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A correct understanding of poverty will elucidate a correct understanding of economics as
well as a correct understanding of our current economic situation.

While I am not an Austrian proponent I have made the subjective basis of economics the
foundation of the economic theory laid out in the ebook referenced below. But I come
to very different conclusions regarding monetary policy, credit operations, taxation, and the
definition of individuals and enterprises in any economic system. I also compare communist
economic systems to our current western credit economic system and believe that Keynes
made an invaluable contribution to economics with his concept that an economy can function
at any level of production. But I also support market mechanisms as the driver of any
successful economy instead of government spending.


Given the plethora of ideas about just how we should proceed in order to improve our
current economic situation, I've added my own. I would really appreciate your review of
the economic principles proposed in the following ebook
http://www.smashwords.com/profile/view/povertyandthefoundationofeconomics
and your comments on any errors that you find. If you do not have the time to do
this, I would appreciate your assigning the task to your friends as an exercise.

As long as we continue to use the western credit system as the primary driver of
economic production the wealthy will continue to control the means of economic
production and poverty will be a guaranteed result. The link above describes an
alternative economic system that will eliminate poverty and maximize economic
production.

Thank you for your time and attention in this matter

Jeffrey Friedman is to be congratulated for his *pioneering* work in this area (the causes of the financial crisis). I find it curious, though, that his work is being acknowledged by Austrian economists, who, as a routine matter, adhere rigidly to the Austrian theory of the business cycle (an account that was not welcomed in Mr. Friedman's symposium of the causes of the financial crisis!) But I digress...

Friedman's work is PIONEERING, I believe, for this reason... It goes without saying that he illustrates very well how public institutions (government and regulatory bodies/agencies) cannot cope well with ignorance. Professor Boettke is exactly right on that point. But, and this is where, in my opinion, Jeffrey Friedman and Professor Boettke diverge, Mr. Friedman DOES NOT then use this insight to champion the *efficiency* of unfettered capitalism. I don't think Jeff Friedman would suggest that free markets APPROXIMATE efficiency standards. All Jeff Friedman is suggesting, which I think is absolutely right, is that it is better to allow free markets ONLY BECAUSE they promote heterogeneous and diverse activity. This, in turn, allows us to experiment with different plans, theories, and approaches. The problem with regulation is that it HOMOGENIZES what would otherwise be heterogeneous activity, and there is no reason to suppose the regulatory standards will be the correct ones.

It is a remarkable insight, and one, I would suggest, that is somewhat at odds with the Austrian dogma concerning the *efficiency standards* of free market capitalism. Under Jeff Friedman's analysis, we can say that free market capitalism will produce all kinds of inefficiencies and mistakes (because there is ignorance occasioned by social complexity); but, according to Mr. Friedman, this is preferable to government regulation precisely because diversity is better at coping with ignorance than regulatory uniformity. That is all. There is no ECONOMIC EFFICIENCY argument being made here.

signed,
--- a jeff friedman groupie!!!

Do some extent, Friedman and Kraus acknowledge the link between incentives and ignorance near the end of the book. I think Friedman's attack on the incentives story is wider than what he openly suggests (that is, an attack on "moral hazard" theories). Friedman has always attacked what he calls "economism", and I think he uses the book as an opportunity as such. But, he comes to acknowledge that there is some room for an incentives story and that his own story is really one of incentives (there was a price incentive in investing into the mortgage market, thanks to the recourse rule and the capital minima requirements).

Austrian Away,

I don't think any Austrian would argue that people do not make mistakes. One of the things that set the Austrians apart the most from the Neoclassicals, I would think, is the emphasis on the imperfect aspects of the market -- that's why the Austrians focus so much on an explanation of the market process.

I think that the particular argument you highlight from Friedman and Kraus' work is based on Austrian influence, not the other way around.

