equilibrium. This is not a point only stressed by Austrians, but even Chicago writers such as McCloskey have made this point.

So ultimately, I am asking what then is your criticism? Is it that neoclassical economics has already absorbed the importance of the entrepreneur? Well in that case, you are decidely wrong as Baumol has gone to great pains to argue in his work. Is it the case that you are arguing that we do not need a concept of the entrepreneur to discuss market forces? Well, there I think it depends on what questions you are asking, but I tend to agree with Phelps and others (such as Buchanan, Coase, North, etc.) who recognize the need to capture these dynamic properties of capitalism as well as the well-known static properties of equilibrium.

Finally, there are normative issues at stake that are tied up to these issues of the nature of capitalism and how we characterize it. I think your remarks so far have not demonstrated an appreciation of this fact. I may be wrong, but I discuss these issues at some length in my paper What Went Wrong with Economics, Critical Review, 11 (1997).

The question of uniqueness was not your original point, it was that the mainstream had fully absorbed these points. That, I would contend, is decidely false. If you are asking whether Austrians are the only ones who emphasize these dynamic characteristics of capitalism, I agree the answer is NO, but I would argue that the work of Mises and Hayek is far superior to the alternatives in explaining the role of entrepreneurship and the welfare benefits of the market economy (not the first and second welfare theorem defenses). See my recent remarks on Dani Rodrik's discussion of first-best and second-best economists.

Pete

Prof. Boettke,

My original argument was that Austrians are not unique for studying the market process because mainstream economists do so as well. You seem to disagree.

Maybe we should narrow down what we mean when we say "mainstream". Personally, I think when you can easily name 6 Nobel Prize winning economists that you believe "recognize the dynamic properties of capitalism" that the concept has gone mainstream (Hayek, Buchanan, Coase, North, Phelps, and Smith). You apparently have much more rigorous standards. So by what criteria do you measure the mainstream acceptance of ideas?

PS* I also wonder how you feel about Paul Krugman's "The Self-Organizing Economy". I believe that he displays just as much understanding that capitalism is a dynamic process in this work, even if he cannot address all its aspects in such a slim volume. I'm aware you would disagree with him on political philosophy, but this would not be the same as saying he is wholely ignorant of the dynamic nature of capitalism.

The Nobel Prize winners you mention ALL claim they are not "mainstream" and in fact criticize neoclassical economics and in so doing nod to the Austrians, especially Hayek. So you are providing evidence that contradicts your original position in that instance.

But the "confusion" is not completely your fault. In a recent paper of mine, I argue that we must make a distinction between "mainline" economics, and "mainstream" economics --- a distinction that Kenneth Boulding first made. "Mainline" economics is those who argue for the self-organizing properties of the market economy, whereas "mainstream" is whatever is currently fashionable in the scientific community. Sometimes mainline ideas are mainstream, but other times mainline ideas are out of step with the mainstream. For most of the history of the Austrian school, for example, these thinkers we all mainline, but not mainstream. But as the mainline comes more in line with the mainstream, the uniqueness of the Austrian school fades (though still there at a subtle level). The subtle points are difficult to discuss on blogs for the same reasons that Tyler has raised as to why philosophy doesn't work in this environment. But it is these subtle points that the various Nobel Prize winners (as well as the Austrians) are emphasizing. However, these ideas are not taught in the mainstream curriculum either at the undergraduate or graduate level and thus the reason why their is a fight for their place.

On Krugman --- that particular volume as well as his volume on Geography, Trade and Growth are some of his better works and we can learn a lot from them. But ultimately, Krugman is a market failure theorist, and not a self-organizing theorist --- he is mainstream, but not mainline. A better slim volume of his to understand his position is The Return of Depression Economics. He is a Keynesian economist. That is not name calling it is just a statement of fact.

BTW, if you look at the entries here at the Austrian Economist you will see many positive references to the work of mainstream economists --- Shleifer especially, but also Glaeser, etc. These works are major advances in political economy. But what they still miss to a considerable extent is the emphasize on dynamic adjustments on an analytical level. Again the language of Richard Nelson is helpful. What makes these guys so great is that they have a great "appreciative theory" of the market, but when they write and teach they often emphasize the "formal theory" of the market.

