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Note that many of the presentations at the INET Berlin conference were influenced by Hayek's economics -- e.g. those of Frydman, Goldberg, White, & Leijonhufvud, etc.

And many were making Hayekian arguments about banking, finance, uncertainty, formal modeling, choice theory, etc, likely in deep ignorance of Hayek's priority in articulating exactly the same insights.

"Imperfect Knowledge Economics"? Isn't that just "real world economics" vs. "Impossible to Attain God's-Eye View Economics"?

I'm with Greg and Troy. Sounds like Austrian in new clothes. How much old soup will they chew if they don't read the originals and their actual students?

If it is "Austrian in new clothes," then great, wonderful, awesome.

One thing I've noticed, Greg and Troy, is that everyone thinks their gang's insights are less perfectly groped towards by some other group. Trust me, guys: people think of Austrians along precisely these lines too. They make a big fuss over insights that "our" guys made much earlier, and then they accuse us of missing points we always thought were obvious or implicit.

This is one of the things I love about reading Smith. It's incredible how many points we think of as seminal papers in the 20th century are already made in Smith. This is all the more impressive because even Smith is widely thought of as primarily a synthesizer of older ideas.

I think we should all just be glad that innovative thinking is being given this support. And if you think Austrians could do it even better, compete for INET money and submit it for publication!!

To all,

I personally don't care whether they call it Austrian, Hayekian, or whatever, what matters is whether the ideas will advance our understanding of the economy or not. I happen to believe that the path to better understanding is along lines of Smith and Hume in 18th century, Say and Bastiat in 19th century, and Mises and Hayek in 20th century.

The 21st century is wide open and these ideas about agency, institutions, and processes ... Very exciting opportunities.

Pete

Daniel,

Frydman, Goldberg, White, & Leijonhufvud explicitly cite Hayek ... I'm not talking about "teams", I'm talking about an explicitly recognized and cited paternity of ideas.

Ernst Mayr, David Hull and many others have made a big fuss over the heritage of Darwin's explanatory strategy, and his significant contributions to the domain of biological science.

Doing so has actually played a role in building and establishing the actual content of biological science -- important content that is lost in the drive to advance tiny niches of "normal science" involving pure math constructs (often misused), empirical studies (often unclearly connected to the wider field), etc., etc.

It's a fundamental failure to understand the development of a scientific explanatory program in the complex sciences to mistake this for mindless high school ego games or some such.

Look. It's this simple.

The explanatory strategy of economics or any other complex science as a global explanatory project involves a broad and evolving array of different elements and reminders of dead ends or mistakes.

It's almost impossible to keep all of these elements in the foreground and to remember all of what is in play -- and all of this complexity is compounded when you have a contest of rival explanatory strategies appealing to some overlapping elements within that contest of rival understandings and causal explanatory strategies.

Having someone like Darwin in biology or Edelman, Hebb, Hayek or Fuster in global brain science as an exemplar of someone who successfully put most or a good deal of the crucial elements in play -- from the problem to be explained to the causal elements providing the explanation -- is crucial for sustained scientific advance. In one fairly coherent body of lifetime work you have an integrated set of reminders of a good part of what the problem is, what the mistakes to avoid are, what the possible explanatory elements look like, etc.

To dismiss this, to dismiss the role of Darwin in biological science or Edelman, Hayek and Fuster in global brain theory (etc.) is to miss a crucial aspect of how progress is made in the essentially complex sciences.

Greg -
I was more reacting to your second paragraph than your first. I like Hayek. I'm not out to deny his relevance. I'm not "dismissing" anyone.

My point is that these ideas have been floating around for a long time and have been put forward by a lot of people, and as Pete says it doesn't particularly matter if they cite or are inspired by a somewhat different set than what you cite or are inspired by. The important thing is to get good science done, and a big part of that is to get good science funded - and that's why INET is so exciting.

At INET Berlin you see this constantly -- people rehearsing classic reminders from the heritage of economic science (e.g. Knight & Keynes & Hayek on uncertainty or what ISLM did to money & finance) and applying those classic reminders to extremely relevant aspects of failed contemporary explanatory practice.

It is brain dead for the profession to imagine that it is more "science" the more it ignores such reminders, and more ignorant it is of the rich context of consideration in which these reminders have purchase.

