The Austrian Economists

Would you rather be known as politically influential, famous among the intellectual elite, or making a lasting scientific contribution?

This is a variant of the question James Buchanan would often ask a graduate student.  The "correct" answer was of course to make a lasting scientific contribution --- to be read not in your lifetime, but centuries after your death.

Among economists perhaps nobody exemplified the opposite of this in the 20th century more so than John Kenneth Galbraith, who passed away on Saturday.    The NYT obituary does an excellent job conveying Galbraith's influence on our political and intellectual culture.  The claim is made that Galbraith is the most widely read economist in the history of the discipline.  Richard Parker's biography, John Kenneth Galbraith: His Life, His Politics, His Economics is also an excellent source for studying the impact of Galbraith had on the intellectual and policy debate.

But Galbraith's claim to scientific influence is dubious at best.  Parker tries to make the case that Galbraith's ideas are now influencing modern economic discussions in the scientific literature like behavioral economics.  Among heterodox economists Galbraith is no doubt an icon, but as someone who made a lasting contribution to the mainline of the discipline it is hard to agree with Parker.  Galbraith achieved influence and fame, but did not make a lasting contribution to the advance of the discipline of economics.  He did set a standard for writing that we should aspire to achieve, but his core ideas are either restated Veblen, warmed over Keynes, or Marxist platitudes.  It is not clear that any of his ideas are original enough to warrant that he be placed in that company of critics of the market economy.  But there can be little doubt that between 1950-1970, he perhaps more than anyone popularized the teachings of Marx, Veblen and Keynes and made them acceptable to generations of Harvard students and members of the intelligentsia in the English speaking world.

On a personal note, I met Galbraith and shared dinner with him one night in the early 1990s.  I was prepared to hate the evening only to be completely charmed by the man and his stories of JFK and India, of battles with Milton Friedman and William F. Buckley, or a profession which has succumbed to too much formalism, disrespect for history, and an inability to address the institutional contingencies of our age.   It was an amazing evening and it was one of the important moments which taught me that you cannot divide the world neatly into those who are stupid, those who are evil, and those who agree with me. Instead the world is full of charming, brilliant, and good hearted individuals who just happen to hold opinions opposite of the ones I do.  Understanding results from delving into those reasons for differing opinions without succumbing to the cheap tricks of attributing disagreement to bad motives and to lack of intelligence among opponents.

BTW, my very first professional paper in economics (first written in 1984, but published in 1989) was inspired by reading Galbraith and attempting to negotiate between Galbraith and the institutionalists on the one hand, and the Austrians on the other.

Against the Washington Consensus?

I have always found myself in a strange position in the development policy debates.  I am uneasy with government led development efforts, and yet the Washington consensus reflected an admission that privatization, monetary responsibility, fiscal restraint, and free trade out performed the older Keynesian recipes for development.

What exactly went wrong in the 1990s will be a topic for many a doctoral dissertation.  Did Russia run into problems because of too much free market policy?  Certainly that conclusion would be one that would stretch the truth.  Hard to say that monetary restraint was the policy rule when the ruble went from 180R = $1 to over 5000R = $1.  As I wrote in an Op-Ed in the Orange County Register in January 1993, Shock Therapy in Russia failed Because It Lacked Voltage, not because Shock Therapy fails on its own terms.

Pablo Halkyard discusses the shift from the Washington Consensus to the Washington Confusion and links to Dani Rodrik's discussion of the World Bank's Economc Growth in the 1990s: Learning from a Decade of Reform.

The Revolution that Never Was

A few weeks ago, Prof. Sudha Shenoy visited the department of economics at GMU. A native of India, Sudha lives in Australia and has recently retired from teaching economic history at the University of Newcastle. She gave several talks ranging from the battle between Hayek and Keynes, the role of Austrian economics in historical analysis of capitalism, capital theory, and economic growth and development. Sudha is one of the teachers and representatives of the traditional Austrian school of economics (see here and here). She got into economics because she was inspired by her father who went to England during the inter-war period and took classes with F. A. Hayek at the London School of Economics.

There is no nonsense in her economics; it is solidly rooted in the Austrian tradition, especially capital theory. Here are two examples. First, she believes there was no Industrial Revolution in the late 18th and early 19th century. Second, echoing Mises, she is appalled by how bad most economists are when it comes to history. While this is probably the result of modern training in economics, it does not excuse our amateurish approach of the discipline.

