Coordination Problem

Could It Be That the Mistake Theory of Government Policy is Mistaken?

|Peter Boettke|

In a rather neatly argued paper "Why Have the Socialist Been Winning?", George Stigler contrasts mistake theories of the growth of government with bias theories of the growth of government and ultimately with rational theories of the growth of government.  I want to focus my comments on the mistake theory, mainly because it is the one that I adhere to.  But Stigler suggests that perhaps people like me are not fully shouldering the burden of proof that we must.  In short, Stigler's argument is making me think through my position.  He has a way of reasoning and asking questions which is very helpful for testing the weak points in one's understanding of the issues in political economy and public policy.

"Overwhelmingly," Stigler states, "the most popular explanation for the growth of government, among those opposed to the trend, has been that it was a mistake: a mistake in the literal sense that a misinformed populace has acted against its own interests."  But Stigler argues that we economists do not have an operational theory of mistakes, and that unless we develop a theory of the kinds of mistakes that are made in public opinion and public policy, an explanation based on a broad and sweeping claim about mistaken opinion that persists within the polity must be judged vacuous.  Persistent and widespread social phenomena cannot be satisfactorily explained by mere reference to mistaken opinion.  To get an satisfactory explanation we have to postulate an economic theory of mistakes -- and economics of error --- and Stigler says we haven't even developed a mistaken theory of mistakes as of yet within the economic way of thinking.  We are at ground zero in this regard as a research enterprise among economists.

"The fundamental objection to the 'mistake' theory," he argues, "is that it flies in the face of both our general knowledge of society and the facts of socialization in our times.  If deception by intellectuals were the motive force of social change, we would expect to observe on numerous occasions on which a group of conservatives with large powers of persuasion had captured the public's fancy, and succeeded in initiating a regime of declining governmental activity. After all, which socialist philosopher has been as profound as Hayek, which socialist propagandist has been as lucidly logical as Friedman?"

How would you respond to Stigler's questions?  

Is an economically coherent theory of mistakes possible?  

Can those mistakes persist without implying that our identification of them as a mistake is an illusion?

Can ideas lead societies astray, and can ideas also save a society from ruin?

 

How The Grinch Stole the Free Market

Steven Horwitz

Thanks to the very creative and very smart Sarah Skwire, we have a new holiday classic for the free market crowd. A teaser:

All their windows were dark. Quiet snow filled the air.
Everybody was dreaming sweet dreams without care
When he came to the first house in the square.
“This is stop number one,” the old fake Friedrich hissed
And he stepped to the door, velvet glove on his fist.

Then he walked right inside. Didn’t ring, didn’t knock.
(Property rights are respected by folks who read Locke.)
Then he slithered and slunk, that legislation-mad demon,
Around the whole room, and he took every freedom!
Cigars! Motorcycles! The schools! And their guns!
Freedom to travel! He took every one
And he made regulations
to stop them all. (Grinches adore legislation.)

Then he slunk to the icebox. He took the trans-fat!
He took the raw milk! And the sauerkraut vat!
He cleaned out the fridge; took their bathtub-brewed booze.
Why, that Grinch even took their last freedom to choose!

So he shut it all down with a heart filled with glee.
“And NOW!” grinned the Grinch, “For a tax on this tree!”

Humane Studies Fellowships for Students

Steven Horwitz

Undergraduates and grad students: if you're looking for fellowship money for next year and you're a libertarian/Austrian, the Humane Studies Fellowships are what you want to be applying for.  Pete, Dave, and I were all recipients of Institute for Humane Studies money way back when, as have been our co-bloggers and many other well-known classical liberal academics.  They're looking for people just like you, so apply and get into the IHS network if you aren't already.

Mises in Investor's Business Daily

Steven Horwitz

A nice piece on Mises in Investor's Business Daily today.  A bit too much emphasis on the libertarianism/policy and not enough about how Austrian economics is different.  Still, a pretty respectful treatment of the man who is now living in his student's shadow.

