More from Dan Klein

Dan Klein has posted a response to several of the comments on his "Austrian Vices" post.  He specifically focuses on the comments by Adam Martin and Charles Steele.

Comments

[Tom]

As a student of Austrian Economics my criticisms are:

Austrian Microeconomics Textbooks:

Where are they? Don’t tell me Rothbard’s, Man, Economy, and State (MES), is the Austrian micro textbook. It is a fine book, but it is over 40 years old and it is would be considered an introductory textbook with some intermediate level topics. Are there any intermediate to advanced level Austrian microeconomic textbooks written recently? There are plenty of critics and criticisms of Neoclassical microeconomics (e.g. material found in MES and Skousen’s book Economics on Trial), most of which I find valid, but I don’t think the Austrians have developed an alternative microeconomic system. The two dimensional graphs found in your typical Neoclassical textbook of supply and demand; marginal cost; average total costs; monopoly and competitive firms and industries; utility curves; budget constraints; etc… are very useful to students of economics in learning the subject. Even if the criticisms of Neoclassical economics are completely valid, what is the alternative system for students of economics? How many Austrian professors teaching microeconomic do not use Neoclassical microeconomic textbooks and techniques for their undergraduate students?

Austrian Macroeconomics Textbooks:

Again, where are they? Well, there is one: Roger Garrison’s macroeconomic textbook, Time and Money. I found this to be an outstanding contribution to Austrian economics. It builds on the Austrian macroeconomic tradition of capital theory, which by the way I think is the most important aspect that differentiates Austrian macro from all other forms of macroeconomics. Capital theory is not a field, it is Austrian macroeconomics; if you ignore capital you may be doing macro, but just not Austrian macro. Roger Garrison’s book, however, may be considered only as an introductory macroeconomics textbook. I only hope in the future there will be intermediate and advanced level Austrian macro that builds on Garrison’s foundation.

Most economists will have no idea what you’re talking about when you mention “capital theory” because most economist have never heard of Austrian macroeconomics. Why is that? Probably the same reason no one knows about Austrian microeconomics, because there are nearly zero textbooks produced on that subject that are used at an undergraduate level or graduate level.

I would like to see a group of well-respected Austrian economists come together to discuss writing undergraduate and graduate level Austrian micro and macro textbooks. Perhaps they could discuss what such a textbooks would look like regarding subject matter at the introductory, intermediate, and graduate level; how much overlap there is between Austrian and Neoclassical microeconomics; how Austrian economics could be modernized in the sense of covering current issues (as a student of economics trying to find a discussion of modern topic in a 40 year old textbook is not possible).

Having an Austrian alternative to the Neoclassical and Keynesian (New, Neo, whatever) textbooks that could be put in the hands of undergraduate and graduate students would provide a tremendous boost to the Austrian movement. Could this be done and would there be any interest in doing this, I don’t know. My fear would be that any attempt to produce an “Austrian” textbook would bog down in infighting about maintaining Austrian purity and lose sight of the goal of providing the undergraduate and graduate student real alternative textbooks to the mainstream hegemony.

[Peter Boettke]

Dan,

I think your comments on eq and diseq are right on, but also keep in mind that the reference point for Kirzner and Lachmann (and for that matter myself) in these discussions is the General Competitive Equilibrium model. The introduction of multiple equilibria with the ascendency of game theory moved economic theory in the direction that you are talking about.

If you look at my paper (with Chris and Pete) on "Man as a Machine" and study the trajectory of modern theorizing in economics that we sketch out, we argue that the old Austrians (Menger-Mises) were comfortable with the debate between historicism; the modern Austrians were comfortable with the debate with GE models (Mises/Hayek-Kirzner/Lachmann), but that the young generation of Austrians had yet to engage the debate with contemporary theorizing under the influence of game theoretic methods. We refer to contemporary theorizing as "formalistic historicism" --- which is actually in line with the critique of contemporary theorizing that one could read in Peltzman's review of the Handbook of Industrial Organization. Nevertheless, in the contemporary context, you are completely right that the model always must be specified. But the eq/diseq point the Austrian market process theorists were making was in reference to the model of GE and its caricature of the market system.

