The Austrian Economists

The Future of Europe—Yet Again

Yesterday, Henri Lepage gave a presentation at the PPE workshop on the future of Europe. Lepage’s books Tomorrow Capitalism and Tomorrow Liberalism, published respectively in 1978 and 1980, were among the first works in the world to present a clear explanation of Chicagoan economics and Virginia public choice (for the general public). He subsequently published two other books on property rights and on new industrial economics (i.e. the economics of contracts)—the last one being my favorite. A generation of young economics students in the 1980s (including Peter Boettke) learnt a great deal about free markets because of Lepage’s work. In the midst of the Reagan and Thatcher revolutions of the 1980s, Milton Friedman’s Free to Choose and Lepage’s books were among the best sources to understand the policy changes.

As Lepage explained yesterday, he doesn’t write books anymore. He is too busy working for the European Parliament; that is, understanding the “legislation machine” as he calls it. When he is done with his current job, I hope he will put his thoughts on paper and write a book about the future of the European Union (EU).

Among the issues he discussed, three struck me as immensely relevant to understand the future of Europe.

First, members of the European Parliament (MEP) have a double allegiance between their member country and the EU. This means that while some MEP may be willing to defend good policies when the EU at large is concerned, they become partisans when the legislation impacts their country. This creates a dynamic where good policy is often attacked by those you would expect least.

Second, Lepage believes most of the problems that the EU faces find their source with the Maastricht Treaty signed in 1992 that led to the existence of the EU as we know it today. Originally the European Community (EC) was mainly a free trade zone—even though it used the European Monetary System, established in 1979 (and which never worked), and it also had some judicial powers with the European Court of Justice. In two millennia, Europeans had (almost) never been able to trade freely; the EC, in addition to establishing lasting peace among European countries, put the free trade agenda on the table. This was laudable, even if one may argue that there was no need for another bureaucracy to implement free trade. Then, in 1992, Europe changed gear: it went from a commercial zone (the EC) to a political and monetary union (the EU). In essence, the EU became a supra-national government, and (therefore) a “legislation machine.”

Third, part of the EU role is to make sure that Europe is politically stable. This led to the idea of EU enlargement. Peripheral countries must be included into the union in order to make the frontiers stable and to export the European model of democracy to people who couldn’t figure it out themselves (e.g. Estonians—as if Estonia needed help from the EU). In the name of exporting democracy, this disguised imperialism extends EU influence by bribing surrounding countries (with EU structural funds). Ultimately, this reduces the competition that may come from the outside, and which could threaten the core. Once one realizes that among the reasons for Western development was jurisdictional competition, one sees that EU enlargement (if it succeeds) could become synonymous with suicide. (And this doesn’t even address the issue as to where the enlargement should stop.)

The future of Europe is not bright. Lepage recalls the days when Europe was catching up fast with the US in the 1960s and 1970s. It is now going the other way (see here). While some may think that the EU as it stands today is the logical outcome of what its founders, Jean Monnet and Maurice Shumann, wanted; this is far from certain. We should hope that French and German influence continues to abate in the EU, and that Eastern Europeans and Britain come to dominate entirely future debates. So far, I believe the EU has been a huge and costly mistake; it remains to be seen how the story will end.

The Soviet Thaw 50 years Later

Arts and Letters Daily reports on a variety of reflections on Khrushchev's 'secret speech' of February 25, 1956 which denounced Stalin's crimes.

Nikita Khrushchev gave his secret speech to the 20th Party Congress in the Kremlin fifty years ago... Robert Conquest ... Wm. Taubman ... Anne Applebaum ... Claire Bigg ... Roy Medvedev ... Jeremy Page ... Boris Kagarlitsky ... John Rettie ... Nina Khrushcheva ... Tom Parfitt ... Richard Bruner ... and what an electrifying speech it was.

Khrushchev's speech proved to be one of the most important political speeches in modern history.  What other political or economic speeches would our readers list from the past 50 years?

