Posts filed under ‘Austrian Economics’
Interesting New Books
| Peter Klein |
In place of the “What I’ve Been Reading Lately” posts that show up regularly on certain blogs, I hereby offer something slightly less egocentric, the “What I’ve Been Receiving Lately” post. It contains a list of books I’ve recently received by mail, some by choice, others because publishers sent them (perhaps hoping I’d blog about them — Mission Accomplished!). Not the most scientific sample selection process, but there you go.
- Jesús Huerta de Soto, Socialism, Economic Calculation, and Entrepreneurship (Elgar, 2010). English translation of an important work first published in Spanish in 1992.
- Guinevere Liberty Nell, Rediscovering Fire: Basic Economic Lessons from the Soviet Experiment (Algora, 2010). What the failure of central planning teaches about markets and institutions.
- Koray Çaliskan, Market Threads: How Cotton Farmers and Traders Create a Global Commodity (Princeton, 2010). Economic sociology meets global commodity systems. Contains dust-jacket endorsements from Richard Swedberg and Donald MacKenzie, so expect a review from the orgtheory boys soon.
- Peter J. Boettke, ed., Handbook on Contemporary Austrian Economics (Elgar, 2010). Essays by young Austrian economists associated with George Mason University.
- Robert E. Wright, Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills (Prometheus, 2010). I think the title says it all.
- Ranjay Gulati, Reorganize for Resilience: Putting Customers at the Center of Your Business (Harvard Business School, 2010). Looks fluffy, but I have a teaching interest in change management so I’ll give it the benefit if the doubt.
- David Stark, The Sense of Dissonance: Accounts of Worth in Economic Life (Princeton, 2009). Also deals with organizational change, but in a more serious way. Ethnographic studies of three organizations dealing with large exogenous shocks. Looks interesting.
Entrepreneurial Paradoxes
| Peter Klein |
A new working paper from the always-interesting Peter Lewin: “Entrepreneurial Paradoxes: Implications of Radical Subjectivism.” Sample paradoxes:
- Entrepreneurial opportunities are complicated by uncertainty but would not exist without uncertainty.
- An entrepreneurial opportunity for everyone is an opportunity for no one in particular.
- Entrepreneurial opportunities are subjective and objective; discovered and created.
See the paper for the full set of paradoxes and some informative and challenging discussion.
Congratulations to J. C. Won
| Peter Klein |
Congratulations to University of Missouri PhD student Jong Chul Won for being one of three Don Lavoie Memorial Essay Competition Winners for 2010. His paper is “The Emergence, Limit, and Distortion of the Firm: The Entrepreneurship Approach.” The contest is sponsored by the Society for the Development of Austrian Economics. Details are below the fold.
Missouri student Per Bylund was a 2009 winner at the Austrian Student Scholars Conference for his paper “The Theory of the Firm: Coasean Misconceptions and Austrian Solutions.” If you’re interested in entrepreneurship and the theory of the firm, particularly from an Austrian perspective, the University of Missouri is the place to be! (more…)
Influences
| Scott Masten |
Oliver Williamson has obviously had an enormous influence on my research and career, but I encountered Olly only fairly late in my education; in fact, I didn’t take Olly’s Industrial Organization course until my last semester of course work, in the fall of my third year in graduate school. Prior to that, my primary field had been comparative economic systems or, as it was called at Penn, comparative economic planning. My interest in the latter field and, indeed, my decision to go to graduate school in the first place I owe to Edwin Dolan. I had entered college intending to go to law school and enrolled in Dolan’s Economic Analysis of Law seminar in the winter of my sophomore year. That course was eye-opening for me in two respects. First, after spending long days in the library stacks reading law cases (when the next best alternative activity was skiing), I decided that that was not what I wanted to do for the rest of my life. Second, I learned that I could engage the “fun” (that is, the analytical) part of law by continuing in economics, which I already found appealing. (more…)
The Pretense-of-Knowledge Syndrome
| Dick Langlois |
Has Ricardo Caballero been reading Hayek (or maybe Brian Loasby)?
In this paper I argue that the current core of macroeconomics — by which I mainly mean the so-called dynamic stochastic general equilibrium approach — has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in “fine-tuning” mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in “broad-exploration” mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.