[Bogdan Enache]

Tom,

Almost all Austrian Economics treatises are in fact - though not exactly - what today we call a textbook. Menger's book, Principles of economics, was in fact modeled on the standard contemporary textbook format.

You may want more up-to-date Austrian works - that's very good, I want that too, but I really don't understand what kind of Austrian textbooks you want.

[tom]

Bogdan,

Thanks for responding. I guess if I knew what a modern Austrian micro and macro textbook would look like and what I would want to see in them I wouldn’t need to ask the original question about the lack of modern Austrian textbooks for undergraduates. Intermediate micro texts today don’t look like Alfred Marshall’s Principles treatise, although some of the tools in the mathematical appendix can be found in today’s textbooks. There must have been a gradual (or maybe not so gradual) evolution in the Neoclassical micro textbook. My complaint is why is there no similar evolution of Austrian microeconomic textbooks drawing on the works of Rothbard and Mises that can be used by undergraduates.

Neoclassical economics has many tools at their disposal to analysis the economy. For example, utility curves, budget constraints, substitution effects, and income effects for example are used in probably every Neoclassical micro textbook to analysis how changes in income and prices affect choices. Austrians have plenty of criticisms of these tools and methods.

The Austrians have there own analytical tools as well. They have the deductive method, looking at means and ends, and value scales for example. Also, there is overlap between the Neoclassical and Austrian microeconomic. But there hasn’t been a development of Austrian micro and macro textbooks that build on the works of Menger, Mises, Hayek, Rothbard, and Bawerk. I wish I new the reason why.

On the macro side, Roger Garrison has made some headway in producing an Austrian macro textbook. But his excellent work will need further development by other Austrians who can build on what he has done.

Perhaps, what I want cannot be done. An Austrian micro textbook may not be able to be developed beyond what Rothbard has done, and perhaps the only thing more that can be done is by way of a critique of the Neoclassical micro or merely to add an Austrian appendix to the mainstream text.

I am only a consumer of Austrian economics do not have the answer, but I would love to see some of the producers of Austrian economics come together to discuss the lack of an Austrian micro and macro textbooks for undergraduates and what can be done to fill the gap. If such a project could be successfully done, it would provide a tremendous boost to Austrian economics

[Peter Boettke]

Tom,

I respectfully suggest you look at Paul Heyne's Economic Way of Thinking, which for the 10th and 11th editions David Prychitko and myself have also been authors. The book is a principles of economics textbook and takes a "economics as a coordination problem" perspective in both micro and macro. In short, this is an "Austrian" textbook and has both micro and macro elements to it.

Pete

[Daniel Klein]

Pete,

I downloaded and read your paper “Man as a Machine,” which you refer to. Excellent stuff. I wish I had had it in hand when I was editing Johansson’s analysis of textbook vocabulary. The following sentences nicely fit his findings:

“Converting either man or the economy into a machine necessarily eliminates the messiness of entrepreneurial discovery and adjustment from the process. It is also the case that the machine imagery pushed institutional contingencies out of economics.”

In those two sentences you anticipate Johansson’s main findings about the textbooks.

I read your paper as saying that entrepreneurial discovery and error are beyond the “eq” conversation.

I do not find in your paper any affirmation of Kirzner’s mixing of the two. In particular, I find in it no affirmation of Kirzner’s statement that entr discovery is equilibrating.

In his 1997 JEL article, Kirzner writes about entr disc as equilibrating:

“The dynamic competitive process of entrepreneurial discovery (which is the driving element in this Austrian approach) is one which is seen as tending systematically toward, rather than away, from the path of equilibrium.” (p. 62)

“This equilibrative process of competition is at work even in markets in which one firm may enjoy monopolistic privilege. This is because even a monopolistic equilibrium can be approached, in a world of uncertainty, only through a process whereby market participants can become better aware of one another’s attitudes and plans.” (p. 69)

“In a world of ceaselessly changing tastes, resource availabilities, and known technological possibilities, this entrepreneurial process cannot guarantee rapid (or slow) convergence to a state of equilibrium. But it does at each moment guarantee profit-incentives tending to nudge the market in what, from the perspective of that moment, must be recognized as the equilibrative direction.” (p. 70)

My dissatisfaction with Kirzner has two dimensions:

First, he writes about eq without reference to a clearly defined model. The passage from p. 70 would seem to suggest that he wants to refer to a new model tailored to “the perspective of that moment.” Sorry, Izzie, that is not the way the storytelling genre works. There is no point invoking the model/eq genre if you are going to tell a dynamic narrative in which the model changes with each moment. Contrary to how he ends that passage, the profit incentives do not speak of a “direction” that must be recognized as “equilabrative”. (Moreover, he runs into other troubles if we allow that rent seekers too make entrepreneurial discoveries.)

