Coordination Problem

Wisdom from Ludwig Lachmann

According to some attendees of the South Royalton Austrian conference, W. H. Hutt when he saw Ludwig Lachmann turned to some of the students and asked "Why is he here?  Lachmann is a Keynesian!"

20 years later in 1984, Ludwig Lachmann during his annual visit to GMU a student asked him whether or not Hutt should be considered an Austrian.  Lachmann replied "If Hutt believes himself to be an Austrian economist, then he must be an Austrian economist."

I think Austrian Vice #12 should be debating who is an Austrian and who isn't. (slight variant on the hard-coreness position Pete L raised)  Rather than worrying about who is an Austrian or not, why don't we worry if people are making progress in terms of scientific understanding and/or public understanding (though teaching or popular writing) of the economic and social world.  Our focus should be on whether someone is a "good" social scientist or scholar.

Perhaps Austrian Vice #13 is having blog debates on these topics?!

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BTW, a question was raised about Leeson's originality and I want to stress something to everyone --- Pete's work on social cooperation among heterogenous agents represents a major break-through in political economy.  Like Paul Seabright's The Company of Strangers, though obviously more self-conscious of the Austrian roots of the argument, Leeson explains to us the fundamental truth of what Mises termed "Ricardo's Law of Association."   Leeson explains the "mechanisms" that make the truth of social cooperation under the division of labor a reality in practice.  In so doing, Leeson has always advanced our understanding not only of cooperation in anonymity but cooperation without command.  He is the most original thinker in the economics of anarchism since Murray Rothbard and David Friedman wrote on the topic in the early 1970s (I would argue that a lot of the work done by Hoppe and others are more contributions to the moral theory of anarchism than economics per se).

As I explain in my essay on "Anarchism as a Progressive Research Program in Political Economy," in Ed Stringham's Anarchy, State and Public Choice, Leeson and Stringham have made major advances in the literature on anarchism by working on these mechanisms --- to either filter out non-cooperative types (Stringham), or credibly signal cooperative capacity among diverse individuals (Leeson).   The string of former students from GMU that worked on economics of self-organization without third party contracting is very impressive and would include not only Stringham and Leeson, but also Ben Powell and Chris Coyne.  It was the most rewarding period of my teaching career to work with these students between 1998 and 2005. Leeson, Powell and Coyne are now all teaching themselves in PhD programs and Stringham is the editor of the Journal of Private Enterprise. So whether we want to call them Austrian or not, the reality is that we now have more people teaching at PhD programs that will use the works of Mises and Rothbard in their teachings at the graduate level than at anytime in the history of the tradition, and more people editing journals that are sympathetic to the research agenda of Mises and Rothbard than ever as well.

I call that progress in economic science and teaching -- no hyphen necessary to designate "Austrian".

On Beating Dead Horses

Frederic Sautet and I will offer a detailed comment on the recent controversy over Pete Leeson and Dan Klein's posts on Austrian vices.  But I couldn't resist listing a few reactions.

1. In my opinion Ludwig von Mises is the greatest economists of the 20th century.  That doesn't mean he is the only economist to make significant contributions to the discipline. It also doesn't mean that I don't find some of his presentations of arguments to be flawed on a variety of margins. But I do think his work in monetary theory, market theory, comparative political economy (calculation, interventionism, and interest group logic), and methodology represent some of the most provocative and insightful contributions ever made to economic science.  His work on socialist calculation, in my opinion, is the single most important contribution to political economy of the 20th century.

2. That history of thought is a viable research discipline within economics, and history of thought can in fact be an indispensible tool in contemporary theory construction.  As Kenneth Boulding once put it, "After Samuelson Who Needs Smith?" and to paraphrase Boulding's answer, 'We all do, because Smith can still speak to us today in a way that Samuelson cannot.'  What is true for Smith is also true for Menger, Bohm-Bawerk, Mises, Hayek, etc.

3. The most important thing is to make sense of the economic world we are studying, not be faithful to any school of thought.  Students of society should look "out the window" not necessarily just to the "blackboard" to find the problems and puzzles to work on.   Applied economics and political economy, not textual interpretation is the most productive use of most economists time.

4. Schools of thought are labeled by their intellectual enemies, whereas fields of research are defined by practioners.

5. Always remember what excited you about economics in the first place.  Why that first book caught your imagination, why that lecture made you rethink your world, etc.  If you do that, you will be a better teacher of economics to undergraduates, and a more enthusiastic and insightful researcher in the field and mentor to graduate students.  Too many professors forget the unsophisticated versions of themselves at 18, 19, 20 years of age and teach today's 18, 19, and 20 year olds as if they were the 30 year old version of themselves.  Remember what made you angry as a youth, remember what made you fight with others who were ignorant of economics, remember the policy issues that ignited your intellect and the philosophical issues that convinced you that the social sciences was something worthing of pursuing for your career.  Economics should be a passion and an obsession, not merely a "job" if you hope to make progress in understanding the world.  Respect the professors and books that turned you on to the economic way of thinking, even if you believe you have now become a more sophisticated analyst of the social world.

