Coordination Problem

The Calculation Debate in the Media Down Under

Steven Horwitz

A nice article on the socialist calculation debate by Australian Chris Berg.  I would quibble with a few details, especially the "theoretically" vs. "practically" impossible splitting of Mises and Hayek, but it's always good to see this debate get some press.  As Berg notes, "We are often told the debate between Hayek and Keynes is the great question in political economy. But whether governments can spend their way out of recessions is just one element of the larger debate about the coordinating power of markets."

Best Sentence Read Today on Why Ordinary Economics Is Necessary Even in Extraordinary Times

|Peter Boettke|

In Henry Hazlitt's Economics in One Lesson he writes: "Emotional economics have given birth to theories that calm examination cannot justify."

 

 

Costs, Benefits, and the Analysis of Predation in Political Economy

|Peter Boettke|

At a recent discussion of Ed Stringham's Anarchy, State and Public Choice with graduate students led by Nick Snow, the question was put to Pete Leeson and myself as to why in the early 1970s the public choice analysis of anarchism did not talk more about the positive political economy of self-governance.  The response --- that sort of work didn't exist at the time.  The work of Anderson and Hill, the work of Landa and Grief, the work of Ellickson and Benson -- all would appear in print after those discussions.  Instead, what existed was primarily normative analysis of a pure individualist society.  Of course, there was Friedman's Machinery and a few empirical studies of ancient societies that operated without a centralized state.  But there was not an accumulation on evidence that could disasuade a political economist from the necessity of the state to provide the framework of law and order that would permit the flourishing of economic activity and the creation of wealth.

But then the conversation moved to a more substantive discussion.  The weighing of the costs and benefits of mechanisms to curb private predation.  It is because of the threat of private predation that the state is called upon to curb the proclivities of mankind to cheat, steal, and act in general in an opportunistic manner with guile.  By creating a "geographic monopoly on coercision", however, the opportunity for public predation becomes a reality.  Public choice economists certainly understood the problems of public predation.  So what are the tacit presuppositions in their political economy?

First, they must believe that the costs of private predation are prohibitive to economic activity (e.g., the Hobbesian jungle). Second, they underestimate the benefits of mechanisms of self-governance to permit social cooperation under the division of labor to exist even outside the realm of a formal framework of law and order (e.g., the governing of the commons through community based rules).  Third, they overstate the benefits of constitutions to curb the predatory capacity of public actors (e.g., freedom in constitutional contract). And fourth, they understate the costs of public predation (e.g., the churning state).

If you recalculate given this new cost-benefit configuration, then public choice analysis of anarchism would shift in a different direction than the analysis contained in those early 1970s work.  You don't need normative analysis about rights, instead all you need is positive economic and political economy analysis.

What do you think?

The Message of Adam Smith and the Paradox of Being Governed

|Peter Boettke|

James M. Buchanan wrote the following in The Limits of Liberty (1975):

Dissatisfaction with the institutional structure, and most notably with the observed performance of government at all levels, remains widespread, but there is no effective means through which this shared attitude can be translated into positive results. Reactions against the excesses of bureaucracy provide the source for bureaucratic expansion. Frustrations with the status quo are noted by politicians and by actual and would-be self-serving “public servants.” Proposals come forward for resolving “social problems,” almost on an assembly-line schedule, proposals that necessarily require expansion rather than contraction in elements of structure that generate the evils. The infinite regress involved in what has been called the “public utility attitude” goes on. If something is wrong, have government regulate it. If the regulators fail, regulate them, and so on down the line. In part this is the inevitable result of public failure to understand the simple principle of laissez-faire, the principle that results which emerge from the interactions of persons left alone may be, and often are, superior to those results that emerge from overt political interference. There has been a loss of wisdom in this respect, a loss from eighteenth-century levels, and the message of Adam Smith requires reiteration with each generation. Modern economics must stand condemned in its failure to accomplish this simple task, the performance of which is, at base, the discipline’s primary reason for claiming public support.

There is more to it than this, however, and some miraculous rediscovery of eighteenth-century political wisdom would scarcely get us out of the woods. The surface paradox between observed frustrations with governmental processes and the resulting expansion in these same processes is itself based on a deeper and more complex phenomenon, one that itself involves a more permanent paradox.

What has changed if anything with regard to (a) this general paradox, and (b) the condemnation of modern economics?

 

Poverty in the Less Developed World Up Close and Personal

|Peter Boettke|

I have often argued that comparative systems analysis will advance only when the birds-eye perspective on "growth" is replaced with a more ground-level analysis of the actual operation of political/legal, cultural/social, and economics/financial mechanisms.  What I have termed "the political economy of everyday life" and it was the academic vision behind various projects at the Mercatus Center over the past decade with various degrees of success.