But it is impossible not perceive that the profession does think it is more "scientific" the more ignorant it is of the rich dimensions of its explanatory enterprise, and the more blind it is in pursuing conceptually narrow and horse-blindered mathematical results and "empirical" tests.

"It is brain dead for the profession to imagine that it is more "science" the more it ignores such reminders"

I guess we just have different impressions of the way the profession looks at these things.

Most of my own work is empirical... I'm not sure I understand the contrast between the empirical work that is the heart of any science (economics included) and being ignorant of rich dimensions of thinking about these problems. I don't know - I just don't get it Greg.

We just disagree about what the "heart" of any science is and we likely disagree about what counts as "empirical work" as well.

Darwin's work in the first instance was conceptual -- re-imagining the nature of the problem to be explained and re-imagining the elements and causal connection of the elements involved in the explanation.

What you read Kuhn or Popper or Hansen or Toulmin on science?

Daniel writes,

"I'm not sure I understand the contrast between the empirical work that is the heart of any science (economics included) and being ignorant of rich dimensions of thinking about these problems."

Daniel writes,

"My point is that these ideas have been floating around for a long time and have been put forward by a lot of people, and as Pete says it doesn't particularly matter if they cite or are inspired by a somewhat different set than what you cite or are inspired by. The important thing is to get good science done, and a big part of that is to get good science funded - and that's why INET is so exciting."

My angle on this is different.

I'm saying that getting a coherent picture of the wider explanatory strategy and of the various reminders of the myriad dimensions of the problem and the elements of the explanation (including all of the inviting false traps) is an overwhelming challenge and the massively dimensional work of central figures like Keynes and Hayek and Lucas and Hicks, etc. play a vital role in the getting of good science done -- they are giant "embodied" structured reminders of conceptual space in the science.

Getting good science done in any deep fundamental sense is less likely to occur when scientists are massively lacking in a background understanding of these various dimensions -- including the dimensions of the blind alleys and dead ends to avoid.

These ideas _haven't_ "just floated around" untied to deep and wide-ranging explanatory projects developed by folks with sophisticated understandings of a great many explanatory dimensions in economic science -- untied to these contexts these "ideas" lack much of their content.

The life work of Elinor Ostrom and the multi-dimensional understanding she has achieved is a good exemplar of what I am talking about -- referencing any particular technical or empirical tid-bit has a completely different significance when it is embedded in Ostrom's wide-ranging explanatory understanding -- vs when it it ripped out of that matrix of understandings and is set bare alone to speak for itself on an isolated cloud.

Referencing Ostrom _and_ the "tid-bit" of insight delivers a whole bus-load of additional insight and understanding than the bare, naked tid-bit alone stripped of the context where it is giving rich significance.

I know what you're talking about Greg. I think most empirical economists would disagree that they are "ripping it out of that matrix of understandings" and setting it "bare alone to speak for itself on an isolated cloud".

To be quite honest, I think most empirical economists would find that sort of sentiment a little condescending.

Not everyone is interested in Ostrom's problems, or Hayek's problems. Most have a pretty substantial appreciation of the richness of the questions they do happen to be interested in.

ANYWAY - to bring this back to the subject of the post, one of the things I liked about this a lot (but was somewhat subtle in the summary of the initiative) is that it is discussing imperfect knowledge rather than imperfect information. I for one think the imperfect information has been a critical contribution to economics over the last several decades, but information is just an input or a factor on its own. Imperfect knowledge seems to imply something a little more than that, and it asks something of how the information is incorporated, processed, and used.

I'm not following the exchanges too closely, here. But FWIW, I think there may be less real difference in opinion between Greg and Daniel than they seem to imagine. Maybe there were some exaggerations or something on each side, but, basically, you gotta have theory and history as Mises (among many, many others!) pointed out. On Greg's side, you gotta have the framework and all, otherwise what observations are you going to make what hypotheses are you going to test? Without the conceptual framework you might have some interesting facts of whatever, but how could have a real science? On Daniel's side, any empiricist is necessarily using a framework, and any good empiricist will be clear about what that framework is, problems within it, and so on. In other words, a good empiricist is a good scientist. So, again, it's theory *and* history. I suppose that's a simple point, but it seems like we need to remind ourselves of it regularly.

I completely agree with Roger's most recent comment. The really important underlying point, that I think anyone would (or should) agree on, is that there's not one way of 'knowing.'