Hawtrey, Cassel and Enough of the Debate Between Keynes and Hayek

|Peter Boettke|

I learned while in graduate school from George Selgin that one should pay attention to what David Glasner has to say.-- even when you disagree.  I am not a monetary theorist, so a detailed response to Glasner will best be done by Horwitz, or Selgin, or White.  But I do think one could generate an interesting discussion.

My prior is that we haven't engaged enough in the debate between Keynes and Hayek and haven't through force of argument compelled our intellectual opponents to recognize the complete intellectual victory of Hayek which would be required to get our macroeconomic policy on the right track.  We still operate within a Keynesian framework of macroeconomics, when what is required is the complete abandonment of that framework, and the thorough adoption of a microeconomic-relative price economic analysis of macroeconomic phenomena.  Wicksell-Mises-Hayek pre-Keynesian macroeconomics updated for the post-Keynes, post-Friedman, post-Representative Agent, world of macroeconomic public policy.  Some hybrid of classical, Austrian, and public choice economics and political economy is what is required.  We need to establish the basic point that what is needed now more than ever is very ordinary economics (basic price theory) for extraordinary times, and deviations from ordinary economics for the sake of political expediency are what turn market corrections into economy wide crises here, abroad, and globally.

We don't need exotic fixes to seemingly complicated problems, we need a return to the basic lessons of Econ 101.  Simple economics is not simple-minded.  Think clearly about incentives, think clearly about information processing, and think clearly about how the rules of the game structure the incentives and impact the quality of the informational signals sent and received, and the flow of new information that gets communicated among economic participants.  But that message is not what Glasner is talking about when he suggests we need to get beyond the debate between Keynes and Hayek.

Glasner's basic point is that the framing the macroeconomics debate as one between Keynes and Hayek distorts our understanding of the actually debate that took place during the Great Depression and the debate that should be taking place today.

 

HT: David Levy

Thinking About the Great Depression

|Peter Boettke|

Many economists explain the Great Depression as a consequence of monetary mismanagement.  The more prevalent view focuses on the monetary contraction of the 1930s, a minority view focuses on the manipulation of money and credit in the 1920s.  But in both narratives monetary policy plays a central role in the cause of the Great Depression. And if one is so inclined, you don't have to choose between either narrative because both can be invoked for different historical periods.  The "cure" for running over a pedestrian with your car, is not to then back up over him again; the "cure" for inflation is not deflation.

But what about non-monetary theories of the Great Depression?  For most of the history of economic thought, I would argue that such theories while often popular had little grounding in the logic of economic activity.  Underconsumption theories or overproduction theories don't really satisfy the economic imagination, nor do they fit the historical record neatly.  Wild swings on optimism and pessimism don't work as explanations.  As Larry White has often said in the context of the current financial crisis --- "Yes, people did crazy things. But someone gave them the crazy juice!"  That someone, was the Fed and its easy monetary policy through much of the first decade of the 2000s.

But a full story of the current financial crisis would also have to invoke non-monetary factors which both steered the initial misallocations in one direction and not another, and which have prevented an adjustment (read a recalculation) of economic decisions and allocations to be consistent with the underlying realities of economic life.  In short, monetary theories must work alongside of non-monetary theories to provide a full account.

But which ones?

Joe Stiglitz offers his explanation in an opinion piece for Vanity Fair.  What do you think about the structural explanation?

I have always been persuaded by the narrative provided by Murray Rothbard in America's Great Depression.  Not only do I buy the Austrian theory of the manipulation of money and credit in the 1920s, I have always found Rothbard's analysis of the various government programs which prevented the necessary market correction from taking place to be persuasive.  In fact, while I know that Rothbard's (and Austrians in general) narrative of the 1920s is often challenged, has there been a good critique of the narrative about how the governmental policies adopted first by the Hoover and then pursued by the Roosevelt administrations prevented the market corrections that were necessary for economic recovery?  What substitute for market discipline can be reasonably relied upon during a period of recalculation?

