Coordination Problem

Thinking Seriously About Progress in Science

Recent experience has once again made me think about how progress is made individually as a scientist and as an intellectual movement. And what causes intellectual stagnation and frustration with progress in the world of scientific economics. I believe there is some confusion about Thomas Kuhn's The Structure of Scientific Revolutions and the idea of paradigm shift.  In the standard account anomalies pile up that the currently fashionable research paradigm cannot explain (or didn't predict).  The old within the discipline are resistant to change, but the young and bold push for a scientific revolution.  The "normal science" of one age, gives way to the "extraordinary science" of the new.

In the community of Austrian economists this account of Kuhn's model of scientific belief was first introduced (I believe) by Murray Rothbard in a 1971 essay that is both contra-Whig and 'Kuhnian'.  It then became a theme for the resurgence generation of Austrian economists with Edwin Dolan's introductory essay to The Foundations of Modern Austrian Economics entitled "Austrian Economics as Extraordinary Science."

So far so good.  I was inspired by this picture when I first became serious about studying Austrian economics at the highest level possible and pursuing a career as a professional economist.  I try to inspire students with the story of paradigm shifts as well.  But the word "paradigm" and the phrase "paradigm shift" are probably the most overused and abused in the world of the social sciences.

There is, I would argue, an interpretation of Kuhn that is misleading.  Before Kuhn wrote The Structure of Scientific Revolutions, he wrote an essay entitled "The Essential Tension."  In that essay, Kuhn argued that paradigm shift cannot be accomplished by "outsiders" but instead are accomplished by "insiders" who make an "outsider" move.  In other words, John Maynard Keynes, Paul Samuelson, Milton Friedman, etc.  Your works can push for a radical departure in the prevailing scientific practice only if you are considered within the scientific community.  This, I would suggest, is extremely important for the way one thinks about their profession and it doesn't radically change because of the world of blogs, the internet, and e-lists.  In fact, unless you believe that within the next 50 years we will see the University of Phoenix  out-compete Harvard in the market for elite students, or the blogosphere to out-compete the AER, JPE and QJE in scholarly reputation, you should stick with Kuhn's story in "The Essential Tension" and/or Michael Polanyi's discussion in "The Republic of Science".

If you want to pull off a "paradigm shift" you need to expose the anomalies within the prevailing paradigm insides of that paradigm --- thus the "essential tension".  Once you get the scientific establishment on its heels, the younger members of the scientific community (well trained enough to give them credibility) can peck away and eventually turn the tide and get a new paradigm to prevail.

The anomalies can be either empirical or theoretical, e.g., stagflation and microfoundations.  The paradigm change occurs when the theoretical change enables a better understanding of the empirical anomaly.  But it has to emerge from the pens of those who are considered the best and the brightest, not those truly outside of the mainstream or even the community of scientists.  Amateur economists, individuals without advanced degrees, or those not teaching in research universities, who spend their time writing in blogs or in journals not listed by SSCI cannot pull off the desired paradigm shift.  This is a form of economic discourse, perhaps even an important one, but not one that matters scientifically.

There is a wonderful essay by David Colander entitled "Surviving as a Slightly Out of Sync Economist" that provides information to aspiring economists that I found particularly useful.  But even there we have to recognize that David (who has had a wildly successful career) teaches at Middlebury (an outstanding academic institution) cannot possibly pull off a paradigm shift in economics.  His advice is how one can individually survive and perhaps even flourish as someone out of sync, but not how out of sync ideas can get wide-spread acceptance and come to be in fact those that are in sync.  Which I take as the ultimate goal of any out of sync economist.  If you believe your ideas better "track truth", then of course you want other to think in terms of these ideas so we can gain a better understanding of truth.

For me the challenge to Austrian economists is to achieve progress on both fronts -- that of individual careers and that of the intellectual movement.  Careerism without a concern for the fate of ideas is empty, and self-satisfaction over intellectual purity without regard to careers or wider spread acceptance among those who matter most in the world of ideas is self-defeating.  Only outsiders with a claim to inside legitimacy can move ideas from being outside to those that are now inside.  The essential tension remains, for me, the critical issue to grapple with when one thinks seriously about how to advance an alternative scientific paradigm.

Is the Econ-Blogosphere Prone to Systemic 'Failure'?

