Coordination Problem

Is There Nothing New Under the Sun in the Field of Economic Policy?

|Peter Boettke|

John Maynard Keynes famously argued in The General Theory that practical men who believe themselves to be devoid of the influence of academic scribblers are in fact "usually the slaves of some defunct economist."  This was good rhetoric on Keynes's part primarily to emphasize to his readers how they had to abandon the habits of thought and intellectual straightjackets that they had taken on-board often unwittingly.

But did you know that Milton Friedman argued similarly in Capitalism and Freedom?  Friedman states: "There is seldom anything truly new under the sun in economic policy, where the allegedly new generally turns out to be the discard of a prior century in flimsy disguise." (1962, 57)

Do you agree?  If so, what does that say about both Keynes and Friedman's respective positions (as they are juxtasposed with each other often in discussions of public policy)?  If both are claiming that the positions they are opposing are merely retreads of previously held positions, then what would public policy innovation really look like?

Also, if we consider the argument that Friedman (and Adam Smith before him) makes about the failure of government intervention but the continued progress that US citizens enjoyed during the period inspire of that failure, how can we in fact cleanly test which economic policies are good and which ones are bad.  We have in front of us novel/good; novel/bad; old/good; old/bad.  Keynes and Friedman both thought they were offering novel/good to be juxtaposed to old/bad mainly and fearing the possibility of novel/bad (Soviet style central planning or Nazi style corporatism as prime examples).  But if the empirical test is ambiguous at best, how can we sort out the correct story?

Here is Friedman: " ... there can be little doubt that the record is dismal. The greater part of the new ventures undertaken by government in the past few decades have failed to achieve their objectives.  The United States has continued to progress; its citizens have become better fed, better clothed, better housed and better transported; class and social distinctions have narrowed; minority groups have become less disadvantaged; popular culture has advanced by leaps and bounds.  All this has been the product of the initiative and drive of individuals co-operating through the free market.  Government measures have hampered not helped this development.  We have been able to afford and surmount these measures only because of the extraordinary fecundity of the market.  The invisible hand has been more potent for progress than the visible hand for retrogression." (1962, 199-200)

I make this argument myself all the time --- stressing the horse race between Smithian, Schumpeterian, Stupidity --- but I do recognize a problem. As I see it, the critics of the market (Keynes, Samuelson, Stiglitz, etc.) deny the very "fecundity of the market" that Smith and Friedman are upholding.  The market in their intellectual framework is not self-regulating, and thus the progress experienced must be due to government policy measures.

So the question remains -- how would you design an intellectual test (a broader concept than the more narrow idea of an empirical test) that would be able to sort out from the complex reality of economic policy history which stream of thought is correct?  Which academic scribblers have the logic and evidence on their side -- the Smith, Say, Mises, Hayek, Friedman crowd, or the Marx, Keynes, Samuelson, Stiglitz crowd? And if we cannot sort that out, are we in fact all merely "slaves of some defunct economist" when it comes to our public policy pronouncements?

I don't think so, I believe we can sort rationally.  But I am sure that those whose positions I consider counter-productive also believe that their positions emerge from rational analysis.  And there is the tension in public policy discussions.  The Robert Aumann discussion of agreement and disagreement among rational agents simply doesn't deal with humanly rational actors, who have priors, and who look at the world through multiple perspectives.  The puzzle isn't why rational actors would ever disagree, it is in fact the opposite how do humanly rational actors ever come to agree with one another about how the world works?  This can only be accomplished by institutions that incentive the different actors and provide them with quality information and critical feedback.  It is about the epistemic community they find themselves in.  So thinking along those lines, why would it be that the epistemic community of economic public policy would produce an endless intellectual cycle rather than a dovetailing toward a consensus?

Isolation and the Cognitive Capacity of Human Beings

|Peter Boettke|

Adam Smith in discussing man's propensity to 'truck, barter and exchange' famously said: "Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog." We humans are social creatures, we talk, we haggle, we trade.