And I should clarify my comment above. I'm all for Austrian insights coming in different forms - even if they don't recognize the actual origin and much duplication comes from it. The source of the funding caused me much concern, because I'm worried about the kinds of policy recommendations that come from this endeavor. But we'll see.

Also, I think DK's last point is really quite important. (DK, I hope you appreciate how hard that was for me to write ;-) )

Information problems are very important in my little field, anyway (finance). But, except for the behaviorists, we don't talk much about knowledge problems which exist even with 'perfect information' or 'full information.' So I agree with Daniel it's important to keep that distinction right in front of us all the time because researchers may think knowledge is another word for information.

Reading the web site makes me think of pinning the tale on the donkey. It’s fun to watch blindfolded kids stumble around trying to guess where the donkey is. Not so much with economists.

Might it not make sense for Austrians to actually read Frydman and Goldberg's books, including *Imperfect Knowledge Economics,* instead of speculating about them?

What evidence do you have that people haven't read the book, Jeffrey?

Is there a context that makes any sense for this remark?

"Might it not make sense for Austrians to actually read Frydman and Goldberg's books, including *Imperfect Knowledge Economics,* instead of speculating about them?"


The lack of a discussion of substance, that's all.

Your blog comment section expectations for Peter's brief remarks are out of control, Jeffrey.

Jeffrey writes,

"The lack of a discussion of substance, that's all."

The "Epilogue" of _Beyond Rational Markets_ is an exemplar of how Frydman and Goldberg use the rich conceptual space carved out by Keynes, Knight & Hayek to ground core insights in a pre-existing and wide-ranging network of multi-dimensional reminders.

http://www.econ.nyu.edu/user/frydmanr/Epilogue.pdf

Gheez, Jeffery, don't be so sour. I mean, really, you come to this blog and haughtily inform "Austrians" that they should read F&G. Come on, play nice. Recalling the frequent mentions Pete has made of F&G I googled "boettke frydman" and what do I find? The first link is to an earlier discussion on this very blog in which Pete responds to your mention of them by pointing out that he teaches from "Frydman's book" (meaning, presumably, F&G's 2007 book "Imperfect Knowledge Economics"). So I really don't get where you're coming from with your "substance" remark.

For the record, I have been citing F&G, albeit only in passing so far. And, like F&G I cite both Keynes and Hayek in my work, though perhaps with a greater slant towards H and away from K obviously enough. So, you know, I'd really prefer that you don't just of presume "Austrians" don't read. Indeed, if you, um, cough, cough, read what Pete and his students and grand students write, you can't miss the fact that they are plugged into the current literature.

But you want "substance." Okay, you first. I gather you think F&G are the bee's knees? If so, pray tell why?

And to be fair to us, Jeff, we got off on all sorts of uproarious tangents before even getting to the book, so there may not be enough information here to figure out who has and who hasn't read it.

(I haven't).

Roger, current literature, heck I was on Goldberg's dissertation committee that Frydman supervised. And I teach from the IKE book, and Frydman's AER classic all the time. There are very important technical issues as you know about the rational expectations hypothesis and the convergence to equilibrium in Frydman's work. The "Austrians" that are working on refinements to core theory understand these points at a level of detail that was not recognized by Jeff's comment.

Don't misunderstand. Pete raised the topic, good. I was hoping that people would respond by discussing the actual arguments of the book(s). Since nobody did, I wondered why people don't seem to have read the book(s).

Frydman and Goldberg have been using something close to Austrian theory to address the rest of the econ world. "Imperfect Knowledge Economics" came out in 2007. So one might expect that by now Austrians would be well informed and jumping at the chance to agree with X that he says, disagree with Y, etc.

I agree with Boettke that what matters is that people are doing good economics. I am pretty sure I didn't explicitly mention Austrian economics in my comment.

Jeffrey, it's been established that your assumption is false .. and I'd suggest it is hoping for too much to anticipate that economists are going to go through the details of a body of work in the comments section of blog headed by a short non-technical blog note.

But perhaps, Jeff, you'd like to model appropriate behavior by commenting the role of discretion laid out in their 2011 book.

