Coordination Problem

The Transformative Rise of Austrian Economics

|Peter Boettke|

The Daily Bell published an interview with me yesterday. 

For as many years as I can remember as a professional economist I have described my research activities as follows:

My research has primarily been in the area of comparative political and economic systems and the consequences with regard to material progress and political freedom. In addressing these questions, I have also had a particular interest in 20th century economic thought and the methodology of the social sciences because of my judgment that much suffering throughout the 2nd and 3rd worlds in the 20th century were caused by bad ideas in economic theory and public policy and that these bad ideas were promulgated because of misguided notions in the philosophy of science as applied to the social sciences. It has become an important part of my research efforts to explore and tell the tale of this mistaken intellectual path. The Austrian School of Economics, its ideas, its historical figures, and its fate in the economics profession and public policy discourse has been a source of continued intellectual inspiration for me since my undergraduate days and is no doubt evident throughout all my writings.

Fields of Interest: Market Process Theory, Comparative Political Economy, History of Economic Thought and Methodology, Economic Development, Economic Methodology, Austrian Economics, Political Economy, Informal Institutions

In the years since I have been a practicing economist, the methodological swings have been interesting to observe, if also frustrating.  At one point in the 1980s and early 1990s, I thought economists were going to final open up to a multiple methods methodology with respect to empirical research and we would see a return of traditional narrative historical research.  My believe was inspired by D. N. McCloskey's "rhetorical turn", but also the professional reception of the work of Avner Greif.  In the mid 1990s, I was very convinced of this turn due to three factors -- (1) it was obvious that official statistical analysis failed to capture what was wrong with the economies in East and Central Europe and the former Soviet Union, and that only opening our eyes to the informal sector would solve that mystery, and this also seemed true for what was going on in less developed economies, (2) Greg Mankiw's very clear analysis of the shortcomings in the then standard growth regressions in terms of sorting out the causal explanation for differing performance in his Brooking Papers in Economic Activity 1995 paper, and (3) Greif's analysis in "Cliometrics After 40 Years."  Now in retrospect, I realize that I read a lot into these that is perhaps unique to me. But I took these signs as the opportunity for a wedge to form that could be exploited by those interested in field research in political economy and the constructing of analytic narratives, which I argued was the appropriate empirical complements to market process theory and public choice analysis (including constitutional political economy).

But while research in the analytic narrative tradition is feasible in the field of political economy and economic history, it did not result in the sort of methodological sea-change that I had expected.  Instead, the sort of comparative historical political economy that I had hoped would take on a leading role in modern economics and political economy is still a minority position. But it is a growing minority if you look at the publication placement and scholarly impact of work by Pete Leeson, Chris Coyne, Ben Powell, Ed Stringham and David Skarbek.  Their work respectively represents the outgrowth of this optimism for a methodological rethinking.  The research program in comparative historical political economy has been laid out in systemic form in a few essays that Chris, Pete and I have published jointly -- (a) The New Comparative Political Economy; (b) Institutional Stickiness and The New Development Economics, and (c) Comparative Historical Political Economy.

As we explain in the last of these papers, empirical research must be comparative, historical and political economy.  One of my favorite articles in recent years is Daron Acemoglu's Journal of Economic Perspectives reminder to researchers in development economics that progress in the field requires the primacy of a theory of individual behavior and economic forces at work as well as an accouting for political economy.  Our papers should be read in that same line of argument, and also on the empirical front demanding that the real action goes on behind the official view and the statisical agencies working from that official view.  In economic relations, it is the de facto and not the de jure alone that we must uncover if we hope to understand the relationships and modes of interaction that define the social order. 

So we come back again -- methodological individualism, institutional analysis, and process tracing provides the analytical framework, and field work and narrative history forms the basis for empirical research.  We can, of course, supplement our empirical research with pattern recognition with statistical tools, and lab experiments to illustrate the analytical framework or computer simulations to again illustrate the analytical framework.  But good old fashion historical research, and the use of archives, memoirs, ethnography, and on-the-ground soaking and poking, should be in the empirical tool-kit of economists and not just Mostly Harmless Econometrics.  Remember it is Comparative Historical Political Economy -- same players different rules means a different game.  We must examine how different rules produce "better" or "worse" games, or to put it another way, how alternative institutional arrangements are either conducive to productive specialization and peaceful cooperation, or thwart such efforts at human betterment.

Anyway, as I say in the interview linked above, I am very optimistic about the scientific and scholarly future of the contemporary Austrian school of economics.  But there should be little doubt that a methodological sea-change is required to see the wide scale appreciation let alone acceptance of the Austrian school of economics and the broader agenda of classical liberal political economy.

