Coordination Problem

Philosophical Sophistication and Imperfect Knowledge Economics

|Peter Boettke|

Last night my graduate course focused on discussing the contributions to economic theory of G. L. S. Shackle, and in particular the challenge his classic work Epistemics and Economics (1973) represents to the standard general equilibrium and partial equilibrium style of theorizing.  We also read Alan Coddington's review of Shackle in British Journal of the Philosophy of Science and Ludwig Lachmann's Journal of Economic Literature appreciation of Shackle.  I recommend all PhD students in economics to spend a few weeks in their education going through these writings as well, even if they are to reject in the end as too radical.  I'd throw in their also Kenneth Boulding's Journal of Political Economy review essay on Paul Samuelson's Foundations from the late 1940s.

Why you might ask?  Well, because of at least 2 reasons -- these writings attempt to answer 2 fundamental questions, namely: (1) what are we actually studying in economics?, and (2) what does it means to be intellectually sophisticated and rigorous?

Shackle argues that economics is primarily about thoughts and as such expectations take center stage in economic analysis, and all the problems that introduces concerning unknowledge, and notions of reason, time, etc.  Shackle's distinction between analytical and constructive theories is vital to our understanding of our jobs as theoretical economists.  And his point is that one can be sophisticated and intellectually rigorous in developing constructive theories even though they "must describe a process of groping experiment and gambling for knowledge, of being wrong many times in order to be ultimately right" while analytic theories provide a sort of false impression of "rigor" through a formal presentation that restricts itself to describing "what things will be like when, if ever, they have attained rightness." (p. 53) Analytical theories are epitomized by optimization and equilibrium, and the critical move is pre-reconciliation of plans prior to simultaneous solution.  Constructive theories on the other hand focus our attention on the myriad steps or movements of transformation that prod us from one situation to another.  We are groping or slouching toward the coordination of activities -- no pre-reconciliation, but instead the reconciling of divergent plans and an evolution toward a solution.

I had the great fortune to read Shackle early in my graduate career and to also be encourage to do so by not only Ludwig Lachmann, but also James Buchanan.  After graduate school, I spent my assistant professor years at New York University, working with Israel Kirzner and Mario  Rizzo.  Both Kirzner and Rizzo also appreciated the challenge that Shackle represented to the dominate version of economics.    But again, most critics of Shackle (and Lachmann) argue that his position results in analytical nihilism.  But that is not the argument at all.  In fact, the argument is better understood as arguing for a more sophisticated and intellectually rigorous economics --- one that adopts methods that are appropriate for the subject matter, and one that doesn't run away as a result from the problems that our humanity presents to the theorist.

Besides my Austrian colleagues at NYU, I learned a great deal from other faculty members there.  I often attended Roy Radnar's  micro seminar to learn how economic theorists talked to each other, and I often attend the Jeff Goodwin's seminar on States and Revolutions in the sociology department.  In retrospect, I remember how impressed I was with how quick Jean-Pierre Benoit was in seminars and how productive Boyan Jovanovic was in terms of published research.  I also remember how much I enjoyed conversations with Andrew Schotter, Jess Benhabib, and Roman Frydman about economics and political economy.  It doesn't always show in my work, I know, but I tried to be a sponge around all these people and learn from that as much as I was capable of, and try to fit that into my own Austrian and Virginia School framework.  Frydman, especially, seemed to me to be interesting in the same way that Shackle was, though more focused on trying to figure a way to translate the insights of constructive theory into the language of analytical theory.

Since leaving NYU, I have followed the writings of Frydman more than any of my other NYU influences outside of Kirzner and Rizzo.  I have used his books in my classes and I have tried to get students to think about his imperfect knowledge economics.  I think of various people within the Austrian circle who have spent time at NYU, perhaps only Roger Koppl and I share this fascination with the promise of what Frydman is doing for the sort of economic theory we would like to see widely adopted.*  Anyway, this interview from INET is worth your time going through -- as the interviewer puts it:

Talking to Frydman is a bit like entering a fascinating meditation on the limits of knowledge and the nature of truth. Having lived through the failure of centralized planning in communist Poland, he is particularly sensitive to the hubris of believing that the future can be exactly mapped. Although the models that he has worked on are mathematical, Frydman’s approach to economics has drawn on the narrative insights of Friedrich Hayek, John Maynard Keynes, and Frank Knight.

