Coordination Problem

Kirzner's Entrepreneur as a Misesian Solution to Hayekian Problem

Steven Horwitz

Given the debate going on in this thread, I thought I would post the section of my contribution to the Spring 2010 Journal of Private Enterprise symposium on Dan Klein and Jason Briggeman's critique of Kirzner here as it speaks directly to the issues that have been raised about Mises and Hayek.  UPDATE:  the issue can be found here.

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II.  Kirzner’s Entrepreneur as the Misesian Solution to a Hayekian Problem

One element of Klein and Briggeman's argument is to try to “dehomogenize” Mises and Hayek, though around issues different from those raised by Salerno (1993) and others.  K-B are troubled by what they see as Mises’s categorical claims about markets and his aprioristic methodology and its “apodictic certainty.”  They argue that Kirzner’s work is in this Misesian tradition and one way of reading their paper is that it is a plea to Kirzner to become more “Hayekian” so that all the good things in Kirzner’s work would be more persuasive to more people.  Kirzner responds, rightly in my view, that this is a fundamental misunderstanding of his work in that Kirzner has never been committed to Mises’s epistemology and that Kirzner has had a much more Hayekian vision of economics and the economy than K-B give him credit for.  Saying that an author has a better understanding of his own work than do his critics seems a rather obvious point, but it is worth making anyway:  I think Kirzner is correct here.

Perhaps one way to see the point is to offer yet another way of summarizing Kirzner’s work on competition and entrepreneurship.  What the entrepreneur does, for Kirzner, is to provide a Misesian solution to a Hayekian problem.  The Hayekian problem is the one Hayek raises in “Economics and Knowledge” (1937, pp. 50-51).  There Hayek says:

The problem we pretend to solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs, etc.,  and which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all of those individuals.  And experience shows us that something of this sort does happen, since the empirical observation that prices do tend to correspond to costs was the beginning of our science.

Hayek goes on to say that traditional equilibrium theory assumes away the problem by assuming that everyone knows everything.  He also rejects the idea that there could be that “somebody” who sits god-like over the economy directing the process.  It is that metaphor that K-B want to invoke for the Hayekian understanding of concatenate coordination.

However, I think they overlook the central point of this passage, and of that whole essay frankly.  It is true that Hayek talks about the overall picture of the economic system, but here he is focused on the process by which prices correspond to costs, which is a very “micro” level consideration.  The puzzle he poses is how that ever comes to be, the answer to which will require focusing on the individual actions of millions of people in millions of markets.  Yes, the overall pattern, what K-B term “concatenate coordination” is the context for Hayek, but the economic problem is the coordination among producers and consumers that drives prices to costs.  What Hayek argues needs further explanation is how the learning necessary to bring about that equilibrium, defined as the circumstance in which all plans are capable of being fulfilled because everyone knows enough about everyone else and the state of the world to enable them to do so, ever comes about.  How, in the real world of the market, does the knowledge necessary for prices to be driven to costs get communicated and spread to those who need it?  That, for Hayek, is the problem of economic coordination. 

Kirzner’s work offers a solution to that problem in the form of the Misesian entrepreneur.  If knowledge is imperfect and individuals are stuck simply optimizing based on that knowledge, then no learning can take place and coordination can never be achieved.  What can unstick us from this situation?  The Misesian entrepreneur can by seeing what has been previously overlooked and shifting the “given” means-ends framework, creating the knowledge necessary for people to make decisions that better align with the facts of the world and the expectations of other actors.  Entrepreneurship, for Kirzner, is what “brings about the state of affairs” that expectations and actions are coordinated and that prices tend toward costs.  Kirzner makes no grander claim for entrepreneurship than that.  The entrepreneur does not induce the “smile” of aesthetic joy on the face of our god-like coordinator, nor does the entrepreneur assure with certainty a world that classical liberals would think is desirable.  The entrepreneur simply spreads knowledge that leads people to make choices that they themselves would view as better, hence the “dovetail coordination” that Kirzner discusses.