When I read Robert Higgs (my favorite economic historian of the American experience), I see his work as completely consistent with Rothbard (and Friedman for that matter), and focusing on the non-monetary causes of the depth and severity of the Great Depression.  But his non-monetary factors are different from those that Stiglitz focuses on.

Gene Smiley's work on the Great Depression provides an excellent overview as well.   So whose explanation best fits the facts, and best has parallels to today?

 

Meta point: If my priors are correct on this issue, but the vast majority of economists cut the opposite way, can this be explained without recourse to (a) an explanation that focuses on shifts in the philosophy of science in middle of the 20th century, and (b) an explanation that focuses on shifts in the philosophy of public administration during the 20th century.  In other words, can we explain the rise of Keynesianism within economics and politics without also talking about a shift in the nature of scientific explanation in economics (see Knight "What is Truth in Economics?") and the transformation of public administration (see V. Ostrom, The Intellectual Crisis of American Public Administration) and the unique timing of both?

Methodology matters because it not only defines what is considered a good question, but more importantly what is considered acceptable answers.  And political expectations matter because when a discipline is asked to provide something that it is constitutionally incapable of providing, but it must provide it anyway for it success as a policy science it will corrupt the practice of the discipline.  The alliance of scientism and statism didn't just effect public policy, but the nature of the practice of the discipline, the selection process for that discipline, and the historical narratives that are accepted and those that are rejected by that discipline.  That much said --- all we have is the constant contestation of ideas in that discipline as a hope for self-correction.  In short, we have to think harder, dig deeper, write clearer, and in general just work harder to persuade our scientific peers of the correctness of our position.   There are no short-cuts, nor end-runs around the profession.  Simply put, we have to be better economic thinkers and communicators if we hope to provide a corrective to what we think of as error in thought and practice.

Regime Uncertainty and the Labor Market

Steven Horwitz

I just finished reading a student journal where she mused about whether there was a connection between regime uncertainty in the 1930s and the increase in discouraged workers, especially among non-whites (she had read an article on that topic for one of the class assignments).

And I wonder whether there isn't a story happening now that brings these together.  If (and let's leave it as an "if') the very slow recovery in investment is a product of regime uncertainty, then that regime uncertainty has an indirect effect on labor.  The lagging investment is certainly part of the slow growth in jobs, which has, according to the latest data, lead to a tick up in the rate of worker withdrawal from the labor force.  The drop in the unemployment rate to 8.6% was partially a result of just such an increase in discouraged workers. 

Think of it this way:  regime uncertainty creates discouraged capital which, given that it is ultimately complementary in turn means we have more discouraged labor.   Put differently, the drop in the labor force participation rate might be a result of a drop in the "capital participation" rate, which is itself due to regime and policy uncertainty.

Thoughts?

Rizzo on Hayek vs. Keynes

Steven Horwitz

Mario Rizzo gets it, why can't Krugman and Warsh and DeLong?

However, I think the real issue is this. Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. Hayek does not want to argue that the government expenditure multiplier is 0.5 instead of 2.0, for example. He does not want to discuss just how much fiscal stimulus should be undertaken and what form it should assume.

In short, he does not want to focus on aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.

Suffice it to say this greatly erodes the intellectual capital of a field of economics – although one not noted for its successes.

I Know What You Should Do Next Summer

|Peter Boettke|

This is directed at PhD students and recently minted PhDs who aspire for a career in academia.  Summer is a fantastic time to be an academic because you can focus on research projects without significant distractions associated with teaching and/or administration.  But it is also a time as a PhD student to make major investments in your human capital outside of the work you are doing in the classroom and with the professors at your school.  There are summer programs run by a variety of groups in economics and political economy, I want to suggest the four that are appropriate for either advanced PhD students or junior faculty hoping to refine their knowledge of liberalism, law, institutional analysis, and market processes:

May 2012 --- Beijing Workshop on Institutional Analysis, Ronald Coase Institute

June 2012 --- Scholarship and a Free Society, Institute for Humane Studies

July 2012 --- Henry Manne Program Law Institute for Economists, Law & Economics Center

August 2012 --- Advanced Austrian Economics Seminar, Foundation for Economic Education

I cannot think of a better way for an ambitious aspiring economist to spend this upcoming summer.