Anyway, I think you might find my syllabus for my Austrian Theory of the Market Process II class (PhD) interesting for both its survey of the modern literature as well as its relationship to the classic literature in AE.

Pete

Prof. Boettke,

I would think that whether these economists percieve themselves as being mainstream is beside the point of whether they were in fact mainstream. Perception doesn't dictate reality. The question should instead be how we infact measure what ideas are "fashionable".

You mentioned that other, perhaps lesser known, economists were also working on these subjects, such as Axtell and Ostroy. And you seem to agree that Krugman and Stiglitz at least have moments where they glimpse the "dynamic nature of capitalism". So, how many economists at leading institutions would we have to find before we concluded that the conception of capitalism as dynamic process had went mainstream? Maybe we should even expand our search beyond the ivory tower? After all, dynamism is already the subject of popular books (The Future and Its Enemies, The Wisdom of Crowds, and Emergence), so the idea must be catching on somewhere.

But I suppose it doesn't matter if we can measure acceptance or not. The fact is that it's simply more fun to consider oneselve a radical, pushing the limits of the profession, than to be just another member of the faceless majority.

But I suppose you're right. None of this is very easy to discuss on a blog and I still have much to learn on the subject. So I thank you for the interesting reading recomendations (I really will check them out) and the fun conversation.

Have a great morning!

PS* I have actually been a loyal reader (and occasional commentor) of your blog for about a year now. I look forward to your future posts.

One last point on the sociology of the profession. Recognizing in words the dynamic aspects of capitalism is not the same thing as theorizing about the dynamic aspects of capitalism. The question on perception and reality is one of what advice would you give to a young ambitious graduate student on how to advance their career. Working on these refinements to theory would not be high on the list. They are not "fashionable".

Thinkers such as Buchanan, Coase, North, Phelps, and Smith focus on these issues either late in their careers, or pursued careers outside of the established institutions of higher learning precisely because they were not fashionable.

I don't think anyone is getting joy out of perceiving themselves as "radical", there is a reality of those of us who have tried to compete in this very competitive game of journal publishing and academic climbing. I was a professor at NYU, and spent a year at Stanford as a research fellow (and more recently 2 stints as a visitor at LSE). The sort of dynamic capitalism ideas associated with Hayek and Kirzner are not on the agenda in what is considered mainstream price theory. The ideas do, however, attract attention by slightly out of sync economists, and also others in disciplines such as strategic management and organizational theory.

Pointing to popular books such as you do misses the boat of the nature of the sociology of the economics profession. These books, like The Black Swan (also an excellent book), do not have much impact on economics as it is practiced. I wish they did. But economics is a journal culture, not a book culture. Look to the writings in journals to see where the profession is at and heading. The book culture that exists on economic topics has very little impact --- except say in the field of economic history, and perhaps in generating majors for us to teach at the undergraduate level (the Freakonomics phenomena).

But the professional game is still one that requires a very high aptitude in math --- 780 or above on the GRE or don't even apply for a PhD go to law school instead --- and to limit ones intellectual imagination to those questions which are easily written up in journal article form.

It is, I would argue, a very satisfying intellectual game to play. But we have to remember that, as Milton Friedman taught us, economics is not just a game to be played by clever people, but a discipline that is essential for understanding the world around us. The profession is more or less caught up in the game -- that is what determines the mainstream --- but the discipline historically is one that can render the world intelligible and provide guidance on how to improve our world through a better understanding of human action and the economic forces at work.

I am glad to know that you read the blog --- thank you for taking the time. And do let us know when we veer off into silly claims of exclusivity on truth --- that is never our intent. We are about engagement ... taking ideas we thinker were best developed by Menger, Mises, Hayek, Kirzner, etc. and applying them to contemporary issues, or interacting them with contemporary literature to build a new and stronger synthesis in thought. Austrian economics is a live body of thought and as such should be continually changing and developing. I do hope that sense comes across on this blog --- Austrian economics as a progressive research program in modern political economy. It was our intent in starting this blog, that this would be the impression students and others would get from reading us. If that is not the impression you get, then we have failed in our purpose and more importantly (I would argue) failed to promote the ideas of Menger, Mises, Hayek and Kirzner in the best way possible.