Our ability to thrive and lead flourshing lives is a by-product of the world created by individuals realizing the great gains from social cooperation under the division of labor.  Figuring out what 'rules of the social game' will enable us to realize peaceful cooperation and productive specialization among individuals is one of the primary tasks of political economy.  In short, as social creatures we require social rules that minimize conflict and maximize cooperation.

A caricature of economic man, however, is anything but social.  Instead, homoeconomicus is depicted as an isolated creature who is able to calculate costs and benefits instaneously and accurately.  But it turns out, actually that isolated creatures would have an extremely difficult time performing such calculations and thus would be unable to see the benefits of exchange, specialization, and social cooperation.  They instead would when confronted with other humans behave not unlike Smith's dogs.

What can we learn from the study of the impact of orphan's lonely beginnings for the study of economics and human sociability?  

On Coase and Coasean Economics

|Peter Boettke|

Last night in my graduate seminar on comparative institutional analysis we discussed Ronald Coase's 1991 Nobel Lecture -- "The Institutional Structure of Production." If you haven't read it recently, read it again carefully.  Coase is the master economic theory minimalist, and one of the most illuminating thinkers of the 20th century.  He is also a very humble man, never claiming originality for himself.  But as with most brilliant thinkers, it is only because of their statements that we come to see their point as obvious.  One of my favorite paraphrases of Coase is actually from in paper on the FCC, if you read that article you will see that he attributes his basic idea to Adam Smith --- as I put it, Coase says basically 'my "novel" theory (novel that is if you haven't read Adam Smith)'.  This statement expresses a classic Coasean intellectual sentiment -- understated, but also so fundamentally true.  Coase is all about exchange and the institutions within which exchange takes place. 

The Nobel Prize lecture highlights how the socialist calculation debate -- as communicated through Arnold Plant -- influenced the young aspiring economist Ronald Coase at the LSE, and led to his work on the theory of the firm.  The lecture also straightens out the meaning and purpose of the "Coase Theorem" --- as Coase says:

What I showed in that article, as I thought, was that in a regime of zero transaction costs, an assumption of standard economic theory, negotiations between the parties would lead to those arrangements being made which would maximise wealth and this irrespective of the initial assignment of rights. This is the infamous Coase Theorem, named and formulated by Stigler, although it is based on work of mine. Stigler argues that the Coase Theorem follows from the standard assumptions of economic theory. Its logic cannot be questioned, only its domain. I do not disagree with Stigler. However, I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance to me of the Coase Theorem is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies) could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. My conclusion; let us study the world of positive transaction costs.

Too many commentators -- and that includes an entire generation of Austrian economists -- have completely missed the importance of Coase's insight. There is obviously room for disagreement with Coase on fine points of theory and the implications of those points.  But the quoted passage deserves to be read very carefully again and again so that its very subtle point sinks in.  In Coase's hands the Pigovian remedies of tax and subsidies to address externalities are rendered either redundant or non-operationaly by a logical analysis grounded in the standard assumptions of economic theory upon which those remedies were recommended in the first place.  Minimal theory, maximum illumination --- that is Coase's defining characteristic as an economic thinker.  We should all be so fortunate to be as 'unoriginal' as Coase in our economic analysis!!!  If only the rest of the economics profession was content with pursuing the logic of Adam Smith's insights on the human propensity to truck, barter and exchange so persistently and consistently to its logical conclusion, then we would be much better economists and policy analysts.