K-B are criticizing Kirzner for overlooking questions that were never within the realm he was operating.  The debate over The Communist Manifesto is a good example.  Kirzner, qua economist, is only interested in the question of whether the production of that book allocated resources in a way such that the price obtained for the book better reflected the value of those resources to the buyers.  Speaking as an economist, the overwhelming market success of the book strongly indicates that it did, thus producing it enhanced economic coordination.  K-B are free to argue that from some broader social or political-economic perspective, perhaps that of our god-like smiler, the world would have been a better place had the book never been produced.  That may well be true, but it is simply irrelevant to what Kirzner means by coordination and the coordinating role of the entrepreneur.  As Kirzner points out in his reply, K-B seem to be castigating him for even drawing such lines in the first place.  Kirzner, rightly, does not deny that economics plays an important role in service of the classical liberal vision, but he (2010, p. 79) does maintain the “simple truth taught to beginning students of economics” that not everything that markets do efficiently is something that produces widespread social benefits.

 

Hayek at His Most Misesian

Steven Horwitz

Pete has often said that the best reading of Mises is a Hayekian one, and the best reading of Hayek is a Misesian one.  I completely agree, and I've spent energy over the years trying to convince people of the truth of the first half of that aphorism, mostly because it seems that self-proclaimed "Misesians" are more hostile to Hayek than Austrians more favorable to Hayek are to Mises.  But today I offer some evidence for the second half of the aphorism.

On Wednesday, my Austrian course covered Hayek's "The Facts of the Social Sciences" essay.  I think this is Hayek at his most Misesian, and it's worth noting that it was written 1942, well after the "Economics and Knowledge" essay that some argue was Hayek's split from Mises.  Consider the following passages from that essay and see if you think they aren't very Misesian.

Yet there seems to me to be no possible doubt that this [interpretation of the intentions of others] is exactly what we are doing, in ordinary life as well as in the social sciences, when we talk about other people's intelligible action, but that it is the only way in which we can ever "understand" what other people do;  and that, therefore, we must rely on this sort of reasoning whenever we discuss what we all know as specifically human or intelligible activities (62).

If that isn't Mises on "thymology," I don't know what is.  Compare this passage by Mises in Human Action (58):

Understanding is not a privilege of the historians.  It is everybody's business.  In observing the conditions of his environment everybody is a historian.  Everybody uses understanding in dealing with the uncertainty of future events to which he must adjust his own actions.

And is the following Mises or Hayek?'

The claim to which I have referred follows directly from this character of the first part of our task as a branch of applied logic.  But it sounds startling enough at first.  It is that we can derive from the knowledge of our own mind in an "a priori" or "deductive" or "analytic" fashion, an (at least in principle) exhaustive classification of all the possible forms of intelligible behavior.

It's Hayek from the same essay (pp. 67-8). Consider this too:

There can be no doubt that we all constantly act on the assumption that we can in this way interpret other people's actions on the analogy of our own mind and that in the great majority of instances this procedure works (64).

Compare to Mises, again from Human Action (p. 24)

But it is beyond doubt that the principle according to which an Ego deals with every human being as if the other were a thinking and acting being like himself has evidenced its usefulness both in mundane life and scientific research.  It cannot be denied that it works.

The footnote on the subsequent similar paragraph in Mises is to Alfred Schutz's The Phenomenology of the Social World and rightly so.

This essay, as much as any that Hayek wrote, shows the high degree of consistency between he and Mises when it came to the task of the social sciences and the appropriate methods for engaging in social scientific research. 

 

Advanced Austrian Summer Seminar at FEE

|Peter Boettke|

The Foundation for Economic Education will host again the summer seminar on Advanced Austrian Economics.  This seminar has been in continuous operation since the 1970s due to the efforts of Israel Kirzner.  Professor Kirzner will be presenting 2 lectures again this summer, and that alone should be reason for graduate students interested in learning more about Austrian economics to apply.  The other faculty include: Chris Coyne, Roger Garrison, Steve Horwitz, Peter Leeson, Mario Rizzo and Larry White.

