What does it all mean?

As promised Fred and I will have a more detailed response to the list of vices and the virtues of Austrian economics -- old and new.  But in my PhD course in The Austrian Theory of the Market Process we spoke today about Disequilibrium, Strategizing, and Profit, and in particular learning within firms and markets.  The issue of the use and abuse of equilibrium models was of course discussed at length, as the book and other readings, addressed the inability of such models to adequately treat firms, managerial strategizing, and competitive advantage for profit.

In the discussion, I returned to an old theme of mine on equilibrium models which divides their use into "descriptive as-if" (Chicago), "normative benchmark" (Market-failure), and "analytical foil" (Austrian or older neoclassicism).  The critical issue, to me, is that Walrasian exercises require a pre-reconciliation of plans prior to transactions, whereas in the market process tradition the point of economics is to explain the reconciliation process that transpires in the market.  Adam Smith talked about the bargaining process, Hayek used the term catallaxy to describe the market order, and Mises suggested that market theory and the price system can be captured under the heading catallactics.  Exchange and the institutions within which exchange takes place.  This is the core idea of the subject matter, subjectivism, heterogeneity, calculation, etc., are all vital concepts to understanding how the market system can generate social cooperation under the division of labor.

As Gerald O'Driscoll titled his brilliant dissertation from the 1970s, Economics as a Coordination Problem and that remains the fundamental issue we are trying to deal with as economists and political economists --- what institutions promote (hinder) the coordination of diverse (and often divergent) plans among numerous and heterogeneous agents through time so as to produce social harmony and greater prosperity (social conflict and poverty). 

Comments

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And the Austrian version of pre-reconciliation is ex-post coordination that is nothing more than slogans about the entrepreneur and plan coordination.

Anyone would think Lachmann never wrote anything.

[Peter Boettke]

Lachmann is great -- many of us are influenced by him.

But see the paper by Leeson, Coyne and myself "Does the Market Self-Correct?" in ROPE, which attempts to address the points you raise.

[[email protected]]

Thanks. I'll read with interest.

[Jason Briggeman]

I am unsure about this characterization of "the fundamental issue we are trying to deal with as economists and political economists". We as economists do not plan or create institutions, nor do we qua economists have a compelling interest in "social harmony and greater prosperity". What we do as economists is try to understand the social world, the agents of change, the factors that drive social outcomes. Economics tells us what we must give up to have X, regardless of what X is. To say that all of economics is or should be focused on figuring out one particular tradeoff sounds to me like a politically or philosophically motivated statement; it seems to have as its aim the ruling out of research into other tradeoffs, the redefining of such research as "not economics".

If we WERE in the business of building institutions (some economists do get hired by busybody enterprises), I would have to believe that any institutions exclusively planned by economists would have some tendency to serve economists or to yield what economists believe people should want (think about Caplan's work here). You (and I) may want "social harmony", but a lot of people want to watch bad guys getting blown up on television. The claim that peace and quiet are desirable above other goals is just not to be found in economic science. "Social harmony and greater prosperity" are not free goods and will not come without cost; a Kleinian "People's Romance" is one example of something that must be given up.

[Peter G. Klein]

Pete, are these three categories -- descriptive as-if, normative benchmark, and analytical foil -- meant to be inclusive? While the Austrians and older neoclassicals certainly used equilibrium models as analytical foils (e.g., Mises's "final state of rest" and "evenly rotating economy"), they also employed another, realistic kind of equilibrium model, this one meant to characterize actual, day-to-day market prices. This includes not only Mises's "plain state of rest" (Menger's "points of rest" or Boehm-Bawerk's "momentary equilibrium") but also the end-of-the-market-day situation described by Wicksteed in his country fruit market example (what Joe calls the "fully arbitraged state of rest"). Would you characterize these as equilibrium models, and if so, do they not characterize a fourth, "causal-realistic" concept of equilibrium?

[Peter Boettke]

Peter,

I like your point about "causal-realistic" concept. We need something to describe both interconnectedness, and also capture the logic of market clearing (provided all the data is frozen). So I think your point is well taken, but something that I didn't taken into account in my original article, nor in my post. Thanks for adding that in, it is essential to doing economics to have that part of the story.

Pete

[Adam]

Professor Klein,

How is that end of market day (I believe you called in WSR in your ASC presentation) different from Marshallian partial equilibrium?

I agree with Pete that there's something important about realistic market clearing concepts, so that's not a challenge, I was just wondering if anything different than standard partial equilibrium stories.

[Peter G. Klein]

Adam:

There are many important differences. Wicksteed's market demand curve is much like Marshall's short-run demand curve, but Wicksteed unequivocally rejected what he viewed as Marshall's "objectivist," technical approach to supply in favor of a thoroughly subjectivist approach. In Wicksteed's formulation, the "supply" curve is simply the seller's demand curve for holding the product (he called it a "reverse demand curve") and is based entirely on subjective marginal utility considerations, not "objective" costs of production. Wicksteed's analysis is also temporal in the sense that he treats goods and services as, at the moment of exchange, already produced and existing in a fixed stock. For a technical analysis of Wicksteed's approach to supply and demand see John Creedy, "The Role of Stocks in Supply and Demand: Wicksteed's Problem," Oxford Eonomic Papers, October 1991): 689-701 (a somewhat unsympathetic, but informative, analysis). Kirzner also has a useful essay on Wicksteed on mises.org (http://www.mises.org/content/wicksteedbio.asp). Writes Kirzner:

[quote] Wicksteed rebelled against a view of production activity which sees it as a matter of strictly technical relationships and entirely distinct from the marginal utility considerations governing consumption activity. It was the confusion arising from this Marshallian view which was responsible for the residual classical idea that market price is, in some sense, the outcome of a balancing of an (objective) cost of production with (subjective) marginal utility. In Wicksteed's strongly-held opinion, the "jevonian" view is an emphatically different one: "In no case can the cost of production have any direct influence upon the price of a commodity, if the commodity has been produced and the cost has been incurred; but in every case in which the cost of production has not yet been incurred, the manufacturer makes an estimate of the alternatives still open to him before determining whether, and in what quantities, the commodity shall be produced; and the stream of supply thus determined on fixes the marginal value and the price. The only sense, then, in which costs of production can affect the value of one thing is the sense in which it is itself the value of another thing. "Thus has been variously termed utility, ophelimity, or desiredness, is the sole and ultimate determinant of all exchange values.(20) For Wicksteed the only sense in which "costs" plays a role in the explanation of market price, is that in which "cost" is the anticipated value of a prospective alternative which is, at the moment of production decision, being rejected in favor of what it is decided to produce. [/quote]

[NotanAustrian]

Dr Boettke. I look forward to your thoughts on the austrian vices posts. In particular, I'm interested in what you have to say in response to Dan Klein.

Please post this in the near future.

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"see the paper by Leeson, Coyne and myself "Does the Market Self-Correct?" in ROPE, which attempts to address the points you raise."

"And the Austrian version of pre-reconciliation is ex-post coordination that is nothing more than slogans about the entrepreneur and plan coordination. "

The paper you mention offers nothing more to solve the problem.