That sounds right to me and fits with my experience.  I think this line from the interview captures Roman's attitude perfectly however: "Economics is not mechanistic. It requires understanding of history, politics, and psychology. Some say that economics is an art, but NREH is actually rigorous economics. It simply recognizes that there’s a limit to what we can know."  But what he means by rigorous is a mathematical model.

Shackle taught us, however, that such mathematical reasoning at best provides us with syntactic clarity, but may fall far short of the task because it doesn't ensure semantic clarity.  And as Kenneth Boulding argued right at the start of this transformation of economic reasoning with Samuelson that the flawless precision of mathematical economics might prove fruitless in aiding us in addressing the critical questions that exist in the borderland between economics and sociology.  And if it is in that borderland where we find the institutional infrastructure that enables (or prevents) learning among human actors on how to coordinate their plans one to another, styles of intellectual reasoning which crowd out those institutional frames that operate in fine details to distill the diffuse knowledge in an economy in ways that enable complex coordination must be rejected.  It is a false rigor if it eliminates from study the very questions we must ask to answer the fundamental questions. 

So for me, economics as a profession has a long way to go to catch up to what Buchanan suggested in "What Should Economists Do?" and what to escape from the intellectual indictment that Hayek charged the discipline with in his Nobel Prize lecture "The Pretense of Knowledge".  In short, we have a lot of work to do if we want economics -- the inexact and imprecise science that it is -- to be philosophically sophisticated and intellectually rigorous.  But it is important to realize that if we ever get there, works on imperfect knowledge economics will have been very critical in nudging us along the way.

 

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*It is probably worth noting that I was a member of Michael Goldberg's dissertation committee where a lot of the applied work in imperfect knowledge economics was first worked out.

Baylor University Establishes PhD Program in Entrepreneurship

|Peter Boettke|

Students write to me all the time about getting a PhD.  I have a few words of generic advice -- (1) go to the best school that will pay your full way; (2) look at a wide variety of options and visit the schools and go to the one where you feel most comfortable; and (3) think hard about your choice because this is both (a) the intellectual adventure of a lifetime if you choose right, and (b) an investment that you will draw on for the rest of your life.

For students attracted to market-oriented economics, let alone Austrian economics, the options are so much greater than when I was deciding on graduate school back in the early 1980s.  Take advantage of the wide variety of options in philosophy, politics, economics, and even history (with the rise of the study of the history of capitalism, it is a wide open field).  But there are also programs through business schools to study economics, law, public policy and entrepreneurship.  For the past few years I have been telling students to look seriously at Texas Tech and King's College of London, but with this announcement from Peter Klein students should definitely consider Baylor.

 

The Department of Entrepreneurship at Baylor University's Hankamer School of Business is currently accepting applications for the Ph.D. program in Entrepreneurship. The application deadline is January 15th, 2016 to receive full consideration for admission and accepted students will begin their studies in the fall of 2016.

The doctoral program builds on Baylor’s long standing tradition as a leader in entrepreneurship and equips students with the skills to conduct rigorous research that meaningfully advances the discipline, eventually launching high-impact careers as faculty members at leading universities. Although the primary focus is on entrepreneurship, students are afforded a secondary area in strategic management.

Selected students work closely with faculty members to develop deep knowledge of the field of entrepreneurship and an appreciation for theory, research methodology, and the publication process. Doctoral candidates are afforded the opportunity to generate and publish research with faculty mentors and receive active support in facilitating their own research. Faculty include Kendall Artz, Ray Bagby, Peter Klein, Les Palich, Steve Bradley and Matthew Wood. Their research has regularly appeared in top journals such as Journal of Business Venturing, Entrepreneurship Theory and Practice, Academy of Management Journal and Strategic Management Journal.

The Ph.D. in Entrepreneurship uniquely emphasizes excellence in teaching. Students take required courses in pedagogy and take part in phased mentorship that builds teaching skills.