Dani Rodrik asks whether as economists who have high opportunity costs start cutting back on blogging will that produce a "lemons" result in the econ-blogosphere.

I have actually made a similar argument for years about the internet and economic discussion --- whether on e-lists or on blogs.  I believe that for subtle discussions of economic issues the medium has several weaknesses.

But then Rodrik gives reasons why the econ-blogosphere will remain along lines that are similar to ones that Tyler Cowen has given to counter the market for lemons story.

However, Mankiw's decision to eliminate the comments section does raise very relevant points.

Laissez Faire Books is Closing Its Doors

I just learned from Liberty and Power that Laissez Faire Books is shutting down after 30+ years of business.  The news surprised me.  LFB has been a constant and reliable friend throughout my intellectual journey.  In fact, when I decided that I wanted to be an academic economist one of my goals was to have some book of mine carried in LFB.   The fact that my first book was on the cover and reviewed so favorably by Roy Childs  was a dream come true.  Of course, all of Roy's reviews were glowing, but as a young author reading Roy's praise was a very special moment in my life.  I met Roy only once before that review appeared (at a FEE conference on Liberalism in 1985), but after I moved to NYU and through Mario Rizzo I got to meet and talk to Roy numerous times about Austrian economics, libertarianism, classical liberalism, and the intellectual movement we had decided to devote our lives to.

I remember visiting the store front in NYC when I was an undergraduate and then as a graduate student.  Upon entering the store I thought the world of my intellectual passions was there for my taking.  It was an amazing experience for me at  20 years of age.  My copy of Menger's Principles was purchased there, and over the years LFB was my source for classics in the history of economic thought (Augustus M. Kelley reprints were carried) and Austrian and libertarian literature (with major discounts from publishers such as Elgar and Routledge). And I gave a book talk at the San Francisco store when I was at Hoover and Why Perestroika Failed was published in 1992.

As Kathleen states in her note to customers, the world of book publishing and book distribution has changed drastically over the past few decades and the market has spoken.  But for many of us, LFB did provide an indispensible service.  Outside of my offical academic affiliations (GCC, GMU, NYU), FEE, IHS, and LFB were the movement organizations that did the most for my "education" in philosophy, politics, economics, history and the history of ideas.

THANK YOU to all those associated with LFB over those years.  You weren't just good, you were great.

The Future of Development Aid and the Millennium Challenge Corporation (MCC)

William Easterly, Ambassador Danilovich (CEO of the MCC), and I talked about the future of development aid on Capitol Hill last week on Thursday 11th (see here). Pete Boettke gave the introduction and moderated the discussion. It was a great day on the Hill (see here for the video—slow upload). Bill Easterly spoke first about the failure of development aid in the last 50 years, the two tragedies of development, and the main reason for this disaster (i.e. the lack of accountability in development agencies). For those who have never heard Bill speak on the issue, he is very good.

In my view the three major issues of development aid are:

• The knowledge problem. In order to know where aid should be directed, one must have a deep knowledge of local conditions. There are examples after examples in development policy where the lack of knowledge of local conditions led to massive useless spending. As a result, programs that have a deep sense of people’s situations and needs are more likely to succeed. Opportunidades in Mexico could be an example.
• Public choice. The way aid is provided is not neutral. Development agencies not only have a poor access to the crucial local knowledge, but often also have incentive structures which may be contrary to their long-term goals. Agencies often need more funds to solve more problems, whether the diagnosis of these problems is correct or not. They seek to increase their resources irrespective of whether or not they achieve the right results. The lack of accountability is manifest in most cases, as agencies are rarely independently evaluated. In short, the delivery of funds often suffers from political interference, bureaucratic self-interest, and congressional micromanagement. It is difficult to imagine how publicly-financed foreign aid could be immune to political pressures.
• Dependency and the Samaritan’s dilemma. Disbursing aid over the long-run creates a “Samaritan's dilemma,” which means that the more you help someone, the more it creates a demand for aid. This is known as the dependency problem. Once poor countries governments are ensured of a source of external free funds, they can game the system.

