Coordination Problem

Chill to the Next Episode: Best Wishes for 2006

Best wishes to all for a peaceful, productive, and prosperous New Year.

As we end 2005, Brad deLong set off a discussion on his blog by raising the question of the ideologue status of Hayek.  The general consensus of the 70 plus comments and the track back is that Hayek is a ideological dogmatist.  With the lone exception of J. Barkley Rosser, however, nobody took the time to critically assess Hayek's analytical argument.  Instead, we are treated to claims of guilt by association (Hayek supposedly never publicly criticized Pinochet and therefore supported the right wing authoritarian) and policy myths (rich get richer, poor get poorer and it is Hayek's fault). 

My original post, which de Long took as the starting point of his post, was an invitation to engage Hayek (and Austrian economics more generally) analytical argument and to avoid these sort of ideologically blinded discussions.  First, rather than a hermeneutics of suspicion, I prefer to advocate the Lachmann principle of "charitable reading".  Second, while I think policy relevance is a virtue and not a vice, I think our critical focus should be on the reasons and evidence a thinker brings to bear on his policy positions and not those policy positions per se.

Austrian economics as a school of economic thought puts forth various propositions that follow from their methodological position and analytical methods.  They are committed methodological individualists (but not atomistic) and methodological dualists (but not post-modernists).  The analytical focus is on decision making in a world with an uncertain future.  The capital structure in a modern economy consists of heterogeneous capital goods that have multi-specific uses, and the entrepreneurial market process is one of on-going discovery of better ways for individuals to arrange their affairs to coordinate production plans with consumption demands.

But rarely does debates over the relative merits of Austrian economics in modern economic discourse turn on these questions of methodology and method.  Instead, the critique gets bogged down in outrage over the policy positions offered.  This just seems to be the fate of Mises and Hayek.

To be frank this annoys the hell out of me.  One of my favorite Dr. Dre songs has him warning his critics that they better watch out or "They will bring back the old me."  But rather than respond to uncharitable readings with uncharitable readings of ones own, I do hope that Austrian economists will heed Lachmann's demand for us to follow the principle of charitable interpretation, and they follow the scholarly example of civility that Israel Kirzner has represented throughout his career.

So as we end 2005 with charges flying of ideological dogmatism, lets hope that in 2006 (especially since policy issues of extreme importance such as the war, universal health care, financial instability, market regulations, globalization, etc. will be no doubt on the table) that cooler heads will prevail and that honest debate will take place and reason and evidence will be the guide.

The Fragility and Robustness of Modernity

I am persuaded that the concepts of fragility and robustness of political-economic-social systems are more productive than the concept of efficiency.  Markets are amazingly robust as evidenced by their self-correcting capacity.  Socialism, on the other hand, is extremely fragile and any deviation from ideal conditions leads quickly to acute problems. Pete Leeson and I discuss the relative robustness and fragility of liberalism and socialism in our paper in Journal of Markets & Morality.

However, market societies are fragile in their own way.  One of Hayek's most challenging propositions is that our evolutionary past has 'hard-wired' us for norms appropriate for small group settings, while modernity and the extended order of the 'Great Society' requires us to adopt norms and morality appropriate for anonymous interactions.  In sorting out the implications of these tensions between the intimate order of our tribal past and the extended order of social cooperation under the division of labor it is vital to get an accurate picture of Hayek's theory of cultural evolution and spontaneous order.  I published a paper in the journal Cultural Dynamics in 1990 attempting to do that.

The bottom line is that while we don't need to understand in order to experience that benefits of a spontaneous order, we may very much need to understand deeply the principle of spontaneous order in order to sustain the extended order of the 'Great Society'.  Thus, the number #1 role of the economist in society, as James Buchanan often told us in his classes, was to teach citizens the principle of spontaneous order.  See, e.g., Buchanan's essay "Economics as Public Science," in Foundations of Research in Economics edited by Steve Medema and Warren Samuels.

Anyway, a very challenging paper on the fragility of modernity that can be found in Gerard Radnitzky's essay "Science as a Particular Mode of Thinking and the Taming of the State".

Thanks for Rafe Champion for the pointer.