Markets for Managers

|Peter Boettke|

Get this book, and use this book in your classes.

 

 

Anthony Evans has established a website for the book, and also has already posted some videos on YouTube with more to come.  Right now you can get videos providing an overview of the book, exchange, comparative statics, trade interventionism, and AD-AS analysis.

Skidelsky on the House of Samuelson

|Peter Boettke|

Robert Skidelsky's new essay "The Fall of the House of Samuelson" has a lot of interesting tidbits of 20th century history of economic thought.  As he writes of the heyday of the Keynesian consensus:

Reading The Samuelson Sampler, it is extraordinary to realize just how confident economists of his generation were that the New Economics (as the Keynesian approach was called in America) had solved the problem of depression and mass unemployment. As Samuelson put it in his 1973 introduction, “the specter of a repetition of the depression of the 1930s has been reduced to a negligible probability.”

It is precisely at the peak of this confidence that Friedman and Buchanan would offer their own monetary policy and fiscal policy challenges to, as Buchanan would put it, Keynesian follies.  And Hayek's price theoretic explanation of the business cycle would receive renewed interest.

We have seen something similar since 2008, though the monetary policy and fiscal policy critiques have been more numerous none has been as pathbreaking in my opinion as those offered by Friedman and Buchanan of that older generation.  Perhaps because their critiques are still fresh enough in our memory as to be part of the common-knowledge or at least in Buchanan's case perceived common-knowledge.  Though I would point to the work of my colleague Richard Wagner as that of someone who is pushing out that framework in public finance theory and policy with great originality.  We all should be reading more Wagner.

My colleague Larry White has just released a great paper on Hayek and Contemporary Macro that should be widely read as well.

 

 

How Different is Economics Today From What It Was In the 1950s?

|Peter Boettke|

Ric Holt at the History of Economics Society discussion list recently posted this General Economics Exam from Harvard given in 1953.  Most of the discussion is how different economics is today than it was then, but what I find intriguing is how many of these questions remain relevant.  If you look at it in that light, then the importance of methodological differences can be stressed --- the reason methodology is so important in science is because it not only determines what are good questions to be asking, but ultimately what is considered a good answer.  In short, questions from 1953 may still be good questions today --- almost without doubt they are -- but what might be considered a good answer probably has changed drastically.  Depending on your own perspective, that can either be deemed a good thing, or a bad thing.

DEPARTMENT OF ECONOMICS
GENERAL EXAMINATION

(Three hours)

Please note on the front cover of your bluebook the number of each question upon which you write, in the order followed in your book, and HONORS or NON-HONORS.

PART I
(One hour)
Economic Analysis

HONORS candidates answer ONE question taken from questions 1- 4.

l. "Depressions are caused by the exhaustion of investment opportunities and the rigidity of saving." Discuss.

2. "Keynes' theory may have undermined the nee-classical theory of the price level but it has left intact the neo-classical theory of relative prices." Discuss.

3. "The basic criteria of anti-trust policy with respect to product markets are the same whatever thecompetitive structure of labor markets may be." Discuss.

4. "Despite all the changes that have taken place in economic theory the profit motive continues to occupy the central role which it had in Ricardo's theory." Discuss the role of profit in (a) Ricardo, (b) nee-classical theory, (c) Schumpeter's theory.

NON-HONORS candidates answer ONE question taken from questions 5-8.

5. "Future historians may well write the epitaph of our civilization as follows:

From freedom and science came rapid growth and change.
From rapid growth and change came economic instability.
From instability came demands which ended growth and change.
Ending growth and change ended science and freedom."

Discuss this alleged conflict between economic growth and measures to secure economic stability. In your answer refer to the views of some of the great economists, for example, Schumpeter and Keynes, on this problem.

6. In explaining business cycles most economists place crucial emphasis on fluctuations in investment or capital goods.

Discuss the determinants of investment and the manner by which these factors operate upon investment to produce fluctuations in National Income.

7. The basic economic questions any society must somehow answer are: ( 1) What consumer and capital commodities shall be produced and in what quantities? (2) How shall the goods beproduced, i.e., by whom and with what resources? (3) For whom are goods to be produced, i.e., how is the national product to be distributed among individuals? Outline the way in which these questions are answered in a perfectly competitive, free enterprise economy.

8. In addition to wages, interest, and rent, economists often talk about a fourth category of income: profit. What do economists mean by this return? What are the causes of profit and its function in a capitalistic system?

PART II

(Two hours)

All students are required to choose TWO of the four fields in Part II of this examination and to answer two questions in each selected field. Thus a total of four questions are to be answered in Part II with an allowance of a half hour per question.

