Robust Political Economy and Black Swans

|Peter Boettke|

I first started using the term "robust political economy" to describe my unique blending of Austrian economics and public choice economics in 1992 in a review essay I wrote on Stiglitz's Whither Socialism?  The editor of the JEL had asked me to write a review, and I actually met with Stiglitz to discuss his Wicksell Lectures (which were in manuscript form at the time) for lunch and discussed Hayek and the knowledge problem, and Stiglitz's own take on Hayek.  This was before he left for Washington, DC.  My essay eventual came out as a stripped down review of the book in the JEL, but the term "robust political economy" did not make the final edits and instead the language that made it was "intellectually rugged argument".  However, later Peter Leeson and I published an essay "Liberalism, Socialism, and Robust Political Economy."  I should point out that we had a difficult time getting that paper published with referee and editor comments that ranged from: 'we all know this' to 'nobody believes this'.

The "robust political economy" type argument is about to get a jump start in the intellectual culture with the paperback edition of The Black Swan by Nassim Taleb.  Taleb actually says on his homepage that his 'activism' at the moment is all concentrated on "robustifying" society against black swans.  Anyway, he provides the material forthcoming in the book on robustness and fragility for you to preview.  It is not identical to the mix of the Austrian critique of omniscience and the Public Choice critique of benevolence, but it is consistent with that line of thinking.  "Intellectually rugged"; "robust"; "hard-cases"; "building in redundancy" are all trying to get at the same idea in political economy.  Taleb is more focused on the level of policy, whereas Hume, Smith, Hayek, Buchanan and myself (derived from Hayek and Buchanan) is focused on the level of rules (or politics to use Buchanan's language).  What social and political system operates to make sure that bad men can do least harm?  What social system of exchange and production can utilize man as he is -- sometimes smart, more often stupid; sometimes publicly spirited, more often privately interested -- and does not require the perfectability of men for its operation?  Built in redundancy is good in your investment plan, it is good in your approach to policy, and perhaps essential when thinking about political economic systems where the cost of mistakes are potentially huge.

You can hear Nassim Taleb discuss the new material in Black Swan as well as many other topics in this week's edition of EconTalk.

Comments

[Paul Lewis]

Readers might be interested in the symposium on Taleb's book in Critical Review (vol. 21, issue 4). See http://www.informaworld.com/smpp/title~db=all~content=g919004450~tab=toc~order=page)

[Daniel Kuehn]

Great thoughts - thanks for sharing. I've always been intrigued by the Hayek-Stiglitz pair up, particularly with respect to their views on information.

Do you know if they ever interacted or even collaborated on anything?

[Barkley Rosser]

In his Nobel address, Stiglitz did recognize Hayek's primary role in the economics of information.

Taleb is a fan of very few living economists. The set of (mostly) dead ones that he has positive views of includes two that have sometimes been linked here, only to have others then get all in a fluff over the linking: Hayek and Keynes.

[Peter Boettke]

Barkley,

I completely agree with you about the linkage on the problem situation, and that is what excites Taleb as I read him. But I wonder IF Keynes's politics/policy can pass through the "robustifying test" that Taleb is establishing? What do you think? I believe Hayek has been thinking about that "robustifying test" since the 1940s --- see his essay "Individualism: True and False" in Individualism and Economic Order, and in particular pp. 11-14. Or Mises, Human Action, pp. 692 and ff I believe.

So I think the problem situation of being ensnared in the dark forces of time and ignorance IS the right problem situation, but the devil is in the details of institutional analysis to see the way that agents ameliorate these forces and/or cope with them. The problem situation doesn't ever go away, we must in fact deal with it. Keynes doesn't, in my mind (and perhaps I am wrong), do that with respect to the world of politics/policy. As a result, he runs afoul in his solution to the crisis, and his diagnosis doesn't see the problem in terms of institutions and policy variables, but instead as residing in the problem situation and psychological dispositions. This is why Hayek is not a Keynesian, but it is also why Hayek does share common ground with Keynes at a fundamental level about the problem situation we economic actors face. As I have often said to students Shackle plus Price Theory, gets us far. Shackle alone gives us poetry, and price theory alone gives us sterility, but you mix Shackle and price theory and you have the dynamic analysis of the human economy and polity required to make sense of our world (and perhaps even improve it).

[Daniel Kuehn]

RE: "The problem situation doesn't ever go away, we must in fact deal with it. Keynes doesn't, in my mind (and perhaps I am wrong), do that with respect to the world of politics/policy."