The program is a full time four-year residency program. Tuition remission, a competitive annual stipend (among the highest in the field), support in attending key conferences in entrepreneurship and competitive summer research grants from the Baugh Center for Entrepreneurship and Free Enterprise. Students will also have opportunities to connect with initiatives such as LAUNCH Innovative Business Accelerator at the BRIC (Baylor Research & Innovation Collaborative).

The Department of Entrepreneurship is housed in the new state of the art Paul L. Foster Campus for Business and Innovation.
Information, including the online application is available at http://www.baylor.edu/business/entrepreneurship/phd/.

Please contact Dr. Matthew Wood, director of the doctoral program or email info_ent_phd@baylor.edu if you know of high potential candidates or if you have questions about this exciting program.

Matthew S. Wood, Ph.D.
Assistant Professor
Director, Entrepreneurship Doctoral Program
Department of Entrepreneurship
Hankamer School of Business
Baylor University
One Bear Place
Waco, TX 76798
ms_wood@baylor.edu

This is a great opportunity to attend a great university and study with great faculty who will encourage you to study and utilize in your work the economics of the great Austrian economists.  The field of entrepreneurship is very open to contributions from the Austrian school of economics perspective.  Take advantage of that opportunity.

Publish or Perish -- How Rankings May Distort Incentives in Economic Research

|Karen Horn| *

There is virtually nothing that cannot be ranked. From the performance of football clubs to vintage wines, from bestselling books to competitiveness and the degree of economic freedom in different countries – it is easy to put together an ordinal scale, so that everyone can see who is on the top and who is at the bottom. And most people love rankings. They provide orientation and make life easier. In football, for example, rankings help us to see immediately who is best. Success is simply defined as winning a match, and that is perfectly reflected in the score. That’s straightforward. In the book market, however, things are not so evident. Bestseller lists don’t help us much. True, we don’t have to read all available books to find out which is on the top, we just look at the list. But “bestselling” doesn’t necessarily mean “best” in terms of literary quality or whatever else one might be hoping for; the “wisdom of crowds” can rarely reach that far. Rankings are only as good as their criteria, and they merely measure what is measurable. This is the reason why, when it comes to academic quality, rankings can be completely beside the point. Worse, they might even set perverse incentives.

Let’s look at the case of economics. Rankings abound – in a vast variety, ranging from the international list of top authors registered with the RePEc (Research Papers in Economics) platform (https://ideas.repec.org/top/top.person.all.html) to the Guardian’s “league table in economics” (http://www.theguardian.com/education/ng-interactive/2015/may/25/university-guide-2016-league-table-for-economics), focusing on universities. Many of them are published by newspapers. The presence of such a large number of rankings, each with a different philosophy, already indicates how difficult it is to measure academic excellence in economics. The first problem comes with picking the relevant criteria, a choice often narrowed by limitations in practical measurement. What should a ranking focus on? Should it focus on impact, which it would be almost impossible to isolate? Or on influence, which is to a large extent in the eye of the beholder and extremely hard to capture?

Most rankings look at academic excellence, claiming to increase comparability and foster a spirit of competition. Excellence is measured by some more or less objective indicator. But here comes the second problem. It is a problem of focus and scope: where exactly is excellence important? Is it in research alone? What about teaching? What about giving economic policy advice, engaging actively in the transfer of knowledge between academia, the public, the media and politics? Is there an ideal combination of these different activities, which would justify applying standard weights to them? Why not allow for individual specialisation? If someone is very productive publishing theoretical papers in specialised economic journals but hardly ever appears in the media, like Ernst Fehr at Zurich University, one of the international figure-heads of behavioural economics, that should certainly not diminish his being acknowledged as an excellent economist.

There is only one logical consequence: One must wave good-bye to the idea of an overall ranking, breaking it up into a set of special indexes to which the interested public may refer according to its specific need. General rankings compare the incomparable. One can’t have the cake and eat it. Either complexity is maximally reduced at the cost of producing meaningless or even misleading rankings, or specialisation is taken into account and complexity reintroduced through the back door.  