A. Economic History

9. "The very increases in the possibilities of unrestrained competition of the past seventy-five years,through developments in transport, technology, the size and organization of firms, etc. - may in themselves partly explain some of the restraints on price competition that have appeared in thiscentury." Discuss both the developments and their alleged effects.

10. "In the past 150 years the United States economy has radically altered its relationship to the world economy and at intervals has been a seriously disturbing factor." Discuss, including references to periods in the 19th as well as the 20th century.

11. "In spite of the waste, apparent exploitation, and graft, the railroads more than paid for themselves in terms of American economic growth." Discuss.

12. Why did Hamilton favor a central banking system? What was the subsequent history in the 19th century of the issue that he poses? How satisfactory, in terms of the needs of an expanding economy, were the alternatives to a centralized banking system that existed
prior to 1912.

B. Money and Finance

13. What are the relations between a country's balance of payments and its internal monetary andfiscal policies?

14. From a fiscal policy standpoint, what do you consider wouid be the best budgetary policy for thefederal governmet to adopt in order to combat a growing deflationary trend?

Indicate the relative advantages and disadvantages involved in the policy you propose.

Indicate practical as well as theoretical considerations.

15. "Classical economists tended to view the amount of taxes paid by the private sector of the economy as measuring the amount of 'burden' which the government imposed on the private sector." Do you agree with this view? If you do, what is the justification for your position? If you do not, what are some possible alternative ways of measuring the " burden" of the government on the economy, and for what purposes can they be used?

16. "Older business cycle theories emphasized fluctuations in prices while modern ones emphasize fluctuations in income." What is the theoretical and empirical justification for this change in emphasis?

17. What role did the Federal Reserve System play in financing the Second World War?

Discuss the impact of this experience upon money and banking in the United States.

C. Market Organization

18. The spread between prices paid farmers for products used as food and prices paid for these foods at retail was 55% of the consumer's dollar spent for food in 1910-14. It was 54% in 1952 . Account for the failure of this spread to increase in spite of the great increase in processing, services, and transportation sold with the food.

19. Although price discrimination generally is regarded as being contrary to the public interest, it is expressly sanctioned in railroad rate-setting under another name: the "value-of service" principle.What cost and market characteristic of railroads might lead you to justify the use of discriminatory pricing in their case?

20. Bituminous coal is a "sick" industry. What are the causes of this "sickness''? What attempts have been made to impose "healthier" conditions on the industry?

21. Various techniques are used by oligopolistic industries in attaining stable and desirable price and production conditions. Explain at least three ( 3) of these techniques and discuss the possible reasons for using any one over another.

D. Labor Economics

22. What role did the courts play in labor-management relations in the latter part of the nineteenth century? How far was this situation changed subsequent to 1930?

23. What is collective bargaining? Is it a process of communication and education leading to agreement based upon mutually accepted and recognized goals and standards, or is it a temporary truce based upon balance of power with conflicting basic objectives?

24. Has organized labor "distorted" the wage structure and wage level of the country at the expense of the unorganized or the weakly organized and at the expense of the recipients of other functional shares?

25. How would you handle the problem of national emergency disputes?

April 29, 1953.

'I thought science was better than it is' --- It should be a public contestation and not based on the old guard repressing results

|Peter Boettke|

Did you know that it took 5 years for Leda Cosmides to publish her ground breaking work on cheater detection in social exchange?  This interview is fascinating and discusses her ideas, but also the scientific knife edge on which she walked at the beginning of her career.  But she also had important supporters, who recognized the value in her work, the energy she had, and scientific promise of the approach she was pursuing.  

 

The Subjective and Contextual Nature of Value

|Peter Boettke|

Listening to NPR this morning, I was alerted to some TED talks by Rory Sutherland.  They are entertaining talks no doubt, and also 'informative' about the importance of "branding" in the buying and abstaining from buying behavior on the market, as well as in our perceptions of our well-being.  Sutherland, however, has a tendency to misidentify what economists are up in their analysis, but he uses his strawman to good effect for the narrative he wants to construct.  As a matter of intellectual history, though, economics since the late 19th century has explicitly acknowledged the subjective and contextual nature of value.