Troy - my apologies. I suppose I was just anticipating too much who you had in mind when you talked about "Impossible to Attain God's-Eye View Economics"?. Touchiness on my part is no excuse, though. You have more than enough spelled out comments I disagree with, so it's not necessary for me to imagine things to disagree with!

Daniel,

Too bad there's not a "like" button on these comments. :-) Apology accepted.

Since everybody is going gonzo over F&G (and Pete is personally friendly with them), and even Greg Ransom is chiming in on them being wonderful (and Jeff's complaint is that he thinks nobody here has read them), I shall just throw in one minor whiney caveat.

It is the old story of people claiming too much originality. I find most of the F&G approach fairly reasonable. However, they have a tendency to overly ding approaches of others and to claim a bit too much originality for their own approach. So, while some behavioralists impose their own deterministic models, most do not, and also animal spirits are not at all "purely erratic" as claimed, but from Keynes to Akerlof and Shiller recognized to be strongly endogenous to recent conditions (so, they collapsed in the early stages of the Great Depression as the financial markets collapsed).

I shall note that Frydman in particular does not like this sort of remark at all. The last time I made this point on a blog he sent me a very nasty note by email protesting in a ridiculous manner. If he is reading this, I suggest to him that he not repeat the exercise. I shall be no more impressed this time than I was the last one. That said, I am largely in agreement with their general approach, and I agree that he is a smart and articulate guy.

Hayek advanced the same view, e.g. in his 1929 book:

"animal spirits are not at all "purely erratic" as claimed, but from Keynes to Akerlof and Shiller recognized to be strongly endogenous to recent conditions"

The problem with "animal spirits" isn't that it describes "purely erratic" behavior, but that it doesn't explain anything at all. Suddenly, without rhyme nor reason, everyone is failing to act in a rational manner? "Animal spirits" simply means "beats the hell out of me why people are all acting like that." If a lot of people are all acting in a certain way, there is a real reason for it.

Troy,

Not at all. It is more a matter of our tendency as humans to overshoot what is reasonable in terms of our emotions. So, when things start to go well, we get too enthusiastic and excited. Our animal spirits get us going and we become very active, although often overdoing it, as in bidding prices up too high on certain assets or overbuilding certain kinds of capital stock.

Then we go the other way when things start to go sour and get way down in the dumps, overshooting the other way. It is not a theory that "everything is driven by animal spirits" with these things just randomly changing for no good reason. There are often clearly identifiable exogenous shocks that set them going one way or another, and the other element of this is herding and contagion, that we tend to pick up these trends from each other. This is very much part of what goes on in speculative bubbles and their crashes.

And forget "reasonable" and "unreasonable", much less emotion. Without a crystal ball or reason to think otherwise, people think the future will be comparable to the past. That means that in good times the future looks rosier than it actually is and in bad times it looks worse.

I'm not sure why Troy thinks this is a cop out. It seems pretty elementary to me.

I'm not sure we really have a theory of animal spirits, Barkley. And it's an open question how much of a theory is possible. Consider De Grauwe's model.

http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Recently_published_articles/Animal%20Spirits-ET-final.pdf

The animal spirits wax and wane, but you can't predict them, even in the model. We have a model, but I don't know if we have a *theory* there. As far as I can tell, De Grauwe is fairly representative in that in his model the waves of optimism and pessimism are not predictable.

With Minksy you have something that looks much more like a theory. In the end, however, I find myself questioning whether that really counts either. His theory boils down to the following, doesn't it? "First, expectations are on an even keel. But then they get too optimistic, and then wildly optimistic, and then you have the bust, after which expectations are on an even keel again." It reminds me of Anne Elk's theory of the Brontosaurus:

http://www.youtube.com/watch?v=cAYDiPizDIs.

Now, there is a question of how much of a theory is even possible. If the system achieves computational universality, then we are in Markose's "Type IV dynamics" and meaningful prediction is impossible. Or you could take a Chaitin route and point out that if the dynamics of animal spirits are sufficiently complex, then they are lawless; they are what they are for no particular reason.

The trick then, IMHO, is framing the scientific question rightly so that you have a question that you can answer and that has empirical content. Frankly, I thought I'd done that with Big Players, but it is not much cited beyond my fellow Austrians. Leaving aside my efforts, which may or may not count, do we really have a theory of animal spirits out there? Has anyone come up with a real theory of the state of confidence?