I think he does. In his early work - the Tract on Monetary Reform - and in the General Theory he makes repeated appeals to the fact that we don't know how these policies will work, and that we should proceed cautiously. That comes out as a major theme in the concluding note of the General Theory. And Keynes flat-out rejects the most problematic option in what you call "the world of politics/policy" - namely, letting the state actually run enterprises (again, a major theme of the concluding notes). He doesn't go into detailed public choice issues in the General Theory, you're right. But then again, he doesn't go into detailed discussion of the state at all in most of the general theory. It's meant to be a general theory of the operation of the economy. But if you look at the Tract, especially, where policy decisions are central, I think he outlines the institutional and political pitfalls quite clearly.

[Jerry O'Driscoll]

Mario Rizzo and I drew the connections between Keynes and Austrian subjectivists in The Economics of Time and Ignorance. And I have done so in more recent papers.

There is one respect in which Keynes and Hayek were hopelessly at odds. In the section of I&EO that Pete references, Hayek wrote of the need for "a social system which does not depend for its functioning on our finding good men for running it."

The contrast with Keynes could not be sharper. As explained by Keynes' biographer, Roy Harrod, and quoted in Buchanan and Wagner, Democracy in Deficit, Keynes always operated on the "presuppositions of Harvey Road." In Buchanan and Wagner's words, "Keynes was an elitist, and his idealized world embodied policy decisions being made by a small and enlightened group of wise people"(78).

Keynes was also a self-described "immoralist," which is perhaps why he could pander to the National Socialists in the Preface to the German ediiton of the General Theory.

[Roger Koppl]

Barkley,

What Jerry said. Jerry and Mario and Ludwig Lachmann taught many of us to learn from Keynes's epistemics. But their policy responses to time and ignorance were almost opposites. Hayek wanted good institions more than he wanted good men; Keynes wanted good men more than he wanted good institutions, as revealed by his famous letter to Hayek on The Road to Serfdom. Butos and I argued that the key point is Hayek's anti-rationalism vs. Keynes's rationalism (HOPE 1997).

[Daniel Kuehn]

Ugh - Jerry, if you're on that tired old bandwagon interpretation of the German preface you've just made me much less likely to read your book. I was enjoying your post for the first couple paragraphs (although scratching my head on a few points). I think you'd like Raico's recent piece at the Mises Institute.

[Steve Horwitz]

Daniel,

Read Jerry and Mario's book. Jerry's last point there should not obscure the rest of that comment, which is spot on and which you conveniently decided not to address.

The whole point that Pete is making, and others here too, is that Keynes can't have a "general theory of the operation of the economy" if he doesn't endogenize the political process. That's the point that Buchanan and Wagner make in Democracy in Deficit and that's precisely the point at the center of Pete's discussion of robustness.

[Daniel Kuehn]

Steve - I made sure I only went so far as to say "less likely" :) I don't think I'd toss a book over one sentence. But it is tiring to continue to hear that. And I agree - I was enjoying his post and his points.

Endogenizing the political process certainly makes any model more thorough, but I'm not sure Keynes fails insofar as he doesn't do this. The basic ABCT doesn't endogenize in the way that Buchanan and Wagner do either, but we still see value in it.

What's most ironic is that the point of the German preface, which Jerry seems to have completely missed, is precisely that the advantage of the General Theory is that it relies on no assumption of competition or free institutions - it works in a variety of contexts. That doesn't endogenize the political process, but it certainly provides a flexible framework in which to insert an endogenized political process.

The GT also leaves much to empirics, precisely so that you don't have to assume these things about the poitical process. The size of the multiplier will change depending on the realities of a given situation. A political system run by bootleggers and baptists is going to have a platry multiplier.

So no, the GT doesn't offer us all we would want out of a model of the economy - but for that matter neither does Buchanan and Wagner :)

[Jerry O'Driscoll]

Au contraire, Daniel Kuehn.

"Nevertheless, the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire."

Not a "flexible framework" adaptable to a variety of institutions. Rather it "much more easily adapted" to a totalitarian state. Credit an author for understanding his own theory.

[Daniel Kuehn]

Jerry -
Yes, I've read the preface several times before.

Of course the General Theory is more easily adapted to the conditions of a totalitarian state. I wholeheartedly agree with that. How would you, as a German economist in 1936, use a theory that assumed competitive markets? It would be a worthless theory.

A theory grounded in aggregate demand, however, could be effortlessly utilized. It doesn't make it a "totalitarian" theory. And the reason why I was concerned about your book is that anyone who considers Keynes to be anything but anti-totalitarian doesn't seem to be very familiar with him.