But providing a footnote correction to Rory Sutherland is not my purpose.  The field of marketing and the role of advertising in the competitive market process is an area that should attract some of the best and brightest minds among the young emerging practitioners of contemporary Austrian economics.  And it would not be a sharp departure.  First, Israel Kirzner has already addressed some of the core issues in his own work, such as in Competition and Entrepreneurship, but also elsewhere.  But the roots go deeper.  Hayek, of course, provided a challenge to Galbraith's critique of the manipulation of wants that nevertheless maintains the subjective and contextual nature of value --- see his "Non Sequitur of the Dependence Effect," SEJ (April 1961).  And if you dig deeper still, you will find Wroe Alderson, the "father of modern marketing".  Alderson understood that the standard neo-classical model of perfect competition would squeeze out analytically marketing and the role of advertising in what he termed "dynamic marketing behavior".  The IO economist Duncan Reekie discusses Wroe Alderson in works such as Markets, Entrepreneurs and Liberty (1984) and in most depth in his paper, "Marketing Behavior and Entrepreneurship: A Synthesis of Alderson and Austrian Economics" that was pubilshed in The European Journal of Marketing (1982).

Finally, no mention of modern marketing theory can be complete without mentioning Shelby Hunt, and in particular his work A General Theory of Competition (2000).

There is much to learn from listening to the experience of folks like Rory Sutherland, but to put it in the correct intellectual context one should not strawman economic thinkers, but instead embrace the long held scientific insights among economists about the subjective and contextual nature of value, and the dynamic adjustments and adaptations that constitute the market process.

Horwitz on Piketty

Steven Horwitz

Last month, I gave a series of talks in Lithuania, including one on Piketty.  I focused on the theoretical issues rather than the empirics. If you're interested in the latter, you should read the Magness and Murphy paper forthcoming in the Journal of Private Enterprise.

 

Do Economists Lean Left?

|Peter Boettke|

It is a popular mythology by politicians and intellectuals to claim the economics profession is a bastion of free market fundamentalism.  Consider Fred Block's recent book on The Power of Market Fundamentalism and how these ideas in practice impoverish the many while enriching the few.  Here is his interview for INET on his work.  Of course, Block is in some sense a long time critic of the economics profession for its market fundamentalism, so this isn't new.  The attitude he expresses has been voiced for generations.

Even in the heyday of Samuelson and the neoclassical synthesis --- which combined neoclassical market failure theory micro with Keynesian macroeconomic theory, the heterodox critics found a way to claim that the economics profession was dominated by free market fundamentalism.  One of the most interesting social theorist of the second half of the 20th century, Albert Hirschman talked about the incredible influence as market fundamentalist that Mises, Hayek and Friedman had over our intellectual culture -- while he was secure with his royal academic position at the Institute for Advanced Study.  I personally do not stress the martyrdom narrative for Mises and Hayek, but the reality is that their positions were relatively speaking far from the academic royalty status that their critics enjoyed.  They persisted (and James Buchanan should be included here as well) against all odds.

One of the most absurd claims I ever read was in the work of Alice Amsden and Lance Taylor, The Market Meets its Match, which was originally published in 1995.  The book claims that free market reforms in post communism must be declared an utter failure, and that the entire move toward market reforms was because of the intellectual dominience in the economics profession and the policy community of the aprioristic reasoning of Ludwig von Mises and the dogmatic quasi-religious faith in Hayekian spontaneous order.  Readers should note that post-communism begins in 1989, and goes through a variety of starts and stops, and post-communism in Russia proper, only begins in 1992. So the time frame for this "natural experiment" is very short-lived if you consider the time delays in publishing an academic book.  So the arm chair theorizing Amsden and Taylor accuse the market fundamentalist of engaging in to the great harm of humanity must not be limited to the fundamentalist, but also to the critics as well since "experience" could not have been the reason for the judgment passed in this book.  Amsden siting at MIT and Taylor in New York at the New School, both endowed professors, theorized that somehow they and their ideas were the downtrodden in the world of economics, and Mises and Hayek were the annoited royalty of the profession.

I was an assistant professor at NYU when I read those words in The Market Meets Its Match, and I remember thinking as the probability of earning tenure was slouching toward zero that if only it was the case that the work of Mises and Hayek was so valued by the scientific establishment in economics then those of us working in the Austrian tradition would not be viewed so suspiciously methodologically, analytically, and yes ideologically.  But in now close to 30 years of actively submitting articles and books for review by academic peers, the suspicion at a methodological, analytical and ideological level has not eased, and thus one must work that much harder to persuade one's peers of the merits.  Please note, I am not complaining --- this is the business I signed up for.  But it is surely an act of utter intellectual delusion to insist that the economic profession at large is free market fundamentalist.

John Cassidy might say that; Phil Mirowski might claim it, but the facts are so contrary that it has to be presented as an unbelievable conspiracy otherwise it couldn't be sustained.  From Samuelson to Stiglitz; from Keynes to Krugman, the bottom line is that the royalty of the profession of economists has "leaned left".  Of course, not as "left" as their colleagues in the humanities and other social sciences.  Economists in general, or at least for the most part, understand that there are constraints, and the trade-offs must be negotiated. But economists are, like their counter parts in the humanities and the social sciences, members of the general intelligentsia. And our intellectual culture leans toward the progressives, and has for a century.  My colleague Dan Klein actually found this out in survey data on voting and campaign contributions among economists.

