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« Bruce Caldwell on Keynes and Hayek | Main | "Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three." »


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Personally I think this crisis will result in change that is contrary to the thinking of Austrian economists. This crisis will be used (and is being used at this moment) by government and socialist politicians to blame the "free" market for the problems they themselves have caused. At this moment, governments all over the world are thinking of new regulations that will plant the seeds for the very crisises they try to avoid.

(I apologise for the horrible English in this post, I'm not a native speaker.)

Mario Rizzo has a very smart discussion on the difference between explanation and prediction in the context of this dispute. See


Particularly in light of Mario's post, I have to agree with William Easterly's claim that we don't have anything to apologize for: "First, Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it."

While the Austrians have a great set of explanations and while we have been saying that credit expansion will lead to a business cycle, we can't predict with precision the exact events that will occur. Further, for all of the heat that economists have taken over all of this, I have yet to see how people with systematically better forecasts used those forecasts to take advantage of everyone else's ignorance and become the wealthiest people in the world.

Here's Easterly:

No! As much as I admire Bill Easterly his argument won't fly. We must steer between the extremes of rational expectations style no-prediction and perfect forecasting magic. The point is that most contemporary macroeconomics did not have a clue that something was wrong, something dangerous was brewing.

Also: from a rhetorical point of view, people will wince if you say, in effect, the beauty of our theory is that it can't predict major disasters.

Interesting point. I was fascinated by Bernanke's recent Hayekian musings. Perhaps he is seeing the light? I just wrote an article on this subject, but at a more "retail" level. You may find it interesting.

Jeff Harding

mathematical economics índeed could have warned us. just think of radner and the restrictive informational requirements in sequence economies to which he points his finger. the more realistic our models,so Radner, and the more structure and rigidities we impose on our system, the more difficult it is to find an equilibrium as a meaningful limit point of real-world activity. the problem is that math is usually employed to produce reduced-form GE-models (in order to predict). reading arrow or hahn or radner, it becomes clear that finance and monetary macro (dsge) is misuse of mathematical tools. indeed, general equilibrium analysis highlights most of the knowledge problems hayek liked to think about. the chicago-style direct confrontation of general equilibrium to data is a much more serious problem than the use of math as such. but this is exactly the point made by good mathematical economists like morishima, and again arrow, hahn, etc. it is a pity that austrians usually make their points outside this most serious line of research.


Have you read Roman Frydman's Imperfect Knowledge Economics? You might find a lot in that work that resonates with you.

I also think that if you look at individuals such as Rizzo and O'Driscoll, or High (Maximizing, Action and Market Adjustment) or Thomsen (Prices and Knowledge) there have been several attempts to address the information economics of Radnar and others as well as the work of Franklin Fisher on disequilibrium foundation of equilibrium economics.

However, this literature comes to a slightly different conclusion than you -- that is that this literature adequately address Hayek's knowledge problem point. While there is no doubt that the entire line of research appreciates Hayek's idea (from Koopmans to Arrow to Hurwicz to Radnar even to Milgrom), what they capture of Hayek falls short of what he is after. I tried to make this point when I reacted to the Nobel for mechanism design theory.

BTW, I require my students in my gradaute course to read Mirowski's Machine Dreams prior to our class so they get this narrative about Hayek's information challenge and how it was picked up by various strands of modern neoclassicism.

dear peter (since we once met at the HES conference at GMU and you offered Peter ...),

I will consult Frydman. Thanks for the hint. It was actually your insistence to have one foot in mainstream teaching that I started to study mathematical economics more seriously (I still regard myself as an austrian but share Friedman's 'there is only good and bad economics'-view that is also supported by this blog (if I get you right). I really love the GMU approach. Don once asked me to apply for your PhD programme, but for personal reasons I could not (yet I feel the opportunity cost of my decisions quite often).

The reason why the Radner-Arrow-Block-Hurwicz literature stops right before the Hayekian main line of argument is that the conceptualization of disequilibrium convergence is sooo difficult. mainstream economics opt to stop at the boundaries of tooled knowledge, sacrificing interesting logical narratives for scientific discipline and rigor. I stand in between.

I also agree with you that the now common Stiglitz-Grossman interpretation of Hayek's information problem is at least problemtaic. Yet, see two mainstream economists who exactly make this point in a mainstream journal: L. Makowski and J. Ostroy in: Perfect Competition and the Creativity of the Market, JEL, No. 2, 2001. I think there is a lot of agreement between us: that mainstream has a lot to offer for austrians and vice versa. In writing my previous post, I did not think of you. I had the more representative austrian in mind.

BTW: why do austrians not exploit the implications of the debreu-mantel-sonnenschein-(kirman) theorem to highlight the significance of Hayekian aggregation problems? After all, mathematical economics 'proves' that all attempts to derive aggregate behaviour from representative agents is futile, that aggregate excess demands for any good cannot be controlled by imposing even the most restrictive assumption on individual agents? I am sure, Hayek would find this result quite interesting.


Excellent question. I can only speculate, but I guess I would say it is a result of small numbers of Austrians actually doing academic economics in relationship to the profession at large, and the interests of the small numbers that are attracted.

I have a paper with Pete Leeson that shows the similarities between Hayek's argument on the limits of agreement under democracy in The Road to Serfdom, and Arrow's impossibility theorem --- it picks up on a point I made in my EEJ paper on Hayek. Buchanan also recognizes this point in a letter to Karen Vaughn from the early 1990s when he was revisiting the socialist calculation debate. Also Pete, Chris and I have a paper on market self-correction which attempts to deal with puzzles presented by guys like Dixit on irreversible investment, etc.

