Posts filed under ‘Austrian Economics’
Rafe Champion on Talcott Parsons
| Peter Klein |
Rafe Champion has posted a working paper, “The Success and Failure of Talcott Parsons,” evaluating Parson’s methodology and comparing it to the approaches of Menger, Mises, and Popper. Here is the abstract:
At least three varieties of methodological individualism can be identified in the modern social sciences, all based on the achievement of Carl Menger. These are the praxeology of Ludwig Mises, the voluntarist theory of social action of Talcott Parsons and the situational analysis of Karl Popper. This paper describes how Talcott Parsons drew on Marshall, Pareto, Durkheim and Weber to foumulate an individualistic “action frame of reference” in his first book The Structure of Social Action (1937). The paper also signals some flaws in his approach which drove him to abandon individualism in his subsequent work and to devote himself to the elaboration of the general theory of social systems, a verbal counterpart to general equilibrium theory in economics.
Please send him feedback. And see Mises’s comments on Parsons.
A “Commie Austrian”
| Nicolai Foss |
Regular readers may have noticed the comments of a commentator who signs on as “Cliff.” Cliff is in fact a visiting scholar at the Center of Strategic Management and Globalization at Copenhagen Business School. His real name is Zhu Hai Jiu. I mention him here because he embodies what Israel Kirzner has often said that he wished existed: The Socialist Austrian. Cliff is, I believe, a card-carrying member of the Chinese Party -– and an Austrian economist.
Hayek on Subjectivism and Progress in Economics
| Nicolai Foss |
Austrians are very fond of quoting Friedrich von Hayek’s claim in his The Counter-Revolution of Science (1952: 52) that all major advances in economics over the preceding one hundred years represent the progress of subjectivism. Hayek’s claim is, however, quite puzzling. (more…)
Interesting New Paper by JC Spender
| Nicolai Foss |
One of the puzzles of business administration/management is that the fields of entrepreneurship and strategic management have existed, and continue to exist, in such relative separation. Intuitively, one would think of entrepreneurship — the identification and seizure of new opportunities for profit — as constituting the core of the strategic management field. This, however, is not the case. However, there are various indications that strategic management scholars are about to develop interest in entrepreneurship (e.g., work by Kim and Mahoney, Alvarez and Barney).
One specific indication is an excellent and highly recommended recent paper by JC Spender, “The RBV, Methodological Individualism, and Managerial Cognition: Practising Entrepreneurship.” Here is the Abstract:
If we consider Schumpeter’s methodological individualism and entrepreneurship, the ‘managerial cognition’ arguments can contribute new insights to the RBV discourse. I open by examining the links between resource inputs and firm outputs , and argue the types of rents implied by the RBV cannot arise or be sustained if these links are logical and explainable. The only rents then available are Marshallian quasi-rents arising from information asymmetry or the Ricardian rents from initial allocation, i.e., those of Porter’s analysis. Today’s RBV lacks the components necessary to create and manage the value at the core of Barney’s VRIO model. Causal ambiguity or uncertain inimitability might imply sustainable rents but clearly do not explain how the arise, any more than asserting the firm has dynamic capabilities does. To illustrate how value might be created and brought into the analysis, I look at Penrose’s model of managerial learning, primarily as an accessible instance of the epistemological approach proposed by Austrian economists such as Hayek, Kirzner, and Schumpeter. This concept of value creation parallels the sense-making concepts of the managerial cognition literature. I conclude that an alliance of BPS and MOC approaches can complement and so complete the RBV, synthesizing notions of value creation, heterogeneous and immobile resources, and endogenous growth into a dynamic theory of the firm. It balances rational choice and Schumpeterian entrepreneurship. To wrap this argument up, I discuss the theoretical and practical implications of the amended RBV.
Foss and Foss RAE Paper Published Online
| Nicolai Foss |
My paper with Kirsten Foss, “The Limits to Designed Order: Authority Under ‘Distributed Knowledge’ Conditions,” Review of Austrian Economics 19: 261-274 (2006) has just been published online on the Springer site. Here is the Abstract:
We examine the argument, put forward by modern management writers and, in a somewhat different guise by Austrian economists, that authority is not a viable mechanism of coordination in the presence of “distributed knowledge” (which corresponds to Hayek’s treatment of the use of dispersed knowledge in society). We define authority and distributed knowledge and argue that authority is compatible with distributed knowledge. Moreover, it is not clear on theoretical grounds how distributed knowledge impacts on economic organization. An implication is that the Austrian argument that designed orders are strongly constrained by the Hayekian dispersed knowledge (Hayek, Kirzner, Sautet) is less decisive than it has usually been taken to be. The positive flipside of this argument is that Austrians confront an exciting research agenda in theorizing how distributed knowledge impacts economic organization.