Second, he is trying to mix entr discovery with equilibrium. But the whole logic of model/eq is that it precludes entr disc. It is a form of storytelling which necessarily eradicates entrship, as Barreto, Baumol, Johansson, and others have noted.

So we have to junk all this kind of stuff. Let’s not talk of entr disc as either “eq” or “diseq”. I gather that you agree?

Thus, we should strip all the “eq” stuff out of Kirzner. Where does that leave him? I say there is available an understanding of extensive coordination, an understanding unrelated to any concept of equilibrium, that accommodates the Hayek/Kirzner notions that voluntary processes including entr disc generally enhance coordination. With that, Kirzner’s emphasis on the entr teaches big things that model building does not.

Kirzner and Mises were very anxious about the mantle of science. That is why they thought they needed to merge their key insights with eq stuff. It was a mistake.

BTW, Kenneth Boulding in 1939 (in the Canadian Journal of Economics and Political Science) wrote about how we shouldn’t let eq talk blind us to the bigger and better stuff. The article is entitled “Equilibrium and Wealth” and he is saying that we should worry more about the theory of wealth, as opposed to equilibrium concerns. I suspect that Buchanan and Vanberg (Econ & Phil 1991), which Kirzner cites, says the same thing.

I gather that you agree: Dump the “eq” talk except when you are telling a model, which implies that you are telling a story devoid of entr discovery.

Dan

[Peter Boettke]

Dan,

I agree with 99% of what you say, I just believe it is important to maintain some notion of systemic tendencies and the idea of generalized interconnectedness. General equilibrium models did that, the particularized theorizing of game structures doesn't always provide that. And I don't know what other language to use. In my youth I wrote a paper "Beyond Equilibrium Economics" which is very critical of Kirzner along the same grounds as you raise. Then I read his 1990 paper "The Meaning of Market Process" and I got a renewed appreciation of what he was trying to do in his work. I am, as you know, very uncritical of Kirzner in general and tend to read his work in the most charitable way possible. However, I generally agree with the point you attribute to Boulding (who was also my teacher) and from whom I also take great inspiration.

But Dan I would argue that the points you raise clearly distinguish you from (a) mainstream neoclassicism circa 1970-90, and (b) put you in the camp of the radical market process thinkers such as Shackle, Loasby, Lachmann, etc. Am I reading you completely wrong on this? Among people in the "in-crowd" of 1970s Austrianism, I often describe myself as a Shacklean who read carefully Market theory and the Price System.

BTW, I don't care what we call it. But the "Austrian economics" that I am comfortable with would fit neatly into the "Smith-Hayek" identity that you advocate. I just don't think "Smith-Hayek" is a very good label. But clearly Austrian is not as good a label for our present purposes as I would have hoped it would be.

One of the strategies that I have told my students to do is to just forget labels and right papers without labeling anything and just declare intellectual victory. Appropriate ideas from whatever traditions you find useful for the tasks at hand, and just write clearly and forcefully. Perhaps if we do that, we can worry about the identity issue on the margin and have shifting identities depending on what margins we choose to emphasize at different points in time: free market when at APEE, Austrian when at SDAE or HES, classical liberal when at MPS, libertarian when at CATO, political economists when at AEA meetings, etc. All are true and not in contradiction with one another, but different points of emphasis are stressed depending on the context and the audience. Does that sound crazy to you?

[Daniel Klein]

Pete,

RE tendencies, I totally buy and trumpet Kirzner’s insight that we tend to notice things that are in our interest to notice, even without deliberately searching for them. (Per my deepself paper, I say our “B-brain” is searching for them). But that too can be done without any eq talk.

