Posts filed under ‘Austrian Economics’
The Evolution of Entrepreneurial Skill
| Peter Klein |
Market competition is often characterized as an evolutionary selection process. “[O]ne of the main functions of profits is to shift the control of capital to those who know how to employ it in the best possible way for the satisfaction of the public. The more profits a man earns, the greater his wealth consequently becomes, the more influential does he become in the conduct of business affairs” (Mises, “Profit and Loss,” 1951). Within a given population, then, the market process selects for those individuals with the greatest levels of entrepreneurial skill. But can the emergence of entrepreneurial skill as a human trait itself be explained in terms of natural selection? Here’s one attempt:
Evolution and the Growth Process:
Natural Selection of Entrepreneurial Traits
Oded Galor, Stelios Michalopoulos
NBER Working Paper No. 17075, May 2011This research suggests that a Darwinian evolution of entrepreneurial spirit played a significant role in the process of economic development and the dynamics of inequality within and across societies. The study argues that entrepreneurial spirit evolved non-monotonically in the course of human history. In early stages of development, risk-tolerant, growth promoting traits generated an evolutionary advantage and their increased representation accelerated the pace of technological progress and the process of economic development. In mature stages of development, however, risk-averse traits gained an evolutionary advantage, diminishing the growth potential of advanced economies and contributing to convergence in economic growth across countries.
This is a (mathematical) theory paper with “entrepreneurship” modeled as tolerance for risk, so some readers will find the execution less interesting than the idea. But it is good to see these kinds of big-picture issues addressed in the mainstream literature.
Frank Knight and the Austrians
| Peter Klein |
At this year’s Austrian Scholars Conference I gave a presentation playfully titled “Frank H. Knight: The Forgotten Austrian.” The title was tongue-in-cheek, of course, as Knight was no Austrian. Though friendly with Hayek personally, Knight was a harsh critic of Austrian capital theory, particularly as formulated by Böhm-Bawerk and Hayek. (Knight conceived capital as a permanent fund of value, with interest determined by the technical marginal productivity of capital, rejecting notions of production structures and time preference.) Knight was also a key developer of perfect competition theory — anathema to Austrians — though mainly to illustrate the importance of uncertainty, not to serve as a welfare bechmark.
Still, there are many interesting similarities between Knightian and Austrian economics. Regular readers of O&M already know that Mises’s approach to entrepreneurship, uncertainty, and the firm is basically the same as Knight’s. Knight rejected positivism, calling it “the emotional pronouncement of value judgments condemning emotion and value judgments” (Knight, 1940). He often sounded like a Misesian praxeologist: “If anyone denies that men have interests or that ‘we’ have a considerable amount of knowledge about them, economics and its entire works will simply be to such a person what the world of color is to the blind man” (Knight, 1956). Indeed, critics dismiss Knight’s epistemological writings as “extended Austrian-style disquisitions on the foundations of human knowledge and conduct and the like” (LeRoy and Singell, 1987) — the ultimate insult! (more…)
Mitch on Hoselitz
| Peter Klein |
The following is a guest post from David Mitch, Professor of Economics at the University of Maryland, Baltimore County and an expert on Bert Hoselitz.
The reasonably recent postings on this blog on Bert Hoselitz prompt me to post a correction to my biographical piece on him for the Elgar Companion to the Chicago School of Economics (2010) edited by Ross Emmett and also to make some further comments regarding Hoselitz’ “Austrian” origins. Both the correction and futher observations stem from Yvan Kelly’s very interesting article “Mises, Morgenstern, Hoselitz, and Nash: The Austrian Connection to Early Game Theory” published in the Quarterly Journal of Austrian Economics 12, no. 3 (2009).