Information versus Knowledge
| Peter Klein |
Here’s a fascinating symposium from the April 2005 issue of EconJournalWatch on the distinction between information and knowledge in economics. The contributors are Brian Loasby, Thomas Mayer, Bruce Caldwell, Israel Kirzner, Leland Yeager, Robert Aumann, Ken Binmore, and Kenneth Arrow. (Via Jeff Tucker)
Intelligent Design and the Sociology of Science
| Peter Klein |
Don’t worry, we’re not getting all weird on you and entering the fray on creationism and evolution. Today’s topic is the theory and practice of science. Specifically, consider the controversy over intelligent design (ID), the idea that purely natural forces — i.e., random mutation and natural selection — cannot explain the origin and diversity of life. What are the most common arguments against including ID in the science curriculum?
1. ID is wrong because it contradicts the scientific evidence.
2. ID is wrong because it isn’t science (e.g., it does not offer testable predictions). Leave it in the philosophy or theology classrooms.
3. ID is wrong because “serious scientists” all think it’s nonsense.
The second and third arguments seem to pop up the most in conversations I’ve seen and heard. They are taken by their proponents as self-evident. But #2 obviously presupposes a particular philosophy of science, and #3 a particular sociology of science. One rarely sees these philosophies articulated and defended. Is prediction the hallmark of science? Does neo-Darwinian theory make falsifiable predictions? How does scientific consensus emerge? On what grounds to scientists accept or reject theories? (Argument #3, in particular, seems to presuppose a charmingly pre-Kuhnian worldview.)
As an aside, I know several “heterodox” economists who reject ID primarily on ground #3, which I find highly ironic. They see themselves as (unjustifabily) outside the mainstream of their own discipline, but assume that in natural science the consensus is always right.
A Brief History of Time (in Management)
| Peter Klein |
My colleague Allen Bluedorn, Professor of Management at the University of Missouri, recently published an interesting book, The Human Organization of Time: Temporal Realities and Experience (Stanford University Press, 2002). The book explores a number of philosophical, sociological, and cultural issues related to time and our perception of time and develops applications for business administration. Of course, attention to time, process, and history is a hallmark of the Austrian, evolutionary, and dynamic capabilities approaches to economics and management featured frequently on this blog.
For a short introduction to these issues check out the June 2006 issue of the Academy of Management Learning and Education, which features “Time and the Temporal Imagination” by Bluedorn and Rhetta Standifer. Here is the abstract:
Time has been one of the most challenging and elusive concepts in human thought, and it is only now beginning to receive the attention it deserves in organizational scholarship. To this growing scholarly attention we present the case for including material about this most universal of phenomena in our teaching, just as we are beginning to do in our theoretical and empirical investigations. We argue for developing a temporal imagination, a concept we proposed recently, and then describe reasons for teaching about time as well as present first principles that provide a foundation for the teaching of time and temporal phenomena. These reasons and principles are then illustrated in a discussion of temporal depth (time horizons) and how it might be taught.
New Paper by Kirzner and Sautet
| Nicolai Foss |
Israel Kirzner is surely one of the more neglected of economists. Now that entrepreneurship has become almost a mainstream theme in economics, Kirzner certainly deserves more recognition and credit for his four decades long insistence on the importance of the entrepreneur as the prime mover of the market process. (Here is a great Israel Kirzner site.)
What appears to be Kirzner’s latest paper is “The Nature and Role of Entrepreneurship in Markets: Implications for Policy,” written with Frederic Sautet and published by the Mercatus Center at George Mason University.
The paper is particularly interesting as it is taken up with a theme that has often been claimed to be absent from Kirzner’s work, namely that of institutions and how institutions can be designed (or influenced) to impact entrepreneurship. The new stuff arrives at about p. 14. In addition to discussing how the institutional matrix impacts entrepreneurship, there is so much emphasis on creativity as an aspect of entrepreneurship that the paper sounds Schumpeterian in places. There is also much emphasis on entrepreneurship being embedded in a cultural context.