As far as the Industrial Revolution is concerned, her basic view is that there never was any. To be more specific, the idea is that there never was any discontinuity in the development of Western economies. A revolution is a discontinuity; it is a clean break from a former state of affairs. The French and Russian Revolutions were clear, unpredictable changes that replaced one political system by another. According to Sudha, it would be far fetched to say that the Industrial Revolution replaced a state of affairs by another one in the space of a very short time. Instead, European economies, especially Britain, France, and Germany experienced gradual changes that were the results of growing markets, the deepening of the capital structure, and more freedom.

Sudha is not alone in claiming this. Mises for a start said the same in his work, especially in Human Action (see here):

The attribution of the phrase "the Industrial Revolution" to the reigns of the two last Hanoverian Georges was the outcome of deliberate attempts to melodramatize economic history in order to fit it into the Procrustean Marxian schemes. The transition from medieval methods of production to those of the free enterprise system was a long process that started centuries before 1760 and, even in England, was not finished in 1830.

Sudha carefully explained how economists trained in the Austrian tradition and who understand capital as an interwoven structure of complementary (to various degrees) capital goods, have better tools to understand industrial development. The British economy was already extremely complex in medieval times and this level of complexity never ceased to increase in spite of the political turmoil England went through. By the time we reached the Glorious Revolution in 1688, the economy was already phenomenally complex. What may have misled historians and economists is the fact that industrial development accelerated in the 18th century, but this was the result of centuries of capital accumulation. Or was it?

Some historians have written on the lack of substantial discontinuity. For instance, N F R Crafts’s British Growth during the Industrial Revolution, published in 1985, and Maxine Berg’s The Age of Manufacturers, published in 1994. However, the majority still subscribes to the idea of Industrial Revolution because major innovations took place at the end of the 18th and in the early 19th century (e.g. the steam engine and the telegraph). What is your view?

Jane Jacobs — RIP

Jane Jacobs passed away on Tuesday at the age of 89. Jacobs was one of the greatest independent scholars/intellectuals in the 20th century.

I first heard of Jacobs and her work through Sam Staley, when we were in graduate school together in the 1980s. Sam and Sanford Ikeda more recently edited a special volume of The Review of Austrian Economics on urban interventionism, which in a large part contrasts the appreciation of spontaneous order in the development of cities that one finds in Jacobs's work with the urban planning approach that dominates government policy toward cities.

I reviewed and loved Jacobs's System  of Survival.

Thank you Jane Jacobs for your intellectual integrity and wonderful insights.

The Inevitability of the Unexpected

Twenty six years ago today, on April 24, 1980, US President Jimmy Carter decided to launch a rescue mission using the Delta Force to bring back home the US hostages who were held captive in the US Embassy in Teheran. The attempt to rescue the hostages failed and Eagle Claw (that was the name of the mission) ended in a complete debacle at Desert One point. The tragedy left eight soldiers dead and many others injured. They are in our prayers on this day. The Atlantic this month has a very interesting (interactive) article on the failed mission (see here and here for the Wikipedia entry).

It describes what people in the military call: “the inevitability of the unexpected.” Eagle Claw is an illustration of the complexity involved in planning such a large one-off mission and how even the best trained soldiers always face uncertainty. Here are some interesting points illustrating the (radical) uncertainty problem that the soldiers faced in that mission:

• The C-130 planes that flew from Masirah in Oman into Desert One in Iran (see interactive map), encountered “curious milky patches in the night sky.” These patches were made of suspended dust (haboob). These clouds of dust were huge, 100 miles long for one of them. They made the trip considerably more difficult for the planes but also for the Sea-Stallions helicopters that flew from the USS Nimitz stationed in the Gulf of Oman. Planes and helicopters flew very low and thus needed as much visibility as possible. One of the helicopters had to return and the others almost didn’t make it. The haboobs also accounted for the damages to the helicopters, which eventually led to the mission abort. According to the article, no one seemed to expect them.
  
• As the first plane landed in Desert One, a remote place in the mountains, a bus full of poor Iranian passengers traveling through the night, was crossing the field chosen for landing. Again, no one expected such an event to happen. The soldiers stopped the bus and held its passengers as hostages. While they were not a threat, they had to be taken care of, which was time-consuming for the soldiers.
  
• A team had checked the quality of the landing site three weeks prior. However, on the day of the operation, it was not a hard-packed surface anymore, as a layer of fine sand (ankle-deep in some places) was covering it. This made taxiing for the planes difficult and created dust storms with the planes’ propellers and the helicopters’ rotors. This also contributed to the mission abort.

