Nathan Rosenberg (1927-2015) passed away on August 24th. When I was in graduate school, Rosenberg and Birdzell published their popular study, How the West Grew Rich (1986). The book had a profound impact on me both for its presentation of alternative hypotheses, and its interpretation of the historical facts. It is through this work that my interests shifted from primarily the battle between socialism and liberalism, to the broader questions of economic history and development. This work wasn't representative of Rosenberg's technical contributions to economic change, but it was a masterpiece of putting all the pieces together into a bigger picture. The upshot, to paraphrase McCloskey -- Smith 1, Marx 0.
But Rosenberg was a brilliant historian of technological change and innovation. Here is a very insightful appreciation of his work by Richard Langlois.
Nathan Rosenberg was a masterful economist -- he thought clearly, and he wrote clearly. I expect we will continue to learn from his clear thinking for generations to come.
Are all of the rules and regulations governing economic activity a product of central planning or legislation? To what extent does privately produced and enforced governance play a role? In his latest book, Edward Stringham argues that much of what is orderly in the economy can actually be attributed to governing mechanisms devised and enforced by private groups and individuals.
Please join the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University for a panel discussion on Thursday September 3rd from 2:00-3:30 in the Johnson Center Cinema featuring Edward Stringham and his new book, Private Governance: Creating Order in Economic and Social Life (Oxford University Press, 2015). We will be pleased to hear from author Edward Stringham, as well as panel chair Peter Boettke, and commenters Jason Brennan and Bruce Benson. For any further questions, please contact Bethany Stalter at email@example.com or (703) 993-4889.
The imaginative and penetrating economic thinker Glen Weyl has posted a revised version of his forthcoming paper "Price Theory" to SSRN. This is a very important paper for a variety of reasons, and I cannot deal with it in the detail that it demands in this post. But I want to highlight a very simple point that I think matters a lot for what we want to get out of "price theory" which is the backbone of economic theory more generally.
As Weyl states plainly in his abstract, he defines price theory as "neoclassical microeconomic analysis that reduces rich and often incompletely-specified models into "prices" (approximately) sufficient to characterize solutions to simple allocative problems." In the model, in other words, prices are sufficient to assure that the most willing suppliers and the most willing demanders are perfectly coordinated with each other -- their plans dovetail. Can we identify the "prices" that characterize that equilibrium state of affairs? In Weyl's discussion the contributions of Mises and Hayek can be summed up as the claim that prices are a parsimonious way to communicate the relevant information for allocative efficiency.
Without denying this "economizing" role that prices play in coordinating the plans of numerous and diverse actors throughout the economy, I think it is a mistake to push the argument that prices are a sufficient statistic for a competitive equilibrium. The mistake is that this perspective too easily glosses over the underlying institutional environment that is required for prices and monetary calculation to emerge and serve their function within an economy --- namely private property, freedom of exchange, profit and loss accounting, sound money, fiscal responsibility, etc. --- and it too easily glosses over the guiding role that relative prices play in accommodating change and resulting in the necessary adjustment of economic plans. In other words, the prices as sufficient puts too much emphasis on the role of equilibrium prices, and ignores the role that disequilibrium prices play within a theory of the market process, let alone the institutional infrastructure that enables the competitive market and a functioning price system to operate.
I understand that different models or theoretical frameworks have different purposes, and in many instances the economic theorist is not attempting to understand how prices guide decisions, but instead wants to explore the equilibrium properties of a system and thus how the equilibrium price will reflect that solution. For Weyl's purposes, his depiction is completely unobjectionable and he has done a great service to the economics literature by providing a survey and relating this work to modern trends in theory. However, besides his rather narrow reading of Mises and Hayek, I think there are at least 3 critical sins of omission in this survey: Hayek's 1937 paper on Economics & Knowledge; the work of Armen Alchian on economics forces at work that can be found from his classic paper on evolution and uncertainty to his work on some economics of property rights to his introduction to economic reasoning found in University Economics; and James Buchanan's discussion of "What Should Economists Do?" and the exchange paradigm versus the allocative paradigm in economic theory. I am partial to the Alchian phrase -- economic forces at work, because the prices as sufficient perspective emerges in discussing economic forces after they have worked. Prices are sufficient for a solution, they are not -- to use Buchanan's phraseology --- seen as part of the guides to adjustment in the evolution toward a solution. In Hayek's brilliant 1937 paper, he is clear that such issues such as full and complete information, and optimality conditions such as P=MC or min AC, are by-products of the competitive entrepreneurial market process, not assumptions going into the analysis of the market theory and the price system at the start. In fact, to make those assumptions is to lead the analysis into paradoxes that are problematic for market theory if taken seriously, e.g., the paradox of perfect foresight that was identified by Morgenstern. Again, perfect foresight is a defining characteristic of an equilibrium after all economic activity has been adjusted so that the underlying variables of tastes, technology and resource availability are perfectly reflected in the induced variables of the market --- in that state of affairs, and only in that state of affairs, can prices be said to be sufficient for a solution to a problem of allocative efficiency.
Prices as solutions is a different theory than prices as guides to adjustment which brings about a solution. In my alternative reading of the history of economic thought, I would argue that from Smith to Hayek the critical theoretical task was two fold (a) identifying the underlying institutional environment that enables individuals to better realize the gains from productive specialization and peaceful cooperation, and (b) identifying the role that prices play in guiding the process of exchange and production so that the most willing supplies and the most willing demanders will be brought into coordination with each other. Prices are guiding a process of necessary adjustment, they are, as Hayek wrote in The Use of Knowledge in Society, "a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement."
The great historian Robert Conquest passed away on 3rd of August 2015 at the age of 98. Conquest exposed the brutal reality of the Soviet socialist experiment, and in so doing played a major role in ultimately changing the course of human history. In works such as Kolyma,The Harvest of Sorrows, The Great Terror, as well as books on Lenin and Stalin he made the socialist ideal confront the reality of socialist practice in such a blunt way that only ideological delusion and the lust for pure political power could sustain the socialist experiment. That the 'dream' persisted until the late 1980s is testament to how blind those can be who take comfort in the ideology of socialism.
Conquest wrote bravely about a grim reality, but also with a gifted pen. Please honor him by reading one of his books over the next few weeks.
Here is a gala dinner in his honor from 1992 sponsored by the Independent Institute.