Coordination Problem

Have We Had This Discussion Before? Revisiting the LSE in the 1930s

|Peter Boettke|

Thomas Piketty has become quite a sensation with Capital in the 21st Century.  I have yet to make my way through the book, but I have been following the discussion quite closely.   But even given the clear best-seller nature of this tome, it was surprising to see Bill Maher on his HBO show discussing Piketty's book and to declare that the upshot of the book is that "socialism built the middle class".  There was some irony in watching this yesterday evening by sheer accident given that in a talk I gave earlier that afternoon for students at Beloit College I emphasized that socialism has a particular meaning and a systemic ways of thinking about human affairs and should not just be equated with things "we" like -- such as greater equality of income distribution.

Nevertheless, the way that Maher was throwing around the term, and the fact that his panel seemed so comfortable with the use of the term, really reminded me of the discussion about socialism -- and in particular market socialism -- in the 1930s at the LSE.  In my 2004 Hayek Lecture at the LSE I wrote:

The LSE counter-reaction to the Mises-Hayek critique was to argue that socialist policy and economic and political freedom were compatible. Durbin (1945) actually stated: "We all wish to live in a community that is as rich as possible, in which consumers' preferences determine the relative output of goods that can be consumed by individuals, and in which there is freedom of discussion and political association and responsible government." He also adds that "We are socialist in our economics because we are liberals in our philosophy." Even Hayek's friend and comrade in the debate with market socialist Lionel Robbins (1947) came to argue that: "An individualist who recognizes the importance of public goods, and a collectivist who recognizes the desirability of the maximum of individual freedom in consumption will find many points of agreement in common. The biggest dividing line of our day is, not between those who differ about organization as such, but between those who differ about the ends which organization has to serve."

To Hayek the evolution of the argument in this direction must have seemed most puzzling and frustrating. In fact, it is my contention that the development of Hayek's research program over the next 40 years was not a consequence of him running away from economics, but of running deeper underneath economic argumentation to understand the source of the misunderstanding by his former students and colleagues.

I want to highlight the Durbin claim --- 'socialist in our economics because we are liberals in our philosophy'.  This is, I would like to contend, what Maher and others believe as well.  But Hayek's argument is that this argument is wrong in its basic economics, and wrong in its understanding of politics, and it is certainly wrong in its analysis of the interaction between economics and politics.  And the consequences of being wrong have tragic consequences.  Liberals are led by the logic of their own argument to pursue economic policies that destroy the very foundations of the liberalism that they supposedly cherish.  This is the tragedy that forms the core of the argument in The Road to Serfdom.

Now that argument has been denied, confused, and abused throughout its history as Hayek's stock as a social thinker has risen, fallen, risen again.  There are obviously technical details in the Piketty book, but as Tyler Cowen's review discusses if you look through the lens of Austrian capital theory as well as the lens of public choice theory, the analysis will start to shift ground.   But I will wait till I get through the book until I pass full judgement on this and other issues with respect to Piketty's work.  Nevertheless, I do wonder whether we haven't had this discussion before and that we are just forgetting the ultimate conclusions that were drawn.

 

 

 

Time to Buy -- Impact Scholars in Political Economy

|Peter Boettke|

Ben Powell and Pete Leeson are rising stars in the disciplines of economics and political economy. (Both are in that first decade range of getting their PhD -- Powell 2003, Leeson 2005 -- so they are representatives of the next generation of maturing scholars).  Ben now directs a new research and graduate education institute at Texas Tech and is the North American Editor of The Review of Austrian Economics.  Pete is a distinguished professor of law & economics at GMU, and the North American Editor of Public Choice.  Their two books respectively are among the first books published in the Cambridge University Press Studies in Economics, Choice, and Society. 