The correction to my piece is as follows. On p. 274 of my piece, I state that “Prominent leaders of the Austrian School of Economics such as Ludwig Mises and F. A. Hayek had departed Vienna by the time Hoselitz began his university studies.” Yvan Kelly indicates on p. 38 of his article that Hoselitz attended two of Mises’ seminars in 1933 and 1934 based on correspondence that Hoselitz sent to Mises in 1941. I have not yet seen copies of this correspondence. However, I was clearly in error in stating that Mises had departed Vienna by the time Hoselitz began his university studies. Klaus Herdzina’s (1999) biographical essay on Hoselitz cited in my piece indicates that Hoselitz studied at the University of Vienna between 1932 and 1937. I do not know from what sources Herdzina obtained this information; but I based the statement in my own piece that Hoselitz studied at the University of Vienna between 1932 and 1937 on Herdzina’s essay. Hulsmann’s 2007 biography of Mises (p. 678) indicates that Mises stopped his private seminar and left Vienna in 1934. Thus, it would appear that Hoselitz’ studies at the University of Vienna did overlap with the period that Mises was in Vienna and leading his private seminar. And this would thus be consistent with the possibility that Hoselitz attended some of Mises’ seminars. So again, the statement in my piece for the Elgar Companion that Mises had departed Vienna by the time Hoselitz started his studies at the University of Vienna would definitely seem to be in error assuming the Herdzina is correct in his dating of when Hoselitz studied at the University of Vienna. (more…)
Contributions from Mature Scholars
| Peter Klein |
Following up my earlier post on Austrian longevity: Rafe Champion notes that Max Weber died suddenly of pneumonia, in 1920, at age 56. What important further contributions might he have made if he had lived longer?
This prompts the thought, what would have been lost if some long-lived Austrians [and fellow travelers] had died at 56? For Mises, that was 1937, before his masterwork was completed (later translated as Human Action) and before he was a living presence in the US.
For Hayek, that was 1954. No Constitution of Liberty and later works, no Nobel Prize.
For Popper, 1958, before The Logic of Scientific Discovery appeared in English and a dozen other books apart from The Open Society and The Poverty of Historicism.
Coase turned 56 in 1966, with several important contributions still to come: the 1970 paper on durable-goods monopoly, the 1974 paper on the lighthouse, and his recent papers on Fisher Body, not to mention the Nobel Prize and his crowning achievement, the 2002 CORI Lecture. What other examples come to mind?
More Hoselitz
| Peter Klein |
Since we first inquired about Bert Hoselitz, new information has come to light. First, we hosted a copy of Hoselitz’s hard-to-find 1951 essay “The Early History of Entrepreneurial Theory,” still the best source on the origins of economic thinking on the entrepreneur. Randy has also located Hoselitz’s rare 1963 paper “The Entrepreneurial Element of Economic Development,” which we hope to share soon.
Also, Yvan Kelly published an interesting paper in 2009, “Mises, Morgenstern, Hoselitz, and Nash: The Austrian Connection to Early Game Theory” (Quarterly Journal of Austrian Economics 12, no. 3), which provides more information. Hoselitz attended Mises’s Vienna seminar in 1933 and 1934 and, after Hoselitz emigrated to the US, Mises helped him get a position at Chicago. In 1947 Hoselitz taught a class on international economics at Carnegie Tech, where one of his students was John Nash — the only economics course Nash ever took. Notes Kelly, “there exists the distinct possibility that Nash’s thought process in formulating the [Nash] equilibrium was influenced by Austrian thought.” Kelly goes on to quote Nash’s Nobel lecture: “By coincidence the person who taught the course was someonethat came from Austria. . . . Austrian economics is like a different school than typical American or British. So by coincidence I was influenced by an Austrian economist which may have been a very good influence.” (This article by a famous blogger also deals with the Austrian connection to game theory.)
CORS Lecture and Mises Brazil
| Peter Klein |
O&Mers in Brazil, come see me at two events this week. Thursday, 7 April, I will deliver the inaugural CORS Lecture at the University of São Paulo on “Entrepreneurship, Strategy, and Public Policy.” CORS, the Center for Organization Studies, is a new institute organized by O&M friends Sylvia Saes and Decio Zylbersztajn and involving many scholars familiar to O&M readers. The lecture is co-sponsored by the Mises Institute Brazil, my main host for the trip, and I will speak at the Institute’s Second Conference on Austrian Economics 9-10 April in Porto Alegre, along with Hans-Hermann Hoppe, Robert Murphy, Guido Hülsmann, Gabriel Zanotti, Ubiratan Iorio, Antony Mueller, Fabio Barbieri, and Dalton Gardimam. I’ll give one talk on entrepreneurship and another on networks. I would love to see you at one of these events!
