Coordination Problem

Austrian Economics Seminar at the Foundation for Economic Education

|Peter Boettke|

On Monday August 2nd, the Foundation for Economic Education will host again the summer seminar in Austrian economics.  These seminars owe their origins to the academic entrepreneurship of Israel M. Kirzner, and have been located through the years in Boulder, Co., Milwaukee, Wisc., Irvington, NY, New York City, and for more than the past decade back in Irvington at the FEE campus.

This year speakers will include Israel Kirzner, Mario Rizzo, Roger Garrison, Peter Lewin, Bill Butos, Bruce Caldwell, Larry White, Steve Horwitz, Pete Leeson, Chris Coyne, and myself.

I hope Steve will live blog from the seminar as he often has in the past.  I am thrilled again to get the chance to see Professor Israel Kirzner and get a chance to talk economics with him.*

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*Fred Sautet and I are almost complete with our editing of The Collected Works of Israel M. Kirzner, we are just putting the finishing touches on our introduction for Discovery, Capitalism, and Distributive Justice.  I think this is perhaps Kirzner's most underappreciated work, and I hope this edition will bring new attention to this work and its importance in Kirzner's body of work.

Health Care Reform --- Behemoth Bureaucracy vs. Nimble Entrepreneur

|Peter Boettke|

How do you want to fight disease and promote better health among yourself, your family, your friends and your neighbors?*

 

HT: David Hebert

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*You can learn a lot about the "vision" conflict evident in this policy reform by revisiting the municipalities debate where Vincent and Elinor Ostrom began their research program in institutional analysis and development.  See part 1 of Challenging Institutional Analysis and Development --- I am linking to the Kindle Edition which is less than $20 and you can join the e-book revolution.  Anyway, there is indeed an "intellectual crisis" in America public administration and public policy analysis, namely the lingering legacy of the 'progressives'.

Why Graduate Students Not Only Should, but MUST Read Rothbard's Man, Economy and State

|Peter Boettke|

When I teach my PhD course in the Austrian Theory of the Market Process I assign four required books that in my opinion students must master to make a contribution to the this literature --- Mises, Human Action; Hayek, Individualism and Economic Order; Kirzner, Competition and Entrepreneurship; and Rothbard, Man, Economy and State.  I have written before about how Rothbard's vision has guided much of my own research and teaching career despite what others may believe, here and here.

But in stressing the captivating aspects of Rothbard's vision of a free society, I run the risk of giving the impression that I discount the analytical contributions that he made to economics in Man, Economy and State.*  An important point to stress is that at the time of its publication, Rothbard's book represented the state of the art in what Henry Hazlitt called "orthodox economics".  The young Rothbard had read and absorbed not only the teachings of the classical economists and the writers in the Austrian tradition, but was completely aware of all the developments in property rights economics, law and economics, public choice, Chicago economics, and of course he was deeply knowledgable of his intellectual opponents from Marxist, to Institutionalist, to Georgists, and of course Keynesianism.  The footnotes in Man, Economy and State demand very careful study to get a full sense of the amazing range of Rothbard's learning as an economist and social philosopher.  The first 66 pages of the book might still be the most straightforward discussion of the economic way of thinking one can find anywhere.  And, of course, there are great discussions of price formation (as opposed to determination), production and entrepreneurship, competition and monopoly, money and the business cycle, and public economics and political economy.

My copies of Human Action; Man, Economy and State; and The Wealth of Nations are held together with masking tape and various efforts at rebinding for a reason.  The Road to Serfdom, The Constitution of Liberty, and Individualism and Economic Order are pretty worn, but nothing like the condition of those other 3 books.  Only Don Lavoie's National Economic Planning is the other book on my shelves that is in that same condition due to continuous reading and consulting over the years.  Graduate students who do not devote themselves to serious study of Man, Economy and State, will do themselves a great disservice in their economic education, perhaps one they will never be able to recover from and thus they will be lesser economists as a result.

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*Chris Coyne and I attempt to highlight Rothbard's contributions to the economic analysis of socialism in theory and in practice here.  In writing that paper, again the amazing and awe inspiring fact was how much Rothbard had mastered in the literature on comparative economic systems, and also how he anticipated subsequent developments in the field in the 1960s-1980s.