Once the criteria are defined, however, the next problem comes up with operationalisation and measurement. Good luck with measuring excellence in teaching: objective methods would refer to the number of online postings or email backings-and-forthings between the teacher and his students or any other similarly arbitrary item. Subjective student evaluations however are notoriously biased. Bad marks for the teacher may sometimes be the result of a very demanding course, which however, from a pedagogical point of view, is a rather good thing. Measuring influence is not much easier. In some cases, a data base has been generated by asking a panel of experts in public administration or a random public about names in economic science that they have heard of. This is as uninteresting as it is circular. The economists who appear regularly on television and thus influence public opinion are known well enough. What remains is excellence in research, which however must be looked at in its own right, not as a proxy for the rest. Research excellence can indeed help to improve someone’s performance as a good teacher, but some talent is needed as well. There is no reliable correlation.

Fortunately or unfortunately, however, economics isn’t physics. Economists don’t deal with natural laws that only need to be deciphered, but with an ever changing social reality and human perception. Economic findings therefore cannot so easily be classified as “correct” or “incorrect”. The methods used may be apt or not; the specification of a model may be fitting or not; the data may be complete or incomplete; the implications drawn may be convincing or unconvincing. In many cases, only time – and repeated testing by the peers – will tell. Nevertheless, most rankings try to grasp research excellence by counting the number of publications within a given time – as if quantity meant quality! Focussing on quantity just reinforces the pressure to publish: “Publish or perish”, as a phrase from the Thirties goes. If there is – quite plausibly – such a thing as diminishing returns in economic science, though, like almost everywhere else, quantity at some stage must drive down quality.

Some rankings aim to remedy this problem by applying different weights to the journals in which the papers are published. For example, it is considered more prestigious to have a paper in the American Economic Review (AER) than in Kyklos (ever heard of?). The academic community distinguishes A, B, and C journals. With the corresponding weights attached, a paper in the AER then counts more than one in Kyklos. This looks alright at first sight – but only at first sight. That the AER is considered an A journal doesn’t mean that all papers in the AER are also A papers. The distribution of quality within a journal is usually very uneven. Would it make more sense to look at citations, i.e. at ex post instead of ex ante indicators, as some economists claim? Absolutely: if a paper is truly excellent, it will find recognition and spur further research, which means that many people will refer to it explicitly. And yet, there remains a caveat which has to do with the implicit incentive for citation cartels. “I quote you and you quote me” is indeed already a typical deal in academia. Considered in full light, citation-based rankings may say more about the network of a researcher than about the quality of his work.

The practical impact of rankings is as yet unclear. One would hope that the spirit of competition that rankings allegedly seek to foster won’t simply increase superficial short-termism. True scientific innovation and depth may likely take a few years of profound reflection and experience, without much written output, and universities should be wise enough to make this possible for their faculty. And one would also hope – and trust – that universities investigate into the capabilities of their potential staff in a much broader and at the same time more detailed way than rankings do. There remains a worry that rankings may create a public reputation which may be difficult to ignore even within academia. But perhaps the most problematic effect is that they may foster an academic mind-set already biased in favour of publishing instead of teaching – to the detriment of students.

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*This is a guest column by Dr. Karen Horn -- one of the leading voices sound economics throughout Europe.  Dr. Horn for many years was the economics editor at Frankfurter Allgemeine Zeitung and was the Director of the Berlin office of Institut der deutschen Wirtschaft; she currently teaches history of economic thought at Humboldt University in Berlin and is the editor of Perspektiven der Wirtschartspolitik, a German scholarly journal published by the Verein für Socialpolitik.  Here is a fantastic talk she gave at the European Students for Liberty Conference in 2014 and her wonderful introduction and overview of Prof. Israel Kirzner's contributions when Kirzner was honored in Germany this past year.

Legal Origins -- The Founder of the Modern Discussion ... Armen Alchian

|Peter Boettke|

Armen Alchian published "Some Economics of Property Rights" in 1965, but the notes on which that paper is based date from his lectures in the 1950s.

Watch and listen to this excerpt from the Liberty Fund DVD "A Conversation with Armen Alchian".