I do think there are unique contributions associated with the Austrian school.  My teaching of Austrian Economics focuses on Mises, Hayek, Rothbard and Kirzner.  I don't find too many other economists as insightful and as comprehensive as these four.  But that doesn't mean that I don't also stress the contributions to economic science of Buchanan and Tullock, Alchian and Demsetz, Friedman and Becker, and Vernon Smith, Coase and North.  And I think there are significant contributions made by many contemporary economists influenced by the Austrians and in particular Hayek, Kirzner and Lachmann that moves us forward in terms of advancing a progressive research program in the tradition of Mises and Hayek.

BTW, George Selgin has a great article from the 1980s on the real bills doctrine where he argues that it is important to beat dead horses in economics because dead horses have an unfortunate way of coming back to life.

New Paper on Democratic Failure

Russ Sobel and I have a new paper on democratic failure, "Race, Politics, and Punishment: Democratic Failure in the New Orleans Mayoral Election." To download the paper, click here. Here's the abstract:

This paper empirically evaluates two competing theories of electoral accountability in the context of New Orleans’ 2006 mayoral election. According to the democratic efficiency theory, voters can successfully punish ineffective political agents by removing them from office. In contrast, the public choice theory argues that the bundled nature of political goods prevents voters from successfully holding ineffective politicians accountable. We find that although there is limited support for the punishment effect predicted by the democratic efficiency theory, this effect is overwhelmed by the fact that the bundle of goods politicians offer contains elements that pull in opposing directions. This prevents the punishment effect from having any real impact, leading to democratic failure. Our results support the public choice theory of electoral (un)accountability.

Austrian Vice # 11

First, let me say that I greatly appreciate everyone's comments on my Austrian vices post (even you, Pearl). I am delighted that it provoked interest.

Although I have not responded to most comments, I am reading them. And my reading reminded me of an additional Austrian vice I wanted to quickly raise.

11. No more "I'm more hardcore than you" contests.

This is fun over a beer. And let me assure you, no one takes more delight in calling my libertarian friends pinkos than I do. Having said that, keep it in the bar.

Hardcore contests are not something that should be vented in the professional arena. So, papers about how Hayek and Simons were sellouts, whether or not Mises was an anarchist, etc. are a no go. This is not helpful and no one (except for you and your friends) actually cares.

This injunction goes double for discussions about whether or not (insert Austrian no one knows) is hardcore.

And it goes triple for discussions about whether not (insert name here) is "really an Austrian." None of the "greats" (Menger, Mises, Hayek, etc.) cared about this. They didn't worry about "deviating" or focus their energies pointing out potential "impurities" in X's work.

Mises and Hayek were inspired by the work of those who came before them and built on their ideas. Often, this involved departing from what their predecessors said. After all, without departure, there can be no building. So let the greats be your muse and then be yourself. Who cares if (insert Austrian-litmus test giver here) doesn't think you're Austrian? Mises and Hayek would.

Dan Klein on Austrian Vices

Peter Leeson's post 10 Austrian Vices and How to Avoid Them has revived an old debate that exists at GMU. Professor Dan Klein (guest blogger) offers below further reflections on Austrian vices:

“Pete Leeson’s post on Austrian vices was interesting and provocative. Here are some I would add:

1) Never use the terms “equilibrium,” “equilibrating,” “disequilibrating,” etc. Except in reference to a reasonably clearly defined model.  Realize that whether certain actions are equilibrating depends on the model we are using to interpret the events.  Virtually any behavior can be modeled as equilibrium/equilibrating.

2) Realize that important terms in the lexicon are contextual. Illustration: Was Adam Smith tall?  Well, in his day he would be considered medium, in our day he would be considered short.  That context dependence of the discourse does not undo the idea of “tallness.”  Likewise, entrepreneurship and error are contextual not only in the sense that they depend on the context of the individual action, but also on the context of the discussion we are having about those actions.  Some interlocutors would consider a discovery to be entrepreneurial, some not.  That does not undo the idea of entrepreneurial discovery.  This insight goes against the essentialist urge within Austrianism (Menger, Mises, Rothbard, Kirzner), which wants to tag certain actions as “error” or “entrepreneurial discovery” in an absolute way.

3) Be more candid about Mises, Hayek, and Kirzner not having a well specified characterization of coordination. Be more candid about when you are really just leaning on the idea that voluntary exchanges imply better coordination, and coercion implies worse coordination (which I think is a faulty and otherwise inadequate characterization of coordination).  Be franker about the disharmonies of interests that exist in purely voluntary processes.