Pete

"economics is a living thing --- to to live implies both imperfection and change." Ludwig von Mises.

So far in this thread, I completely agree with Professor Boettke's comments and corrections, that "student's" original posts generally mis-characterized the mainstream in its content and its members. My sole remaining comment concerns "student's" characterization of an Austrian: Ludwig Lachmann. Who I also think "student" gets wrong.

In his first post on this blog, "student" wrote:

"I believe my characterization was correct. Ludwig Lachman talks explicitly in several essays (including the one linked below) about how the “market process” is simply how markets reach equilibrium. He acknowledges that “mainstream” economists have their own stories of how this process takes place, he simply contends that Austrians tell a different story."

This is a misrepresentation of Lachmann. Lachmann is always clear to explain that the study of economics is about recognizing the patterns and forces that drive the market processes to tend towards equilibrium. He explains further how this is explicitly different from an analytical framework which assumes to be within a state of equilibrium.

For Lachmann, the economy is never in equilibrium. The market process never ends, there is no successful attainment of the state that the process tends toward. To claim that he is concerned with a process of how markets achieve equilibrium and that this characteristic is not significantly different from the mainstream, misses Lachmann's point entirely.

The attainment, and re-attainment of equilibrium conditions implies perfect knowledge and for Lachmann's purposes homogeneity of capital. Both of which he avoids with his non-mainstream approach.

I don't know what Daniel D'Amico is talking about: "Lachmann is always clear to explain that the study of economics is about recognizing the patterns and forces that drive the market processes to tend towards equilibrium." For Lachmann, there need be no tendency towards equilibrium. Endogenous disequilibriating tendencies may, at any time, be stronger than equilibriating tendencies. Certainly the study of economics, for Lachmann includes the recognition of these disequibriating tendencies.

If all plans were in sync, they would still be embodied in different capital goods. I don't see how relations of complementarity among heterogeneous capital goods would magically make them homogeneous.

Yes, Robert is correct Lachmann agrees that disequilibrium can over power equilibirum tendencies. I misspoke, but I think the general point is the same that Lachmann's characteristic of economic science is critically different from the mainstream view. See especially Lachmann's essay in Toward Liberty.

I apologize, I don't understand Robert's second paragraph. I don't think plan coordination homogenizes capital. But I do believe that general equilibrium conditions and mainstream descriptions of functioning markets implies homogeneous capital.

Daniel D'Amico tells us that he doesn't think that if plans were coordinated, capital would be homogeneous. But he does think "general equilibrium conditions" imply homogeneous capital. I continue to not know what Daniel D'Amico is talking about.

Maybe equilibrium is one of those words like induction and rationality that carry a heavy load of different meanings. General equilibrium is an imaginary state where every single market has cleared. The kind of equilibrium that Lachmann and Hayek talk about is more like the coordination of plans of different people (to be treated by methodological individualism and situational analysis). So my plan to sell a house reaches an equilibrium with someone else who plans to buy a house when we agree on a price to do the deal. If we are both genuine then there is a tendency to complete the deal but the final price can be pushed up or down depending on many considerations. And of course either party can abort the deal if circumstances change or the other party is too inflexible.

Movements in the housing market "as a whole" such as volume of sales or average price are like the murder and suicide rates, outcomes of all the plans, calculations and decisions by players in the game.

Reading Debreu's Theory of Value is difficult for those without a mathematical background. It may not give insight into even a virtual economy (e.g., in the World of Warcraft). But it is a prerequisite for understanding what economists mean by the phrase "General equilibrium".

And in the Arrow-Debreu model, the plans of all agents are coordinated in equilibrium. This model clearly resembles Hayek's ideas in "The Use of Knowledge in Society".

Defenders of the model - not me - have been arguing for decades that the model does not contain homogeneous capital and does not need any market for aggregate investment or saving.

Robert,

There is of course the Cambridge/Cambridge debate which might challenge your interpretation.