 

Evonomics -- A Challenge or a Confirmation to Economic Reasoning?

|Peter Boettke|

David Sloan Wilson is on an intellectual campaign to fix economics.  As you read through the various pieces at Evonomics, I think you will find that his critiques often ring true, but that his targets often miss the mark.  The problem with modern economics lie not in Adam Smith or in F. A. Hayek, but in the dehumanized rendering of the moral sciences that took place in the 20th century and in particular as a result of false notions of science.  He should be targeting not laissez faire, but the social engineering perspective that became embedded in neoclassical economics in the 1940s and onward with the work of the Cowles Commission and the intellectual revolution that Paul Samuelson initiated.  This "mechanomophism" of economics meant that economists -- left as well as right -- could view the economy as an object of social control.  The entire "fresh water" and "salt water" debate in economics is what is wrong and ignores what was actually taught as the core insights in economics from Smith and Hume to Say and Mill to Wicksteed, Knight, Mises and Hayek.  Neither the 'rational choice postulate', nor the 'invisible hand theorem' are understood the same in this "mainline" tradition of economics and political economy as those terms were understood in either the "fresh water" schools or the "salt water" schools of economic thought after 1940.

This is why the now standard "mainstream" debate would become challenged during the decades of the 1960s, 1970s, 1980s, 1990s, and 2000s by restatements of the mainline view updated to reflects the new economic realities of their time --- the property rights perspective of Alchian and Demsetz; the public choice perspective of Buchanan and Tullock; the entrepreneurial market process perspective of Mises, Hayek and Kirzner; the law-and-economics perspective of Coase and Manne; the new economic history of North, Mokyr, McCloskey; the new economics of governance of Oliver Williamson and Elinor Ostrom; the experimental market process perspective of Vernon Smith; and the institutions rule discourse in 21st century economics associated with Shleifer, Acemoglu and Rodrik.  Unlike the stale and worn out debate between "perfect market" conceptions of laissez faire and "market failure" conceptions of interventionism, the real debate -- just as it was in the days of the classical political economists and in the early days of neoclassical economics before the social engineers took over the discipline -- is about how alternative institutional arrangements either promote productive specialization and peaceful social cooperation, or truncate the division of labor and result in increased strife and social conflict.

The 'invisible hand theorem' does not follow directly from the 'rational choice postulate' -- that can only occur with heroic cognitive assumptions and frictionless social settings.  Instead, as Adam Smith clearly argued, the 'invisible hand theorem' is derived from the 'rational choice postulate' via institutional analysis.   That is the crux of the mainline teachings in economics and political economy from Adam Smith to Vernon Smith.  The devil is in the institutional details.  The style of reasoning means, e.g., that competition cannot be judged as universally "good" -- it depends on the context.  Consider the stark contrast Hayek draws between the benefits of competition within the context of an open access market economy where it is the main vehicle for the discovery and utilization for new and fresh knowledge about how to better coordinate the plans of actors throughout the economy, and how detrimental competition can be in the closed access socialist planning system as actors try to negotiate their way through the decision apparatus to be the decisive decision maker in the economic arena.  Competition as rivalrous action is postulated in both settings; individuals striving to pursue their plans as effectively as is humanly possible is assumed in each setting; but the results are wildly different.  Not because competition is bad, or because actors are stupid or worse smart but corrupt, but because the ecology in which they interact is different.  

 Watch this lecture from August 2015.

 Evolutionary ideas are extremely important for the future development of economics --- though I do think that Edith Penrose's warnings about the limits to the analogy should always be heeded -- but I think as we start building on where economics is to go, we have to correctly identify why it went "wrong" from an evolutionary perspective first.  It isn't an ideological misstep alone that derailed the mainline of economics --- the very tradition of economic thought that so influenced the development of biology to begin with.  It was an alliance between a methodological misstep and an ideological misstep in the 20th century that has never been fully corrected.  The result has been a distorting of the basic terms of the debate in economics, and thus subsequent intellectual developments have been stuck within this same language and unable to break its hold.