4) Ask yourself whether the insights about knowledge’s richness, from such figures as  Smith, Polanyi, Hayek, Lachmann, Schelling, Kirzner, and a thousand philosophers and poets,—notably the dimensions of interpretation and judgment—can really delimit a viable “field” of economics.  (That is Pete Boettke’s defense of retaining “Austrian economics,” that it does work on the topic of knowledge’s richness like transportation economics does work on transportation.)

Regarding Leeson’s call to get over “subjectivism,” I would say yes, but don’t throw the baby out with the bathwater.  The “subjectivism” stuff in Austrian discourse has often represented the attempt to get at knowledge’s richness, that knowledge is not merely a matter of asymmetric information, but also asymmetric interpretation.  I say avoid “subjectivism,” but knowledge’s richness remains important.

5) Bear in mind and be more upfront about the fact that the vision of an “Austrian” identity was never that of anyone from Austria.  It is the vision of Rothbard, Kirzner, and their followers.

6) Ask yourself whether the larger purpose is to erect a scientific foundation for laissez-faire economics, or to criticize the scientific pretensions of interventionist economics.”

Pete Boettke and I will offer another view.

10 Austrian Vices and How to Avoid Them

Tonight I discussed with some young Austrian students what I believe are the greatest "Austrian vices." These vices are "bad habits" I have noticed many Austrians--myself included--tend toward. To avoid these vices, I offer the following modest suggestions for young Austrians:

1. Stop block quoting Mises and Hayek.

This is not useful, except in very rare cases, such as a history of thought paper (see # 3 below). Anyone who wants to read Mises and Hayek can do so him or herself. Your reader does not need you to recount the "masters'" words to him/her.

2. No more attempts at rewriting "capital theory."

Most economists will have no idea what you're talking about if you tell them you're working on "capital theory." "Capital theory" is not a field (at least not one that has existed in the last 50 years). Furthermore, you are not going to do this. Do not pretend otherwise. In fact, "grand theory" or "treatises" of all kinds should be avoided until you're a full professor or 65, which ever comes first. Nearly all Austrians at one point have these delusions of grandeur, but they are just that--delusions. The sooner you recognize this and start working on specific, applied topics the better off you will be.

3. Work on topics other than history of thought.

History of thought is, in my opinion, a very important field in economics, and one that does not get the credit (or attention) it deserves in the wider profession. Having said this, you will feel compelled at many junctures in your career to write history of thought pieces. As an Austrian, you never need to worry that you will neglect history of thought. Instead, you are very likely to work too much on this and too little on advancing our knowledge by working on new topics. Be cognizant of this and research accordingly. Set a limit for yourself--say, 1 history of thought paper for every 5 non-history of thought papers.

4. No more discussions about the calculation debate.

The calculation debate is very important but has been essentially dead now for a very long time. There is no reason for you to recount this debate, rehash its components, etc. We all get the point. You will feel drawn to rehash the calculation debate nevertheless. Resist this urge.

5. Get over the "subjectivism stuff."

I think it's safe to say that very few economists today adhere to the labor theory of value. Everyone now recognizes that value is subjective (even if to operationalize many ideas in economics we have to "pretend" for the analysis that costs, for example, are "objective"). Let it go and move on.

6. Do not confuse "correctness" for "goodness" in economics and vice versa.

Many Austrians have a tendency to think that economists they agree more with are "better" economists than those they disagree more with. This is not true. Just because I share more in common with (insert unknown Austrian economist here) on most issues does not mean he is a "better" economist than (insert famous non-Austrian economist here).

7. You are not going to write a treatise that revolutionizes economics.

Really, you're not. But if you work on specific, applied topics, you may contribute something interesting that others find useful nevertheless. See # 2 above.

8. Do not engage (i.e., make the focus of your research) work that is more than 25 years old.

Work that is a quarter of a century old is probably a liberal outer bound. There are exceptions to this, such as history of thought, a citation to a seminal paper published in the past central the topic you are writing on, etc. However, many Austrians have a tendency to "live in the past." We don't need any more critiques of Keynesian economics circa 1970. We really don't need any more discussions about why Gustav Schmoller was wrong, or how Samuelson was mistaken. Economics has moved on. So should you.

9. Don't tell us what Mises, Hayek, Rothbard, etc. "really meant."

First, we can read them ourselves (see #1). Second, we don't care; Mises, Hayek, and Rothbard are interesting and important regardless of our ability to divine what they "really meant" in the second paragraph of p. 224 of (insert work here).

10. Stick a fork in the "philosophy talk."

You are not a philosopher. Your reader can tell this. You tend to find philosophical subjects, such as the philosophy of science, especially interesting. This is fine. But you are not going to make a major breakthrough on the epistemological status of economics like you think you are. The sooner you recognize this and devote your time to working on areas where you might have an impact the better.