Center for History of Political Economy -- Summer Institute 2011

|Peter Boettke|

As I mentioned before, the Institute for New Thinking in Economics has awarded a significant grant to the Center for History of Political Economy at Duke.  This is a very significant and positive development as far as I am concerned.  And one of the main areas of investment for CHOPE is summer programs to help PhD students develop an appreciation in the subfield, and for advanced students and junior faculty to improve their understanding on how to teach the subject.

I want to encourage all the students who read this blog to think seriously about applying for the Summer Institute programs.  The main faculty of Caldwell, Medema, and Hands are among the best contemporary practitioners of the craft (they also happen to be GREAT people as well).

I cannot overstate how enthusiastic I am about the programs that Bruce Caldwell is developing at CHOPE and its potential for helping nudge the economics discipline a bit in a more scholarly direction.  I got hooked on economics through a dynamic professor (Hans Sennholz), and being convinced of his arguments and those of the authors he relied on --- namely, Hazlitt, Mises, and especially early on Friedman.  But it was a year long sequence in history of thought during my second year at Grove City College that grabbed me in terms of scholarship and the idea that I might want to work in the world of ideas. Reading Adam Smith, David Ricardo, and especially J. B. Say started me on an amazing intellectual adventure that hasn't stopped yet.  I still find Ricardo tough to slog through, but Smith and Say are pure joys to read.  And, of course, Mill can be frustrating while quotable; Marshall is enjoyable though disappointing, and Wicksteed emerges as the best of the post-Ricardo Brits.  By the time I was heading to graduate school, I was addicted to looking for Augustus Kelley Reprints to pick up from the extra money earned stringing tennis racquets or giving an extra-lesson.  Note, these are independent of my true passion in economics which was the Austrian tradition of Menger, Bohm-Bawerk, Wieser, Mises, Hayek, etc.  It would be interesting to do an inventory of my library and see how many are Kelley reprints, that I picked up close to 30 years ago on a college student and then tennis teaching pro salary.  Students today get many of these resources for free online, but I am not sure they cherish them since they are acquired for free rather than acquired with earned money as a matter of choice.  Something about holding the physical copy and understanding where it came from and what it meant lends a respect to the product, at least in my mind.

Throughout my now 20+ teaching career, I have regularly taught history of thought courses both at the undergraduate and graduate level.  And I have been an active participate in the History of Economics Society off and on throughout my career.  The field is fascinating for a variety of reasons, but mainly that understanding how the discipline evolved through intellectual debate and cultural and ideological shifts is an important input into gaining perspective.  Even if you don't plan on teaching the history of economic thought, it will pay to simply go and be exposed to the field by Caldwell, Medema, and Hands.

Why I do, and Why I find it frustrating

|Peter Boettke|

Bryan Caplan has a very straightforward explanation as to why so many faculty at GMU publish.  The reasons Bryan gives for blogging are basically the same that any of us at Coordination Problem would give.

But Bryan also makes an important point --- those of us who blog at GMU, also pursue a very conventional career of academic publishing in the journals.  This fact is often ignored by critics of our program at GMU.  A recent comment by a PhD student at Stanford attempting to answer the question as to why so many faculty at GMU blog, argued that it was because of the low academic standards at GMU expected of faculty.  This sort of statement can only be made if the most basic form of evidence is ignored (that of a quick viewing of the CVs of those blogging).  Some of those who blog do specialize in being public intellectuals, but the vast majority are active in publishing research, editing scientific journals, and blogging.

On the comments to Bryan's post, however, there is the source of my frustration with blogging.  The commentator congratulates Bryan on blogging and then says that he thinks blogging is more influential than academic work, and then admits he doesn't read much academic work.  The question is influential to who?

Blogging doesn't cultivate the conversation that academic publication does, and many in the blogosphere don't really want to see that translation of academic work to be meaningful for the general public.

In my view, we economists have a responsibility as a scientific community to communicate our results to 4 audiences: scientific peers, students, policy-makers, and general public.  Obviously, not all economists can communicate equally across all 4 audiences and so a specialization tends to emerge.  But the very best economists do better than others in communicating across the audiences, and the very best remember that our #1 priority as economic scientists is the communication with our peers in the scientific community.  If we stop doing that, then we run the risk of failing in our job.