 

Complexity, Frameworks and Laissez Faire Activism

|Peter Boettke|

Edward Lopez did me the great honor of organizing an 'author meets his critic' session at the recent APEE meetings on my Living Economics (2012).*  David Colander was the chosen critic.  David is in many ways the perfect person for this task due to his intellectual temperament, his wide ranging interests in the history of political economy, and the very simple fact that Living Economics is influenced in at least 2 significant ways by the work of Colander: (1) his work with Barkley Rosser and Ric Holt on the changing nature of the neoclassical mainstream very much fits with my own distinction between mainline and mainstream economics, and (2) his book, The Stories Economists Tell, was the role model for my own book at the earlier stages of its conception.  Though influenced in direct and indirect ways by his work, Living Economics also departs in signficant ways from Colander's own narrative about the history and practice of contemporary economics.

Colander is a very challenging critic precisely because he has a slightly different take on the "mainline" of economic and political economy thought than I do.  We have much that we agree on, but also enough differences to make his challenges difficult (and intriguing ones) for me.  We have interpretative differences in theory, judgment differences about the state of play methodologically and analytically in contemporary economics and we have different priors with respect to the "art of political economy".  Let me focus for this post, on this last point of difference.  His latest work tends to link the complexity of economic relations with a concentration on the meta-institutional framework and the piecemeal interventions that are introduced by governments to address social ills.  The critical points are: (a) government and market co-evolve, (b) there is public and private entrepreneurship, (c) that bottom-up reforms do not violate the principles of classical liberalism, and do not necessarily confront the same problems that have been identified in the political economy literature with top-down government planning and interventions.  There is, indeed, Colander argues scope for laissez-faire activism.  This argument has now been published in his new book, Complexity and the Art of Public Policy: Solving Society's Problems from the Bottom-Up (with Roland Kupers).

In my judgment, Colander's argument should be widely discussed among political economists --- especially those with classical liberal priors.  In its own way, Colander's position pushes the limits of Hayek's distinction between the statesman as an engineer versus the statesman as a good gardener, and it also relates to Popper's piecemeal engineering position as opposed to rigid laissez-faire as well as dogmatic socialism. What does a 'good gardener' do in cultivating a vibrant economy?  How do we engage in piecemeal engineering in the policy space?  Bright lines in the sand type arguments simply might not fit into that description of the political economy of a free people.  And if that is true, what, if any, stopping argument do we as positive political economists have to the scale and scope of government intervention?  Colander's work raises these, and many other questions in my mind and should be discussed in depth.

Here is Colander discussing his thesis last summer:

 

 

____________

*Living Economics has been translated into Spanish (2013) and Romanian (2013), and there has been discussion concerning translations into Chinese and Persian languages as well.

What is the point of punishment?

|Peter Boettke|

This, and other questions, is what animates Morris Hoffman's new book, The Punisher's Brain: The Evolution of Judge and Jury.  Hoffman's book is part of the Cambridge Studies in Economics, Choice and Society that Timur Kuran and I edit.  The publishers description is as follows:

Why do we punish, and why do we forgive? Are these learned behaviors, or is there something deeper going on? This book argues that there is indeed something deeper going on, and that our essential response to the killers, rapists, and other wrongdoers among us has been programmed into our brains by evolution. Using evidence and arguments from neuroscience and evolutionary psychology, Morris B. Hoffman traces the development of our innate drives to punish – and to forgive – throughout human history. He describes how, over time, these innate drives became codified into our present legal systems and how the responsibility and authority to punish and forgive was delegated to one person – the judge – or a subset of the group – the jury. Hoffman shows how these urges inform our most deeply held legal principles and how they might animate some legal reforms.

• Unique analysis devoted entirely to using evolutionary psychology to analyze the problems of how and why humans blame, forgive and punish
• Written by a sitting trial judge who has been on the front lines of our modern blaming, forgiving and punishment institutions for more than two decades
• Inaugural book in Cambridge Studies in Economics, Choice, and Society, edited by Peter J. Boettke and Timur Kuran, a new interdisciplinary series of theoretical and empirical research focusing on individual choice, institutions and social outcomes

 I am wondering how much of the argument that Chris Coyne and I put forth in our "The Political Economy of Forgiveness" would need to be adjusted in light of the argument and evidence provided by Hoffman?  Our argument is not based on neuroscience, but on economic analysis that includes questions of sorting, signaling and the passage of time.  In short, we engage in a conceptual cost/benefit calculation and attempt to discuss the optimal amount of forgiveness (or forbearance) in post-atrocity situations, but the intitution seems consistent with philosophical discussions of reparations and practices such as the statute of limitations.