Biotech Clusters in Practice

A few days ago I met an old friend of mine who is the CEO of a small (40 people) biotech company in Boston. The company is privately held, runs losses, and is sustained by millions of dollars from the venture capital (VC) industry. My friend is a very smart guy (he has a PhD in biology from Harvard) and has a small team of highly competent guys around him. He is no economist and has no special liking for free markets. However, he has learnt some economics by running his business and being in the industry over the years. He now understands the limits of government regulation better and the adverse consequences of government interference with his industry. Here are a few ideas that we discussed.

• The biotech industry is a very small and very risky industry. It is mostly concentrated in Boston with a bit in San Francisco. There is some in Europe and Asia too, but most of it takes place in the US. It doesn’t generate many jobs (the pharmaceutical industry does but this is not the same story) and it needs to outsource more and more, as human trials are very expensive.
• The economics of most biotech firms is pretty dire: it takes between 10 and 15 years to develop a drug. In most cases the drug will not work and the firm will go under. Because of the number of trials necessary, biotech is very capital intensive: firms can eat up between $20 and $30 million per year (without making any money).
• As a result, the number of investors in the field is limited. There are less than 100 VC and hedge funds that are willing to invest in biotech companies. The overall majority of these funds are located in New York City. There are some in Boston and San Francisco as well. The industry is so risky, that many hedge funds like to be short on biotech stocks.
• Because success in biotech is a matter of decades, the brightest graduates prefer to go somewhere else where their human capital will be more rewarded. The CEO of a biotech start up makes 10 times less than if he were in the IT industry or if he was working on Wall Street (even though his IQ is just as good if not better). People in the biotech industry are passionate about their work and willing to forgo monetary rewards.
• The impact of regulating the prices of drugs would be enormous. The complex set of relationships that exist between biotech entrepreneurs and financial markets depends entirely on the probabilities of success of future drugs. When regulators talk about controlling prices, they send a signal that goes all the way back to financial markets, and this tends to reduce the main source of equity for biotech entrepreneurs.
• Considering (a) the size of the industry world-wide, (b) the ties among the actors in the industry (in Boston the industry revolves mostly around graduates from Harvard and MIT and their connections), (c) the role of financial markets (with their specialized funds), and (d) the quality of human capital necessary in biotech, it is highly unlikely that governments could ever create a successful biotech cluster anywhere. Markets allocate resources towards the best biotech entrepreneurs, and most of them already are in Boston or San Francisco.
• Many biotech firms cannot obtain capital from financial markets. As a result, they turn to the government to obtain grants. If one considers that the most promising projects attract the attention of super-specialized VC funds (considering that if a successful drug is developed, it can be financially very rewarding), it tells a lot about the quality of the investments the government makes in biotech.

Quote of the Day

“Judas was the first Catholic who accepted a government grant.”
—Peter Kreeft

Links of Interest on WIPO, Global Warming, and Lord George

The World Intellectual Property Organization (WIPO) Patent Cooperation Treaty has seen a record of 145,300 patent applications filed in 2006. The US, Japan, Germany, South Korea, and France take the first five spots with the US representing 34.1% (see here).

Although economists have not much to add to the scientific debate on global warming, they have much to say on the political economy of it. This is why I recommend watching the documentary The Great Global Warming Swindle (it takes a bit more than an hour and, as Chris pointed out in the comments, it was not made by the BBC).

Is a central bank governor admitting playing with fire possible? Yes, Eddie George, the former Bank Governor of the Bank of England (nothing less) admitted that “the Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession” (this is from the article here). Bank Governors rarely admit that they don’t know what they are doing. More transparency of heart and mind is needed...

Thanks to FG, NA, and EW for the pointers.

Property Rights, Wildlife, and Business in Namibia: A Success Story

I am very pleased to announce another excellent paper in the Mercatus Policy Series. Karol Boudreaux recently finished a policy piece based on her work in Namibia (see here). She shows that African people can protect their environment and, at the same time, develop strong businesses that help diversify their livelihoods and alleviate poverty. This has been made possible through the development of community-based natural resource management, which has helped Namibians develop conservancies to manage wildlife and benefit from tourism.

Conservancies are fundamentally based on the development of property rights at the community level. And whenever property rights are better defined and enforced somewhere (and it doesn’t necessarily have to be the government who does the job), good things happen. In Namibia, wildlife numbers are rising, ecosystems are rebounding, and conservancies-related businesses are popping up like flowers in the spring. The system is not perfect and policy improvements can be found—Karol proposes a few. But overall while the private property order has been recently destroyed in some parts of Africa (e.g. Zimbabwe) it has improved in Namibia to the benefit of the people who live there.