But, there is no denying that several economists are delving deep into the ground-level analysis of economic processes throughout the developing world.  Duflo and Easterly in their respective manner are not content to focus on macroeconomic indicators, but instead argued for a more microeconomic understanding.

Tim Besley reviews 3 recent books that try to uncover the economic conditions and decision making of the poor throughout the less developed world.  It is self-recommending, but I'd like to point to Besley's effort to put the political back into the political economy of everyday life whereas the works he is studying are almost devoid of any analysis of how the political/legal environment impacts the choices of the individuals being studied.

 

HT: David Skarbek

 

John Papola on Keynesian Economics at Forbes

Steven Horwitz

John Papola brings together a lot of arguments and evidence about Keynesian economic policy and wraps it all up with a Christmas bow at Forbes today.  This will certainly rekindle recent debates here.

Certain About Regime Uncertainty

|Peter Boettke|

Don Boudreaux at Cato Unbound.

What's an $800 Billion Stimulus Worth?

|Peter Boettke|

Burton Abrams argues that it is worth negative $475 billion.

 

HT: J. Robert Subrick

I've Said It Before, and I Will Say It Again -- Everyone Please Read Buchanan and Wagner To Clarify What Is Going On

|Peter Boettke|

Robert Samuelson, writing in the Washington Post, argues that the Keynesian remedy of government spending might not provide the panacea for our current problems.  Why?  Well, because we are starting from a world of large public debt.

I would interpret this argument slightly different than the conventional wisdom --- Keynesianism is not a panacea because Keynesianism has dominated public policy making for half a century and has left us in such a state of public debt.  Keynesianism broke the old time fiscal religion of balanced budgets and fiscal responsibility, and changed not only attitudes of economists and policy makers, but also eroded whatever institutional constraints existed on public spending that had existed.  Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems.  Keynesianism provided an illusion of short term prosperity, but the reality of long term stagnation.  Of course, the revealing of the illusion can be put off, as I have pointed out before, if there is the discovery of new opportunities for gains from trade, and/or gains from innovation.  

But the governmental habit of spending is still there and the bill has to be paid as some point.  Keynesianism is a disease on the body politic because it caters to the natural propensity of politicians to focus on short run, and to concentrate benefits and disperse costs.

Nobody explained these problems better than James M. Buchanan.  Read his Public Principles of Public Debt, followed by his work with Richard Wagner, Democracy in Deficit.  Both of these exercises should help you understand our current situation, and I cannot imagine you spending your winter break in a more fruitful exercise given the severity of the problem facing the western democratic states (see The Economist March 17th, 2011 issue if you are still complacent, or the work by Vito Tanzi, Government versus the Market: The Changing Economic Role of the State).

 

HT: Don Boudreaux

Warren Samuels on George Stigler as a Political Economist

|Peter Boettke|

In his rememberance of Stigler after his passing, Warren Samuels characterized Stigler's economics as follows:

George was a neoclassicist, a certain type of neoclassicist; if he was more than a neoclassicist he was also an Austrian economist; his version of neoclassicism was an interesting blend of Marshallian and Austrian economics. I am more eclectic than George, and certainly an institutionalist of the old school. In any event, I think he appreciated not only that I took the Chicago School seriously but that I lauded the old, Frank Knight-Henry Simons version of the School relative to his version.

In reading through Stigler's work, from his dissertation to his work on industrial organzation, political economy, and even his Memoirs of an Unregulated Economist one is struck by Stigler's wit, logical mind, and his ability with the art of criticism.  He is an equilibrium always theorist, but he often tells a background story of dynamic adjustment to changing circumstances, and error prone actors slouching their way toward that equilibrium.

Samuels saw this, I see this, but it often gets lost in discussions of his ideas.  Why would that be the case?  My working hypothesis is derived from Richard Wagner and relates to the issue of foreground and background in analysis.  Within Austrian economics (the work of Mises, Hayek, Rothbard and Kirzner), the processes of adjustment to change is in the foreground, but lurking in the background is the equilibrium state of affairs where the induced variables of the market are perfectl aligned with the underlying variables of tastes, technology and resource availability.  In the Chicago style price theory of Stigler and Becker, it is the opposite --- the equilibrium position is in the foreground, and lurking in the background is a story about entrepreneurial alertness to opportunities for mutually beneficial exchange, and the ceaseless processes of adjustment that are the compositive outcome of innumerable actions of diverse individuals within an economy.

This is why the work of James Buchanan on market theory and the price system, and not just his contributions to political economy and social philosophy, should be required reading for all young people interested in advancing the theory of the market process.  His work is in a significant way the perfect blend of Austrian economics and Chicago economics --- and provides the foundation for his unique contribution in developing Virginia Political Economy.

Discuss.