Some Thoughts on Equal Pay Day

Steven Horwitz

Yesterday was Equal Pay Day and my Facebook reposting of my Learn Liberty video on the gender wage gap generated a whole bunch of discussion both on the thread and privately.  The assertion that the gap is mostly not the product of discrimination always generates much heat.  I thought I might take an opportunity here to say a few things about this issue and how it gets talked about among libertarians and their interlocutors.

One point of confusion is not understanding that the issue, for economists, is about discrimination in labor markets and wages.  When we say that wage differentials between men and women are mostly not due to discrimination, what we are saying is the following:  men and women with identical labor market characteristics and preferences about jobs will get paid nearly the same.  Our concern is whether wages are related to those variables rather than the employer’s like or dislike of one group or another, regardless of their job characteristics etc..  Put differently, economists tentatively conjecture that discrimination exists if any part of the pay differential between men and women cannot be explained by human capital and job preferences.

Notice that this says nothing about whether there is sexism elsewhere in the economy.  All that is says is that we only presume that employers are discriminating when they don’t pay people the same who have otherwise the same job market characteristics (aside from gender).

Those who argue, as I do, that most of the gender wage gap is not due to discrimination are often accused of just making a “libertarian” point, as if we think the market magically makes discrimination disappear.  In truth, the claim that most of the gap is not due to discrimination is widely accepted in the economics literature in general, libertarians or not.  The general consensus is that once the other economic factors are accounted for, only about 5 cents on a dollar remains unexplained.  In other words, of the gap of 23 cents (77%), about 75% is explained by those factors.  This is not libertarian priors.  This is the consensus of the literature.  Even a recent studey by the American Association of University Women (hardly libertarians) of 2008 college grads one year out found that there was a raw pay gap of 18 cents, but that only one-third of that was not explained by the usual factors.  In other words, the gap conjectured to be due to discrimination was 6 cents.  Arguing that discrimination explains only a fraction of the gender pay gap is a well-established result in economics.

If I had it to do over again, I would have softened the language in that video, which is phrased too much as “it’s not discrimination.”  The more accurate statement is that it’s “mostly” not discrimination.  Of course even the finding of an unexplained portion of the gap is subject to refutation and much of the literature on this topic involves economists trying to make sure they’ve accounted for all the human capital factors to see if they can explain more of the gap.  The debate continues.

As I noted earlier, even if there were no unexplained part of the gap, and that economists found no discrimination in labor markets, it doesn’t mean there isn’t sexism elsewhere.  For example, even if markets paid everyone exactly according to their human capital and job preferences, that human capital and those preferences could well be the result of sexism elsewhere in society.  Suppose we had a law that prohibited women from attending college.  It’s at least possible that gender wage gap studies would find no discrimination because women’s lower pay would be the result of their lower human capital.  All that would show is that employers don’t discriminate, but it would hardly be cause for celebrating the end of sexism.  The point people like me are making about the gender wage gap is that most of it is not the fault of sexist employers and that markets generally do pay people in accord with their skills and preferences.  That’s all we're saying.

For libertarians, that seems to be an important result, especially if those arguing the other side think they can improve matters with public policy.  Trying to eliminate the pay gap through wage setting like comparable worth or anti-discrimination laws is not going to help and may well backfire to the extent such policies raise the cost of hiring women.  Instead, libertarians might want to join their feminist friends in working on the cultural side of the issue.  Some of the best things we could do to equalize men and women’s pay involve making sure that we aren’t discouraging girls from entering majors and acquiring skills that lead to better paying jobs.  Telling little girls that math isn’t for them, for example, contributes to pay differentials by affecting human capital.  Similarly, we could do more to encourage boys to enter the supposed "feminine" occupations.  We, and by “we” here I mean men, could do more to shoulder the responsibility of household production.  To the extent that it remains mostly women who interrupt their careers to care for children, or who are responsible for more of the “second shift,” it will remain the case that their wages are lower.  We can also use social pressure to encourage firms to offer more flexible employment arrangements that make this possible.  All of these are ways to work outside the state to reduce the role of sexism in determining wages even if we think labor markets are not a source of discrimination.

