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« A Course Worth Taking | Main | What Is It That We Can Learn From the Exchange of Ideas Among Economists? »


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I'm not quite sure what what I'm about to say means in the scheme of your post, but I would note that:

1. Most of the people you would probably suggest are in this tidal wave critiquing the market economy would likely argue that they are doing nothing of the sort.

2. If you were just to define "mainline" and "mainstream" for people and ask them where they are personally, most of the "mainstream" people you argue are out of the "mainline" would consider themselves in the "mainline".

Like I said - I don't know what this means for your own thesis, but it seems like it's going to impact the dialogue a lot.

The biggest differences between Keynesian, Austrian and neoclassical econ are in the time periods considered. Keynesian econ is short term; Austrian is medium to long term. Monetarism and neoclassical are almost totally long term.

Mises wrote that the businessman is much better at handling the short run than are economists. The economist’s job is to get the businessman to look up once in a while and consider the long run.

The Austrian’s job is to get the other schools to consider the medium term that involves the business cycle.

The problem is that in the midst of a crisis no one cares about the medium term or long run. No one wants to discus the finer points of insurance when their house is on fire. But then no one wants to consider the finer points of insurance on a beautiful Spring day when there are no fires, either. They have better things to do.

The ability to consider the long term when making short term decisions is part of the definition of wisdom. How do we make people wiser? I wish I knew. Americans love pragmatism, which is nothing but a cover for short term thinking. Philosophy, which Americans claim to abhor, is a label for long term thinking.

McKinney raised a good point: we need to figure out a better way to put out the fires when the house is already in danger. Part of the problem is how core (or actual) wealth creation get obscured through continual government redistribution at every level. It would not be so hard to determine how much reusable wealth is available from sets of economic activity, or would it? Before anyone can actually look and say, this wealth is now available to continue the process for X, Y and Z, government has already taken that set and added variables from other sets so that no one knows how much was actually available to continue economic activity from the first three factors. I would hazard a guess that we really needed to know what the original set could have accomplished on its own, so that other economic sets might be reassessed from that perspective.

And "K" still sits in the heart of it all, right?

I haven't read the book.

"I guess the real question is how do we guard against the political incentive to address short-run disturbances and make sure that short-run concessions don't impact long-run economic growth."

Right. The problem with short-run thinking is that short runs strung together add up to a long run, and what kind of a long run will it be? If a downturn is due to a distorted structure of production, and if the interventions cause more distortion, we can expect either more bubble-bust cycles or persistent doldrums.

"long run economic growth" and the long run growth "tend" sound don't sound like microeconomics at all.

It sounds to me like Solow macro with Romer updates working with econometric curve extrapolation using a grammar school ruler.

The table is already set in a non-microeconomic manner, and the micro comes in to grapple with things at the edges only after all of the most important things have already been fixed.

Peter writes,

"The hard-core of economics is the reconciliation of the rationality postulate with the invisible hand postulate by way of institutional analysis. There is no macroeconomics in this perspective separate from microeconomics."

The eternal problem of the vote-buying motive as the Achilles heel of democracy, flagged by Hutt based on his studies of the rise of trade unions as a political force in the nineteenth century.

The exasperating thing about the heterodox economists, judging from the Newsletter, is the way they share all the Austrian concerns about the defects of the mainstream while at the same time they are so not interested in the mainline (Austrian) solutions.

A few years ago there was something about the Austrians in the newsletter but you could probably scan it for years without knowing the Austrians even exist.

see for an interview with Acemoglu.

he is great on how the real problems are not that some countries are technologically innovative and some are not, and some countries have high savings rates and some don’t.

They relate to societies having radically different ways of organizing themselves.

In an unheralded point of relevance to the Austrian calculation debate, if the ruling elite is afraid of losing political power, when considering reform, what most ruling elites care about is not whether this reform will make the population at large better off, but whether it will make it easier or harder to cling to power.

That is why the Russian and Austro-Hungarians monarchies and their selectorates long opposed the railroads. They knew railroads would bring revolution with them.

Rothbard was confident that communist states would evolve to avoid stagnation. In 1965, Communist countries, Rothbard said in left and right that:
“Desperately, it tries to fulfill its proclaimed goals of industrial growth, higher standards of living for the masses, and eventual withering away of the State and is increasingly unable to do so with its collectivist means. Hence the inevitable breakdown of socialism….

Communist countries, therefore, are increasingly and ineradicably forced to desocialize and will, therefore, eventually reach the free market. communist states will increasingly and ineradicably forced to desocialise and eventually reach the free market.”

Acemoglu focuses on why this does not happen.

There are plenty of socialist rat-holes surviving in Asia, Africa and in Cuba that are not evolving into anything but more squalor with tiny very rich ruling elites with the latest cell-phones. The resource cursed states are another example.

When you have a system where a narrow group controls political power for its economic ends, it also is disappointing for economic growth. It doesn’t encourage new technologies to come in; it doesn’t allow people to use their talents; it doesn’t allow markets to function.

Such a system is structured and survives precisely because it is successful in denying voice and power to the majority.

Political and economic freedom is instead a by-product of a long process of co-option.

The Soviet nomenklatura used both co-option and repression to encourage loyalty to the regime.

The cost of co-opting people into the Party was a decrease in the standard of living of members of the nomenklatura, whereas the cost of repression was the danger that members of the nomenklatura would themselves be victimized. The soviet party had 26 million members at the end.

The fall of soviet communism was a drawn out struggle over access to patronage over state monopolies and a new and better paid manifestation of the old mercantilism but ex-KGB owned and run under Putin. solving the calculation problem better was not the reason.