Diamond-Dybvig (1983) and the Financial Crisis
| Peter Klein |
I started writing a really clever post about the famous Diamond paper (with Philip Dybvig) on financial intermediation and bank runs, its relevance for the financial crisis, and its elevated status in light of Monday’s Nobel announcement. Then I remembered that the author is Douglas Diamond, not Peter Diamond. Doh!
So I’ll try a different framing. “Speaking of guys named Diamond. . . .” The Diamond-Dybvig model, presented in a 1983 JPE article, has become famous enough to spawn an extensive secondary literature (and even sports its own Wikipedia entry). In a nutshell, it models fractional-reserve banks as intermediaries transforming illiquid assets into liquid liabilities and depicts the relationship among depositors as a coordination game with two Nash equilibria, one in which nobody tries to withdraw his funds because he believes no one else will try to withdraw his funds, and one in which everyone tries to withdraw their funds because they believe everyone else will try to withdraw their funds. Bank runs, in other words, constitute a Pareto-inferior Nash equilibrium. This framework led to extensive discussions about deposit insurance, option clauses, and other mechanisms to prevent the bad equilibrium by affecting depositors’ beliefs about solvency. (My former colleague Larry White devotes nearly a chapter of his Theory of Monetary Institutions to Diamond-Dybvig 1983.)
This is a hugely influential article, and I’m surprised it hasn’t been gotten more attention in the last two years. The essential fragility of a complex, interdependent, highly leveraged, fractional-reserve, implicitly government guaranteed system is at the heart of the financial crisis, so you’d think the Diamond-Dybvig framework would play an important role in the debate. But I can’t find much literature on this. The Richmond Fed devoted a special 2010 issue of its Financial Quarterly, guest edited by Ed Prescott, to the DD model, but it attracted little attention. Writes Prescott in his introduction: (more…)
Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity?
| Nicolai Foss |
Cross-country studies of the antecedents and consequences of entrepreneurship have become something of a cottage industry. My contribution to the industry is an earlier paper with Christian Bjørnskov, as well as rather recent one, also written with Christian, “Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity?” (and we have a third paper in the works with a certain Klein).
In the former paper we analyzed institutions and economic policies as determinants of entrepreneurship, paying particular attention to “freedom variables,” like sound money and a stable legal framework. In the latter paper, we focus on where the action is in the growth process, namely Total Factor Productivity, and proffer Austro-institutional arguments why entrepreneurship and the institutions associated with a free society may be expected to positively impact TFP.
While we find that entrepreneurship strongly and significantly impacts TFP, our results only partially support the intuition that institutions of liberty as well as liberal economic policies promote growth in productivity. In fact, we find no significant effects of sound money and legal quality on TFP in the medium run. When some of the freedom variables are interacted with the entrepreneurship variable, we in fact find that entrepreneurial activity is more effective in raising levels of TFP in environments dominated or strongly influenced by government activity, either through production in government-owned enterprises and investments or in its financing activities. Thus, increasing the active involvement of the government in the economy as well as the tax burden actually increases the impact of entrepreneurship on TFP. Our explanation of this somewhat surprising finding is that a reduced supply of entrepreneurship increases the marginal productivity of entrepreneurship; thus, the best ideas do survive even in the relatively hostile welfare state environment. (more…)
Mises Quote of the Day
| Peter Klein |
Mises is known for his uncompromising defense of apriorism in economics, yet he began his career as a historicist, trained by Karl Grünberg, a Marxist and prominent member of the German Historical School. (Mises’s first publications were on land reform in his native Galicia and child-labor laws in Austria, both tediously empirical and inductive.) It was only later, after encountering Menger’s Principles, that Mises turned to social theory.
One of this week’s Mises Dailies features an excerpt from Mises’s 1957 book Theory and History and I can’t resist passing along this nugget, which is hopelessly out of touch with today’s enthusiasm for all things experimental:
[H]istorical experience is always the experience of complex phenomena, of the joint effects brought about by the operation of a multiplicity of elements. Such historical experience does not give the observer facts in the sense in which the natural sciences apply this term to the results obtained in laboratory experiments. (People who call their offices, studies, and libraries “laboratories” for research in economics, statistics, or the social sciences are hopelessly muddle-headed.)