Finally, as libertarians we might want to challenge some of our feminist friends with the following consideration:  if patriarchy is real and men have disproportionate power over all of society’s major institutions, why should a feminist trust the government to be the solution to problems like the gender wage gap?  Even without assuming patriarchy, given the track record of government in the 20^th century and before, why should we believe it will not only care about women’s interests but be able to effectively pursue them?   To simultaneously complain about how Congress is controlled by men and still think that the federal government is the solution to men’s oppression of women seems… problematic.  And if our feminist friends agree that the state is not the solution, then it would seem we’re all on the same side.

So arguing that labor market discrimination plays a very small role in explaining the gender pay gap does not mean that sexism has nothing to do with it.  Sexism matters, but far more in the ways human capital is acquired and preferences are formed than in the wage decisions made by employers.

Association of Private Enterprise Education (APEE) 2014

|Peter Boettke|

In a few days Las Vegas will once again be the meeting place for the Association of Private Enterprise Education.  You can browse the conference sessions here.  The participants come from a large diversity of universities and colleges spread throughout the US and topics range from how to improve the basic teaching of economics to the analysis of pressing public policy issues.  I am currently President of APEE, but my role in this particular meeting is more symbolic as the Vice President each year is the real driver of the meetings (so that was my job last year).  Professor Josh Hall of WVU is this years VP, and he has done an outstanding job of putting together an intellectual exciting program.  Very much looking forward to enjoying the exchange of ideas with old and new friends.  Hopefully, when it comes to the ideas at APEE what goes on in Vegas doesn't stay in Vegas!!!

Get Ready, The Red Raiders are Coming

|Peter Boettke|

Ben Powell has made the following exciting announcement --

 

************

Dr. Edward Stringham and Dr. Adam Martin to Join the Free Market Institute

The Free Market Institute is pleased to announce that Dr. Edward Stringham and Dr. Adam Martin will be joining Texas Tech University as Faculty Affiliates of the Free Market Institute beginning in the fall of 2014.  Dr. Stringham will have a faculty appointment as an Associate Professor of Economics in the Area of Energy, Economics and Law in the Jerry S. Rawls College of Business Administration.  Dr. Martin will have a faculty appointment as an Assistant Professor in the Department of Agricultural and Applied Economics in the College of Agricultural Sciences & Natural Resources. 

Dr. Stringham will join Texas Tech University from Fayetteville State University where he is Lloyd V. Hackley Endowed Professor for the Study of Capitalism and Free Enterprise.  Prior to that position, he served as Shelby Cullom Davis Visiting Associate Professor of American Business and Economic Enterprise at Trinity College and Associate Professor of Economics at San Jose State University.

Dr. Stringham is the editor of the Journal of Private Enterprise and past president of the Association of Private Enterprise Education.  He is the editor of two books and author of more than two dozen articles in refereed journals, including Journal of Economic Behavior and Organization, Journal of Institutional and Theoretical Economics, and Public Choice.  His forthcoming book, Private Governance, will be published by Oxford University Press.

Dr. Stringham's research has been discussed on more than 100 broadcast stations and in hundreds of newspapers worldwide, including many of the highest circulating newspapers in the United States.  He earned his doctorate in economics from George Mason University in 2002 and has won several awards including Paper of the Year Award from the Association of Private Enterprise Education and Excellence in Graduate Teaching Award from the School of Business and Economics at Fayetteville State University.


Dr. Martin will join Texas Tech University from King's College London where he is a Lecturer in Political Economy and Leader of the Rationality, Choice, and Uncertainty Research Group.  Prior to that position, he was a post-doctoral fellow at the Development Research Institute at New York University and has been a visitor at the Center for the History of Political Economy at Duke University and the Social Ontology Group at Cambridge University.