One of the most notable elements of Austrian economics is that it absolutely does not argue the economy is efficient -- only that, even given its necessary inefficiencies, it does things far better than central planning, regulations, etc. by government. Austrians generally reject neoclassical equilibrium theory, which does support the idea of efficiency, in favor of disequilibrium (or, I argue, far-from-equilibrium), which is hardly "efficient." Further, given people's necessary ignorance, the need to be alert, the problems created by time, etc., efficiency is impossible. All a system can do is approximate efficiency -- the question is thus, which one does so best? The answer: free markets.

Mr. Catalan,

Absolutely. The argument is, basically, very "Hayekian," and I am sure Jeff Friedman would concede that point. Knowledge is diffuse, and cannot be concentrated in an intelligent manner. But here is the difference, as I see it, between the Austrians and Jeff Friedman:

Austrians -- knowledge problems create price signals that entrepreneurs can use to coordinate market activity.

Jeff Friedman -- knowledge problems justify heterogeneous rather than homogenous activity, and is not necessarily indicative of Kirznerian entrepreneurship opporunities and market coordination.

That is the difference.

And real quick, to Dr. Camplin,

I do not mean to turn this into a equlibrium vs equlibrating debate. I understand the Austrian view on this question, and that is why I characterized the Austrian view as one of "APPROXIMATING" efficiency standards. That is the idea I am attacking here (and not notions of equilibrium per se).

The Austrian theory of entrepreneurship, though, broadly incorporates Friedman's point. Entrepreneurs fail. But, what allows progress -- on the whole -- is heterogeneous activity. That some entrepreneurs succeed where others fail is an important (crucial, even) aspect of Austrian theory, since it is this distribution of capital which helps achieve some level of "economizational efficiency" (my own term I just used right now). I think Austrian theory already encapsulates what Friedman is trying to say; I guess one could argue, though, that Friedman is just bringing this particular aspect out to the forefront.

It's also important to consider the debate on entrepreneurship between Austrians like Kirzner, Lachmann, and Rothbard.

Mr. Catalan,

Wow! where did you come from? Yes, you make all very good points. I also agree that it is important to consider the debate on entrepreneurship between Austrians like Kirzner and Lachmann. If I had control of the Austrian agenda, this is what the Austrian big wigs (Boettke, Horwitz, Koppl, O'Driscoll, etc.) would be doing, and NOT things like Public Choice or the rational organization of pirate ships.

But, your points are well taken. I suppose I would suggest that we could use Friedman's insight and place it in the context of Lachmann's position in the entrepreneurship debate to say that there is no systematic equilibrating market forces in the economy. The only thing free markets have going for it is that it promotes heterogeneous activity (most of which will be mistaken and distortive of the coordinating abilities of the market economy). But better that than imposing uniform standards on the entire economy via regulation.

Austrian view, what do you mean by efficient? Pareto efficient, or something else? And efficient at what? Austrians assert that free markets will create wealth and promote social harmony. There are so many concept of efficiency. However, Austrians would claim that markets are efficient at creating wealth whereas central planning destroys wealth.

Free markets have to be doing more than just heterogeneous activity. And most of that activity has to be wealth creating because we know that freer markets create more wealth than less free markets. If freer markets did not create more wealth than the wealth we consume and waste, they couldn’t make whole nations wealthier as they have in China.

So I guess if you say that Austrians claim that freer markets are more efficient at creating wealth than less free markets, they yes, Austrian claim greater efficiency for freer markets.

austrian away, if you read a long article that Pete Boettke wrote in Jeff Friedman's journal a decade ago I think you will find that Jeff has come to a position rather close to that articulated by Pete long ago. Jeff is a good learner!

Here is Friedman on there being "no substitute for profit and loss":

http://www.criticalreview.com/crf/jf/society.pdf

Rafe, are you referring to "Where did Economics go Wrong?" I am now aware of any other articles Boettke has published in CR, other than his response to Caplan over the feasibility of socialism?

Yes, that is the one. I think he pointed out the limitations of the view that market failure demands regulation and the opposite fallacy of the "Chicago" position that markets are not supposed to fail at all.