I wrote a tribute to Coase after his death last year, and many years ago now I wrote a paper trying to mimic the Coasean style of analysis to explain the operation of the Soviet-type economy.  As many of my GMU students have heard numerous times, when I taught my comparative institutional analysis graduate class at NYU through the 1990s I would make the students (more alergic to economic minimalism than my students at GMU) read Coase's classic "social cost" paper numerous times throughout the semester.  As Jim Buchanan taught me -- it takes varied iterations to force alien concepts upon reluctant minds.  Those students didn't want to hear about the Coase Theorem, they preferred discussions about Arrow's Theorem and Sen's Paradox.  While discussing Arrow and Sen, I nevertheless returned again and again to Coase (and Buchanan).  I often wonder if 20 years later any of those students think differently about public economics because of that experience.

Perhaps they do, and if so, I hope some of them will consider the following announcement:

Man and the Economy

Call for Papers for a Special Issue in Memory of Ronald Coase

“R. H. Coase: The Man and His Ideas”

Man and the Economy will devote a special issue (December 2014) to the life and ideas of Ronald Coase, the 1991 Nobel Laureate in Economics and Founding Editor of this journal. During his long academic life, Coase devoted himself to economics, which, in his view, should investigate how the real world economy works, with all its imperfections. Coase viewed and practiced economics as a social science, a study of man creating wealth in society through various institutional arrangements. To honor the memory of Coase, we welcome original research articles that extend and develop the Coasian economics, including empirical studies of the structure of production and exchange. We also welcome critical and constructive commentaries that clarify and elaborate the Coasian themes, from a law-and-economics/new institutional economics perspective, which include, but not limited to, topics on transaction costs, property rights, theories of the firm and China’s economic transformation. In addition, we also welcome personal reflections and reminiscences of Coase as a colleague, a teacher, an editor, and/or a friend.

Submissions must be made online via the Journal’s website: http://www.degruyter.com/view/j/me Deadline for submissions is September 30, 2014.

The Rule of Law and Monetary Policy

|Peter Boettke|

Hayek's The Constitution of Liberty was an effort to first develop an argument philosophically and historically for the institutional superiority of the "rule of law" in promoting peaceful social cooperation and productive specialization among free individuals, and then second to apply the "rule of law" to areas of public policy consistently and persistently.  Mises's thought Hayek had succeeded in the first 2/3 of the book, but failed in the last 1/3 on Hayek's own terms.  Application of a principle is always a dicey business.  The devil is in the details.

Since 2008, there has been little talk of "the rule of law" as a guiding principle in public policy.  Among all the voices, I think the most consistent and clearest voice on applying "the rule of law" to monetary policy has been Lawrence H. White.  Here is White's presentation from 2009 Cato Monetary Conference on The Rule of Law and Central Banks.  Larry is a bold and creative thinker, he is also one of the most articulate spokesman for true liberalism in the world today.  Very lucky to be working with him at GMU.

Happy Birthday Professor Israel M. Kirzner

|Peter Boettke|

Israel M. Kirzner was born on February 13, 1930 in London.  He is, in my opinion, the greatest scholar of the Austrian School of Economics.  As evidence I would point to his The Economic Point of View, and his introductions to the collection, Classics in Austrian Economics.  See my review of Classics here.  I would also point to his various interpretative essays on the thought of his PhD dissertation supervisor -- Ludwig von Mises -- as well as his essays on Hayek and Menger.  But Kirzner is not only a scholar of the Austrian School, but the most significant economic theorist of the modern Austrian school in my opion.  As evidence I would point to his development of the entrepreneurial theory of the market process in works such as Competition and Entrepreneurship, but I would also direct readers to his refinements of price theory in Market Theory and the Price System, and his own unique take on the microfoundations of capital and interest theory in Essays on Capital and Interest.

It is my sincere hope that Kirzner will be reconized by the Nobel Prize committee for his development of the entrepreneurial theory of the market economy.   Kirzner is simply put, a scholar's scholar, and an economist's economist.  But besides his excellence as a scholar and scientist, Kirzner is an outstanding teacher of the logic of economic analysis and its importance for understanding the economic forces at work in our everyday lives. And, Kirzner was a tireless champion of a research program within the economics profession that sought to carve out professional space for those younger than him who wanted to develop the ideas of Menger, Bohm-Bawerk, Mises, and Hayek in a scholarly and scientifically responsible manner.