You say the points I am making put me “in the camp of the radical market process thinkers such as Shackle, Loasby, Lachmann, etc.”

I must confess that I am not as up on them as I should be. However, if they eschew models/eq altogether, I’m not in their camp.

Look, I’m not against eq models, such as the standard s & d diagram. I use it quite a lot in teaching principles. (More than I’d really like to.) But the points made with those devices are not Hayek-Kirzner points. Rather, they help illuminate that, for example, the “wrong” people transact when a price control is binding, etc. There is some truth in that point, and the s & d diagram is device for making the point.

At other times in lectures I say: “Now I want to make some important points that the s & d science-fiction story does not make, or that even misrepresents.”

In “Curb Rights,” for example, we do some models (diagrams, not math) to argue that without any curb rights scheduled service will unravel (because of interloping). If Lachmann would object to using such diagrams, then screw Lachmann.

RE the identity stuff: What you say there is, we know our character, but let’s not erect any identity. After all, an identity is constant in all settings. You are shrinking from identity. That is a way to muddle along. I prefer that you erect no identity than a bad identity.

On the other hand, there is a lot to be said for an identity, if it’s a good one. I raised “abolitionist” as an example in my essay. Only an identity will give us real presence and power—both in the academic culture and the public culture. If we really want to mount a Jedi counter-force to the establishment status-quo culture (in particular, in academia, social democratic), muddling through without an identity isn’t going to do much for the cause. We can do better, especially those of us who are financially secure (e.g., tenured).

BTW, thanks much for hosting my thoughts at your blog.

[Matt C.]

I would like to thank everyone for posting on the blog. I was completely naive in regards to the disagreements within "Austrian Economics". This has been a real learning process for me personally, since I am new to the ideas of in this tradition. I appreciate the ability to observe the debate or discussion, whatever you might feel is more appropriate.

My half cent for what it is worth.

Thank you again.

[Jule Herbert]

Pete:

Small pet peeve: Would you please quit using "myself" when the proper pronoun is "me."?

[frederic]

Dan,

I understand your position on eq in Kirzner's work. However, I believe the quotes you use from Kirzner do not acurately represent his position. Kirzner's position ultimately is that if the underlying variables of the market were frozen in a given state then (and only then) entrepreneurial activity would be truly equilibrating (as all profit opportunities would be eventually discovered and no gains from trade would be left untapped). He clearly explains this point in his papers "Market Theory: In Defence of the Austrian Middle-Ground" and in "The meaning of Market Process".

The reason why he refers to eq *tendencies* in his work is purely empirical, it is the best way (in his view) to explain the order that we experience. In other words, he makes an empirical postulate about observed order and inferes that because there is a high level of coordination in a market economy, entrepreneurial activity must tend to coordinate activity. But he is also quick to explain that any tendency is derailed by entrepreneurial activity in the living economy, such that no eq is never attained. I think he can be credited for providing perhaps the richest view of the market process. At a deep level it is of course impossible to think of the underlying variables being frozen as this implies a bunch of other impossible things about human action.

However, my question to you is: if you reject any tendency towards some form of coordination of plans (eq), then how do you explain social order? This is why Pete is right when he asks you if you are in the Shackle, Loasby, Lachmann camp of those who see the market as kaleidic.

Now, there is more to be done in the field of market process theory to explain the impact of entrepreneurship, exploring for instance the idea of entrepreneurial error. Or as Gilberto Salgado showed in a brillant article that even if we keep underlying variable constant, it is not always the case that the market will tend to exhaust all gains from trade. So there is more, much more, to be done to continue the work of Kirzner. But your position in no way shows to me that you have a viable alternative explanation to the Kirznerian hypothesis that entrepreneurial activity, on the whole, leads to greater plan coordination -- and this is how we explain social order in the marketplace.

frederic

[Daniel Klein]

Frederic (Sautet),

I think you don’t see my position. I am saying drop all the eq stuff in connection with entrepreneurship. Really, just drop it.