We also should be careful not to sensationalize. In 1936 the Nazi regime was certainly brutal, but no more monstrous than other German regimes that had come before it. Kristallnacht had not happened. The only purges were within the Nazi's own ranks. They were thugs to be sure, and it was a command economy to be sure - but I think you are reading far too much into the preface because you are assuming your own conclusions. There's no reason to believe that Keynes meant anything more than he said - that an aggregate demand theory of the economy was more easily adapted to Germany of 1936 than a theory based on the assumption of laissez faire.

Au contraire indeed, Jerry.

[Daniel Kuehn]

"Rather it "much more easily adapted" to a totalitarian state."

Be careful not to cross your wires, Jerry. The comparison he is making is that:

The General Theory is more easily adapted to totalitarianism than a competitive market theory is adapted to totalitarianism.

NOT

The General Theory is more easily adapted to totalitarianism than the General Theory is adapted to a liberal democracy.

[Ryan M]

Taleb loves A Treatise on Probability. I've never heard him have a kind word on Keynes's actual economics. In his congressional testimony, he has come out entirely against any and all inflation. On the other hand, I've never heard him say anything good about Hayek's economics either (The Black Swan only cites The Pretence of Knowledge and The Road to Serfdom if memory serves) and in The Black Swan he says he doesn't even consider Hayek to be an economist.

[Jerry O'Driscoll]

Daniel,

You torture the text. It says what it said, and proper interpretation is to read a plain and simple text as written.

Don't accuse me of saying or implying things I didn't. You're obfuscating the issue. Your defense of National Socialist Germany in 1936 is simply shocking.

[Current]

Does anyone really think that the General Theory doesn't presume a reasonably competitive type of economy? I think that is does.

If you have no speculators demanding liquidity then how do you get a liquidity trap? That's not the only example, there are loads of things in it that depend on proper markets. The aggregates disguise that, but it's the case.

[Daniel Kuehn]

Jerry -
Don't be so faint-hearted. I never defended Nazi Germany of 1936. You assume your own conclusions as readily with me as you do with Keynes.

I'm reading the plain English, Jerry. You would do well to read the very next sentences following your quote. You truncate it at an awfully convenient point. Keynes goes on to write:

"Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions."

Essentially my point. Keynes is making a methodological point, plain and simple.

Read the rest of it too. Keynes compares and contrasts several other schools of thought as well, and specifically highlights the earlier reservations that the German Historical School had about those schools of thought. It has nothing to do with Nazism, and everything to do with methodological and analytic questions.

Quit the mental gymnastics, Jerry - it's getting painful to watch. And don't ever accuse me of defending national socialism again. I was simply highlighting that an observer in 1936 that commented on Germany was commenting on something different from what we look back on with 20/20 hindsight today.

[Daniel Kuehn]

"Don't accuse me of saying or implying things I didn't."

What precisely did you think I was accusing you of, anyway?

[Daniel Kuehn]

Current -
People don't stop demanding things because there is no free price mechanism.

I think this preface is getting blown way out of proportion, as it inevitably does whenever it is brought up. Keynes explicitly says he had an Anglo-Saxon market economy in mind when he wrote it. The point is just that there is nothing that depends on that assumption.

His discussion of the possible inadequacy of money wage adjustments is another example of where a competitive market isn't an integral assumption - he caveats that money wages may or may not be set in a competitive market.

[Jerry O'Driscoll]

Daniel,

You're hopeless. I will not respond to any comments of yours in the future. Have a nice life.

[Daniel Kuehn]

Jerry -
Sounds wonderful. This means I can look forward to not being accused of defending Nazis again. I really encourage you to read the entire preface, and not a few select sentences.

[Current]

Daniel,

Authoritarian states generally don't allow "speculators" to exist, let alone demand money. Remember Keynes concentrates on speculation not the general demand for money.

[Anonymous]

@Daniel:

"And the reason why I was concerned about your book is that anyone who considers Keynes to be anything but anti-totalitarian doesn't seem to be very familiar with him."

I don’t think there many people alive today that are familiar with Keynes. The guy is dead for more than 60 years now …

Here are my interpretations:
"Nevertheless, the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire."
What I understand: my theory and freedom don’t go hand in hand since a man would produce for his own benefit, while I just say produce for the sake of producing.

"Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions."
What I understand: since my theory has been largely refuted 200 years ago, I’ll just ignore those years. Or: since it can accommodate to wider fields, anybody can understand whatever he wants.

[Supra Shoes]

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