McCloskey's Transition to Austrian Economics

|Peter Boettke|

Back in the mid 1990s, I attended Deirdre McCloskey's first talk at the AEA meetings after her coming out publicly as a transgender person.  She had not yet had her subsequent medical procedures, let alone written her telling memoir Crossings.   McCloskey stood before a packed room of 500, dressed in a stylish dress and wig, and proudly announced "I am an economist in transition." [pause] "I am transitioning from a Chicago economist to an Austrian economist."  Whatever awkwardness or tension that existed in the room was dispelled with that quip, and McCloskey proceeded to give a wonderful talk on the importance of rhetoric within the economy, pursuing a theme she had developed with Arjo Klamer in  "One Quarter of GDP is Persuasion". 

In a recent paper published in Vol. 3 of the Annual Proceedings of the Wealth and Well-Being of Nations, McCloskey examines the role of entrepreneurship, discovery, and rhetoric in understanding the wealth and poverty of nations. The 2010 Upton Forum at Beloit College was focused on the work of Israel M. Kirzner, and McCloskey's paper is no different.  Download A Kirznerian Economic History of the Modern World.  In my opinion, McCloskey's paper is required reading for all who want to understand why some nations grow rich while others languish in poverty.  It is a continuation of the argument presented in her Bourgeois Dignity: Why Economics Cannot Explain the Modern World.  McCloskey summarizes her argument nicely here, and she pursues the entrepreneurial element in the story in her reflections on Kirzner and Austrian economics.  I have attempted to address her thesis in my essay "A Behavioral Approach to the Political and Economic Inquiry Into the Nature and Causes of the Wealth of Nations."

Many elements in McCloskey's argument remind me of the nuanced argument made by Tyler Cowen in a very underappreciated essay of his -- "Entrepreneurship, Austrian Economics, and the Quarrel Between Philosophy and Poetry."

 

Comments

[Becky Hargrove]

"A Kirznerian Economic History of The Modern World" was an incredible essay which I spent the whole morning with, taking notes plus a page of references to look for. In that many women use language a bit differently than men, the essay is also helpful for those like me who are not always sure how to take part in the existing dialogues of the present. Another plus was the discussion about Hernando de Soto, who greatly influenced me with his book, The Mystery of Capital. I had wondered for some years the current direction of his work.

[Rafe Champion]

Peter Klein found a paper from the 1990s by David Harper on the application of Popperian learning theory to the function of the entrepreneur.

http://labsel.pesarosviluppo.it/Modules/ContentManagment/Uploaded/CMItemAttachments/How%20Entrepreneurs%20learn.pdf

This demonstrates why people with a a good Popperian background (the Popper of conjectural knowledge, not the grotesque caricature that is lampooned under the name of falsificationism) should instantly appreciate the Austrian contribution to good economics. That is why economics will struggle to escape from formalism until Popper is taught properly in the philosophy schools.

[Rafe Champion]

There are books by David Harper as well. But it seems that the injection of Popperism that he administered in the 1990s did not take root.

The late Gerard Radnitzky was good on "the European miracle" (currently in deep trouble, as he noted two decades ago), although he has packed too much stuff into this paper.

http://www.the-rathouse.com/radscience.html

"It is an open question whether the relatively free society, which can support autonomous sciences and is supported by it, which grew out of the ‘European Miracle’ and which constitutes a unique and fragile exception in human history, will be an episode or an enduring achievement. Much will depend on whether it will be possible to educate the educable sections of the population and above all the future decision makers so that they understand the functioning of modern society and economy. This is a cognitive and also an educational task. The comparative institutions approach outlines the consequences of various institutional arrangements: the ways institutions work out for people living under them, what opportunities various systems offer, what sort of life is possible under them. It will then be up to the individuals to choose between giving individual freedom priority in the social and public sphere or to accept some form of slavery under a totalitarian system, including unlimited democracy in the sense of the dictatorship of the majority as a special case of totalitarianism."

[Greg Ransom]

Persuasion and entrepreneurial alertness were united in the person of Steve Jobs, who used analogies and language to re-imagine the possible -- and used them to inspire people to believe in it.

Enormous value and remarkable business communities were created n the process.

McCloskey & Kirzner go well together.