Evolution and Economics

|Peter Boettke|

Don Lavoie published a book in 1985 that is underappreciated (mainly due to inattention) by the current generation in my opinion, National Economic Planning: What is Left?, and I hope that an online version will be made available either by CATO (the original co-publisher) or Liberty Fund in the not too distant future so a new generation will get to read this book.  Of the many novel perspectives pushed in that book, Lavoie tried to develop a close analogy between the work of E. O. Wilson on ant colonies and the information processing that takes place in a modern economy.  "Human mass communication takes place where an individual engages in the dual process of actively influencing other by secreting 'money pheromones' in particular directions, thereby bidding up prices in those avenues, and of passively responding to the prices resulting from the money issuing from other individuals." (p. 70)  The students of Don sometimes joked about Don and his insects and at other times were completely enamored by his efforts.  Heck Gordon Tullock also was studying insects so there must be something to it, I remember thinking as I read a rough draft  manuscript copy of Tullock's Cooperation Without Command.  This was after I had a wonderful conversation with Tullock one afternoon outside the Center for Study of Public Choice about the ant hill that was forming on the side-walk in front of the building.

Lavoie was the first person who ever told me about sociobiology, and Tullock is the first person I ever heard use the term bioeconomics.  The evolutionary metaphor was of course also used by Hayek in his writings, and it was also used by another of my professors -- Kenneth Boulding.  In fact, my first serious effort at journal publishing was a paper entitled "Evolution and Economics: Austrians as Institutionalists," Research in the History of Economic Thought & Methodology (6) 1989 [a paper I actually wrote in my first year of graduate school, and which served along with a paper by Warren Samuels as the centerpieces for a symposium in the journal].  During this time I tried to read everything I could get my hands on that related to evolution and economics from Veblen to Boulding to Hayek; from Alchian to Nelson and Winter, and Loasby, etc..  I also appreciated the criticisms of evolutionary explanations that one could find in Rothbard and Kirzner from a Misesian human actor perspective.  In fact, what I tried to do in that original paper was to reconcile Misesian methodological individualism with an emphasis on the evolution of institutions that one read in the works of Veblen to Boulding.

Fast forward 20 years, and the issue of evolution and economics is still hotly debated.  David Sloan Wilson has established a website that is dedicated to discussing the various versions of evolutionary economics.*  He actually has two wonderful installments on Lin Ostrom, one basically introducing her and her work, and the other discussing her recipe for success in institutions that govern the commons. 

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*See Todd Zywicki's review essay of Wilson and Sober's Unto Others.

Is Steve Levitt Becoming a Gypsy?

|Peter Boettke|

NO, not really, but in his Freakonomics column at the NYT he talks about Pete Leeson's new paper on gypsies.

Publishing Houses Are Needed to Put Books on the Shelves, What Happens When the Shelves Disappear?

|Peter Boettke|

Karl Marx once wrote about the impact of the advent of capitalism on feudalism that "All that was solid melts into the air".  The constant innovations in production, the uncertainty inherent in enterprise, and the changing of social relations tear apart the static conditions of traditional society.  It is important to realize that Marx saw this as not all bad, the dynamic change of capitalism brought material gains unimagined by previous generations.

That the methods of production are in a constant state of revolution cannot be denied in a vibrant market economy.  Such revolutionary forces are currently at work in the publishing industry.  The Wylie Agency announced a publishing venture with Amazon last week that would side-step the big publishing houses.

NPR this morning brought my attention to this discussion (in fact my title comes from a comment made by one of the reporters).  There also was a discussion of Concord Free Press, which gives away books with the caveat that you make a contribution to a charity of your choosing and pass the book along when you are done.  This seems like an awesome idea.  Why is it that the "left" always seem more entrepreneurial about philanthropic enterprise than the classical liberal or libertarian crowd?

The "Austroliberal" Response to the Great Depression

|Peter Boettke|

Robert Leonard's long anticipated, and brilliant work in intellectual history, Von Neuman, Morgenstern and the Creation of Game Theory (Cambridge, 2010) has a great discussion of the "Austroliberal" approach to the events of the Great Depression and the ideas of Mises, Hayek, Machlup, Haberler, and Morgenstern.  And he talks about how they brought this message not only to their peers in scientific works, but to the general public through newspaper columns and to the policy community through policy papers, etc.  In these different outlets they criticized the inflationary effects of credit expansion, opposed exchange rate controls, and favored price adjustment rather than protectionism.  The means of countering the depression was not more government, but price flexibility and the removal of market restrictions. (see p. 148ff)

Richard Ebeling has done a great service both in his edited volumes of Mises's papers published by Liberty Fund, and in his recent book Political Economy, Public Policy and Monetary Economics (Routledge, 2010) and he discusses this same issue (pp. 117ff), and even gives us the great name of Machlup's economic opinion columns "Two Minute Economics".