So, has Israel Kirzner gone applied? Well, not exactly, as the discussion still moves on a fairly abstract level (for an applied exercise that is rather related to Kirzner and Sautet’s, see this excellent paper), but certainly is more “applied” than the Kirzner of, say, Competition and Entrepreneurship.
Review Paper on the Economics of Clusters
| Peter Klein |
Pierre Desrochers calls my attention to this review essay for practitioners on the economics of clusters, published by Brookings in March. The paper cites Pierre's Review of Austrian Economics paper with Frederic Sautet, whch is a good sign.
Austrian Economics and the Theory of the Firm
| Nicolai Foss |
My co-blogger has developed a very nice online bibliography on the extremely important research that takes place in the intersection between Austrian economics and the theory of the firm. It numbers almost 50 papers. A booming research area! The list may be incomplete, so be sure to mail Peter if your AE/ToF paper is not listed.
Austrian Economists and the Wealth of Nations
| Peter Klein |
David Warsh's Knowledge and the Wealth of Nations is eliciting praise from many quarters (Tyler Cowen; Paul Krugman; The Economist; Brayden King). Peter Gordon likes it too, but notes that "the book and its story are poignant for Austrian economists, whose contributions are hardly acknowledged. The question that goes unasked is: What has the neo-classicists' journey of discovery, as sketched by Warsh, contributed that is worthy beyond the Austrians' long-held focus on entrepreneurial discovery?"
Scots, Wha Hae
| Peter Klein |
Today's Wall Street Journal features a front-page profile of a Carnegie-Mellon student majoring in bagpipes, thought to be the only such student in the US. This prompts a confession I've long wanted to make: I'm half Scottish. My mother was born and raised in Freuchie, a tiny village of just north of Edinburgh. While Scottish eccentricities are ripe for satire (ask Monty Python or Mike Myers), we also deserve credit for the steam engine, penicillin, pneumatic tires, the telephone, and the Scottish Enlightenment.
Speaking of the latter, though no one doubts the importance of Smith, Hume, Hutcheson, Ferguson, Steuart, Kames, and the rest, the Scots have been getting a bad rap lately. Murray Rothbard famously and controversially called Adam Smith overrated, describing the late Spanish Scholastics, Cantillon, Turgot, and the Physiocrats as better economists. Gertrude Himmelfarb's recent book The Roads to Modernity distinguishes sharply between Scottish and British achievements. (Hat tip to Nicolai.) Even Hayek, whose interpretation of Scottish thought is extremely influential, takes a drubbing in a recent paper arguing that Polanyi had the better grasp of "spontaneous order." (This paper disagrees.)
Do Austrian Economists Get Sufficient Credit?
| Nicolai Foss |
Apart from the occasional ritualistic mention of Hayek's work in the context of information economics or Mises and Hayek's work in business cycle theory, Austrians as a rule get very little credit from their mainstream colleagues. It is arguable that they get too little credit.
Here is a case in point. In "Information Structures with Unawareness," Jing Li points out that the standard approach to modeling information — the state space approach — cannot accomodate unawareness (the paper is one example of a small literature on how to model unawareness in game theory terms). An agent is "unaware" (a nicer word for "ignorant") of something when he does not know it and does not know that he does not know it.
Li says that there is "little research on these obviously important issues" and goes on to treat unawareness in terms of modeling information as a pair, consisting of factual information and "awareness information."
It is, of course, true that unawareness/ignorance is under-researched relative to its importance. But why then not mention the literature that does deal with it? Such as Austrian economics, in particular Israel Kirzner's work. For example, in his 1997 paper in the Journal of Economic Literature, "Entrepreneurial Discovery and the Competitive Market Process," Kirzner explains in great detail why unawareness/ignorance is not compatible with the standard paradigm.
Market-Based Management
| Peter Klein |
I first heard the term “market-based management” (MBM) in 1994 or 1995, attatched to the now-defunct Program on Social and Organizational Learning at George Mason University. The theory was described in a few papers (one example here) and, as I recall, a monograph. My impression was that the principles of MBM were unobjectionable, but unremarkable: strong mission, values, and culture statements combined with decentralized decision-making and incentive compensation. The main innovation seemed to be the addition of an “Austrian” gloss (e.g., “Taylorism suffers from a fatal conceit….”).