Is A Picture Worth a Thousand Words?

Just returned from an initial research trip to New Orleans.  Too much to discuss, but this picture communicates better than I ever could.

Better Off Stateless

Fred Sautet blogs today on Somalia. I have recently written a paper entitled, "Better Off Stateless: Somalia Before and After Government Collapse," on Somalia's stateless economy. I use an event study to examine Somali welfare before and after anarchy emerged. When a state is predatory enough, it can drive social welfare below that level attainable without any government at all. Such was the case in Somalia. I comprehensively examine all indicators of Somali development for which data are available pre- and post-statelessness. On nearly all indicators, Somalis are better off today than they were 15 years ago under government. The evidence suggests anarchy has been welfare-enhancing for Somali citizens.

Somalia and the Absence of Central Government

Yumi Kim from the Mises Blog has a very good post on Somalia and its absence of central government (see here). The author based her post on Michael van Notten’s book The Law of the Somalis.

Somalia is perhaps one of the very few successes in Africa—although it is probably too soon to tell. In Somalia, customary law is alive and well, and it offers all that is needed for conflict resolution (see Kim’s description of it). Far from being in need of a central government (which would act as most other governments in Africa do, as a stationary bandit), Somali clans have been able, since the violent disintegration of the last central government in 1991, to use the laws and customs that had governed Somali life in the distant past.

So far, the results are remarkable; trade and investment seem to be growing:

Somalia's telecommunications are the best in Africa, its herding economy is stronger than that of either of its neighbors, Kenya or Ethiopia, and […] since the demise of the central government, the Somali shilling has become far more stable in world currency markets, while exports have quintupled.

One of the puzzles economists have tried to solve in the last 30 years is to understand how impersonal trade (i.e. trading amongst strangers) emerges. One reason, it is believed, is the emergence of the nation state and a common legal system. The Somali case shows that customary law is far more important than central government to enable distant trade.

Legal systems are very much organic; they grow over time from the interactions of people. The experience with nation building in the 19th and 20th c. has been a disaster everywhere the law was imposed. It is true that statute law is now part of Western legal systems, and it is imposed by central governments. However, it is also true that the basis of Western legal systems is hundreds of years old—what some have called the “shadow of the law.” Even in the case of France, the Napoleonic Civil Code was based on French Common Law—it was not invented, and it has slowly evolved since then. As F. A. Hayek explained in Law, Legislation and Liberty, the organic aspect of the law cannot be ignored if the law is to do its job well.

It may be true that Somali clans are akin to mini governments. Also, it can be argued that one does not need to get rid of central government in order to benefit from a slowly evolving organic law system (e.g. the English Common Law). However, Africa’s record with government is appalling. Central governments have been the source of problems in most cases. Somalia, in contrast, appears to have solved many of the problems that plague other African nations. There is still some violence for the everyday person, but a decentralized solution seems to be able to overcome it better than its centralized alternative. This should be another lesson for those who think that democracy and state building are the best solutions for developing countries. But it will be a difficult lesson to admit for the central planners amongst us.

What's in a Name?

Pete Boettke blogs today on the upcoming debate between himself and Dan Klein about whether we should start calling Austrian economics by another name. (See below). Klein advocates renaming Austrian economics, "spontaneous order economics." It seems to me that Austrian economics encompasses more than examinations of spontaneous orders, so I'm not sure why we would want to call it this. Additionally, it seems odd to rename Austrian economics in light of the fact that it already has a name: Austrian economics.

But my purpose in this post is not debate the relative merits of alternative labels for what we do. On the contrary, I wanted precisely to note that it matters little what we label this. Who cares what we call Austrian economics? Certainly not anyone outside of Austrian economics.

What is important is getting on with the project of doing good economics, regardless of what it's called. I believe, and I would wager most readers of this blog do as well, that good economics is rooted in the ideas of Menger, Mises, Hayek, Buchanan, Tullock and other economists interested in analyzing the processes of exchange and the institutions within which that exchange takes place. So, let such thinkers be your inspiration and engage this kind of research actively.