Seems to me that explanations such as “animal spirits” or randomness are default positions for what one’s model doesn’t explain.

For example, when LTCM went south, the Nobel prize winning founder said that the market can stay irrational longer than your money lasts. In other words, there was nothing wrong with his model; animal spirits ate up his capital before the model could prove itself.

But as Hayek wrote, limiting theory to the available data is like looking for one’s keys under the lamppost. The fact that one’s model can’t explain behavior doesn’t mean that behavior is irrational, random or the result of animal spirits. It only means that the model is missing important variables for which there is no data.

Also, many people still cling to objective value, which today is called intrinsic value. They think a market has an objective value based on their model of it. But all value is subjective, though not necessarily irrational.

We can't predict or tractably "model" what or how people learn or how their understanding will change across time -- a scientistic fallacy would be to then assert that learning doesn't exist and changes in understanding do not occur.

But then, economists esteem and reward scientistic fallacy far, far more than they value sound causal explanation or genuine scientific understanding.

My only disagreement, Roger, is with your characterization of the Minsky view, that people get optimistic and then wildly optimistic, after which they go back to being on an even keel. More often than not when they get wildly overoptimistic, they overshoot the other way to being very pessimistic, those collapsed animal spirits that are so, well, Depressing.

The pattern, agree it is irregular and difficult to model or predict with any certainty at all, is laid out in the title of the famous book by Kindleberger, which drew heavily on Minsky: Manias, Panics, and Crashes, which Paul Samuelson described as being the best book ever written about financial markets, and he was an inventor of the supposedly rational random walk theory, as well as being we now know one of the fathers of derivatives and hedge funds.

It's true I neglected the all-import crash stage of the cycle, Barkley. You get Fisherian debt-deflation and everything heads south. Absolutely.

The problem I have with the optimism/pessimism/overshooting explanation is that it suggests that someone knows what the correct value of the market is. And that assumes that there is an intrinsic objective value. But subjectivism tells us there isn't. It's all relative.

If there is no objectively correct value for a market, then what is the market over-shooting?

McKinney, that's the radical subjectivist critique.

Kirzner provides the answer: while everything is subjective there are things that the decision maker would have discovered if he was more alert. In other words, the "real" value of the market is the value that would have emerged out of the subjective valuations of the individuals had then been more alert.

I understand that as "potential subjective knowledge".

Really like the blog, appreciate the share!

Jose, so the “real” value of the market is that value set by the most alert market participants? But to extend that thought, the “real” market values would be what would exist if everyone had perfect information? But if everyone had perfect information, there would be no change in the market at all. We wouldn’t have a market because there would be no need for price discovery. Major market swings are nothing but searches by the ignorant for “real” prices.

Clearly, some people are more alert and will earn profits by taking contrarian positions. That could mean nothing more than the old idea that good investors expect reversion to the mean. But the mean isn’t the true value of the market. Investors who rely on reversion to the mean know that when market participants get more knowledge they will become less pessimistic/optimistic and revise their valuations.

I’m no fan of EMH, but when most market participants are pessimistic, the price at that point is the real price, given the level of pessimism. However, people will change their behavior and respond to those prices, which will change physical supply/demand and in time change the level of pessimism in the market.

Knowing that people will respond to price changes and being able to predict how people will respond will make you a lot of money, but it doesn’t mean you know the real price of the market. It merely means that you know human nature well enough to predict how market participants will respond to price changes.

I think it’s better to say that alert people can better predict future prices than to say that they know what the real price should be at the moment.

Doesn't ABCT explain booms and busts without having to resort to "animal spirits"?

Manic-depression is a result of the brain cycling in a simpler pattern than it should. This can be caused by underlying genetics and/or environmental factors. In any case, something other than the brain's network structure is causing it to go through boom-bust cycles. We should not be surprised if the economy is working the same way. A healthy economy, like a healthy brain, doesn't go through boom-bust cycles. There is some external factor that causes the cycles. But you will also note that it's not "shocks" that cause one to move from mania to depression -- it's buildup, then crash, inherent to the underlying factors causing the cycling.

In other words, we ought to be looking at structural factors first and foremost. "Animal spirits" is little more than hand-waving as far as I'm concerned. If we can find any other explanation, it's probably the right one.

A hedge between keeps friendship green.

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That insight would have saved us a lot of eorfft early on.

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