Does modern economic theory bias toward this leftward lean?  That is actually the claim that Noah Smith recently made in his article "Economic Stars Swing Left".  I highly recommend the article for a variety of reasons. First, Smith is right that contemporary economics is filled with superstars who lean left.  But as I suggested above, this has been true for almost 100 years.  Second, Smith is unaware that in each manifestation of the so-called arguments for market failure, there have been sustained arguments from more market oriented thinkers to counter them conceptually, empirically, and comparative institutionally. Smith skips completely the work of Nobel econonmists such as Buchanan, Coase, North, V. Smith, and E. Ostrom.  He also skips Nobel worthy thinkers such as Alchian, Demsetz, Kirzner, Tullock, etc.  The modern models and the use of "big data" have simply put new trappings on conceptual arguments about agent rationality, market structure, asymmetric information, inefficiency, instability, and inequality.  Go back and read Keynes's "The End of Laissez Faire" carefully, you will see a good number of these same arguments surfacing -- and not merely in hidden form, but very explicitly so. And with the same conclusion. The market fundamentalist believe in the "invisible hand" but there belief is based on perfectly rational actors interacting in a perfectly competitive market, and if we can show either one or both assumptions to be wrong than the argument for the invisible hand disappears.  Adam Smith to Vernon Smith took on these arguments and showed that markets are far more robust than the critiques believe and demonstrated this with illustrations from "natural experiments" in the world, to the lab experiments, to now with simulation with a variety of agent types.  But Noah doesn't talk about that.

As I mentioned yesterday, if you look at the very brilliant and thorough talk by Raj Chetty, what still is missing?  Well, something Buchanan identified as wrong with public economics in 1949 -- the fiscal brain idea, or to put it more concretely, a stable objective function for the social planner.  This is the comparative institutional analysis that Noah needs to put those left leaning insights through, let alone pay attention to the dynamic entrepreneurial adjustments on multiple margins that failures provoke.

Market fundamentalism is far from the mainstream of economic thought.  The mainstream folks consider their work non-ideological and merely technical because they all share the same tacit presuppositions of political economy.  It would be healthy if they looked through a different window, and spent some time reading those Nobel economists I mentioned above, or the Nobel worthy economists I mentioned as well.

The soul of economics as a scientific discipline is ultimately what we are discussing. Perhaps someday, if we economists who sit in the seat of Adam Smith and practice mainline economics are successful, then Fred Block, Alice Amsden and Lance Taylor's fears will be a reality, and the research program as developed by Mises and Hayek (as well as the other more recent figures I mentioned) will be accepted as the standard bearer for scientific progress in economics.  On that day, the mainline will be the mainstream.  But until that day, the mainline remains outside of the mainstream, and only acts of scientific entrepreneurship will shift that reality.

AEA Richard T. Ely Lecture --- Raj Chetty, "Behavioral Economics and Public Policy"

|Peter Boettke|

Raj Chetty presented the Ely Lecture this year at the AEA meetings.  Here is a video of his talk and Richard Thaler's introduction.

His argument that behavioral factors should be considered pragmatically rather than in some deep philosophical sense makes some sense.  He is a brilliant analyst and speaks in a clear and confident manner.

But I would argue that his approach reflects a fundamental behavioral asymmetry and continues to insulate the political process of policy making from the same analytical scrutiny that he brings to his analysis of decision making among citizens.  Policy advice continues to be presented as if it is being offered to a benevolent despot.

I wonder how much progress could be made in political economy if the best and the brightest among economists, such as Raj Chetty, would take seriously the admonition of Hayek, Buchanan, and Elinor Ostrom that the assumptions of omniscience and benovolence must be rejected if we are going to make progress and develop a robust theory of political economy.

We Virginia School of Political Economy economists have a lot of work still ahead to make the impact on our peers.

BTW, Mario Rizzo's "Austrian Economics Meets Behavioral Economics" is essential reading.

 

A New Years Gift for 2015 -- Austrian Economics Re-Examined

|Peter Boettke|

Gerald O'Driscoll and Mario Rizzo's classic work, The Economics of Time & Ignorance has been re-released with a lot of new material, including the previously unpublished paper "What is Austrian Economics?" from 1982.

The website that has been developed for the book is also outstanding, including a reading guide with multiple links to additional articles by a variety of authors.