Information versus Knowledge
| Peter Klein |
[T]here’s enough information coming at us from all sides to leave us feeling overwhelmed, just as people in earlier ages felt smothered by what Leibniz called “that horrible mass of books that keeps on growing.” In response, 17th-century writers compiled indexes, bibliographies, compendiums and encyclopedias to winnow out the chaff. Contemplating the problem of turning information into useful knowledge, Gleick sees a similar role for blogs and aggregators, syntheses like Wikipedia, and the “vast, collaborative filter” of our connectivity. Now, as at any moment of technological disruption, he writes, “the old ways of organizing knowledge no longer work.”
But knowledge isn’t simply information that has been vetted and made comprehensible. “Medical information,” for example, evokes the flood of hits that appear when you do a Google search for “back pain” or “vitamin D.” “Medical knowledge,” on the other hand, evokes the fabric of institutions and communities that are responsible for creating, curating and diffusing what is known. In fact, you could argue that the most important role of search engines is to locate the online outcroppings of “the old ways of organizing knowledge” that we still depend on, like the N.I.H., the S.E.C., the O.E.D., the BBC, the N.Y.P.L. and ESPN.
That’s Geoffrey Nunberg reviewing James Gleick’s new book, The Information (Random House, 2011). Gleick burst onto the scene with 1987’s Chaos: The Making of New Science, which introduced the butterfly effect, Mandelbrot sets, fractal geometry, and the like into popular culture. (Don’t blame Gleick for the silly Ian Malcolm character in Jurassic Park, or the even sillier Ashton Kutcher movie.) I haven’t gotten my hands on a copy of The Information (gotta love the definite article, as in “the calculus”) but, as best as I can tell from the Google books version, Gleick doesn’t get into the Hayekian-Polanyian distinctions between parameterizable “information” and tacit knowledge that particularly interest O&M readers. (Another good quote from the review: “[T]here’s no road back from bits to meaning. For one thing, the units don’t correspond: the text of ‘War and Peace’ takes up less disk space than a Madonna music video.”) Still, the book should be worth a read.
Miscellaneous Links
| Peter Klein |
- Max Weber versus Rodney Stark. Read the very interesting comment thread at this ThinkMarkets post.
- US firms can expect lower worker productivity starting this week. Duh.
- The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions by Eugen Maria Schulak and Herbert Unterköfler. Newly translated from the 2009 German-language original. (Translator Arlene Oost-Zinner was a production editor on my 2010 book and did a wonderful job — no cracks, please, about the need to have my stilted prose translated into passable English.)
- Do you know what really important US patent was granted on March 14?
Creative Destruction in Popular Culture
| Peter Klein |
Thanks to Thomas B. for forwarding links to US Sen. Rand Paul’s Monday-night appearance on the Daily Show (part 1, part 2, part 3). At the start of part 3, while discussing government bailouts, Paul uses the words “creative destruction,” and Jon Stewart bursts out laughing, apparently hearing the term for the first time. I guess Schumpeter is not as culturally relevant as I thought!
The show had some interesting moments, but I found the discussions (in the parts I watched) pretty shallow. Stewart was grilling Paul on his “free-market” views, focusing on health, safety, and environmental regulation. Both Paul and Stewart took the milquetoast position that sure, some of this type of regulation is needed, but it shouldn’t be “too much.” They didn’t get into a serious discussion of theory or evidence, however, or explore specific trade-offs. There are huge political economy and public-choice literatures on the FDA, EPA, OSHA, etc., showing that these organizations are easily captured, tend to retard innovation, fail to weigh marginal benefits and costs, and so on. The Journal of Law and Economics under Coase’s leadership made its bones on these kinds of studies in the 1970s. The FDA has been a particular target. The Stewart view also ignores comparative institutional analysis — e.g., the role of private ordering (third-party certification, reputation, etc. ) in the protection of health and safety.