There are basically four options available to policy makers who want to do publicly-funded development aid:

• A first option is to continue aid as it has been done for the last 50 years with the results that we know: loans that are never reimbursed.
• A second option is to make aid conditional. Countries receive aid only if they behave well, implementing policy changes. Interestingly enough, this hasn’t work much either. There are many reasons for that. Among them, that aid is eventually always disbursed. This means that conditionality is not really respected. Moreover, further reforms don’t generally happen following an increase in aid.
• A third option is to make aid selective. Countries that have performed well on a series of indicators in the past should receive money. This is the method that the MCC is using. The MCC selects countries that already perform well on a number of indicators and disburses grants. The problem here is that there is no evidence that there has been a significant positive association between good policies and selective aid. The reasons are the same as in the other cases.
• A fourth option is one that has been favored by Peter Bauer and more recently Bill Easterly: aid should be abandoned and countries should be left on their own. Aid is not a good tool to fight poverty; the best allies in this fight are the poor themselves. It is the resourcefulness and ingenuity of poor people that will eventually improve the situation of the poor. Moreover, there is evidence that the absence of aid compels countries to introduce reforms.

The MCC provides (selective) aid to countries that already perform well on a series of indicators. It is unclear to me why one would give money to those who already are on the way to betterment. While the MCC is better equipped than other agencies to succeed, there still are many doubts about its future success. There is no reason why the disbursement of MCC money would not create dependency and slow down the reforms. While the MCC effect is perhaps real, nothing so far proves that it will be long-lasting and that countries are not making policy changes just to receive the funds. While the MCC explains that eligible countries will be required to maintain their policy performance to receive further assistance, it remains to be shown that sanctions will come in case countries don’t maintain their level of performance.

More importantly, I don’t think the MCC is immune to political interference. For instance, a recent article in the Washington Post explained that President Bush wanted to use US development aid as tool to make sure some countries would take a favorable position in the war in Iraq. He is quoted in the article talking about Angola and the MCC: “Angola is getting money from the Millennium Account [MCC], and those agreements could also be in danger if they don’t show themselves to be favorable.” (Thanks to Ian Vásquez for the reference.)

Finally, it remains to be shown that top-down reforms will stick. Indeed, while governments may want to change their policies to become eligible for MCC funding, it is unclear whether these changes will last over the long run. Long lasting changes also involve changes in belief systems. This can happen when people struggle without external help. The solutions that Peter Bauer talked about decades ago were about bottom-up changes, induced by trade and the development of commerce. The MCC, like development aid in general, tends to favor solutions that are government-driven. While changes in policies are desirable, to be long-lasting these changes should be driven by changes in people’s beliefs and biases rather than by the desire to obtain MCC money.

Entrepreneurship and Enterprise in the UK

The European School of Managment produced this report.

Download Enterprising_Britain_-_Interim_Report.pdf

Anthony Evans is doing a great job at ESCP-EAP.

Geneology of the Austrian School

One of the readers suggested that Austrians should do a "geneology" similar to the way mathematicians.  I remember sitting in Don Lavoie's office as a first-year graduate student and noticing a cube he had with pictures of Mises on 3 sides and a family tree of the Austrian school on the fourth.  It turns out that there are only a few of these cubes in existence --- they were produced by Richard Ebeling as holiday gifts one year.

But I think it would be a useful piece of information to know (a) the production of economists and social scientists through the formal educational process by Austrians, and (b) the more controversial and interpretative task of tracing out influences on scholars.

To start, we need to get accurate records on the production of PhD students. Does anyone have a list of the dissertation students of:

1. Menger
2. Bohm-Bawerk
3. Wieser
4. Schumpeter
5. Mises
6. Hayek
7. Lachmann
8. Kirzner
9. Rothbard
10. Rizzo
11. Garrison
12. White
13. O'Driscoll
14. Lavoie
15. High

etc.

I'd be very interested in getting a historically accurate list of the production of Austrian economists from U of Vienna, NYU, GMU, Auburn, Georgia, etc.  Who produced who and how many and where did they get placed?

I think I mentioned at one point the difference between James Buchanan and Gordon Tullock in this regard. Buchanan chaired numerous doctoral dissertations, Tullock very few.  This has had a huge impact on the sociology of the spread of ideas in public choice and professional recognition I would contend.

Once we had this baseline of factual data on the production of PhDs, expanding to include current generations, then we could start the task of collecting data on undergraduate influence -- students becoming teachers who then send new students to their teachers, etc.