Very much appreciate your comment. I have argued along similar lines in my own work on the history (and collapse) of the Soviet Union. And also written an essay pointing out how Rothbard was ahead of his time in this regard.

Would be interested to hear your reaction.


Nice post, Jim! Have you seen Yegor Gaidar's "Collapse of an Empire: Lessons for Modern Russia"? It's a very interesting account of the collapse of the USSR. Add to it Gorbechev's biography and we have good evidence that economics destroyed the USSR, not the Reagan arms race.


You say: "The hard-core of economics is the reconciliation of the rationality postulate with the invisible hand postulate by way of institutional analysis."

Hmm. It depends on the meaning of "is" here. Do you mean "actually is" or "ought to be"? Clearly, the statement is Vernon Smith's view. But does it command broad acceptance? Would it include Brad DeLong?

Would it include Mises? The praxeological analysis could be interpreted with a strong institutional background. But you can just as easily say that it applies always and everywhere as an implication of purpose (reason and action stem from the same source, says Mises).

I believe that the rationality postulates are under broad attack these days (as a matter of the "actual is"). Lots of people make ad hoc substitutions (assume myopia, but accept the rest of rationality, etc). These seems to be a lack of consensus about how to proceed.

Thanks Pete,

My last paragraph was heavily influenced by your thinking. Both Russia and China evolved from state mercantilism to crony mercantilism.

Both Russia and China will face a growth crisis when they hit the development stage which requires more and more of what Olson called rights-intensive production and longer investment horizons. The large investment returns in Russia and China currently make investing worth the risk of confiscation and predation.

Many of my classmates in Japan in 1996 were in an IMF programme for transitional economy students.

From as far west as from Kazakhstan and as far south as from Cambodia, these students were moving into the capitalist groove at full-speed because they were members of the political elite. Good taste dictated not asking why their unofficial incomes were usually twice their official salaries of $50 a month.

One very smart and worldly Uzbek classmate who worked at the central bank had within his own clan, one uncle in the cabinet and another was a local mafia type, to use his own words.

Acemoglu’s point is that political losers are a big barrier to economic development.

The ruling elite will keep their country in poverty unless they can control economic liberalisation so they that they are not overthrown and shot.

Oligarchic power was too dispersed in China and Russia to take Tullock’s advice to announce free elections and make for the airport fast before the honeymoon effect wares off.

In China and Russia, each political elite still uses Tullock’s third method of choosing autocratic successors: an electoral college appointed by the retiring or deceased incumbent.

Every Russian president has been anointed by his predecessor. Another Russian-Uzbek friend told me that Yeltsin’s main interest late in his term was an ex-president law providing immunities from prosecution.

Rothbard’s prediction of a move from communism to market socialism and then the market presupposed that the Soviet elite cared for anyone other than themselves and their families.

Your mercantilism approach allows the fall of communism to be situated as an example of poor regulatory enforcement and internecine political competition in a rent-seeking society leading to the fall of mercantilism as in Tollison and co’s book.

The soviet reality, as described by Rothbard, and build on and correctly named by you and Anderson as an extreme form of mercantilism, was never the theoretical communism that Rothbard predicted to fall.

Socialism is impossible so it cannot evolve. Market socialism, including the informal market socialism identified in Russia by Rothbard can muddle by as a form of mercantilism.

By your describing communism as a rent-seeking society, the process of social and political evolution can be embedded into the history of the rise and fall of mercantilism.

More freedom in Russia and China came as an unintended by-product of a constitutional struggle over who would control the rules under which the economy prospered (or failed to prosper) and the sharing within the elite.

More and more of the general public in Russia and China were co-opted into the winning circle through peacefully adaptations when threats of popular revolution were minimal.

These successive minor reforms were mutual beneficial constitutional exchanges as suggested by Roger Congleton’s brilliant recent book on his king-and-council template and Herschel Grossman’s earlier paper on mass co-option into the soviet communist party from 1953 to 1989.

Pity Rothbard was so against the rent-seeking concept and was so attached to the power of ideology, although some of his writings hint at expressive voting as a driver of election turnouts and voting.

Rothbard as well aware of interest groups and his analysis of rent capitalisation of tax medallions is the same as Tullock’s.

thanks McKinney, those books sound interesting.

I find many public choice explanations of the fall of the USSR disappointing because many want to believe in people power and popular rebellions. Tullock's palace coup theory of revolutions is just so unromantic!

The rise and fall of mercantilism view put forward by Pete will be the foundation of the better public choice explanations.

Until Soviet reality is properly understood in the Rothbard tradition, why it evolved into something else will not be understood until what it was before is properly delineated.

The USSR broke part as the result of an internal power struggle within a new generation of leaders who grew up in a climate of corruption and high living.

Political and economic Power was devolved to the 15 republics in the old USSR because this is the only way to operate a mercantilist state.

These local leaders formed their own alliances and declared succession when the centre was too divided to fight. Local military units defected with them to a new rent-seeking coalition.

Yes, the rationality postulate is under attack from the other people are stupid fallacy: not you, not me, not present company, of course; but the nameless them over there. The perpetually baffled, every man jack of them.

These no-hopers are deemed competent to vote, and to DRIVE CARS, but they cannot get their head around a credit card. How the them over there find their way to work every morning is a mystery to me.

I found the chapter in Tullock and McKenzie’s book on token economies to be most enlightening.

Certified lunatics respond to incentives. The first token economies were for chronic, treatment-resistant psychotic inpatients. Works with autism too!

In 1977 a landmark study successfully showed the superiority of a token economy compared to standard treatment and specialized milieu therapy. Despite this success, token economies disappeared from the 1980s on.


p.s. you and Richard McKenzie do great work in the behavioural economics debate.

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