MIses, Equilibrium and the Problem of Misplaced Concreteness

|Peter Boettke|

In his 1922 book Socialism, Mises argued that in the stationary state of equilibrium there would be no problem of economic calculation.  This theme is repeated again in Human Action.  But assuming this establishes the theoretical possibility of economic calculation under socialism commits two fundamental errors: (1) misplaced concreteness, and (2) disregard for the social institutions that are required for economic calculation.

Hayek famously argued in "The Use of Knowledge in Society" that equilibrium models had misled economists in their analysis of socialism, and that they had confused the problem of imputation within planning, with the logical structure of a general competitive equilibrium state of affairs.  But Ludwig von Mises had actually made this argument in Socialism some 20+ years earlier.

As Mises said: "under stationary conditions there no longer exists a problem of economic calculation to solve.  The essential function of economic calculation has by hypothesis already been performed.  There is no need for an apparatus of calculation. ... the problem of economic calculation is of economic dynamics, it is no problem of economic statics." See 1922, 120-121.

In Human Action (1949) Mises argued that: "The use of imaginary constructions to which nothing corresponds in reality is an indispensable tool of thinking.  ... But one of the most important problems of science is to avoid the fallacies which ill-considered employment of such constructions can entail." (201-202).

We cannot do economics without equilibrium models as aids to thought, but we also have to guard against the ill-considered application of the equilibrium model.  Fritz Machlup referred to this as "misplaced concreteness".  Clearly, Lange, Lerner, Schumpeter, Samuelson, Bergson, et al, committed this error during the socialist calculation debate, and it was repeatedly made in textbooks for at least two generations.  But even after Lavoie's Rivalry and Central Planning (Cambridge, 1985) had set the record straight, the problem of misplaced concreteness would creep back into the mindset of economists who argued that socialist economic calculation was possible just impractical.  And this misplaced concreteness results in a failure to adequately account for the institutional context within which economic forces are at work.

Read Mises carefully --- not only did he get there first, but his analysis on these issues ran far ahead of those in his lifetime, and continues to outdistance that of friend and foe to this day.

Comments

[james mcclure]

Great post; thanks Pete!

[Troy Camplin]

Indeed, what would be required for equilibrium to exist? That there be no more innovation. That value rankings be stable (and, thus, made "objective"). That population itself be at equilibrium (in growth and location). That worldwide climate, weather, etc. be stable and predictable. I suppose one could go on and on listing all of the absurd assumptions necessary to believe in equilibrium. The smallest change, and the system is thrown out of equilibrium. Now, if one is in fact using equilibrium as a way of "holding everything in place" as you change one variable, to see what happens, then it may make sense to use it. But with the existence of computer models that can model far from equilibrium states -- which is the state all real free market economies are in -- I have to begin to wonder at the relevance of their continued use.

[Gene Callahan]

'Fritz Machlup referred to this as "misplaced concreteness".'

Some interesting background: This phrase apparently originated in the philosophy of A.N. Whitehead. Eric Voegelin picked it up from there, and used it to great effect in his work on the philosophy of science. As Voegelin and Machlup knew each other well from the Geistkreis and continued to correspond over the years after they left Vienna, it seems likely that this is the line of transmission of the phrase and the idea behind it.

[Roger Koppl]

The point is somehow simple, but hard to grasp. The "calculation has by hypothesis already been performed." In mind, this point goes to Hayek's distinction between what we can know about systems vs. what we can know within systems. It goes to whether you put yourself in the model. We should put ourselves in the model both epistemically and morally, but it is hard to do so consistently.

[david stinson]

Interesting. Thanks so much!

Misplaced concreteness = thinking one knows something when one really doesn't?

[Rob R.]

Mises (and later Rothbard) started using the term "evenly rotating economy" to define this imaginary static equilibrium construct. I believe this term makes it clearer that this is just a model for economists and not an end-state that an economy is actually tending towards.

[Mario Rizzo]

Assume the problem with the theory of perfect competition is that it was mistaken for reality ("misplaced concrete" though another perhaps better term is "conceptual realism")? But suppose, instead, the creators/users of the model had said, as Lucas says of rational expectations, that we are only building a "toy economy." We shock the system and see what the toy does. What would have been different?

Presumably, they would have not used the model for "normative" purposes, that is, to reconstruct the economy according to its specifications. They would have realized that the model was an instrument for predicting/analyzing a market economy and nothing more.

The real enemy here seems to be the normative use of simple models. Perhaps this point applies also to those who would use "neoclassical rationality" as a normative criterion -- a la behavioral economics.