Mises isn’t talking about the literal laboratories used by today’s experimental economists, but the casual use of such scientistic jargon when collecting and analyzing non-experimental data, whether or primary or secondary. (He likewise rejected the language of “hypothesis testing” and the like when applied to social science.) Anyway, agree or disagree, you have to admit there are a lot of hopelessly muddle-headed people on university campuses.
Best Paper Excerpt I Read Today
| Peter Klein |
What I call here an “orthodox” or mainstream Austrian theory of the firm is an attempt to reshape a Coasian notion of the firm as a centrally planned hierarchy, by merging it with general Austrian theory of the market process and entrepreneurship. The principal Austrians of the present (Klein and Foss, 2005, Foss 1994, Langlois and Foss, 1997) developed a theory of the firm by trying to synthesize this Coasian notion of the firm as a hierarchical entity dominated by commands and orders, with a distinct Misesian theory of entrepreneurship and monetary calculation as preconditions of rational economic planning. This approach is entirely rejected in this paper.
Source. I always thought of myself as a Young Turk, but I guess I’m now Old Guard.
Upcoming Public Appearances
| Peter Klein |
It’s a slow news day, blogospherically speaking, so I thought I’d share information about some of my upcoming public appearances, for reasons that have nothing at all to do with self promotion:
“Entrepreneurship, Strategy, and the Financial Crisis: Lessons from the Austrian School”
Sherlock Hibbs Distinguished Lecture in Business and Economics
24 September 2010, 2:00-3:30pm
205 Cornell Hall, Trulaske College of Business
University of Missouri
“Entrepreneurship and the Financial Crisis”
27 September 2010, 7:00pm
N021 Business Complex
Michigan State University
“Getting Out the Word: Alternative Research, Teaching, and Outreach”
Mises Institute Supporters Summit
8-9 October 2010
Auburn, Ala.
Austrian Economics in Transition
| Nicolai Foss |
The Austrian School of Economics continues to provide grist for the doctrinal historian’s mill. New interpretations are developed. Forgotten manuscripts by prominent Austrians are still being discovered. The discovery of the Mises archive about a decade ago by Jörg Guido Hülsmann comes to mind. I recently had the pleasure of reading four hitherto unpublished Hayek papers (including his talk at Cambridge in 1931, immediately before the lectures at LSE that became Prices and Production, that Joan Robinson later described/dissed in this manner, referring to a question by Richard Kahn: “Is it your view that if I went out tomorrow and bought a new overcoat that would increase unemployment?” “Yes,” said Hayek, “but,” pointing to his triangles on the board, “it would take a very long mathematical argument to explain why”).
Many of those who have done important work on the history of the school includes committed contemporary Austrians (e.g., Joe Salerno, Roger Garrison, Richard Ebeling, etc.), but very substantial research has also been contributed by economists who may may not consider themselves Austrians (this includes many European scholars, such as Hansjoerg Klausinger, Meghnad Desai, Rudy van Zijp, Jacb Birner and many others). This evening I had the opportunity to browse Austrian Economics in Transition, which is an example of this kind of doctrinal history scholarship. The book is edited by Harald Hagemann, Tamotsu Nishizawa, and Yukihiro Ikeda, and was published a couple of months ago by Palgrave MacMillan. It is a collection of essays, 16 in total, by European and Japanese scholar, originating from a conference on Menger in Japan in 2004, and addressing the history of the Austrian School until approximately the end of World War II. (more…)
Bruce Caldwell on The Road from Mont Pèlerin
| Peter Klein |
Don’t miss Bruce Caldwell’s review of Philip Mirowski and Dieter Plehwe, eds., The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective (Harvard, 2009). “Mont Pèlerin” refers, of course, to the Mont Pèlerin Society, the association of classical liberal academics and journalists founded by Hayek in 1947. Bruce finds the volume informative, despite its frequently disdainful tone toward its subjects. He also raises an important general point, one that I’ve wrestled with a lot since the financial crisis: does anybody listen to us?