So start with the most successful folks within the discipline that challenged the discipline from the mainline perspective --- lets just start with the Nobel Lectures of Hayek (1974), Buchanan (1986), Coase (1991), North (1993), Smith (2002) and Ostrom (2009).  Now look for the points of conciliation, not conflict, in those lectures, and compare and contrast those insights with Smith and Hume, Say and Mill, etc.  Lets just look at Vernon Smith's Nobel lecture as a prime example and his focus on the contrast between 'constructivist rationality' and 'ecological rationality'.

The folks at Evonomics would do well to pick up on this theme of ecological rationality.  I believe such a reconstruction of their argument from this interpretive scheme would shift the dominant narrative that has been emerging about what is wrong with modern economics.  There is a lot wrong with modern economics, but there is also a lot right with some recent developments.  There is, however, a lot of work still left to be done.  Veblen's "Why is Economics Not An Evolutionary Science" is still part of our 'extended present' just as is Buchanan's "What Should Economists Do?"

It would wise for us to think through both of these classic essays and consider our scientific options in developing economics in a way which gets us out of the "fresh water" and "salt water" debates.  The "fresh water" economics is unable to quench our thirst for social understanding, the "salt water" also cannot quench our thirst and in fact is unsafe for consumption.  So what happens is all we get is the "dishwater of the orthodoxy" .  Time to unclog the drain, wash away the dull, drab and dead terms of the debate, and reconstruct the contemporary discourse along mainline lines -- where economics is once again a science, but a philosophical science; where the technical principles of economic theory are utilized as they must be to assess alternative institutional arrangements on their ability to promote or curtail productive specialization and peaceful social cooperation, yet it is also recognized that the economist must look seriously at the underlying philosophical issues and bring into explicit discussion the philosophical issues involved in all discussions of public policy.  A theory of public economics necessarily postulates a theory of the state, and that theory of the state relies on a political and moral philosophy.  Rather than hide behind the claim to "expert" knowledge, if we are to have "intelligence in democratic action" (as Frank Knight had hoped) we will need to have this open discourse.

The problem isn't Adam Smith or F. A. Hayek, or even Milton Friedman, the problem correctly identified lies in Keynes and then Samuelson and what the Samuelsonian transformation of economics resulted in, and has continued to constrain economic thought from correcting ever since.  The 1940s and 1950s are the critical decades because during those years, the brilliant Samuelson was able to successfully corner the market in economic research and education -- both at the undergraduate level with his best-selling Economics and his path breaking Foundations.  All subsequent developments of economic thought were shaped by these two books -- even those that rose up to challenge.  But as the brilliant contemporary of Samuelson, and an early and vocal advocate for an evolutionary economics in the modern age, Kenneth Boulding argued in a wonderful essay "After Samuelson, Who Needs Smith?" --- well, we all do because Samuelson missed so much in Smith and the modernist conversation doesn't correct that.  Smith is part of our "extended present" Boulding argues.  

He certainly is, just as Hayek is.  The "mainline" of economic science and political economy must be recognized again for the conversation to advance.

The Economics of Politics -- Adam Smith Fellowship Program

|Peter Boettke|

This weekend we will host another Adam Smith Fellows seminar -- this time on The Economics of Politics -- which will highlight the work of James Buchanan and Gordon Tullock.  I just came across this video of Gordon from 2010 discussing his life -- experiences and intellectual influences.

 

 

Richard Wagner on Economics as Science of Rational Action or Social Science of Human Interaction

|Peter Boettke|

Richard Wagner, my brilliant colleague at GMU, and the author of works such as Democracy in Deficit;  To Promote the General Welfare; Fiscal Sociology and the Theory of Public Finance; and Mind, Society and Human Action, lecturing at U of Richmond in 2010.  Wagner is laying out a variety of things in this lecture. First is the idea of intellectual history as part of theory construction.  Second is the importance of looking through a different theoretical lens to mix and match ideas to offer new syntheses for contemporary discourse.  Third is the substantive theme of what should economists be doing.  And thinking through the idea of "wants" or "activities" as the core of our enterprise as economists.

Take the time and listen and learn, and realize the great intellectual generosity Wagner reflects in his lecture style -- which is always an open invitation to inquiry.