Yea, Boettke made a lot of big claims in that paper, which, by the way, is quite excellent. His grasp on the development of economics and what it tries to explain and how it does so is really quite good. Everyone should read that article -- his co-authored papers with all his PhD students not so much (but he is to be congratualted for helping to get all his students published!).

Matt,

Just want to point out that I have published multiple articles in CR, and was at one time President of the CR Foundation, and been on the editorial board since the late 1980s. Perhaps you might want to start with my paper on the Soviet experience which included an exchange with Alex Nove, or my paper on Institutional economics, but if you look at vol. 1 you will see I had a paper in the issue.

Jeff is an amazing intellectual entrepreneur, and you are right to be impressed. What he has done with CR is phenomenal, and if you ever get a chance, Jeff is clearly the most amazing Socratic seminar leader I have ever seen.

As for the paper that Rafe mentions, the background of that paper is that it is based on a series of lectures that I gave at the Central European University at the invitation of Soros on the state of modern economics in 1992-93. Jeff really flattered me by not only publishing the paper, but then organizing a symposium around the piece, and even those who didn't participate in the symposium such as Mancur Olson and Axel Leijonhufvud would nevertheless talk with me about that paper at some length down the road. And I very much enjoyed my opportunities to wrestle with the critiques of Thomas Mayer and Robert Helibroner and Dan Hausman.

As for my work with my students (or their work independent of mine), that is up to the reader to decide. But let me give you two former students that I think you need to be reading if you haven't given their interests and yours and also the progress they have made in their analysis: Anthony Evans (who has a wonderful co-authored paper with Jeff), and Adam Martin.

BTW, I should have definitely thrown in Virgil Storr as well for work that would fit with your interests. Virgil has made significant contributions not only to methodology, but also to the economic, sociological, and ethical foundations of the market economy.

Jonathan already beat me to it with his point about Lachmann. After all, Lachmann specifically emphasizes heterogeneity and disequilibrium. For my own money, it is neither equilibrium nor disequilibrium, but the far from equilibrium state that is most relevant for economics. It is of course what you get when you have symmetry between equilibrating and disequilibrating forces. Thus, Kirzner and Lachmann can be synthesized.

The Evans and Friedman paper, "'Search' vs. 'Browse': A Theory of Error Grounded in Radical (Not Rational) Ignorance," can be downloaded free here: http://www.tandfonline.com/doi/abs/10.1080/08913811.2011.574471. It is expressly directed to Austrian economists.

Says it's not available.

Professor Boettke knows my interests well (see above), and so I think he will be the first to tell you that any paper beginning with a quote from Shackle is OK in my book.

** By the way, for those interested in "Shackle-ean" notions of uncertainty, I would really recommend the work of Professor Paul Davidson. He has done more than any economist I can think of in actually "operationalizing" this theory radical uncertainty. All of his papers in the Journal of Post Keynesian Economics is a good place to start (the older the better).

Jeff,

It seems odd that you leave out the Austrian who does seem to take radical ignorance into consideration: Lachmann.

I would also argue that, valid though your general argument may be, a central planning board could never be "alert" to local conditions, which the entrepreneur can be alert to. That, it seems, is Kirnzer's point.

Of course, since I don't come to any of this with the biases created by a pure economics education, but rather come to it all with an understanding of ignorance closer to the one you are talking about, it may just be that that makes me more generous in my interpretations than I would be if I assumed they were making their arguments in light of neoclassical ideas of knowledge and ignorance. This may also explain why I am less than impressed by the Keynesian contributions in this area, since I view them as mostly "what is right is unoriginal and what is original is wrong."

Please let me take thread as another excuse to push the glories of computability theory in economics. I think computability theory gives us formal tools for, ahem, modeling radical uncertainty.