At least Paul didn’t say he intended to become the best Senator, horseman, and lover in all Washington!
Freedom to Trade and the Competitive Process
| Dick Langlois |
That’s the promising-sounding title of a new NBER Working Paper by Aaron Edlin and Joseph Farrell. Unfortunately, the argument turns out, in my opinion, to be extraordinarily wrongheaded. Here is the abstract.
Although antitrust courts sometimes stress the competitive process, they have not deeply explored what that process is. Inspired by the theory of the core, we explore the idea that the competitive process is the process of sellers and buyers forming improving coalitions. Much of antitrust can be seen as prohibiting firms’ attempts to restrain improving trade between their rivals and customers. In this way, antitrust protects firms’ and customers’ freedom to trade to their mutual betterment.
The promising part is that they talk explicitly about the competitive process.
The freedom-to-trade perspective . . . stresses the freedom of buyers and sellers to change their trading partners whenever that is mutually beneficial. The aspect of the competitive process that we study here is buyers and sellers exercising this freedom and forming improving coalitions (i.e., new configurations of trading partners). In a highly competitive market a seller who does not give its customers good deals will find that rivals offer better deals to attract these customers. The process of firms fighting over customers and offering them better and better deals raises consumers’ utility skyward. This competitive process is closely aligned with what Schumpeter called creative destruction.
As anyone who has read Schumpeter knows, of course, this is not even close to what he actually meant by creative destruction. (more…)
The Forgotten: “Alternative Views of Mengerian Entrepreneurship”
| Peter Klein |
A film blog I follow, the Mubi Daily Notebook (formerly called The Auteurs Notebook) runs a regular feature called “The Forgotten,” showcasing obscure but important older titles. I propose doing the same thing here. Our first entry is a 1979 article by Dolores Tremewan Martin, “Alternative Views of Mengerian Entrepreneurship” (History of Political Economy 11, no. 2). Martin provides an excellent summary and critique of Menger’s subtle approach to the entrepreneur, one largely ignored in the current entrepreneurship literature, even among Austrian economists. Contrasting Schumpeterian and Knightian views on entrepreneurship, Martin argues that Menger’s position is close to Knight’s (and, hence, that Knight is much closer to the Austrian school than is generally recognized).
As Martin points out, Menger’s entrepreneur (Unternehmer) is a resource-owning, information-acquiring coordinator seeking to acquire and combine undervalued assets (using an “input-computing capacity”). Entrepreneurial activity is scarce, in that it is associated with ownership of scarce capital, but also “unique in that, unlike other goods of higher order, it is not intended for exchange and therefore does not command a price.” There are important differences bewteen Menger and Knight concerning types of uncertainty and the effect of uncertainty on profit. Still:
Menger does not treat the entrepreneur as being the “innovator,” “mover,” or “force of change.” Menger places stress on the entrepreneurial function and the role of uncertainty, not innovation, as giving rise to the possibility for rewards. As Schumpeter [the historian of economic thought] suggests, the economic process viewed by Carl Menger is essentially similar to that of Frank Knight. . . . For Menger (as for Knight) the entrepreneurial activity consists of a more correct — “more rational” — evaluation of goods of higher order. This view contrasts with Schumpeter’s personification of the entrepreneur as the hero of the capitalist drama.
Mario Rizzo’s Graduate Course in Behavioral Economics
| Peter Klein |
Check out the syllabus and join the discussion at ThinkMarkets. I appreciate boat-rocking as much as anyone but am personally in what Mario terms (in his syllabus) the “classical” camp. Still, this is a course I would definitely take. If he’s an easy grader.
Economic Growth Quote of the Day
| Peter Klein |
The path of economic progress is strewn with the wreckage of failures. Every business man knows this, but few economists seem to have taken note of it. In most of the theories currently in fashion economic progress is apparently regarded as the more or less automatic outcome of capital investment, “autonomous” or otherwise. Perhaps we should not be surprised at this fact: mechanistic theories are bound to produce results which look automatic.
— Ludwig Lachmann, Capital and Its Structure (1956), pp. 36-37.
