Coordination Problem

Hayek, the Market Order, and the Fatal Conceit

Steven Horwitz

FEE TV has just put up one of my lectures from this summer's Introduction to Austrian Economics seminar on "Hayek, the Market Order, and the Fatal Conceit."  Enjoy.  (And yes, the audio is one channel only, and look at the intensity on that facial expression!)

 

A Glimpse at Living in Havana

|Peter Boettke|

An interesting account of the different colored markets in operation in Cuba.

Hayek on Interpreting The Road to Serfdom

Steven Horwitz

My reading group is tackling the "Principles and Expediency" chapter of Hayek's Law, Legislation, and Liberty today.  I always forget how terrific this chapter is and it's full of quotable stuff and some of Hayek's best work on the importance of ideas and the role of ideologies.  But I also found this little digression about the main message of The Road to Serfdom that is of interest, especially given Greg Ransom's tireless (and laudable) efforts to correct the misreadings that are out there.  Hayek wrote in 1973 (p. 58, my emphasis):

What I meant to argue in The Road to Serfdom was certainly not that whenever we depart, however slightly, from what I regard as the principles of a free society, we shall ineluctably be driven to go the whole way to a totalitarian system.  It was rather what in more homely language is expressed when we say:  "If you do not mend your principles you will go to the devil."  That this has often been misunderstood to describe a necessary process over which we have no power once we have embarked on it, is merely an indication of how little the importance of principles for the determination of policy is understood, and particularly how completely overlooked is the fundamental fact that by our political actions we unintentionally produce the acceptance of principles which will make further action necessary.

It would seem to me that this is a clear statement that the "inevitability hypothesis" reading of RTS is a bunch of nonsense.  In fact, one might argue that the Western world did, by the 1980s, "mend its principles" at least enough to avoid going to the devil completely.  Of course whether that "mending" job was strong enough to withstand a real challenge seems dubious as we quickly abandoned any recollection of those principles we might have had in the face of an apparent crisis in 2008, and one that resulted from the political choices that were evidence that we had not sufficiently mended them - namely the attempt to expand access to housing via the Fed and policy intervention. 

The Fiction of a Frictionless World

|Peter Boettke|

My good friend Steve Medema is interviewed on how the frictionless version of the Coase Theorem came to spread through the textbooks and captured the imagination of scholars in law and economics to the detriment of thought in both disciplines.

 

As Coase often stressed, in contrast to the fiction of the Coase theorem, the real analysis begins once we admit the frictions in the real world.

The Conversation Continues at Cato Unbound --- Constitution Making From the Ground Up

|Peter Boettke|

The dialogue on public reason liberalism continues, and I stress the importance of constitution making from the ground up following Elinor Ostrom's path breaking work.

Reaction Essay to Gaus at Cato Unbound

|Peter Boettke|

Here is my reaction essay --- Living Better Together --- to Gearld Gaus's "The Range of Justice."

Public Choice Foundations of Macroeconomics

|Peter Boettke|

Tyler Cowen regrets the direction that the IS-LM debate (in the blogosphere) has gone, and suggests that an alternative to the particular set of "technocratic curve-shifting" could be public choice economics (which he adds is still underrated by today's profession) as an alternative starting point of macroeconomic analysis.

Tyler lists others, including New Institutionalism, but I think his suggestion for public choice economics is spot on.  If the crisis has taught us anything, I would argue that it has taught us about the necessity to treat politics as endogenous to the model of policy choice.  Buchanan and Wagner's Democracy in Deficit still represents the best starting point for understanding what went wrong with the Keynesian model of technocratic economic management.  And Wagner's work on political manipulation and the boom-bust cycle is the most underrated of the public choice contributions to macroeconomics.

If you treat politics as endogenous, then I believe even many of the more market oriented proposals for macroeconomic policy will meet with frustration.  Imagine, just imagine if you will, what fiscal and monetary policy would have to look like if we took seriously the Humean dictum that in designing governmental institutions we must presume that all men are knaves.  Just imagine if you will, if the Hayek-Buchanan focus on the generality norm and politics by principle, not interest, were widely accepted. Just imagine what the implications are of Milton Friedman's argument in Capitalism and Freedom, when he says that in reference to the Fed and the Great Depression: 

It may be that these mistakes were excusable on the basis of the knowledge available to men at the time – though I happen to think not. But that is really beside the point. Any system which gives so much power and so much discretion to a few men that mistakes – excusable ornot – can have such far-reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an "independent" central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an "independent" bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers. (emphasis added)

When will we catch up to Milton Friedman?  Let alone James Buchanan?  Or even F. A. Hayek?  The path to a robust political economy must begin with treating political decision making (and the incentives and information embedded in that process) in the realm of policy making not as a footnote caution, but at the very beginning of the analysis.

 

Gaus on Liberal Justice and the Liberal Virtue of Tolerance

|Peter Boettke|

At Cato Unbound, Gerald Gaus has this month's featured essay.  My commentary will be posted on Monday.  I am stressing the rules that enable us to "live better together."

The 2011 Nobel Prize in Economic Science

|Peter Boettke|

I was flying back from Paris on Monday when the announcement was made of the award to Sargent and Sims.  When I turned on my phone, I had multiple messages from family, friends and former students asking for my reaction to the prize.  My reaction is both one of great respect for the brilliance of Sargent and Sims (and acknowledgment for what they did within economics to change thought and practice), and a deep sense of dread for what their contributions represent to the state of economic thought and practice.  Yes, the political economy implications of some of the earlier work done by Sargent is consistent with my own priors.  Yes, the critique of Keynesian theory and empirics was welcomed.  But both Sargent and Sims represent scientism run amok, and the attitude (especially of Sargent) has further killed scholarship in economics and political economy in the search for more rigorous science.

David Henderson is more positive, Tyler Cowen I would say even more so, and Arnold Kling less so.  Ironically, my position is somewhere between Cowen and Kling, as laid out above. Cowen's summary of the contributions and their influence on the profession is excellent.  Kling's reaction to that influence I think is correct, but I think the situation is much worse than his dismissal as historically unimportant suggests.  Economics was transformed in the post WWII period, and the contributions of Sargent and Sims in the 1970s and 1980s deepened that transformation.  In the earlier part of that transformation scientism and statism was aligned, with Lucas and Sargent that alignment was broken, but still the commitment to scientism deepened.  

Hayek's The Counter-Revolution is much more than a critique of the social engineering mentality.  It is a critique of scientism.  We know that scientism kills scholarship, but it also kills science.  As Cowen points out in his analysis of Sims, the contribution is much more methodological than substantive.  Cowen might not agree with my interpretation, but that sums up the problem perfectly.  The great sociologists Peter Berger has argued that a preoccupation with method in the sciences of man has the same impact on performance of the practitioner of the sciences of man as a preoccupation with method does in lovemaking.

What unified "mainstream" economists in the post WWII transformation of the discipline was a methodological commitment to a model and measure program (philosophically justified by some weird mix of formalism and positivism).  Prior to WWII what united economists was a commitment to a set of proposition about how the economy operated, and getting at those propositions could be achieved through a variety of languages and methods.

Sargent and Sims made major contributions to the way economics is currently practiced.  They helped kill methodological and analytical diversity in economic science.  And that is the problem.

 

The Next Ten Years of Research Among Elite Economists

|Peter Boettke|

David Warsh reports on the 55 papers written by distinguished economists at the invitation of the National Science Foundation detailing the questions that will drive research in various fields for the next generation of economists.

This is really mandatory reading for graduate students and young professors (and old professors if they want to stay young).