I'll be giving a paper at the SEAs in which I model radical uncertainty as "not Turing computable." I'll discuss "Discretionary Monetary Policy Does Not Compute" on Saturday, 3:00-4:45 in the session on "Complexity in Economics and the Social Science." I give two simple models in which discretionary monetary policy is formally undecidable.

I'm giving another paper in which I conjecture that financial networks "exhibit computational universality" and cannot, therefore, be reliably stabilized by discretionary regulation of the sort Dodd-Frank creates. Unfortunately, that's a Monday morning session.

Walter Grinder reminded me tonight of two major citations that should be Austrian classics on this issue of search theory:

Jack High, Maximizing, Action, and Market Adjustment: An Inquiry Into the Theory of Economic Disequilibrium (Munich: Philosphia Verlag, 1990)

Jack High, "A Critical Analysis of Search Theory," Journal of Post Keynesian Economics, vol. 6, no. 2 (Winter 1984) pp. 252-64.

On a personal note, my SDAE presidential address was on the distinction between information and knowledge.

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Professor Boettke,

Just who is Walter Grinder? Is he an academic? Does he have a cv? I thought his essay to the Lachmann "Expectations..." volume was just great. But, other than that introductory essay, I don;t know anything else about him. But I would. Please help!

Matt,

Walter Grinder and Leonard Liggio ran the Institute for Humane Studies through much of the 1970s and 1980s, and they both were significant figures in the support and encouragement of a new generation of students interested in studying Austrian economics. Walter also was involved with the Center for Libertarian Studies, and was a professor of economics at Rutgers Newark campus.

The modern Austrian movement owes much of its existence to folks like Walter and Leonard that many students who don't know the history have no clue about because they were behind the scenes, whereas the Rothbard's, the Kirzner's, the Lachman's were out front.

The Society for the Development of Austrian Economics will be honoring Leonard Liggio this Sunday with a Lifetime Achievement Award.

BTW, besides that essay in the Lachmann volumes, one of my favorite Grinder essays is his introduction to Nock's On Doing the Right Thing.

Pete

I found the pairing of Friedman with Kraus to be quite interesting. I know that Wladimir Kraus thinks very highly of George Reisman. Does anyone know if the same is true of Mr. Friedman?

Jeffrey, thanks for the link to your paper.

Friedman: “In other words, since many economists have conflated rationality with non-error, they will probably conflate error with irrationality.”

That’s the objection I have with Caplan’s book on irrational voters.

Excellent paper, but I amazed that a paper like this had to be written. This is just common sense to the man on the street. The only reason such an analysis of ignorance is necessary for economics is the pig headedness of mainstream econ in insisting that equilibrium models actually describe the real world. An analysis of why mainstream econ insisted on the reality of equilibrium models in the face of overwhelming evidence of their unreality would be interesting.

Other obvious points about ignorance are the problems of differing IQs and division of labor. Some people are smarter than others. Smarter people will get more things right. And a rational person doesn’t try to know everything there is to know about every subject. He focuses on his comparative advantage and relies on the expertise of others using their comparative advantages in knowledge. People rely on experts in areas in which they are not expert. But experts can be wrong for a variety of reasons.

McKinney, the great and wonderful (not to mention terribly erudite) Mr. Jeff Friedman, has, I believe, already addressed the problems of expertise (and expert advice) in his equally great and wonderful journal (if I am not mistaken). I remember reading this somewhere, and it was probably Critical Review (because that is the only journal I really read consistently).

On the issue of market coordination and heterogeneous entrepreneurs, I suggest that Matt and Jonathan look at this paper by Leeson, Coyne, and Boettke -- Does the Market Self Correct? -- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=869114

Thank you for the link!

Austrian Away writes:
"[Austrianism offers] an account that was not welcomed in Mr. Friedman's symposium of the causes of the financial crisis!"

And that's false.

The fact is that - in the words of Jeffrey Friedman himself - "Juliusz Jablecki and Mateusz Machaj paper in our special issue, entitled "The Regulated Meltdown," is one of the most important in the whole volume, if not *the* most important."