Finally, it must be said, Kirzner is an example of all that is best in the academic profession and scholarly pursuits --- a true gentleman at all times, Kirzner always put the quest for truth in economic reasoning above all else.

Happy Birthday Professor Kirzner.

 

 

Constructing the Keynesian Narrative -- Joe Stiglitz Edition

|Peter Boettke|

I have said before, and I will say it again, to economists of my generation Joe Stiglitz is a towering figure in economic theory.  But despite my great respect and admiration for his intellect and the argumentative strategy that he pursued with respect to the Walrasian system, my judgement has always been that he missed the mark in his analysis of the market process and underestimated the public choice problems that his alternative political-economic systems architecture would have to confront in theory and practice.  Make no mistake about it, an individual can be brilliant, perhaps even a genius, and be brilliantly wrong.  That is, in my humble opinion, what you have with Joe Stiglitz -- a brilliant but wrong thinker.  This stands out nowhere as obvious as in his efforts at applied political economy and policy relevant analysis of contemporary affairs.  There is no doubt that he stitches together facts of the world, but the narrative that he weaves in the stitching is wildly off the mark.  I would argue this is what you see again in his essay "Stagnation By Design."

Since 2008, and before, he has been constantly complaining about neo-liberal policy and how its lack of attention to the appropriate regulatory framework and disregard for fundamental policy priorities has produced the mess we are in.  In fact, he made the argument very simply even while he was in positions of tremendous political power in the Clinton administration and at the World Bank --- if only the world would listen to me, and engage in the appropriate interventions then the mess would be avoided.  But who were the so-called neo-liberals that weren't listening to him?  What neo-liberal thinker had the same powerful positions that he held?  Did F. A. Hayek or Milton Friedman actually come back from the grave to serve as head of the CEA or as Chief Economist at the World Bank?  Or did all this disruptive inequality and global imbalance happen on the watch of other thinkers.

The current mess in the US is six decades in the making, as Laurence Kotlikoff recently explained in an EconTalk episode with Russ Roberts.  The promisory politics that exploded after WWII can be, as James Buchanan has explained, rests completely with the Keynesianism --  Download Buchanan- Keynesian Follies.

Keynes, in Buchanan's alternative narrative, was an artist who sought to change the perception of his professional peers and policy makers during extraordinary times.  In the US, this led to the suspension of the ordinary institutions of politics during the Roosevelt administration, as the normal checks and balances on political power were relaxed.  The real damage, however, was the extension of Keynes's artistic impression of the workings of the economy and the polity in extraordinary times to the operation of economic policy and the polity in ordinary times.  The Keynesian confusion of "art" as "science" in the economic picture that Keynes drew is the culprit.  A narrative was thus constructed.

Stiglitz is the artistic grandchild of that Keynes picture.  As he says in this latest essay: "Markets are not self-correcting."  There is no subtley in such sentiments about the workings of the economy and the institutional framework within which they operate.  Stiglitz's only conclusion is that without the guiding hand of the state, economic disaster looms around each and every corner.

The mainline economists response is not to insist that markets always clear, but instead to explain the variety of economic forces at work under alternative institutional arrangements; to challenge analysis based on assumptions of either omniscience or benevolence; to explore the multiple margins of adjustment that economic actors engage in while attempting to coordinate their plans with one another in the face of changing circumstances; and to construct arguments about what constitutes a robust political economic system rather than a fragile one subject to volitility, disruptions and social strike.  What institutional arrangements can produce peaceful cooperation and productive specialization among a diverse set of individuals?; that is the question that drives the mainline economist.  Rational choice theory provides the argumentative structure, but it is at the institutional level of analysis where the argumentative burden rests.