The second question [raised by the book] has to do with the potency of intellectuals to shape world events or, more narrowly, even economic and social policy. It is evident that members of the Mont Pèlerin Society, for all of their diversity, still preferred some form of liberalism . . . to other ways of organizing economic and political affairs. But how important were they in the emerging global consensus that began in the 1980s in favor of trade liberalization and privatization? Were not, for example, the dismal performance of Keynesian demand management policies in the United States, Britain, and elsewhere in the 1970s; the heavy-handed actions of the trade unions in Britain during the “Winter of Discontent”; the sclerotic performance of countries like India who had embraced a modified version of the planning model for their own; and, of course, the patent economic and political failures of the East Bloc, far more important in turning the tide, however briefly, towards globalization? Was not George Stigler (himself a founding member of the Society) right in his comment about economists that “our influence appears to be powerful only when we support policies ripe for adoption” (Stigler 1987, p. 11)?
Chris Coyne’s Austrian Course
| Peter Klein |
Earlier I shared the reading list for my graduate course in the Austrian school of economics. Chris Coyne is teaching a similar class and has posted his syllabus here. Chris’s course is laid out differently than mine, with a different mix among types of readings, but I like what he’s done. As Pete Boettke and Joe Salerno have noted, the diversity and variety of course offerings and educational programs in Austrian economics is a sign of the health and vitality of the school.
Department of “Duh”
| Peter Klein |
It must be acknowledged, however, that a researcher’s political ideology or vested interest in a particular theory can still enter even ostensibly descriptive analysis by the data set chosen for the research; the mathematical transformations of raw data and the exclusion of so-called outlier data; the specific form of the mathematical equations posited for estimation; the estimation method used; the number of retrials in estimation to get what strikes the researcher as “plausible” results, and the manner in which final research findings are presented.
That’s Uwe Reinhardt, writing a NY Times op-ed that could have been titled “A Mainstream Economist Tries to Come to Grips with Kaldor-Hicks Efficiency.” It’s actually a pretty thoughtful and informative discussion that exposes some of the fatal — to my mind, anyway — flaws of the Kaldor-Hicks concept. But Reinhardt implies, unfortunately, that virtually every economist accepts the Kaldor-Hicks principle as a normative standard. There is actually a fair amount of dissent, not only from Austrians but also from people like Jon Elster and John Roemer. As Gary Lawson notes in an excellent survey of welfare economics concepts, the Kaldor-Hicks criterion, in practice, is
as useless as Pareto superiority. Kaldor-Hicks efficiency purchases its coherence by requiring that compensation be hypothetically possible in such a way as to guarantee that each person, by her own standards, does not come away a loser, just as strict Paretianism requires that each person judge herself to be as well off or better off than before. All it takes to make the universe of Kaldor-Hicks-efficient transactions an empty set is one person who sincerely cannot be bought-that is, a person who values autonomy, either his own or that of others, so highly that no amount of after-the-fact compensation could possibly leave him as well off as he would have been had the loss never been inflicted. (without consent) in the first place. In a large population, no legal rule [or other reallocation of resources] will ever satisfy the Kaldor-Hicks efficiency criterion.
Austrian Economics PhD Course
| Peter Klein |
This semester I am teaching a PhD course in the Austrian school of economics. Here’s a preview. Visitors to Columbia, Missouri are welcome to sit in!
Excerpt from the syllabus:
It is difficult to cover an entire school of thought in one semester. Austrian economics, after all, is not an applied field like development economics or international trade policy or biotechnology but an alternative approach to all fields of economics. The course objective is not to provide a comprehensive review and critique of the entire Austrian tradition, but to give students a sampler of high-quality Austrian writings, classic and modern, on a variety of issues and topics. One goal is to show that while Austrian economists share a common conceptual framework, theoretical core, and historical context, the Austrian literature contains tremendous variety, both stylistic and substantive. Like any living, breathing tradition the Austrian literature continues to expand and diversify, often at a dizzying pace.
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Lachmann on Capital Heterogeneity
| Peter Klein |
We have written often on the role of capital heterogeneity in an entrepreneurial theory of the firm. “We are living in a world of unexpected change,” wrote Ludwig Lachmann in 1956; “hence capital combinations . . . will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.” Of course, the concept of heterogeneous resources is fundamental to transaction cost and resource-based views of the firm. It is mostly ignored by mainstream economists, however — macroeconomists in particular, as evidenced by the Old School Keynesianism that drives bailout and stimulus policy.