I’ve read Kirzner and many other Austrians pretty diligently, and for five years I hung around the NYU weekly workshop. I have never seen value in an idea of “plan coordination.” I know what coordination is in the Schelling/game theory sense of “coordination.” I know what coordination is in the sense of Newcomb, JB Clark, Hayek, Coase, Polanyi, etc.— a state of affairs (or processes) being aesthetically beautiful or pleasing (analogous to the colors in your living room being well coordinated, or the molecules in a snowflake). I don’t know what “plan coordination” is.

If you say that “plan coordination” is everyone’s plans always going smoothly, you get into a heap of trouble: (1) govt intervention might enhance that; (2) rivalrous competition might upset it; (3) “going smoothly” is up for grabs; etc.

You end up with Austrians gerrymandering their thoughts as they go along.

You seem to associate “plan coordination” with eq. Why would you want to talk about eq without reference to a well defined model? It’s like talking about “the plot” without reference to a story.

You write that Kirzner “makes an empirical postulate about observed order and infers that because there is a high level of coordination in a market economy, entrepreneurial activity must tend to coordinate activity.”

Why doesn’t the public school system display a high level of “plan coordination”? How about the US Postal Service? Just think, govt enterprises never go out of business.

Must that high level, too, be the result of entrepreneurial activity? I raise these concrete illustrations to challenge whether “plan coordination” means anything (other than the two coordinations mentioned above).

You write: “Kirzner's position ultimately is that if the underlying variables of the market were frozen in a given state then (and only then) entrepreneurial activity would be truly equilibrating (as all profit opportunities would be eventually discovered and no gains from trade would be left untapped).”

Three points in response:

(1) It is unclear what it means to freeze a state, especially if you are then going to allow entr discovery. (You subsequently note that there are difficulties in doing so.)

(2) I don’t understand why all profit opportunities would then be exhausted. If you are allowing interpretive transcendence (entr discovery), that would give rise to new profit opportunities, even if otherwise it was like Groundhog Day (same weather, etc.)

(3) You call the exhaustion of profit opportunities “equilibrium”. But in a Stigler “whatever is is efficient sense,” even the non-exhaustion of “profit opportunities” can be described as equilibrium, and sometimes even usefully. Anything that happens can be portrayed as equilibrium, if you construct the model suitably.

[BTW, on points 1-3, I recommend Fink and Cowen AER 1985]

(4) MOST OF ALL: Why do you do this? What is the point of trying to hook up the entr discovery insights with eq talk? It was a bad idea what Kirzner did it, and it remains a bad idea. Stop it!

You write: “However, my question to you is: if you reject any tendency towards some form of coordination of plans (eq), then how do you explain social order?”

I no more reject “any tendency towards some form of coordination of plans (eq)” than I reject “a tendency for zwillaboos to become flabbermossters.”

I don’t say those statements are wrong. I say I don’t know what they mean. Drop ‘em.

Then you ask: “how do you explain social order?” First, who is trying to explain social order? In what context, for what purpose? Second, give me a meaningful context and a compelling purpose, and I bet I can come up with something without any reference to equilibrium.

Robert Ellickson wrote a book, for example, about how ranching norms in Shasta County, Co., favored fence-in, even though the law said fence-out. I don’t think Ellickson ever said anything about equilibrium.

Adam Smith wrote about the extensive coordination that makes a woolen coat, without reference to equilibrium.

I have nothing absolute against equilibrium story telling. But it isn’t going to shed much light on entrepreneurial discovery, error, and other things that involve interpretive transcendence. Those points are better conveyed with homilies, parables, thought examples, etc.

Economics is not about a scientific body of depiction. Just let that go. Trust me on this, OK?

It is, rather, certain webs of argumentation employed artfully to serve human purposes. In our case, advancing human liberty, common decency, and cultural beauty. Aren’t those good enough for you? Focus on those and you’ll see that you will want to shed Kirzner’s eq tendency stuff.

Different characters within economics have different purposes, so it is natural that they employ different styles and genres of argument.

For the purpose of criticizing government intervention and imparting an appreciation of liberty, equilibrium model building is very inadequate. Not worthless, but very inadequate.

Sorry to be so combative. You give me more to punch at than Pete did.

BTW, I say that Hayek is more on my side, with Smith, not your side, with Mises and Kirzner.

/Dan