Let others apply a name to the resulting style of economics pursued. Good economics characterized by certain commonalities among its practitioners is "labeled" by others, not by its practitioners. Mises and Hayek did not decide one day to name what they were doing "Austrian economics." The same is true for other schools of thought.

Sensibly, economists in question didn't care about what their research was called, or even distinguishing with a special name from the economics of others. They did what they saw as good economics, and labels were later applied to them by others once what they were doing was recognized by outsiders as important and meriting distinction.

What's in a name? Very little. And certainly not enough to justify spending time that could be spent doing good economics instead debating labels.

What Separates Austrians from Others in the Science of Economics?

Dan Klein and I will be debating the usefulness of the label 'Austrian' economics tomorrow in the Workshop in Philosophy, Politics and Economics.  I will leave it to you to read the different position statements and make up your mind for yourself.

However, the occassion of the debate has sharpend my appreciation for the 'science wars' that surround economics and the meaning of science as it pertains to the discipline of economics.  Many believe science is about measurement --- if you cannot measure you cannot do science.  If that is indeed your position, then economic 'science' would need to conform to certain standard and any approach that failed to do so would be dimiss as not science.  But of course there are many philosophical difficulties with the science as measurement definition.

I prefer to see modeling and measuring as but one way to pursue science.  Science is not defined by the quest for measurement, but instead the quest to understand the systemic forces at work in the universe -- both the natural and human world.  I am reading at the moment Roger Penrose's The Road to Reality: A Complete Guide to the Laws of the Universe (2004).  Two things are important about Penrose's wonderful book --- first it teaches the principles explaining the order in the natural world through a history of the intellectual quest to find them.  In doing so, Penrose exalts intellectual history as an issue of contemporary relevance for scientific work --- whether he intended to do this or not is not the question.  I personally have always learned by understanding the history of arguments and their evolutionary path, so I find history of thought in political economy central to our intellectual task, not a side issue.  The second point Penrose teaches is that our scientific question is about the forces underlying the order of the universe. These forces bring about the order we see in nature.

Why is this relevant?  Because this is how I view Austrian economics as compared to other schools in the neoclassical tradition. The Austrians share with neoclassical economists the idea that social order emerges out of the choices of individuals.  Where they disagree is that the vast majority of neoclassical economists focus on the state of affairs in that order after all the forces that produced it have done their job.  In short, neoclassical equilibrium theory describes what the human world looks like after all the gains from trade have been exhausted, all plans have been reconciled, and equilibrium has been attained.  The Austrians focus instead on the processes guided by the 'forces' that bring about social order.

Another way to put this is that neoclassical economics concentrates our intellectual attention on the results that emerge once the economic forces at work have done their job, while Austrians focus on examining those forces as they are doing their job.

The Integrity of College Teaching

College teaching is actually a worthy professional calling.  I don't mean being a professor who must balance undergraduate and graduate teaching with research demands.  No, I mean teaching economics to undergraduates.  As James Buchanan has argued, the primary justification for the salary that we earn is our ability to communicate to students the principles of the spontaneous order of the market process.  By this criteria there are some great professors that I have been exposed to in my career.  Israel Kirzner might be the best professor of economics that I have ever encountered.  Ken Elzinga of UVA is certainly in that same company.  But both of those men taught at major universities and established themselves with strong research contributions.  Paul Heyne was also a legendary teacher in the large lecture hall format.