Stiglitz is right to stress that bad ideas result in bad public policy which in turn results in bad economic, political and social outcomes.  But, Stiglitz has misidentified what the bad ideas are, and his narrative mischaracterizes the nature of public policy for the past 6 decades and in particular the last 2 decades.  We have not experienced a period of neo-liberal neglect and arrogance, but instead a waffling back and forth between conservative and liberal Keynesianism guided by an illusion of an artistic rendering of economic and political life.  This has been the public policy hegemony for the past 60+ years.  It is time that this alternative narrative be listened to, rather than the same old story that emerged from the Keynesian follies so many decades ago.

Alexander Fink --- 2014 Winner of ORDO Award for Outstanding Scholarship in the Field of "Economic Order"

|Peter Boettke|

Please join me in congratulating Alex for this much deserved recognition.

"The social-democratic model remains the best one ..." John Roemer

|Peter Boettke|

Tyler Cowen links to John Roemer's recent article in Analyse & Kritik, and highlights how Roemer admits to a change of mind with respect to the workability of his reconstruction of the socialist model in the wake of the collapse of communism in 1989.  My early work as an economist was focused on the Soviet experience and the theoretical and empirical debates that formed around that discussion.  After 1989, the models by Bardhan and Roemer focused on equal shares or coupon based market socialism were the main contenders in the effort to build an system which could meet the Hayekian objections head-on, yet also provide a workable model of socialism with a capital market that while not permiting concentrations of wealth produces prices that could guide the efficient use of resources.

What is interesting in the abstract to the most recent article is Roemer's admission that this earlier model is not workable because of what could be termed opportunistic behavior.  Here is the full abstract:

State ownership, worker ownership, and household ownership are the three main forms in which productive assets (firms) can be held. I argue that worker ownership is not wise in economies with high capital-labor ratios, for it forces the worker to concentrate all her assets in one firm. I review the coupon economy that I proposed in 1994, and express reservations that it could work: greedy people would be able to circumvent its purpose of preventing the concentration of corporate wealth. Although extremely high corporate salaries are the norm today, I argue these are competitive and market determined, a consequence of the gargantuan size of firms. It would, however, be possible to tax such salaries at high rates, because the labor—supply response would be small. The social-democratic model remains the best one, to date, for producing a relatively egalitarian outcome, and it relies on solidarity, redistribution, and private ownership of firms. Whether a solidaristic social ethos can develop without a conflagration, such as the second world war, which not only united populations in the war effort, but also wiped out substantial middle-class wealth in Europe—thus engendering the post-war movement towards social insurance—is an open question.

In my book, Why Perestroika Failed I argue that in assessing the workability of utopian schemes we must first subject them to a coherence test, and then a test of their vulnerability to opportunism.  Schemes that are inchorent are deemed impossible; schemes that are coherent but vulnerable are impractical; and only schemes that are both coherent and invulnerable should be considered in the feasible set of workable utopias. (see pp. 4-5, and then chapters 3-5 in the linked book).

Roemer seems to be suggesting that if the population could coordinate around a solidaristic social ethos, then the social-democratic model, perhaps even the market socialist model, might be workable.  I have always found these arguments weak whether they are made by libertarians, conservatives, progressives, or socialist.  It amounts to arguing that the entire system turns of the moral character of the individuals who populate the system.  If everyone was a libertarian (socialist), then we could have a libertarian (socialist) world.  But think about that for a second, the more everyone coordinates around the norm, the greater the potential scope for gain by opportunistically violating that norm.  So rather than rely on moral character to make the argument work, I have always been more attracted to instituitonal solutions that do not require for their working improved moral character let alone a fundamental change in human nature.  Instutitional problems demand institutional solutions.  Human beings do have the Smithian propensity to truck, barter and exchange, as well as Smithian sentiments about others  --- that is our better nature --- but human beings are also haunted by the Hobbesian propensity to rape, pillage and plunder, and sentiments such as envy, jealousy, resentment, and loathing of the other.  Which propensity manifests itself is a function of institutional environment in which we interact with each other and with nature.  The logic of the situation rules, not a sense of solidarity.  Solidarity, instead, is a by-product of institutions.  So back to the test --- is a proposed system coherent -- are the means chosen consistent with the ends sought? --- and is a proposed system vulneralbe --- can opportunistic actors disrupt the ability of the system to achieve its goals?