Economics and Ideology

Perhaps no charge has been leveled against Austrian economists more than any other to dismiss their scientific contribution as the claim that they are dogmatic ideologues.  This is, of course, ironic because the Austrians from Menger on insisted on their "value-freedom" in a Weberian sense of means-ends analysis.  In fact, Gunnar Myrdal in his analysis of the political influences on economic theory points out that the Austrians are the least guilty.  But the debates with both Keynesianism and market socialism, and the staunch stance that both Mises and Hayek held, led to the impression that dogmatic ideologue was the best label for these two and their followers.  Such a claim is made often at the expense of any understanding at all of the scientific propositions upon which the ideological statement is derived.

An example of this genre of critique can be found in Kenneth Hoover's Economics as Ideology.  Here is my review of this book.

Obviously ideology is an important part of political economy.  Joseph Schumpeter went as far as to claim that science was perhaps not even possible in economics without ideology.  Ideological vision is a pre-analytic cognitive act that provides the raw material for scientific analysis.  Thankfully economics as a discipline now-a-days is more comfortable addressing questions of ideological commitment, self-delusion, expressive voting, biased beliefs, the role of religion, etc., without necessarily dismissing such forays into the complex world of how beliefs give rise to actions and actions led to consequences.

The kind of "hermeneutics of suspicion" and "pyscho-babble" presented in the Hoover book has given way to serious examination of the role of ideology in economic systems, and the ability to assess analytical arguments on their own terms rather than dismiss simply because the conclusions cut against the conventional wisdom.

Perhaps I am being too optimistic about the future of economic discourse and the argument for a more pessimistic reading of the situation is reinforced everytime one reads Paul Krugman's childish attacks on economists of the right, and Joe Stiglitz's conspiracy theories about those in power when in fact he was one of them.  But I remain hopeful ... perhaps my own self-delusion.

Frederic Sautet has posted a few times already on this topic of ideology and public policy, for example, here,and here.

Another One Bites the Dust: Russian Free Market Advisors to the Government that Is

Bob Lawson over at Division of Labour links to both the Washington Post and Financial Times story on the resignation of Andrei Illarionov --- President Putin's chief economic advisor.  Illarionov tendered his resignation after publicly proclaiming that "Russia is no longer a democratic country."

Illarionov joins a rather long list of Russian would-be economic reformers who have moved on from their role as champion of the free market cause in that country.  In my Why Perestroika Failed, I disucss at least 10 major reforms that were introduced during the Gorbachev era only to be reversed.  In the process we are introduced to one reformer after another.

One of the "best" Russian economists I met over the years was Vitali Naishul, who has raised liberal criticism of so-called free market reforms from the beginning --- starting with his critique of voucher privatization in the early 1990s and continuing with his analysis of the lack of administrative reform under Putin.

Also see the interview from The Commanding Heights PBS series with Anatoly Chubais.

Here is an old review of mine on the privatization process in East and Central Europe and the former Soviet Union.

Winning the Battle of Ideas, But Losing the Battle of Practice

The great Milton Friedman was interviewed on last night's (December 26, 2005) broadcast of the Charlie Rose Show.  At 93, Friedman is still the best public spokesperson for the classical liberal position in economics.  It is simply amazing how Friedman's mind remains sharp and his personality so charming --- whether in addressing drug legalization or school vouchers, facts are his weapons, and compasion for the least advantaged in our society is his stated policy goal.

Pushed at one point in the conversation about Friedman's apparent victory in the battle of idea with John Kenneth Galbraith and other public intellectuals on the left, Friedman stated clearly that there is little doubt that classical liberalism has won the battle of ideas, but he quickly pointed out that classical liberalism has not yet won the battle of practice.

Humble in his presentation, friendly in his disposition, and obviously in possession of the courage of his convinction, Friedman remains the role model for any intellectual on the right.

Some gems from the interview:

On his legacy: He has lived two separate lives, a technical economist and a public intellectual and he hopes that there two aspects of his career will be judged separately.  And he also hopes that he will be judged to have been someone who advanced human freedom.

On politics: Ronald Reagan and Margaret Thatcher were the most important political figures for economic freedom.  Richard Nixon had the highest IQ, but Friedman considered him a man who viewed Milton Friedman's principles as his preferences. Nixon did not have princples per se, and thus his preferences were switched whenever the "price" was deemed to be too high.  Friedman described himself as a Republican (with a capital R) and a libertarian (with a small l).