[Greg Ransom]

Send McCloskey the memo:

Steve Jobs' wealth creating innovation - powered by & persuation - was made possible by billion in capital, used ito bankroll all sorts of ever changing capital goods and inputs to production,.

Discovery and alertness _using_ ever changing capital goods and inputs to production in changing combination is at the heart of the story.

E.g. Hayekian / Bohm-Bawerkian capital goods theory is at the heart of the Austrian alertness & discovery & persuasion story - and it's a rival to the Solow / "K" story of "capital.

[Richard Schulman]

On Peter Boettke's recommendation, both my wife and I read Deirdre McCloskey's _Bourgeois Dignity: Why Economics Cannot Explain the Modern World_. We both started out sympathetic to the author's thesis. We both ended up being appalled by the lack of rigor the book brings to bear in supporting its thesis. Rhetoric and wide reading are no substitutes for tight historical argument, which this lengthy, self-indulgent tome lacks.

[von Pepe]

Perhaps inappropriate, but I will take this mention of Kirzner to paste a post by Prof. Manne on the scholar Kirzner that was posted here at CP after people probably stopped reading the post. It also touches on Alchian and Mises.

"I am delighted to have come across this fascinating discussion and dismayed to learn how much I failed to include in my article on compensation for entrepreneurs which will appear in the QJAE in April. A sequel may be indicated. In any event I do have some, I hope, interesting minutiae to add to the thread.

When I was writing my book on insider trading in 1966 Knight's discussion of the entrepreneur was about the only thing (other than Schumpeter) I could find which I thought allowed me to integrate what I wanted to say with the existing literature. Little did I understand how totally unorthodox those views were or how fads in subject matter may determine careers. After reading this discuussion I understand better than I ever did why my book was met largely with silence by the mainstream academic economics world; they simply were not interested in entrepreneurship and, a fortiori, not in arcane arguments of how to compensate entrepreneurs. One of the few letters of praise that I received was from Israel Kirzner, who clearly did understand the importance of the compensation issue in the then just-beginning new literature about entrepreneurship. Alas, that particular focus is still largely ignored, as indicated by the absence of a discussion of compensation in the work of Peter Klein and Fosse or by Sautet in his otherwise excellent work on the subject of entrepreneurs and corporations. That is unfortunate, as I think a focus on the very real world problem of how to compensate for this function aids greatly in understanding what the function actually is.

On another part of this duscussion, Armen Alchian's connections with Austrian economics, I also have some trivia. I first met Armen at a small conference in 1958 at which he presented a first draft of what became the seminal "Some Economics of Property Rights." He began his lecture with a lengthy quote from Mises' Human Action. Many years later I asked him how he had become acquainted with Mises' work. He told me that he took his PhD at Stanford under Alan Wallis, a doctoral classmate of Milton Friedman and George Stigler, and that Wallis had recommended the work to him. (Wallis later, largely on the basis of his own reading of my insider trading book brought me to a chaired position at the University of Rochester.) Certainly there was no hint of a schism then between what came to be known as Chicago Economics and Austrian Economics. Had this schism not been aggrevated by now almost insignificant differences (mainly I suspect a matter of personalities, like Stigler, Rothbard and Friedman who would frequently come almost to blows at Mont Pelerin Society meetings), I suspect that entrepreneurship would have become a serious vein of work at Chicago instead of being relegated for years to the backwater of Austrian Economics. This lack of mainstream interest in entrepreneurs clearly cost me dearly in the academic battles, and I for one am just delighted to have lived long enough to see the topic emerging with the priority of importance that it deserves and, along with that, the rapidly growing respectability of major tenets of Austrian Economics."

Posted by: Henry Manne | January 18, 2011 at 10:19 PM

[McKinney]

I think the genesis of the problem with mainstream econ was the attempt to model every science after Darwinian evolution. In order for other scientists to think of economics as science it had to follow Darwin and be gradual, routine and random. Austrian econ smacked too much of intelligent design to considered scientific. But innovation is intelligent design and the opposite of gradualism and randomness.

Watching some episodes of ancient history I was impressed that all of the components of the steam engine were in place at least 500 bc, maybe earlier. Piston pumps for lifting water for use in irrigation was ancient even then, but man or donkey powered. At the same time temples used steam power to manipulate idols and make them appear alive in order to impress naïve worshippers and encourage them to give more. It would have been a small step in thinking to use steam to power the piston pumps to drive machinery, but that discovery took another 1200 years.