Dr. Martin's research interests focus on the intersection of philosophy, politics and economics and include Austrian economics, economic methodology, economic development and public choice.  The main thread of his work concerns the relevance of Frank Knight's distinction between risk and uncertainty for contemporary political economy.  His research has been published in Journal of Economic Methodology andPublic Choice among other scholarly outlets.  He is the recipient of the 2013 Gordon Tullock Prize for Best Paper in Public Choice by a Junior Scholar, awarded for his paper (co-authored with Diana W. Thomas), "Two-tiered political entrepreneurship and the congressional committee system." 

In addition to advancing his scholarly research program, Dr. Martin serves as a member of the Board of Scholars for the Founation for Economic Education, Director of the Humane Studies Fellowship for the Institute for Humane Studies at George Mason University and judge for the Carl Menger Essay Contest for the Society for the Development of Austrian Economics, an undergraduate essay competition he co-founded.

The faculty and staff of the Free Market Institute are excited to welcome both Dr. Stringham and Dr. Martin to the Texas Tech University community.

**********

I expect amazing news to continue to come from Ben Powell's Free Market Institute and the various research and educational innovations that he initiates there. 

I have been spending a lot of time in the Buchanan archives lately, and in one unpublished set of remarks Buchanan gave to honor Hayek in 1979 he explains how important research and education centers such as the Free Market Institute are for the advancement of ideas in economics and political economy.  Buchanan also argues in those remarks that to build those centers of learning we must marry property rights economics, law and economics, public choice, and Austrian economics.  Powell, Stringham and Martin form the nucleus of a great team right along the lines that Buchanan lays out.

As they might say in Lubbock -- "Guns Up Red Raiders"

Rationality and Religion --- the Wisdom and Wit of Tony Gill

|Peter Boettke|

I am a fan-boy of the work of the political economist Tony Gill, see this earlier post.  I also find him personally very good company.  But that is a different point, lets focus again on his overall work.  So I am very attracted to his discussions of religious liberty and overall liberty and his plea for consistent thinking.  But at a methodological level, I also greatly appreciate his common-sense defense of the rational actor model and the economic approach to the study of organized religion.  The recent EconTalk podcast with Tony and Russ Roberts is very good on this.

Listening to Tony I was reminded of Philip Wicksteed's basic presentation of the universality of the logic of rational action, and his discussion of the "economic" nexus in The Common-Sense of Political Economy.  First let me quote from my own preface to the latest edition of Wicksteed's classic:

Wicksteed deploys the basics of economics to explain not just the universal applicability of decision making on the margin to all realms of human conduct, but develops a theory of the market process animated by exchange; a theory of factor pricing and the equalization of returns; and a general theory of social cooperation emerging out of the purposive behavior of individuals within the market economy.

I encourage the reader to take notice of Wicksteed’s prefatory quote from Goethe: “We are all doing it; very few of us understand what we are doing.” Wicksteed is about to explain to his readers how in our ordinary lives we continually exhibit the economic theory of decision making and interaction even when we ourselves have no idea what we are doing. “In the ordinary course of our lives,” Wicksteed begins his book, “we constantly consider how our time, our energy, or our money shall be spent.” Living a life without philosophical understanding does not mean that our behavior defies philosophical explanation and scientific examination. Economics, in this sense, is little more than applied common sense. As Frank Knight argued about Wicksteed’s work, the “master-theme is that economic theory is merely a clear working-out of the ‘common-sense’ of the administration of resources, and particularly that the same principle governs the organization of production and consumption.” The same principle at work on both sides of the market is the human capacity to strive to realize the biggest bang for the buck, and when played off against one another results in the equalization of returns for effort across all margins. But this isn’t true only in the commercial context. We strive to do this in all our endeavors.

I follow this up by quoting Wicksteed's discussion of the marginal benefit/marginal cost calculus that Caeser engaged in when deciding when to cut his exhortation to his troops before battle.

But an even better example for the sort of work Gill is engaged in, is Wicksteed's discussion of Paul and his tent-making occupation in Corinth.