Again, we are now at a level of technical subtlety that I don't believe the blogosphere does justice (for the same reasons Tyler argues the blogosphere isn't very effective for philosophy).

But just to relay a story ... many years ago Bob Solow and I were on a panel together talking about the future of economics. He described himself as the world's leading expert on the 2 good world. When I was asked a question about heterogenous and homogeneous capital goods and the implications for economic theory, I made passing reference to Solow's quip ---- he blew up, and said "I never did damage to reality." I didn't push the issue because, well he was Bob Solow and I was Pete Boettke. But it did make me think that this issue is more sensititve than any of these guys want to admit and calls into question fundamental issues. And it ultimately will question the entire enterprise and its usefulness for understanding the capital using economy.

In a paper in HOPE I try to negotiate the Hayek vs. Knight debate on similar grounds.

I would hope Cambridge critics would agree with me that I have fairly summarized what defenders of the Arrow-Debreu model say. I think Garegnani, one of the Cambridge critics, was one of the first to point out Hayek’s importance in the rise of the concept of intertemporal equilibrium. My doubts that the Arrow-Debreu model can tell us anything about actually existing economies are partly based on capital-theory.

I have been thinking that maybe I would try to make Daniel D’Amico’s case for him. In a disequilibrium situation, arguably aggregating the value of capital goods over individuals with disparate plans and expectations makes no sense. But, in a general equilibrium one can construct a meaningful aggregate value measure of capital. (See http://robertvienneau.blogspot.com/2007/07/peter-lewin-correct-to-mistaken.html)

I’m not at all sure it makes sense to call this aggregate “homogeneous capital”. One still cannot costlessly take apart these capital goods and reassemble the value into another capital structure in order to accommodate a transition from one equilibrium to another.

Solovian growth theory goes even further than assuming homogeneous capital. He also assumes that the single capital good is homogeneous with the single consumption good. It is a one-good theory, not a two good theory. (Solow, IIRC, did do some work on two-good models in the 1960s.)

I am aware of some of Professor Boettke’s work engaging the Cambridge Capital Controversy.

Robert wrote "I’m not at all sure it makes sense to call this aggregate “homogeneous capital”. One still cannot costlessly take apart these capital goods and reassemble the value into another capital structure in order to accommodate a transition from one equilibrium to another."

I think it is reasonable to accuse the aggregate or average value measure as assuming homogeneity. Heterogeneity is not only in reference to moving capital goods from one production line of one consumption good to another production line of a different consumption good. Heterogeneity also makes reference to the position of capital within a single production line. Capital goods at the early stages of production have value within that specific context. If you move them about willy nilly they loose their productive elements and the value their users impute on them.

Averaging across the time structure of production so that you get a single notion of capital K, implies that with more K you get more output at the same rate of return to the previous production process. That's not necessarily true.

I have read (and apparently forgotton) some of Peter Boettke's papers. When I looked up the article on the CCC I had in mind, I discovered I was thinking of a Roger Koppl article. Sorry for the confusion.

I erroneously ended a URL with a paranthesis. It should be:
http://robertvienneau.blogspot.com/2007/07/peter-lewin-correct-to-mistaken.html

I had in mind no averaging at all. I was thinking of adding the dollar value of a lathe to the dollar value of a box of nails to the dollar value of a piece of lumber and so.

I have no idea why Daniel D'Amico reads "tak[ing] apart these capital goods and reassembl[ing] the value into another capital structure" as being about "moving capital goods from one production line of one consumption good to another production line of a different consumption good". I thought "structure" of production had a definite meaning in Austrian economics, relating to the "order" of a good, as in the remainder of Daniel D'Amico's comment.

Dr. Boettke,
Just a point of clarification on the reading list you recommended...

Which Mankiw Principles book are you referring to?

He has 2006 editions of Pr. of Economics (about 940 pages), pr. of Micro and pr. of macro...each about half that size. Is Principles of Econ simply both of the other two in one book and is this the one you were referring to?

I ask this because the Hal Varian book is juts Micro and I just want to be sure.

Thank you again.

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