Conceptual realism and normativity: very bad together.

[Greg Ransom]

The key innovation from HAYEK is to achieve an ability to imagine prior ignorance -- to imagine what questions equilibrium constructs where inspired to answer, and what problem raising patterns the construct allowed us to see.

He goes back talks about the pattern in which prices approach costs, the quest for just prices and the critique of the quest, the quest for perfect rational efficiency of plan coordination and the road blocks to that sort of perfect social coordination.

All of these things allow Hayek to "screen out" and isolate the various ROLES of the equilibrium construct a successful casting of the explanatory strategy of economics.

E.g. the equilibrium construct helps us to perceive the large-scale social coordination achieved by the global market WITHOUT A TOP DOWN DESIGNER.

This problem is directly equivalent to the perception of the problem of order achieved by Darwin without a top-down designer of that order -- order without a designer raises a problem which demands some sort of causal mechanism explaining it.

Hayek also uses the equilibrium construct to "screen out" and isolate the causal elements that can provide that causal explanatory elements -- elements which are casual, empirical and contingent because the stand outside of the pure logic or math making up the equilibrium construct.

And the most important causal, empirical and contingent causal element standing outside of the givens of logical and math constructs in open-ended LEARNING and changes in understanding and judgment of conditions and alternative possibilities, in the context of changing local conditions and relative prices.

[Contingent because there are always the conceivable but not plausible rivals of "pure change" or "God did it" or "Martians did it" or "we are internally programmed in advance to do it", etc.]

Well, enough for now ...

[David Gordon]

Lionel Robbins has a section on "The Fallacy of Misplaced Concreteness" in An Essay on the Nature and Significance of Economic Science.

[austrian away]

I know that this argument is somewhat unfamiliar, but consider Mises' larger and principal theoretical aim: to illustrate the axiom of action, i.e. purposive behavior. Mises showed that purposeful human action is possible only outside conditions of equilibrium; indeed, in equilibrium humans (economic actors) are nothing more than vegetables because there is no longer any purpose in human action (all felt uneasiness has been removed). So, I would argue that Mises actually goes further than Hayek and demonstrates, in addition to the unreality of equilibrium, the fundamental *undesirability* of equilibrium. Equilibrium destroys the purpose men have for acting. Therefore, Mises' argument is fundamentally normative, while Hayek was merely making a descriptive claim.

[Rafe Champion]

Gene, Voegelin was a member of the Mises seminar, not that he learned a lot of economics! Or classical liberalism.

http://mises.org/misesreview_detail.aspx?control=166

[Rafe Champion]

Thanks for the mention of the Geistkreis, you learn something new every day! Remarkable overlap of membership with the Mises seminar.
http://en.wikipedia.org/wiki/The_Geistkreis

[Roger Koppl]

Machlup told us that in the Geistkreis you would speak on a topic outside your specialism.

[Greg Ransom]

In 1929 Hayek makes the point that static and partial equilibrium constructs falsely misleads economists into thinking that these toys made out of "given" elements effectively capture the guide function of relative price changes --but they usually a loaded with "givens" and relations between "givens" that don't exist in the real world.

See Hayek's 1929 _Monetary Theory and the Trade Cycle_ for a discussion.

I'd wager there are few economists who don't make the mistake flagged by Hayek, in some form or other.

[Xerographica]

Planners fail because they only have access to a microscopic percentage of the information cumulatively held by individuals. So they'll never be able to allocate resources as efficiently as markets can.

But what happens to the scope of government when taxpayers, rather than planners, can directly allocate their individual taxes among the various government organizations at anytime throughout the year? In other words...what happens when donations to government organizations are 100% tax deductible...aka pragmatarianism?

If the government operated as efficiently as the private sector...how much could the scope of government broaden?

Government organizations wouldn't have to operate at a profit so they'd have an advantage over businesses but not over non-profit organizations. So it wouldn't be too surprising if we ended up with an efficient public healthcare system.

But if the scope of government expanded too much...and the tax rate increased proportionately...then the incentive to produce would decrease proportionately as well.

I'm having trouble visualizing this. If 75% of my income is taxed...but I "spend" my taxes on efficiently produced public goods that I value...then...75% of the modes of production are owned by the government...and chances are good that I work for a government organization...that either operates efficiently or risks losing taxpayer funding...so I would still have a decent amount of incentive to produce...

I wonder how fluid the division of labor between the private and public sectors would be.