Thank You Alex for the Corrective to Krugman and Warsh

|Peter Boettke|

Alex Tabarrok helps to set the record straight on Hayek and modern macro.  Hayek's influence in modern economics is ubiquitous, even if sadly modern economics is not as Hayekian as I would like it to be.  Information economics, theories of dynamic competition, equilibrium theory of the business cycle, and complexity theory all owe a debt to Hayek's economic contributions.  The work on legal origins owes a debt to Hayek's work on law and political-social philosophy as well.  Hayek impacts the DNA of economics and political economy to such an extent that many are unaware of the pervasive influence.

Then add to the mix confirmation bias among certain segments of the economics profession --- such as Krugman.  This is no surprise, Krugman is a Keynesian economist.  To him non-Keynesian economists are a caricature of some position he considers completely unreasonable to hold.  So in his reading it makes no sense but to see Keynes's chief rival at the time as unreasonable (so unreasonable in fact to as not even have been a rival at all --- rivalry implies the competition was close).  Hayek cannot possibly be useful today because he was so soundly defeated back then.  But what if Hayek's defeat was an error of judgement by professional economists and policy makers? 

And moreover, what if we separate Hayek's ideas in economics from Hayek's iconic position within our political culture.  Can Krugman assess the ideas in The Road to Serfdom, rather than the bastardized presentation by those on the left and right of the political spectrum? I am talking about the subtle points about democracy and the limits of agreement; about interest groups and the political economy set in motion by the critique of laissez faire; about the selection process of leadership within a planned economy; and about the tension between socialist planning, democracy and the rule of law.  In short, can Krugman deal with The Road to Serfdom the way Keynes himself did at the time it was written?  I don't think so.  Warsh refers to The Road to Serfdom as an embarrassment, really?  Has he actually read what Hayek wrote and the subtle argument he presents in the book.

The final problem I have with both Krugman and Warsh is that they don't actually consult the historical record and the accounts of those who were there in the 1930s when the battle was engaged or the direct citation evidence from post-WWII thinkers such as Koopmans, Hurwicz, etc., all the way to Lucas, et. al. Instead they rely on impressionistic accounts from their education and discourse communities, and cherry pick from recent journalistic histories of economics.  Why not listen to people like Shackle -- who studied with Hayek at the LSE but became persuaded by the Keynesian argument?  Or, listen to individuals like Coase who were at the LSE in the 1930s.  Or they could consult Sir John Hicks, who wrote in his essay "The Hayek Story" that:

When the definitive history of economic analysis during the nineteen thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek. . . . Hayek’s economic writings . . . are almost unknown to the modern student; it is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. Which was right, Keynes or Hayek?

Keep in mind that Hicks wrote that in 1967, a decade latter Bob Lucas would be using Hayek's work on the equilibrium foundations of the business cycle to explain his own work in "Understanding Business Cycles", a few years after that Vernon Smith would frame his market experiments as "testing the Hayek hypothesis", and a decade after that Joe Stiglitz would have a section of Whither Socialism? devoted to Hayek versus Stiglitz.  A lot of attention by some very worthy Nobel Prize winners across the ideological spectrum for a guy who is only known for his political position and not his economics! 

Do I wish the economics profession was more Hayekian in nature?  Of course.  Do I think Hayek gets abused by those on the right and on the left of our political culture?  Of course.  But was Hayek a major figure in 20th century scientific economics?  OF COURSE.

Hayek is the leading representative of mainline economics in the second half of the 20th century (Mises and Buchanan being the others).  These are the men who sit in the seat of Adam Smith and demand our attention, and they are to be juxtaposed to the mainstream of economics which is what is currently fashionable in science and politics.  To miss that, is to misunderstand what is fleeting and what is enduring in the history of the disciplines of economics and political economy.