Re-reading these arguments one cannot help but think of the immediate application to the world today, and how the policies pursued so far have turned a market correction into an economy wide crisis, and continue to threaten our long term economic health of our civilization.  Mises, as quoted by Ebeling, summed up the situation for the economists as follows: "Occasionally, I entertained the hope that my writings would bear practical fruit and show the way for policy.  Constantly I have been looking for evidence of a change in ideology.  But I have never allowed myself to be deceived.  I have to come to realize that my theories explain the degeneration of a great civilization; they do not prevent it.  I set out to be a reformer, but only became the historian of decline."

What can we do to follow in Mises's footsteps but resist this conclusion?

Double Hat-Tip to Tyler Cowen

|Peter Boettke|

Over at Marginal Revolution, Tyler Cowen points to a new paper by Thomas Sargent on Free Banking, and to a recent discussion by Arnold Kling on recalculation.

First, with regard to Sargent's paper, am I being 'elitist' when I conclude that Larry, George and Steve would have a more productive conversation by concentrating on dealing with Sargent rather than Rothbard?

Second, am I being "silly" when I read Arnold and simply conclude that Kling is making Austrian arguments throughout and just not acknowledging them?

Cowen on Monetary Misperception

Steven Horwitz

Tyler Cowen raises this question over at Marginal Revolution:

I have never heard a market-oriented economist argue that a rise in the minimum wage boosts the demand for labor.  You might try this argument: "The government is certifying that these workers are worth this much.  The government is defining the market price.  Entrepreneurs will believe that price and hire workers in the expectation of finding an equivalent or even superior marginal product.  The government said that was the right price." 

No go.  Market-oriented economists instead claim that entrepreneurs "see through" to the real marginal products of these laborers.  The demand for labor, rather than rising, would fall and unemployment would result.

So what happens when the Fed "sets" short-term interest rates or influences other prices?  What is postulated by monetary misperceptions theories, including Austrian business cycle theory?  Entrepreneurs no longer see through to the fundamentals.  Instead, entrepreneurs are taken to believe this Fed-influenced rate is the correct price and they make their plans accordingly.

What is the difference between these two cases?

Several commenters at MR are on the right track I think, but let me take a shot at it with some different language.

The difference is that when central banks create excess supplies of money and push interest rates below their natural level, there really are resources available to borrowers. Yes, the interest rate is sending a false signal about underlying time preferences, but the loans banks are making at the lower rate really do represent resources to the borrower.  Of course those resources are not the result of real savings elsewhere and represent losses to the rest of society, but they are still a gain to the borrower.  Hence there's nothing to "see through" in the sense that there's no binding constraint on the borrower in the same way that the underlying productivity of the worker binds the employer who is considering hiring at the minimum wage.

In supply and demand terms, a minimum wage law drives a wedge between quantity supplied and demanded with a price floor.  Inflation pushes down the interest rate not by directly imposing a price but by shifting the supply of loanable funds curve outward through forced savings in a way that creates a credit market equilibrium interest rate (the market rate) that no longer reflects underlying time preferences (the natural rate).  The fact that we trade time in the form of money, rather than somehow directly, is what makes this divergence possible and what distinguishes it from the labor market.  Such a separation is not possible there and price controls will create shortage and surpluses.

As several commenters note:  the minimum wage is a price control, but an inflation-driven fall in the market rate is a quantity adjustment masquerading as a false price.  The low interest rate is the result of the underlying problem:  too much credit.  The credit, though, is "real" to the borrowers, even if it is an illusion with respect to voluntary savings.

During the boom, borrowers really do acquire resources and some will profit handsomely if they get out in time.  The fact that the errors embedded in the boom take time to manifest, along with the idea that inflation is ultimately a distortion on the quantity axis not the price axis, enables borrowers to not face the immediate constraint that they do in the minimum wage case.

Tyler seems to be forgetting that money is different.  Its "loose joint" properties mean things don't work quite the same way there.

Not More Capital, Rather the Right Capital

Steven Horwitz

Today's Freeman Online column explores the Austrian theory of capital and how it is often misunderstood by its critics.  I wrote this before the recent discussion in the comments on my housing and unemployment post, which is an amusing bit of synchronicity.  A snippet:

Austrians speak of the need for capital to be “complementary” to other capital in order for it to help create an integrated production plan.  A producer must have the “right” capital, that is, capital that “fits together.”  An important implication here is that “more” capital isn’t always better.  What firms need are pieces that fit, not just duplicates of what they already have.

I will also note that unlike one of my co-bloggers, I don't steal people's analogies - I actually cite them.