On what he has learned: Friedman when pressed on what policy position has he had to change his view on responded that he used to believe in antitrust, but now holds the position that antitrust is anti-competitive and that they only significant source of monopoly power in an economy results from government creation and protection of monopolistic power by businesses.

Here is a paper I wrote on the influence of Milton Friedman in East and Central Europe and the former Soviet Union for a conference and volume honoring Milton and Rose Friedman.

Comments are open.

Steve Horwitz knows spontaneous order

Steve Horwitz has a great post on spontaneous order over at the Liberty and Power.  This is not the first time Steve has beautifuly written on the subject, see here and here ... of course he did learn everything from Dave Prychitko and me when we were in school together!!!  In all seriousness, Steve in my opinion writes with a clarity and passion on this subject that is unique and we all benefit greatly from his efforts.  Good job Steve.

GCC and Austrian Economics

One of the most pivotal choices in my life was to attend Grove City College, and by mere accident end up under the influence of Dr. Hans Sennholz.  As I have posted before, Grove City College honored me in 2005 with the Jack Kennedy Memorial Alumni Achievement Award.  Rosemary and I attended the Homecoming and had an absolutely wonderful time visiting the college, reconnecting with old friends and professors, and were most impressed with meeting the current students. The campus is still beautiful and the new buildings are impressive to say the least.

To read my remarks given at the awards ceremony read further.

The Three Roles of the Market

If you were to summarize in three points what the fundamental roles of the market are; what would you say? Austrians have a comparative advantage in this exercise, as they are the only ones with a truly realistic and fully coherent market theory. There is actually too much to say and it is hard to summarize it all in three points – which is also why it is interesting to try.

In my view, the market’s three main roles are:

• A knowledge discovery process via entrepreneurial competition;
• A feedback process via the profit and loss system; and
• The result of the first two leads to an accountability role providing governance.

The market as a discovery process of knowledge is a theme that runs deep in Austrian economics. From F. A. Hayek and his famous 1945 paper “The Use of Knowledge in Society” to I. M. Kirzner and his Competition and Entrepreneurship. The knowledge which would enable a better coordination of individuals’ plans is dispersed or non-existent. Entrepreneurial competition is the process by which this knowledge comes to be revealed and used.

The market as a feedback process is the other side of the discovery process coin. The discovery process cannot take place without the existence of pure profits: they are the incentives for discovery. Profits and losses are the sorting mechanism, which helps weed out good (i.e. socially beneficial) entrepreneurial ideas from bad ones. This presupposes institutions: the law of property and contract – as it evolved in the English Common Law for instance. This second role has been explored by many but is exemplified in L. Mises’s great paper: “Profit and Loss”.

The market as providing governance is a more recent theme now explored by many young (Austrian) scholars. This is the idea that self-governance emerges from market relations. My fellow co-bloggers P. Boettke and P. Leeson have done interesting work in this field. Boettke's paper Anarchy as a Progressive Research Program is a reference. Leeson has many papers on the subject. Among others, I recommend his Trading with Bandits and Cooperation and Conflict.

As this is my last post before Christmas, let me wish you a Merry Christmas.

Good Sex, Bad Economics?

The mere mention of SEX should bring some blog hits this morning.  In The Best of the New World of Economics, Richard McKenzie and Gordon Tullock begin their chapter on "Sexual Behavior" with the sentence: "If you are at all typical of readers of this book, these are the first words that you have read." (Irwin, 1989, p. 102)

Many years ago now I wrote a review essay of Richard Posner's Sex and Reason (1992).  I entitled that essay "Good Economics, Bad Sex (and even worse philosophy)."  My argument in that essay was that the power of Posner's work can be seen in how he applies basic economics to explain a variety of behaviors.  The poverty of Posner's work can be seen in his inability to discuss the meaning of those behaviors.  His commitment to positivist economics constrains Posner from addressing meaning by design.  He considers such questions as "unscientific" and thus religious and feminist writings have no serious contribution to make on the subject of human sexual behavior.  Unfortunately for those concerned with legal and policy treatments of the most intimate of human interaction, the public passions are fueled by conflicting interpretations of the meaning of sexual acts and not merely the act itself.