Here is Richard Ebeling with a fine overview of Lachmann’s capital theory, in contrast to Keynes’s superficial treatment:
A crucial element in Lachmann’s view of capital . . . is that the relationships between and among capital goods are those of substitutes and complements.
The Keynesian fallacy, Lachmann implies, is that Keynes tended to view and consider the capital stock has a more or less homogeneous aggregate under which all capital goods might be considered as interchangeable substitutes. Thus, any increase in capital investment lowers the “marginal efficiency of capital” (Keynes’ term) of every other unit of capital, since every unit of capital is a substitute with all other capital. . . .
Thus, if monetary manipulation brings about an increase in money and credit, and a resulting distortion of the rates of interest, and if this generates a tendency for misguided capital and related investments, and as a consequences capital goods and various types of labor are drawn into particular sectors of the economy and “stages” of the time structure of production, then . . .
You know the rest. And the coda too:
Government interventions and “stimulus” gimmicks merely serve to delay the adjustments and further distort an already distorted market. It is an attempt to maintain capital and labor complementary production and investment structures that are unsustainable in many of the patterns generated during the boom phase of the business cycle.
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Uncertainty and Human Action in Fiction
| Peter Klein |
From Ursula Le Guin’s 1969 novel The Left Hand of Darkness:
“The unknown,” said Faxe’s soft voice in the forest, “the unforetold, the unproven, that is what life is based on. Ignorance is the ground of thought. Unproof is the ground of action. If it were proven that there is no God there would be no religion. No Handdara, no Yomesh, no hearthgods, nothing. But also if it were proven that there is a God, there would be no religion. . . . Tell me, Genry, what is known? What is sure, predictable, inevitable — the one certain thing you know concerning your future, and mine?”
“That we shall die.”
“Yes. There’s really only one question that can be answered, Genry, and we already know the answer. . . . The only thing that makes life possible is permanent, intolerable uncertainty: not knowing what comes next.”
The phrase “permanent, intolerable uncertainty” brings to mind Knight’s famous remark in Risk, Uncertainty, and Profit about the “the sheer brute fact that the results of human activity cannot be anticipated.”
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Foss and Klein Critique of Kirzner
| Peter Klein |
The Spring 2010 issue of the Journal of Private Enterprise contains a Kirzner symposium, including a paper by Nicolai and me, “Alertness, Action, and the Antecedents of Entrepreneurship.” We critique Kirzner’s concept of the “pure entrepreneur,” arguing that alertness is a historically contingent attribute of real-world business people — what Mises calls “promoters” — but not essential to the entrepreneurial function itself. We also suggest that Kirzner is inconsistent on the issue of antecedents, simultaneously holding that the entrepreneur-as-discoverer exists outside any particular institutional environment, and that certain public policies inhibit entrepreneurial discovery by blocking profit opportunities. Some of the material in the paper is familiar to readers of our other works, but our critique of the Kirznerian pure entrepreneur, in the context of ideal types, goes beyond previous arguments.
Oh, some of you may be more interested in the rest of the special issue, which leads with Dan Klein and Jason Briggeman’s broadside, “Israel Kirzner on Coordination and Discovery,” followed by a lengthy response from Kirzner himself. (Our paper is really an addendum.) Pete Boettke and Dan D’Amico, Steve Horwitz, Gene Callahan, Bob Murphy, and Martin Ricketts round out the Kirzner symposium.
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Mises Quote of the Day
| Peter Klein |
From Human Action, chapter 15, section 11 (via JGL):
In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.
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Hayek Interviews
| Peter Klein |
In 1983 the Earhart Foundation sponsored a lengthy set of interviews with F. A. Hayek in Los Angeles. The transcripts have long been available (and form the basis of the interview parts of Hayek on Hayek), but the complete set of videos has just now been put online, courtesy of the Universidad Francisco Marroquín. The interviewers are an impressive lot as well: James Buchanan, Armen Alchian, Axel Leijonhufvud, Robert Bork, Tom Hazlett, Jack High, Bob Chitester, Leo Rosten, and Earlene Craver. (I hardly recognized the youthful Hazlett!) You can also get the transcripts, if you prefer plain text.
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