Machaj and Jablecki are both Austrian economists, they are both associated with the Polish Mises Institute (which Machaj founded).

Another instance on thinking about the labels too much, and too little about the essence.

I haven't wanted to interrupt all of these kind words, but thank you, Pete and everyone else.

Engineering the Financial Crisis was indeed inspired by what I take to be the core Austrian insight: the ubiquity of human ignorance. Popper makes a very similar point: the ubiquity of human error.

To me, Austrian economics is distinctive because it opens the door to saying, as Mises did in the socialist calculation debate: People may err because they don't know what they should know. Speaking for myself, not Wladimir Kraus, I’m not so sure about the rest of Austrian economics, but then, I am not an economist of any kind.

I agree that it's kind of absurd to have to *theorize* ignorance-based error, as Anthony Evans and I do in our recent “Critical Review” paper, but mainstream economists really do seem to have trouble with the concept, and it was this trouble that also led Wlad and me to write “Engineering the Financial Crisis.” For example, the book notes that Stiglitz asserts repeatedly that the crisis was *not* the result of anyone's errors. But we also note, following Pete Boettke's 1997 “Critical Review” article, “Where Did Economics Go Wrong?” that whether it's Stiglitz on the left or Stigler on the right, such assertions are commonplace among mainstream economists, clearing the way for them to claim that incentives, as opposed to ignorance, explain (or rather explain away) errors.

The Evans and Friedman paper linked to above suggests that Austrians seize the moment to criticize that tendency among mainstream economists. Austrians might be able to reform their discipline in this golden moment of opportunity if they show that an ignorance-based economics has a much firmer purchase on the empirical realities of the crisis than the evidence-free assertions of Stiglitz and virtually all other economists who have written about the disaster. That's what Engineering the Financial Crisis” tries to do.
The book is also an exercise in “Austrian political science.” Just as Mises asked how central planners would know what they'd need to know if they were to avoid errors, an Austrian political theory would ask how political actors are to know what they need to know, and an Austrian political science would examine political actors' actual sources of information, the gaps therein, and the theoretical and ideological biases therein.

Thus, Wlad and I find that banking regulators were in the grip of the same economistic ideology gripping Stigler and Stiglitz. They thought that deposit insurance created misaligned incentives for bankers (a moral hazard), such that bankers would now want to take wild bets. Therefore capital cushions had to be mandated by law, and the details of those mandates incentivized bankers to pile into what regulators thought were "safe" securities: those rated AAA. (Incidentally, the regulations provided an even greater incentive to pile into sovereign debt.)

Similarly, the accounting regulators thought corporate executives faced the moral hazard of profiting by hiding losses from shareholders. So they mandated mark-to-market accounting on the grounds that market prices "tell the truth" by "aggregating information" (. . . even Hayek was fallible . . .), rather than aggregating the fallible decisions of buyers and sellers. Mark-to-market accounting therefore writes down corporate assets that are experiencing an ignorance-based market panic, which happened to AAA mortgage bonds in 2007 and 2008, and this directly translates into dollar for dollar reductions in capital. If the corporation is a bank, this dramatically shrinks lending power, and thus may have transformed the financial-market panic into the Great Recession.

The "information," ideas, theories, and ideologies that prompt political action have long been studied in political science, so those who study it face none of the high hurdles to career success that face Austrian economists. The Critical Review Foundation has been running occasional seminars since 1995 to encourage young scholars of Austrian bent to go into political science. Two of those young scholars are now tenure-track political scientists at Yale. If you may be interested in this career path, please contact me through the Critical Review website, http://www.criticalreview.com/crf/

Finally, Wlad and I have a blog where we've posted updated data on the actually risk averse (but regulation-following) behavior of bankers prior to the crisis: http://causesofthecrisis.blogspot.com/2011/10/new-data-on-bankers-risk-aversion.html We'd be happy to debate the theses of the book there.

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