[McKinney]

Richard: “We both ended up being appalled by the lack of rigor the book brings to bear in supporting its thesis.”

I thought McCloskey did the best that is possible with the scant evidence available. He method is largely triangulation. In my own reading of economic history I was as appalled as McCloskey at the lack of breadth of historical knowledge advertised in the usual suspects for European miracle.

As McCloskey repeated points out, most theories of development fail because other empires, such as the Ottoman and Chinese, enjoyed the advantages that the theories claim for Europe and yet did not develop as Europe did. Just one example: large markets. No one in 1600 enjoyed larger markets than the Ottoman Empire. Ottomans traded from Morocco to China.

McCloskey has taken the proper approach in asking what was unique about Europe at the time that the hockey stick inflection in per capita gdp happened. No one else comes up with anything that was remotely unique to Europe at that time. That’s the historical vector.

She finds the theoretical vector for the triangulation in the inability of mainstream math and theory to explain growth by a factor of 16.

Who do you think is more rigorous in the field of economic history? And what type of historical rigor would you suggest would improve her books?

[Daniel Kuehn]

Does anyone know if McCloskey has commented much on Paul Romer's work? The few comments I've been able to find (haven't gotten to look very much) has associated Romer with the sort of plug-and-chug "investment causes growth" literature that she's so good at debunking. I think that's really unfortunate. I like McCloskey a great deal, and I appreciate her pomo/hermeneutics perspective to a certain degree, but I personally wonder whether her work would be better off in combination with people like Paul Krugman, Paul Romer, and Ed Glaeser rather than Kirzner. It's that I have any real problems with Kirzner I'm just never quite sure what to do with him and it always reads more like a criticism of some caricature of mainstream theory than as anything really constructive. Krugman, Romer, and Glaeser have really constructive insight that are very much in line with a lot of McCloskey's critiques and to a large extent I think McCloskey provides a historical account of a lot of the mechanisms that these people have been modeling.

[Daniel Kuehn]

And if you like Kirzner, that's great. I've got nothing really against Kirzner. I'm simply thinking McCloskey seems to fit naturally in with Romer's work for much the same reasons that she identifies with Kirzner, and am curious if she's ever written anything about that literature (and hopefully what I've stumbled across isn't representative).

[Peter Boettke]

Daniel,

Read the chapters in Bourgeois Dignity that relate her position to alternative explanations, including Clark, North, etc.

The issue really is one of appreciative theory versus formal theory (see Richard Nelson on that distinction). Surely, Paul Romer has a great appreciative theory understanding of what McCloskey writes, but that is not the official formal theory and thus you cannot really lump them together. It is a foreground/background issue.

I fear that you see this in many writers (correctly) but don't recognize that emphasis actually matters. If you shine light (emphasize) certain aspect, then the cost is that the other areas become not just de-emphasized but remain in the dark (often hidden from view). The fate of entrepreneurship is one such data point in the history of modern economics, the role of culture is another.

What gets emphasized in an explanation might be just as important in our disagreement as any fundamental misconception in economic discourse.

Along these lines, this is what happens with respect to the "Austrian" contribution in relationship with neoclassical theory, it is also what happens with "public choice" in relationship to standard Pigovian welfare economics.

Emphasis matters.

Pete

[J Oxman]

If I may, I'd like to recommend Virgil Storr on the subject of culture. I remember reading his essay from the Handbook of Contemporary Austrian Economics (edited by Prof. Boettke). It was revelationary, in much the same way Prof. McCloskey's work is revelationary.

[Greg Ransom]

If you want to change understandings and win contests of ideas, then words and metaphors built into words matter.

Peter writes,

"The issue really is one of appreciative theory versus formal theory .. It is a foreground/background issue."

We "appreciate" art and literature. Powerful scientific explanations compel assent and inform our causal understanding of the world.

"Formal" things are rigorous and scientific, non-formal things are arty and matters of perspective -- and are not to be trusted.

In other words, you've lost the "debate" before it's begin ..

No, the issue is between:

* a sound contingent explanatory mechanism referencing genuine causal agents that accounts for the phenomena

vs

* unsound, magical hand-waving categorical relations between what are essentially Platonic Forms outside of any knowable world which only a confused philosopher could possibly believe in and which in fact couldn't possibly interact causally.