This weekend’s Wall Street Journal profiles Koch Industries’s Charles Koch, who not only practices market-based management but actually trademarked the term. Writer Stephen Moore notes, somewhat delicately: “Some of the ideas that undergird Market Based Management seem fairly commonsensical to me, and I’m not entirely sold on the notion that this program somehow represents a seismic breakaway from what is taught at Harvard Business School.” Indeed, the idea that organizations can sometimes exploit “market-like incentives” would hardly surprise Chester Barnard, Alfred Chandler, or Oliver Williamson, let alone Alfred P. Sloan.
A more fundamental problem is that while decentralization provides benefits (more effective use of specific knowledge, conservation of central managers’ time, and so on) it also brings costs (agency problems, rent-seeking, coordination failure, etc.). To my knowledge the MBM literature has yet to identify or analyze the relevant tradeoffs. Jensen and Meckling’s (underappreciated) 1992 paper represents one attempt to grapple with these problems; this recent Foss-Foss-Klein paper suggests a slightly different approach. In short, all organizations represent a blend of market and hierarchy. The trick is to find the appropriate mix. Simply describing the virtues of “market” doesn’t get us very far.
Further Thoughts on Economic Calculation
| Peter Klein |
Nicolai asks important questions about the Austrian critique of socialism. I agree that a fresh look at these issues is warranted. My $0.02:
1. Mises's understanding of economic calculation is not exclusively, or even primarily, related to socialism. It is part of Mises's general explanation of how an advanced economy — i.e., an economy with a complex structure of heterogeneous capital goods — allocates resources to their highest-valued uses.
2. Mises's work on socialism flowed from his work on money. (It’s no coincidence that the 1920 article on calculation followed the 1912 book Theory of Money and Credit.) Entrepreneurs need actual numbers, not ratios of marginal utilities, to perform cost accounting. In a non-monetary economy there can be no "calculation," which for Mises means the comparison of anticipated future receipts and present expenditures on factors.
3. The key to all this, for Mises, is his concept of the "plain state of rest" (PSR). (more…)
What is the Austrian Critique of Socialism, Really?
| Nicolai Foss |
Any self-respecting Austrian or Austrian-influenced blog must have a discussion of the Austrian critique of socialism. So, here goes.
In conversations with Austrians and when reading articles from the Austro-revival of the last three decades, I have always been struck by the prominence that Austrians tend to give to Hayek and Mises’ critiques of socialism. One senses a feeling that this an area where Austrians made an independent, decisive, and lasting contribution, one that even mainstream economists stand ready to acknowledge. Perhaps for this reason there has been quite a lot of internal debate among Austrians about the true meaning of the Austrian critique of socialism (usually under the rubric of “calculation” (i.e., Mises) versus “knowledge” (i.e., Hayek). Most of the debate has concerned whether and to what extent Mises and Hayek’s critiques were different (and perhaps who made the most fundamental argument).
I believe, however, that it is time to change the debate to more fundamental terms and issues, specifically the meaning and validity of the Austrian arguments. (more…)
Mises on econometricians
| Peter Klein |
Nicolai and I share a great admiration for the Austrian economist Ludwig von Mises, whom we consider one of the towering intellects of the twentieth century. A vast collection of Mises’s published and unpublished writings is already available online. The newest addition to this collection is a set of brief notes on research topics suggested by Mises to participants in his graduate seminar at New York University during the 1950s and 1960s. The notes were carefully recorded by his students Percy and Bettina Bien Greaves.
I haven’t had a chance to read through the set carefully, but a few gems stand out, such as this one from 1956: “We need a book to stop the econometricians or we will have more econometricians than those in useful occupations.”
Update: the notes are now available in plain text.
New Foss-Foss-Klein working paper
| Peter Klein |
A new item has just been added to our working papers page, “Original and Derived Judgment: An Entrepreneurial Theory of Economic Organization,” by Kirsten Foss, Nicolai J. Foss, and Peter G. Klein. This is an early draft, and comments are most welcome. Here’s the abstract: (more…)
A Lachmanian Approach to Entrepreneurship
| Peter Klein |
My colleagues Todd Chiles, Allen Bluedorn, and Vishal Gupta have posted an updated version of their forthcoming Organization Studies paper, "Beyond Creative Destruction and Entrepreneurial Discovery: A Radical Austrian Approach to Entrepreneurship." The paper introduces entrepreneurship scholars to the idiosyncratic Austrian economist Ludwig Lachmann, presenting Lachmann's approach as an alternative to those of Schumpeter and Kirzner.
Organizations and Markets 
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