Once that data is collected, then we can start the more difficult task of interpretating influence.  One measure used in mathematics is co-authorship and degrees of separation ---- but that is harder to infer in economics because of the older cultural norm against co-authoring, etc.  But still some sort of "degrees of separation" would be needed.

Does anyone have a paper along these lines?  Or plan on writing one?

Lavoie on Hurwicz

In National Economic Planning: What is Left? Don Lavoie discusses Hurwicz's attempt to address the Mises-Hayek challenge.  Lavoie argued that while the "mechanism design theorists" (what he calls planometrics) have "admitted that the 'reading' of price signals are necessary, they have failed to recognize what kind of social arrangements are necessary for their 'writing', that is, for the relevant information to get put into prices." (1985, 73).

Further on that page, Lavoie has an excellent discussion of why the equilibrium benchmark is not the appropriate standard for welfare assessments.  In the work of Mises, Hayek and Kirzner, Lavoie explains, prices are not equilibrium prices, and the coordination real monetary prices make possible is not the neoclassical notionof general competitive equilibrium.

In my 1996 JEL review of Stiglitz, I tried to capture this idea that prices in the Austrian sense are imperfect signals that nevertheless continuously guide an on-going coordinating process when I said that Stiglitz "overestimated the value of equilibrium prices, and underestimates the value of disequilibrium prices" in coordinating economic activities through time.

Don wrote a paper where he lays all this out, "The Market as a Procedure for the Discovery and Conveyance of Inarticulate Knowledge".  Readers can find a copy of it in David Prychitko's edited volume, Individuals, Institutions, Interpretations.  But I couldn't find an online version to link to.

Among other efforts to present Lavoie's argument on the market as a communication system involving the "reading" and "writing" of market prices and other vital signals for social cooperation, readers should look at Steve Horwitz's 1992 paper "Monetary Exchange as an Extra-Linguistic Communication Process."

A more recent attempt is Virgil Storr's forthcoming paper on "The Market as a Social Space."

Explaining Mechanism Design

Alex Tabarrok does an excellent job explaining mechanism design theory at Reason.

I encourage readers to look closely at Alex's discussion, Bob Subrick's discussion at 'The Stationary Bandit'

Surely mechanism design theory has its problems --- don't all intellectual efforts? --- but its original motivation (to answer Hayek's challenge), and its subsequent development (focus on rules, incentives and information) is a very useful for studying firms, markets, politics, and ultimately economic systems. and also my original post before criticizing the 2007 award.

Boettke in The Wall Street Journal

Pete Boettke has a piece in today's The Wall Street Journal discussing the connection between the work of Hurwicz, Maskin and Myerson and that of Mises and Hayek.

Mechanism design theory was established to try to address the main challenge posed by Ludwig von Mises and F.A. Hayek. It all starts with Mr. Hurwicz's response to Hayek's famous paper, "The Use of Knowledge in Society." In the 1930s and '40s, Hayek was embroiled in the "socialist calculation debate." Mises, Hayek's mentor in Vienna, had raised the challenge in his book "Socialism," and before that in an article, that without having the means of production in private hands, the economic system will not create the incentives or the information to properly decide between the alternative uses of scarce resources. Without the production process of the market economy, socially desirable outcomes will be impossible to achieve.

And Pete's conclusion:

While we celebrate the brilliance of Messrs. Hurwicz, Maskin and Myerson, we should also remember that Hayek's challenge provided their inspiration. Hayek concluded that the private-property rights that come with the rule of law, freedom of contract, and freedom of association is still the one mechanism design that mobilizes and utilizes the dispersed information in an economy. Furthermore, it does so in a way that tends to capture the gains from trade and innovation so that wealth is continually created and humanity is made better off.

Hayek and Hurwicz (once more)

Co-Nobel Prize winner Roger Myerson sees the connection between Hayek and Hurwicz very clearly in this 2006 Lecture in Honor of Hurwicz.

Download hurwicz.pdf

In addition, it should be pointed out how big an influence mechanism design theory has been on Vernon Smith's work in experimental economics and understanding of the price system and the theory of the market economy.  The quest to design incentive compatible systems led to another field that Vernon contributed greatly to captured by the label 'economic system design'.