But there are scores of teachers in the liberal arts colleges scattered across our country.  I am a big believer in liberal arts colleges being the product of one myself.  In fact, my professors at Grove City College were fantastic teachers and Dr. Sennholz was a dynamic and engaging economics teacher.  I recently visited Hampden Sydney College to give a lecture.  I also visited classrooms the next morning taught by Professor Tony Carilli and Professor Chris Coyne.  Carilli and Coyne are actually master teachers and I am convinced that the education a young man can receive at HSC in economics must be among the best that is offered anywhere in the world.  In fact, I was impressed with the entire campus and the educational experience offered at HSC.  The students were among the most disciplined, respectful, intelligent and mature young men that I have ever met (and it is all young men because it is a single-sex school).  In fact, I think HSC is the best example of the high quality of education that liberal arts colleges and single-sex colleges can provide that I have ever been exposed to in over 20 years of visiting colleges and universities throughout North America, Europe, and Latin America.

Teaching college economics is indeed a worthy calling that the vast majority of young PhDs should embrace with pride and professionalism.  The academic culture downgrades teaching and exalts research, but for the vast majority of intellectuals the greatest chance they have to impact the hearts and minds of the next generation is through their teaching.  A master teacher like Carilli can influence a young man's life for the better.  Or in the case of someone like me, the exposure to a teacher like Hans Sennholz proved more transformative than would have been the wildest dreams of my previous teachers, parents, family or friends.

Is GDP the Best Measure?

As a counter-weight to my post from yesterday on Europe, The Economist this week discusses alternative measures to GDP (see here). The problems with GDP measures are well-known, chief among them is that they only take into account monetary aspects of life and they don’t even do it well. Alternatives to GDP are: Gross National Income (GNI) and Net National Income (NNI), both of which are still based on monetary transactions.

What about if we try to include leisure and other issues such as how people feel about income inequality and the environment? This is what the OECD tried to do in its Going for Growth report (that I still haven’t seen). For instance, by adjusting GDP for leisure, the Netherlands becomes richer than the US. Curiously France is still poorer—even though the French spend their time on vacation. Adjusting household income for inequality, France becomes richer than the US, Britain, and the other OECD countries.

While finding alternative measures to GDP is a good idea, it rests on assumptions about the value people place on non-monetary transactions. Since we can’t read people’s minds, this is likely to provide spurious results. With all its imperfections, it seems difficult to come up with an alternative to GDP (or GNI). More importantly, it doesn’t change the fact that unless Europe reforms itself, Europeans may be too poor to afford any desirable leisure in the future. As Ludwig von Mises remarked, the choice is not between a free economy on the one hand and a social democracy where people have more leisure but are a bit poorer on the other; the choice is between prosperity and poverty.

Europeans: You Don’t Get It, Do You?

As a native of the old continent, I am always interested in its future (e.g. see my recent post). Claire Morgan, GPI director at Mercatus, attracted my attention yesterday to a very good article in the Washington Post by Fareed Zakaria: The Decline and Fall of Europe. I recommend the article, see here.

The article discusses a recent report from the OECD (ironically based in Paris) that just came out. Going for Growth (this is the title of the new report) informs us about growth prospects in the OECD. The first issue makes the case that Europe is in a very sorry state. Unless, serious reforms are undertaken, by year 2025, the US GDP per capita will be twice as large as that of Europe. As Zakaria puts it:

It's often noted that the European Union has a combined gross domestic product that is approximately the same as that of the United States. But the E.U. has 170 million more people. Its per capita GDP is 25 percent lower than that of the United States, and, most important, that gap has been widening for 15 years. If present trends continue, the chief economist at the OECD argues, in 20 years the average U.S. citizen will be twice as rich as the average Frenchman or German.

When you look at such a figure (assuming it is a good estimate), one cannot start wondering: what are Europeans doing? They are fast approaching the abyss, and yet, they seem to continue as if nothing was happening. I have come to believe that no one in the general public in Europe really understands what is at stake. It is as if civilization was there to stay irrespective of what they do—and in spite of two world wars.

What a shame for the continent of the enlightenment. The 20th century witnessed the results of “secular-rationalism” (which included Marxism); a movement born with the French Revolution. Unfortunately, it may continue in the 21st century. So in case you were wondering, the Jacobin legacy is still alive and well, but Europeans don’t get it.