You could describe the conflict between Darwinian biology and pre-Darwinian Aristotelian creation science / teleology in the same way.

The words you use sets up who wins the contest of visions -- the words pre-bias the evaluation of the contest of ideas.

[Brad]

I am sure I’m biased, but it seems to me that Deirdre’s Doug North is a bit of a straw man
First, I am puzzled by the idea that Doug was responsible for the idea that changing institutions move you from bad allocations to good ones (McCloskey p. 49). I first became interested in Doug’s work when I read “A Framework for Analyzing the State in Economic History,” which attempts to explain why you might get institutions that do not promote growth.
Second, I’m puzzled by the association of North with Max U and “routine reshufflings.”At least as early as Structure and Change Doug was arguing that the development of a sociology of knowledge and an understanding of ideology were essential to understanding economic history. Doug introduced me to Berger and Luckmann as well as Hayek. “Secular economic change has occurred not only because of the changing relative prices stressed in neoclassical models but also because of evolving ideological perspectives that have led individuals and groups to have contrasting views of the fairness of their situation and to act upon their views.” (Douglass North, 1981) By the way, Doug uses the term ideology to refer to both beliefs about the way the world works and the way it should work. In other words, we need to understand changes in beliefs, such as the rise of bourgeois dignity, in order to understand history, economic or otherwise.
I do agree that Doug and other new institutional people should probably give more attention to entrepreneurship. I, however, find Schumpeter’s entrepreneur and his “creative response” (see his 1947 JEH paper) more useful than Kirzner’s. Of course, this may be because I’ve never been quite sure that I understood Kirzner.

[Peter Boettke]

Brad,

Point taken. But have you looked at Jonathan Hughes's The Vital Few, he actually ties his work to Kirzner more than Schumpeter. I think that might be something interesting for us to discuss. BTW, McCloskey believes I am too neoclassical in my endorsement of North and Buchanan.

Greg,

Not sure I understand. Appreciative theory is about the factors in market processes that defy formal presentation --- see Nelson and Winter, Evolutionary Economics (Harvard, 1981) for the distinction and why it matters. It is not _necessarily_ about artsy feelings. Perhaps I am not tracking what you are saying.

[Rafe Champion]

Reading across a wide span of disciplies carries risks if you read too quickly and if you are not in touch with people who know the fields well enough to correct your errors. It is interesting to see how little McCloskey saw in Kirzner at a first superficial reading. The same applies to the McCloskey misreading of Popper which indicates that you can live a lifetime in US academia without meeting anyone who can give a straight feed on his ideas.

http://www.criticalrationalism.net/2011/05/28/deirdre-mcclosky-on-popper-and-rhetoric/

It is interesting that McCloskey's response was to demand arguments, as though she had produced arguments in the first place, rather than rhetoric and misrepresentation.

Incidentally the same reservations apply to Mirowsky, at the dinner in Washington I compared notes with another scholar and we found that in the areas where we had some competence (not the same areas) we each found that Mirowsky was well off target.

[Daniel Kuehn]

Pete -
As I think I've told you before, I'm strongly with Bryan on the subjectivist/RADICAL subjectivist understanding of the difference between mainstream and your take on the Austrians. I know this is your view, but I guess I just don't feel like I'm underemphasizing it at all - and certainly don't mean to if others take it that way. I think the sort of critique you raise says as much about how we come to these arguments as it does about the arguments themselves.

For example, I remember once you perhaps or someone else here once paraphrase Akerlof's discussion as being an argument against the market and for interventionism. That sounded odd because I remember a substantial discussion up at the very front talking about how the same information problems would plague central authorities. I checked, and sure enough it was there. You remembered Akerlof differently than how I remembered reading and being taught Akerlof. The same is true with Stiglitz. You read him as saying property rights aren't important. That wasn't how I remember reading him - Stiglitz has always said that property rights are crucially important but won't help without market institutions in place (his whole critique of shock therapy).

Underemphasis of certain points is hugely dependent on our own perspectives. I've never taken Romer or Krugman or Glaeser to underemphasize entrepreneurship at all - EXACTLY the opposite in fact. And they bring something else to the table: tractability and broader applications. That matters a great deal, and I'm not personally prepared to have to choose between McCloskey and Romer (even if McCloskey herself thinks the choice is necessary!).

