Economics as a Coordination Problem -- Even in Tough Times It is Important to Stress This

|Peter Boettke|

Mathieu Bedard recently brought my attention to the following quote from Robert Leonard's excellent Von Neuman, Morgenstern and the Creation of Game Theory:

From 1928, Hayek and Morgenstern had been the co-directors of the [Austrian Trade Cycle Institute], with its tiny staff. [...] Instead of resorting to public works as a means of countering depression, the Austroliberals promoted Autoflockerung – namely, price flexibility and the removal of market restrictions in the spheres of both production and employment. Elsewhere in the capital, public speeches by Mises and Hayek promoted the same economic philosophy.

So rather than a unique brand of 'depression economics', the economists at the Austrian Trade Cycle Institute relied on basic price theory and the self-adjusting process of a free market.

Robert Leonard refers to this as an economic philosophy.  In some sense there is no doubt that it is a reflection of a certain perspective.  But in another sense, this line of advise is simply the persistent and consistent application of price theory to problems in public policy.  The production plans of some must mesh with the consumption demands of others, and this is done in a free market through the structure of incentives provided by property rights, the flow of information provided by relative prices, and the learning and necessary adjustments in decisions and allocations that are spured on by the lure of profit and the penalty of loss.  Economics is, as Gerald O'Driscoll so famously put it, a coordination problem.

I imagine that if you read carefully the discussions in Vienna in 1928 they would sound very familar to those who have been reading the discussions in the US and UK since 2008.  The minority position is the one insisting on the power of the price system to guide the recalculation process that must take place.  The majority position is one that focuses on public spending and easing monetary policy.  And like that period, the different positions held no doubt reflect different philosophical perspectives, but it is important to stress that they also reflect deep analytical arguments about the nature and significance of economic science.  For those in the business of economic science, the differences in philosophical perspective while important are less so then the analyical arguments about the power of price theory in explaining the complex coordination of economic activity.

Comments

[Daniel Kuehn]

I don't think it's correct to say that the majority position is the majority for one thing - I think both the positions you describe are minority positions and the majority position is much murkier, ill-defined, and not based on much economics at all.

But I also think it's a mistake to say that what you term the majority position isn't in agreement on the power of the pricing system to guide the recalculation process. So far as I know, none of us have denied that point. The analytic difference, it seems to me, is whether the market guarantees full employment and whether collective action through other institutions can achieve full employment or something like it with minimal costs.

But if you approach the difference as if people are rejecting the power of the price system to coordinate economic activity I think you're going to leave a lot of people scratching their heads.

[FriedrichHayek]

Hayek advocated pre-announced total income stream targeting by the central bank if the bust phase of the trade cycle involves a vicious crashing cycle in the shadow money and banking system, in which recalculation takes the economy every further away from a wealth producing coordination equilibrium.

Money and credit are a loose going in the coordination and recalculation system, and when they are carooming every further out of joint, in a central banking system the job of the central bank is to set expectation leading to greater coordination rather than less.

[FriedrichHayek]

Loose JOINT

[Peter Boettke]

the correct German word it has been pointed out is: *Auflockerung" --- which if I have this right translates to "freeing up" or"loosening up" the market economy.

[Mariorizzo.wordpress.com]

If this controversy been "resolved" by most of the economics profession today in favor of some version of the aggregate demand view, what does that say about economics as a science? If the majority is wrong (as Austrians believe) -- after all of these years of discussion -- where is the science? Are we using the word "science" just to impress people?