So my frustration with blogging is that sometimes it leads individuals to forget the ultimate responsibility of the economist --- which is to persuade our professional peers.  More people read blogs than a host of academic journals.  But you also have to ask who is doing the reading --- the answer matters depending on what audience you are trying to reach with your work.  If it is your peers in the scientific community, then I would argue that blogs are a best complementary, and never can be seen as a substitute for journal publication.

So why do so many GMU economists blog?  What Bryan says about intellectual background and the way we approach the discipline, but also look at what Bryan says about publication in academic journals, books, and a variety of outlets.  The real question is not why GMU economists blog, it is why do GMU economists publish in a variety of outlets as much as they do.  One explanation that might fit with Bryan's is the article by Richard McKenzie on what made the Center for Study of Public Choice so special an environment at VPI. The spirit that McKenzie expresses in that article permeates the intellectual environment of GMU from the 1980s to today.

 

State Department accountable through glossy photos

Chris Coyne

That is the title of my guest post at AidWatch.  In it, I discuss the Office of the Coordinator for Reconstruction and Stabilization's 2010 Year in Review report.

Congratulations to Steve Horwitz -- 2011 Hayek Prize Winner

|Peter Boettke|

The Fund for the Study of Spontaneous Orders formally announced today that Professor Steve Horwitz had been awarded the Hayek Prize.

Very much deserved Steve.  Keep up the great work.

Strangers Nowhere in the World

|Peter Boettke|

That phrase comes from Kant, but it is also the title of an excellent book that I am reading at the moment by Margaret Jacob (U of Penn Press, 2006).  Jacob's book is about the rise of cosmopolitanism in Early Modern Europe.  It is, in short, about the rise of European Liberalism.

This last point I want to stress because too often in the popular media the teachings of the Austrian school are identified with conservative politics when in fact the great Austrian economists, such as Menger, Mises and Hayek were in fact European Liberals.  Radical liberals that opposed intolerance, militarism, and arbitrary state authority.  Yes they were economic liberals, but their views on economic policy were part of a larger world view that followed consistently from an embracing of the cosmopolitanism that Jacob writes about.

For anyone who doubts this, read Mises's Liberalism.  As he says on p. 56, "Liberalism demands toleration as a matter of principle, not from opportunism."  Only toleration, he continues, "can create and preserve the condition of social peace without which humanity must relapse into barbarism and penury of centuries long past."

On colonialism, Mises wrote: "No chapter of history is steeped further in blood than the history of colonialism.  Blood was shed uselessly and senselessly.  Flourishing lands were laid waste; whole peoples destroyed and exterminated.  All this can in no way be extenuated or justified." (see p. 125)

Every sort of national chauvinism is to be rejected, and instead the free mobility of people and goods is to be pursued.  We are to be citizens of the world.  Cosmopolitanism, toleration, trade are the hallmarks of liberalism.  That is what Ludwig von Mises stood for in his politics. 

 

The Economics of Valentine's Day

Chris Coyne

 

Pursuing Perfection, Finding Excellence

|Peter Boettke|

That is the message that Vince Lombardi told the Packer players who previously went 1-10 as he took over the head coaching job in Green Bay.

Lombardi's coaching career reflects that motto --- we will pursue perfection, in full knowledge that perfection is unattainable, but in pursuing perfection in everything we do, we will find excellence.  And, as history shows excellence he and those players did find.

It is an amazing story of how Lombardi found that excellence at the High School (football and basketball), College (Army), and then NFL (Giants, Packers and Redskins).  The famous phrase of Lombardi that 'winning isn't everything, it is the only thing', takes on a new meaning when you learn that by winning he means this focus on details and fundamentals, and the pursuit of perfection.  Lombardi's message is almost identical to that of the other iconic coach -- John Wooden.

I highly recommend the HBO documentary on Lombardi to all teachers and those who have a leadership role in their jobs.  The move from good to great in individual and organizational pursuits, in my opinion, is tied up with these lessons from Lombardi.