Part of the Austrian criticism of positivism as applied to the human sciences is that an appropriately subjectivist stance must account for the shared meanings embedded in the phenomena under examination.  The first task of the social scientist, Ludwig Lachmann often told us, was to render social phenomena intelligible in terms of human purposes and plans.  It was our second task to trace out the consequences (intended and unintended; desirable and undesirable) of our actions.  The issue of intelligibility versus predictability is a subtle but important distinction between the Austrian and mainstream conceptions of the scientific project in modern economics.

If economists tread lightly in the field of sexual mores and behaviors, others from alternative ideological and philosophical positions are not so constrained.  Recently the New York Times picked Toni Bentley's The Surrender as a noteworthy book for 2005 --- Bentley believes she has found God through sexual submission, and in particular her book is a celebration of the trust and freedom found in a particular sexual act. (I'll let you look that up)  Rather than an anti-feminist track, Bentley believes her book could only be written by a feminist.  In this regard, her theme is not that much different from the great individualist feminist and libertarian writer Wendy McElroy's XXX or Sexual Correctness.

In an earlier post on this blog I discussed the endogenous supply of bad behavior induced by questions of incentives and signals.  This seems to be evident in the sexual behavior of artists -- who it turns out have more sex than the rest of us.  Is this due to something in the artistic gene, or is it due to expectations of what it means to be an artist and the fact that this behavior is tolerated in those deemed creative so that those who want to be viewed as creative behave that way even if they are not all that creative in reality?!

One thing is for sure, sex is not going away and perhaps a praxelogical analysis could be conducted that steers between the positivism of Posner and the nonsense of warmed over marxist feminism.

P.S.: I should point out that my good friend Steve Horwitz has in fact thought long and hard about many of these issues, taught for many years a course on human relationships to freshman, and he published an essay on "The Functions of the Family in the Great Society," Cambridge Journal of Economics 29 (5) September 2005.

The Remarkable Jacques Marseille

Prof. Jacques Marseille, one of the few French intellectuals (he is an economic historian) sending the alarm about the current French situation, has an interesting article this week in the French magazine Le Point (thanks to François Guillaumat for the pointer). If you read French, it is available here.

Therein Jacques Marseille reflects on the similitude of Argentina and France. Very rich and well-managed 100 years ago, their public finances are now deep in the red and their citizens are much poorer (especially Argentina’s). The interesting parallel however is that of the rise of the dominant ideas, which over a period of 100 years, have led to similar mental models (what I call the “value transfer” mental model as opposed to the “value creation” one). Surely, this process has taken place in most Western countries. However, Argentina and France may have shared a more intimate path than others. I believe (from talking to Argentineans but I may be wrong on this) that French intellectuals of the left, such as Jean-Paul Sartre, have had a particular influence in Argentina. Peron (who many have described as a populist) and other Argentinean politicians paid a great deal of attention to the French left, and more so, perhaps, than to any other intellectual movement in Western Europe.

Beyond his Op-Eds for Le Point, Les Enjeux, and Le Figaro, Jacques Marseille, who holds the chair of economic history at the Sorbonne Paris I University, has published interesting and controversial works (check his website here). In his book, Empire Colonial et Capitalisme Français, he argues that colonization slowed down the development of France. Among other things, it explains why public opinion in 19th century Europe was not enthused by colonial expansion – in spite of government propaganda (e.g. the grandiose colonial exhibitions).

Jacques Marseille has recently published, La Guerre des Deux France, Celle qui Avance et Celle qui Freine, which analyzes the French situation of the last thirty years. The book was published as a response to the famous work by Jean Fourastié: Les Trentes Glorieuses. Marseille also republished in 2005 Le Grand Gaspillage, which is a very important and true account of French public finances, and the wastage of public spending.

Marseille is one of those French intellectuals who have done tremendous work showing over and over again the errors of socialism (one may also think of sovietologists such as Alain Besançon and Françoise Thom, and economists such as Henri Lepage and Pascal Salin). France (and Western Europe) needs many more intellectuals like them.