Yup even in the most sacred of human endeavors, the economic calculus guides our actions.

You Have to Read Marx and Understand His Philosophical System to Appreciate What He Said and What Is Wrong With It

|Peter Boettke|

In the front matter of my first book, The Political Economy of Soviet Socialism: The Formative Years, 1918-1928, I chose as the epigraph a quote from Mises's Socialism that reads as follows:

It must be admitted that the idea of Socialism is at once grandiose and simple. ... We may say, in fact, that it is one of the most ambitious creations of the human spirit. The attempt to erect society on a new basis while breaking with all traditional forms of social organization, to conceive a new world plan and foresee the form which all human affairs must assume in the future --- this is so magnificiant, so daring, that it has rightly aroused the greatest admiration.  If we wish to save the world from barbarism we have to refute Socialism, but we cannot thrust it carelessly aside.

I first read this quote from Mises as an undergraduate and it had a great impact on my path of study --- I even contemplated pursuing my PhD at the New School for Social Research in NYC because of it.  I read everything I could on Marx for about 10 years -- original sources and secondary sources.  I did this with regard to the Soviet experience as well -- as is evident from my bibliography for the above referenced book which is divided into (A) Primary and Secondary Sources on the Soviet Union, and (B) Philosophy, Politics, Economics and the History of Ideas.  During this time I sought out to learn from whomever I could about Marx's body of thought.  Leszek Kolakowski's The Main Currents of Marxism is indespensible for anyone on this path of study, but I would also highly recommend Andrzej Walicki's Marxism and the Leap Into the Kingdom of Freedom.

Of course, there is no substitute for reading Marx himself -- as torturous as that might be at times.  The key to reading Marx is to understand his philosophical system --- namely, the methodology of dialectic materialism, and what this implies both for his critique of utopian socialists and for his analysis of capitalism.  Marx's analysis of capitalism is not independent of his picture of the socialist future --- it is instead a critique from that vantage point.  It is also at the core of why Marxism is not a reform agenda, but a revolutionary agenda.  Both his concepts of alienation and exploitation are tied closely to his picture of a world that transcends the existing social relations of production.  Justice, in short, can only be served through transcendence of the private property order of commodity production.  To achieve this, Marx conceived of a rationalization project that entailed the abolition of commodity production and the establishment of a unified plan.  Rationalization would produce such a burst of productivity in the economic system that the division of labor could be abandoned as we become one with our true species being.

Marx's analysis of the increasing concentration of capital, on the instability of capitalism caused by disproportionality, and the linkage between both of these and monopoly capitalism are all derived through a perspective that starts from the vantage point of a future socialist world.  Socialism, to Marx, would eliminate the inherit contraditions of capitalism.

But this reading of Marx is not genuinely understood.  Consider the recent discussion at the New York Times on Marx. Or this older piece by John Cassidy from the New Yorker.  In these discussions, Marx's analysis of capitlaism is completely divorced from his perspective on socialism.  But if the negative analysis of capitalism is only possible given his positive vision of socialism, what happens if his positive vision of socialism turns out to be faulty?

The bottom line, as Mises said, socialism is indeed one of the most ambitious creations of the human spirit, but it was also a miserable failure wherever and whenever implemented.  Millions of individuals were casualties of the socialist experiments in the 20th century.  It is vitally important for each new generation to understand this message --- socialism failed not because humanity failed to live up to its ideals, but because socialism fails humanity.  Its problems are not bugs in the system, they are features of the system.

When I was just starting graduate school, I attended a series of lectures by Murray Rothbard that later became his history of economic thought volumes.  During those memorable lectures, Rothbard stated the following which I think provides a very important guide to would-be students of the history of economic ideas.  "The key to understanding the history of economic thought," Rothbard stated and then chuckled before finishing his sentence, "is to understand that Marx was a commie and Keynes was a Keynesian." He and his audience then laughed hardily.  But 30 years later, Rothbard remains spot on in that advice, and in order to truly appreciate the contributions of Marx and Keynes you need to understand the full implications of that statement and once you do, you will also be able to see the fundamental flaws in both systems as well.