Economics of Wikipedia
| Peter Klein |
Wikipedia turns ten today, as you’ve no doubt heard. Most Wikipedia content is recycled, so let me honor the subject by recycling an old O&M post: “Hayek and Wikipedia.” The relationship between the Wikipedia model and Hayek’s concept of dispersed, tacit knowledge, exploited through decentralized decision-making, is perhaps to obvious to note, but consider it noted. See also this Reason piece which emphasizes the Hayek connection. (Of course, in Hayek’s model, information is communicated and actions coordinated through changes in market prices, a feature absent from systems like Wikipedia.) You may also amuse yourself with other old O&M posts about tacit knowledge.
CFP: Hayek and Behavioral Economics
| Peter Klein |
Forwarded on behalf of Roger Frantz:
CALLL FOR PAPERS
“Hayek and Behavioural Economics” (2011). Palgrave Macmillan. Vol 4 of Archival Insights into the Evolution of Economics. Robert Leeson Series Editor. Vol 4 editors, Roger Frantz and Robert Leeson.
Papers on all aspects of Hayek’s work as it relates to behavioral economics defined broadly which includes but not limited to economics and psychology, neuroeconomics, and topics in the history of economic thought.
Papers will be due by the summer of 2011. Send inquiries and an abstract to Roger Frantz (rfrantz@mail.sdsu.edu) or Robert Leeson (rleeson@stanford.edu).
Google Tries Selective Intervention?
| Peter Klein |
Can a large firm do everything a collection of small firms can do, and more? If not, how do we understand the limits to organization? Arrow focused on the information structure inside firms. I favor Mises’s economic calculation argument. Williamson’s preferred explanation for the limits to the firm is the impossibility of selective intervention — the idea that higher-level managers cannot credibly commit to leave lower-level managers alone, except when such selective intervention would generate joint gains. Williamson’s argument is not, however, universally embraced (or even understood the same way — see the comments to Nicolai’s post).
Google apparently sees things Williamson’s way and has formulated an explicit policy on “autonomous units” designed to address the problem. Such units “have the freedom to run like independent startups with almost no approvals needed from HQ, ” reports TechCrunch. “For these divisions, Google is essentially a holding company that provides back end services like legal, providing office space and organizing travel, but everything else is up to the pseudo-startup.” Can it work? Insiders are doubtful. The TechCrunch reporter even frames Williamson’s thesis in this folksy way:
There’s a lie that companies and entrepreneurs tell themselves in order to commit to an acquisition.
Oh, we’re not going to change anything! We’re just going to give you more resources to do what you’ve been doing even better!
Yeah! They bought us for a reason, why would they ruin things?
It usually works for a little while, but big company bureaucracy– whether it’s HR, politics or just endless meetings– almost always creeps in. It’s a law of nature: Big companies just need certain processes to run and entrepreneurs hate those processes because they stifle nimble innovation.
Short Course on Network Economics
| Peter Klein |
I’m teaching a five-week, online course starting in January called “Networks and the Digital Revolution: Economic Myths and Realities.” It’s offered through the Mises Academy, an innovative course-delivery platform that is becoming its own educational ecosystem. A description and course outline is here, signup information is here. I’d love to have you join me!
CFP: “Competition, Innovation and Rivalry”
| Peter Klein |
The European Society for the History of Economic Thought (ESHET) is having its 15th annual meeting 19-22 May 2011 at Bogazici University, Istanbul. A special themed section, headlined by keynoters (and O&M friends) Dick Nelson and Stavros Ioannides, is “Competition, Innovation and Rivalry”:
The way in which innovation has been described, categorised, contextualised and theorised by various figures as well as schools of thought in the discipline of economics warrants a thorough investigation from a history of economic thought perspective. Although it is a truism that some approaches in economics by focusing on the conditions of allocating resources efficiently within a static framework failed to consider innovation properly, other approaches by underscoring the evolutionary characteristics of the economy, and thus by paying attention to dynamic efficiency, aimed at shedding light on innovation in an explicit manner. Knowledge and entrepreneurship standing as natural ingredients of innovation, much debate has been devoted to the roles played by competition, rivalry and collaboration among economic actors. A corollary of this debate has been on the characterisation of different economic systems in boosting or hampering innovation. . . . We are interested in papers that expose the history of economic ideas concerning innovation, competition and rivalry as well as papers that provide a historical or methodological perspective concerning methodological, ideological and political debates which evolved around these concepts.