I agree that the Makowski and Ostroy paper is very important, though I still think Franklin Fisher's Disequilibrium Foundations gets at the fundamental theoretical point as to why Kirzner is vital to neoclassical price theory.

Anyway to return to your question --- could it be that to be interested in Austrian economics, the economists that are tend to focus on methodology or history of thought at first? And when that tends to be revealed as a difficult professional path, they turn to applied interests in economics and political economy? Both of these mean that individuals will not be as alert as they could be to intellectual arbitrage opportunities with economic theorists.

I honestly do not think it is lack of ability to read mathematical articles or appreciate them. I am not talking about production of mathematical articles (which takes certain skills) but the consuming of them (and any PhD in economics will have that aptitude otherwise they couldn't have survived getting the PhD given the training for that degree today). So I really think the answer has to be found in the disposition to be alert to opportunities for intellectual exchange and with whom.

When I taught at NYU, I regularly attended Radnar's seminar and learned a lot, and when I was at Stanford I regularly attended Paul Milgrom's Comparative Institutional Analysis seminar (even presented a paper). But since I have been at GMU, I haven't followed the theory developments as I should (especially since Vernon [and Bart Wilson] left, who I used to talk about this stuff with occasionally. One of my colleagues is actually going to present in my workshop this fall a paper on the path to equilibrium, so we will talk about some of these issues on equilibrium and informational efficiency and adjustment. But the students are not obsessed with these questions as Dave Prychitko and I were, or Sandy Ikeda was, or Roger Koppl still is.

Actually, Koppl is probably the one Austrian who really pays close attention to all the opportunities for intellectual exchange with mathematical economists. Check out his work. He has some very interesting papers on computability.



Why not skip all the academic mumbo jumbo and just reread The Theory of Money and Credit? It is a road map for where we have been, and that we are are on the road to 'Catastropheville.' ED


You have a strong point. But then again there is a discipline of theoretical physics and then applied disciplines that come out of that --- e.g., engineering.

There is still work to do in theoretical economics, in my opinion, that will someday translate into the applied discipline of public policy.

However, if we had to stop now, Mises would certainly be on the top of my list of theorists to build from in our policy analysis. As I put it in my Why Perestroika Failed, Mises-Hayek and Buchanan-Tullock. And as I have stressed throughout our current situation, the best insight I think we can get on where we are is a combined reading of Hayek's Tiger by the Tail, and Buchanan/Wagner's Democracy in Deficit. In both cases, we are dealing with the legacy of Lord Keynes in monetary policy and fiscal policy.



May I suggest Hayek's Road to Serfdom, Chapter 10 especially.

Mises says 'catastrophe' and Hayek says 'worst get to top.'

Do you have a plan for an outcome moving in that direction??



"Catastrophe" can be averted provided the warning is heeded. This is the idea of the endogenous public choice theorist (developed by Ulrich Witt in relationship to Hayek's Road to Serfdom and why Britain did not go down that road completely). The reason they didn't was because Hayek's ideas provided an effective warning.

Obama might be pushing against a screen door (not a steel door), but we have seen evidence that the door still has it latch locked. We need a reinforced steel door with a deadbolt, etc., but starting with a screen door and locked latch, perhaps we can keep Obamonomics from just walking straight in without any challenge.

That is the only way I know how to respond to the challenge you put for us.



you write: "I agree that the Makowski and Ostroy paper is very important, though I still think Franklin Fisher's Disequilibrium Foundations gets at the fundamental theoretical point as to why Kirzner is vital to neoclassical price theory."

I agree. Franklin Fisher's book is one of my favorits. I really do think that Kirzner's concept of altertness is even better stated in Fisher by the concept of "consciousness of disequilibrium". and his book also makes clear that the Wieser-Wicksteed-Robbins approach to opportunity cost approach (market siccors have both a utility dimension and ensure communication of relative scarcities in a general or global (dis)equilibrium setting) is important in coordination. the law of supply and demand (in the formal sense) is a natural playground for austrian economists, but few of them play that game. the post WWII austrian reaction against the general equilibrium theorists of their times (and their misuse of GE analysis) came by overshooting. Rothbard is a pretty good example: just think of the nonsense he wrote about indifference curves and of his strange interpretation of neumann-morgenstern exected value approach (in talking about marginal utilities without deriving it from indefference preorderings he was the cardinal guy, while expected utility is rather pseudo-cardinal).

refering to the further dialogue above: it is certainly untrue that mises' theorie des geldes can offer something to the understanding of the current crisis which is not better stated somewhere else. this year or next palgrave/mcmillan will publish a paper collection on 'austrian economics in transition'. there I discuss mises's business cycle theory, its evolution over time, and how Mises year by year lost ground to the theoretical developments WITHIN the austrian school, especially when compared to Hayek, Machlup, Haberler, Schumpeter. the ABCT is simply wrong in almost every theoretical step taken. I assume you know that, since you and steve do not use the chance to promote the 'we-austrian-always-knew-that-it-will-bust'view which however dominates the mises institute, where I locate the average or representative 'modern' austrian. and I really do not think that these guys can really consume the literature you referred to in your previous post. they know - of course apriori - that mainstream economics is a waste of time.


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