Thanks for the cite on Bourgeois Dignity.

[Greg Ransom]

Peter, I'm all in favor of the distinction and definitely get it.

What I'm waving the RED FLAG about is the WORDS used to LABEL the distinction. I'm simple saying there has got to be a better word than "appreciative" if you really want to make progress.

Words carry metaphor and associated significance of all kinds with them. Picking "appreciative" as the label for your side and to give the other side the word "formal" is simply to chose to place yourself at the bottom of a mountain while placing the other side at the top of the mountain.

Look out the word "appreciative" .. many of the examples involve art or performances or acts of kindness. And one core sense is a _feeling_ or an expression conveying a special feeling. I.e. your word is of the realm of psychology and mushy and non-objective personal perspectives.

Then look at "formal". What is the opposite of formal? The non-rigorous. The muddled and mushy.

Imagine you are Stephen Williamson. You are attempting to make the case for the "appreciative" and for the inadequacy of the "formal".

If Williamson first encounters this topic framed in these words, he won't stay around for a second to hear what you have to say.

That's all I'm saying.

Peter writes,

"Not sure I understand. Appreciative theory is about the factors in market processes that defy formal presentation --- see Nelson and Winter, Evolutionary Economics (Harvard, 1981) for the distinction and why it matters. It is not _necessarily_ about artsy feelings. Perhaps I am not tracking what you are saying."

[Greg Ransom]

Sorry, make that:

"Imagine you are trying to present this distinction to Stephen Williamson. And you are using these words, attempting to make the case for the "appreciative" and for the inadequacy of the "formal".

If Williamson first encounters this topic framed in these words, he won't stay around for a second to hear what you have to say.

[Mathieu Bédard]

I've just noticed that her bibliography is divided thematically on her website, for those like me who feel lost (she's written so much on so many topics!).

http://www.deirdremccloskey.com/articles/index.php

[Brad]

Pete,

I believe you must be thinking of another book. The Vital Few follows Schumpeter. Kirzner isn't even mentioned.

[Peter Boettke]

Brad,

Read the preface again. Hughes is brining the entrepreneur back into the story, and he credits that with Kirzner.

Also look at John Nye's paper on "lucky fools" which also makes some very interesting points, and more recently work by Mokyr on knowledge.

Also, I would suggest that you look at Kirzner's own essay "Creativity and/or Alertness" -- which I think does an excellent job and relating the two positions and also how they can be seen as complementary to one another. In several of my papers on entrepreneurship, I make a distinction between Smithian gains from trade (Kirznerian alertness to arbitrage opportunities) which ensure that we tend toward being on the PPF, and Schumpeterian gains from innovation, which pushes the PPF out. It is a simple presentation, but I think it captures both why we tend toward market clearing at any given point in time (and under the right set of institutions), and why we constantly have productive disturbances to the existing status quo of technology and resource allocation.

[Brad]

Pete

Kirzner doesn't come in until the preface to the 1986 edition. My reading of it is that Hughes is saying in the 20 years since he first wrote The Vital Few economists have largely continued to ignore entrepreneurship and that among theorists Kirzner is one of the few exceptions. Kirzner does not, however, figure into the text even though Hughes revised it. Hughes makes clear in the Introduction and the section titled Creative Destrcution that his view of entrepreneurship is derived from Schumpeter.

John's Lucky Fools paper is one of my favorites. I don't think it has received as much attention as it should.

I'll try to check out "Creativity and/or Alertness."

[Nike High Heels 7]

Former Notre Dame player Derrick Mayes (top left), former Hawaii coach Bob Wagner (center) and former Iowa sports information director George Wine (right) ranked the Cowboys No. 6 on their ballots. All ballots of the 115 voters in the poll were made public Monday, one day after it was determined that Louisiana State and Alabama would play in the Bowl Championship Series title game on Jan. 9 in New Orleans.

[Uggs Online]

room of 500, dressed in a stylish dress and wig, and proudly announced "I am an economist in transition." [pause] "I am transitioning from a Chicago economist to an Austrian economist." Whatever awkwardness or tension

[Deirdre N McCloskey]

Dears,

What an interesting discussion, though I am surprised (I always in the blogosphere) by the intemperance of some of the comments! Oh, well, if you can't stand the heat . . . .

Love,

Deirdre

[mattress reviews]

Impressive blog! -Arron