Abstracts are due 15 December; see the above link for details.
Austrian Awakening?
| Peter Klein |
Following the Keynesian Consensus of the 1950s and 1960s Monetarism emerged as an alternative. By the late 1970s, there were Keynesians and Rational Expectations macroeconomists. When I took graduate macro in the late 1980s, I was told there were two schools of thought: New Keynesian and New Classical. (Elwood: “What kind of music do you usually have here?” Claire: “Oh, we got both kinds. We got country and western.”)
Old-style Keynesianism made a roaring comeback in the last two years. But cracks are starting to appear in the consensus edifice. An increasing number of commentators in the popular press are voicing disappointment with the results of deficit spending and money creation (aka “quantitative easing”), the classic Keynesian policy instruments. What are they turning to instead? Not Monetarism or New Classicism, which don’t seem like viable alternatives. Surprisingly, the mainstream press is rediscovering the Austrians.
“We’re All Austrians Now,” declares CNBC, saying the Mises-Hayek theory “provides the best explanation for the business cycle we just lived through.” And pity the poor Fed: “the resurgent popularity of Austrian economics may actually be hampering the ability of the Federal Reserve to reflate the economy with low interest rate policies. Businesses, now aware of the dangers of a low inflation-sparked economic bubble, may simply be refusing to fall for the age-old boom-bust trap.” Sunday’s Newsweek noted “The Triumphant Return of Hayek,” citing “a growing backlash against the Fed’s monetary activism” and adding that Bernanke’s policy “suffers from the same fundamental flaw as Keynesianism, in that it protects inefficient players instead of injecting renewed vigor into the economy.” (Bonus quotation, via Larry White: “Keynesian theory . . . advocates a policy opposed to the interest of large investors and entrepreneurs and then, when this policy is about to be realized, holds the high liquidity preference of investors and the timidity of entrepreneurs responsible for the necessity further to increase taxation and public works.” — Otto von Mering, 1944) Even the staid Economist thinks the Austrian theory deserves more attention from policymakers.
Is there a shift in public attitude toward government management of the economy? Is the opinion-molding class changing its tune? Or are these reports anomalies? If public opinion and opinion among elites is changing, what explains the change? New evidence? Change in ideology? Self-interest?
Blinder: Keynesianism is Right, Because Keynesians Are Really Smart
| Peter Klein |
Alan Blinder’s defense of QE2 is as feeble as Mankiw’s defense of “emergency measures” more generally. Blinder’s argument is simply that QE2 isn’t all that different from standard Keynesian fine-tuning (true) and that Ben Bernanke is smarter than critics like Sarah Palin (duh).”To create the fearsome inflation rates envisioned by the more extreme critics, the Fed would have to be incredibly incompetent, which it is not.” This reminds me of Janet Yellen’s unfortunate 2009 statement that “the Fed’s analytical prowess is top-notch and our forecasting record is second to none. . . . With respect to our tool kit, we certainly have the means to unwind the stimulus when the time is right.”
Blinder apparently thinks that the anti-Keynesian backlash is just some quibbles about this little jot or tittle. He cannot grasp that the growing sentiment against monetary central planning, against fine-tuning, against the whole statist monetary establishment, is a rejection of Keynesianism at the most fundamental level. People are tired of the philosopher kings and their pretense of knowledge.
But this is folly to kings. Consider Blinder’s criticism of Bernanke:
What the Fed proposes to do is neither foolproof nor perfect. Frankly, it’s not the policy I would choose. As I’ve written on this page, I’d like the Fed to purchase private securities and to reduce the interest rate it pays on reserves, even turning it negative. The latter would blast reserves out of banks into some productive uses.
Ah, to think like a king! But the days of the monetary monarchy may be numbered.
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