Socialist have a hard time coming to grips with both tests, and as a result no viable model has yet to be proposed.  It is to Roemer's credit that he admits this is true of his proposed mutual shares market socialist model -- though he believes it is only becuase of vulnerability, when a real analysis would show that it doesn't even met the coherence test due to epistemic reasons.  Furthermore, even the claim that the social-democratic model (as he understands it) produces the best - most egalitarian - outcome can only be sustained if you ignore the full thrust of the coherence test and the vulnerability test.

As a result, reports of John Roemer's retreat from socialism are exaggerated as you can see in this recent interview with the Yale Herald.

Nothing Better Than Prague in the Spring

|Peter Boettke|

Time to register for the Prague Conference on Political Economy.  Congratulations to Michael Munger, who will give this year's Franz Cuhel Lecture, and to Martin Ricketts, who will give the Friedrich Wieser Lecture.

PCPE—Prague Conference on Political Economy

PCPE 2014, April 4-6 with keynote speeches by professor Michael Munger of Duke University and professor Martin Ricketts of The University of Buckingham

Call for Papers

 

We are inviting you to participate in the 10th annual  Prague Conference on Political Economy (PCPE). PCPE is an international and interdisciplinary gathering of scholars and supporters (not only) of the Austrian School of Economics and political economy of freedom. During two days of the conference (Friday afternoon and Satuday), participants will have an opportunity to participate in lectures and debates focusing on economics, political science, history, philosophy and other humanities, and to discuss these issues with leading theorists in the field, both from Europe and overseas.

Deadline for submissions is March 17, 2014.

Preliminary program:

Friday, April 4 2014

3.00 pm - 4.00 pm: Registration

4.00 pm - 4.15 pm: Opening of PCPE 2014  by Josef Šíma

4.15 pm - 5.00 pm: Friedrich von Wieser Memorial Lecture delivered by Martin Ricketts (University of Buckingham)

5.00 pm - 5.45 pm:Franz Cuhel Memorial Lecture delivered by Michael Munger (Duke University)

Saturday, April 5,  2014

10.00 - 12.00: Sessions I

14:00 - 16.00: Sessions II

16:00 - 18:00: Sessions III

Sunday, April 6, 2014

Sightseeing and departure

 

This conference PCPE is an attempt to resurrect the tradition of Austrian economics- and liberty-oriented thinking that thrived in central Europe at the beginning of the 20th century, but sadly disappeared thereafter. By establishing an annual forum for scholars and students to meet and exchange ideas we hope to build a solid institutional basis for the advancement of the liberty-oriented research program.

The Conference takes place in the quaint and newly reconstructed building of the CEVRO Institute [school of legal and social studies] in the heart of Prague, the capital of Czech Republic.

As the president of the conference, I believe that the conference will keep up the good spirit of previous years. We will do our best to succeed in making the 2014 conference at least as stimulating and useful as the past ones. We also believe that your participation will make the conference an even greater success.

We hope you will join us!
prof. Josef Sima, Ph.D., president of the CEVRO Institute (josef.sima@vsci.cz)

2014 Summer Institute on the History of Economics, June 1-13

|Peter Boettke|

The Center for the History of Political Economy at Duke University will be hosting another Summer Institute onthe History of Economics this coming June. The program is designed for students in graduate programs in economics. Students will be competitively selected and successful applicants will receive a $2000 stipend for attending, plus free housing and reading materials. The deadline for applying is March 3.

Additional information for those interested can be found at the CHOPE website.