While a military mission is not an entrepreneurial endeavor guided by monetary profit signals, the Eagle Claw debacle shows how uncertain the future can be, even when the best trained individuals try to plan it. As in many entrepreneurial ventures, once the opportunity has been recognized, the main difficulty lies in doing it for the first time: to boldly go where no man has gone before.

Academics as Public Intellectuals

Several years ago there was a book by Russell Jacoby, The Last Intellectuals that argued that unlike in the past public intellectuals today actually cluster in universities.  Richard Posner's Public Intellectual's: A Study of Decline picks up on Jacoby's thesis and demonstrates how the requirement of disciplinary specialization narrows the scope of intellectuals to express informed judgement on a wide variety of topics.

In the Chronicle of Higher Education there is a nice discussion of professors who have the ability to speak on TV to issues related to their academic specilization and beyond.  As I have pointed out before I have not excelled in this medium of communication.  On the other hand, I have had some mild success as a teacher of economics --- as measured in students who have decided to go on to earn a PhD after studying with me, standard teaching evaluations and awards, and dissertation students who have established careers as teachers themselves.  But teaching economics provides one with a captive audience, and being a graduate student advisor puts on in a unique position to impact people over time through intensive interaction.  Being a successful public intellectual as represented in newspapers, radio and TV requires a different set of skills -- namely the ability to communicate clearly and with brevity. 

As Milton Friedman once told my colleague Walter Williams --- if you cannot explain economics to the general public in 700 words or less perhaps you don't really know economics.  Friedman is perhaps the most effective spokesman for economics as a public intellectual we had in the 20th century and perhaps is rivaled only by Frederic Bastiat in the history of our discipline.  When Milton Friedman says something we all better listen, and in this case his challenge to economists to learn to write clearly, simply, and efficiently is certainly one we should take on in vocation of being economists as public intellectuals.

Hayek, Tiebout, and Globalization

Hayek argued in the 1940s for Interstate Federalism in order to preserve liberal economic policies.  Tiebout's argument was that federalism simulated in politics what market competition achieved in the economy.  Does Globalization result in the theoretical path laid out by Hayek and Tiebout and lead to increased competition between nations in terms of public policy?  The evidence seems to support the conjecture that globalization does generate a "race to the top" in terms of public policy.  Download racing_to_the_top.pdf .

 

Rethinking the Rebuilding of New Orleans

My colleague Tyler Cowen will have a series of columns this week published at Slate.com on the rebuilding of New Orleans after Katrina.  Tyler makes the interesting argument that much of the devastated area should be rebuilt, but as shantytowns.

As readers of this site will know, I am heading up a project on Katrina at the Mercatus Center (e.g., here, here, here, here, here, here, here, here) that is focusing on three dimension of social transformation --- civil society and social capital; political economy and governance; entrepreneurship and cities.  At the intellectual level this project represents a variety of intellectual arbitrage opportunities: Lachmann and Putnam; Hayek and Tullock; Kirzner and Jane Jacobs.  For example, in rethinking the rebuilding of New Orelans Jacob's ideas about dense cities and the role of commerceical life are extremely relevant (and don't contradict the Cowen thesis about shantytowns on the edge of the city).

Katrina unfortunately has provided economists and public policy analysts with a 'natural experiment' in which nature's fury enables us to study both the folly of man (due to both his hubris and incompetence) and the capacity of human beings to stare adversity in the face and fight it back with the ultimate resource --- the human imagination.

Why Can’t Social Change Happen in Western Europe?

Following on Pete’s post on Saturday, I’d like to expand a bit more on the issue of reforms in Europe. I just want to make four points.

1. Insiders. Europe has too many insiders that benefit from the current system and are not ready to bear the costs of change. This means that in countries such as France, two economies run “side by side”: on the one hand those who are exposed to competition (and have adjusted accordingly) and on the other those who are not (and who defend the status quo).

2. Things still need to become worse. Because insiders still gain more than they lose from the current system, it may imply that for European countries to reform, things have to become much worse. We haven’t reached the bottom yet, and knowing when this point has been reached is difficult. However, it is not as if reforms had never taken place in Europe; most European countries have had experiences with economic reforms in the past two decades, but major reforms have been limited to the UK and Northern Europe. We are still waiting to see grand scale reforms in other EU countries.

3. Voting systems. Also, Europe’s love for proportionality in electoral systems perhaps makes it harder to find a constituency that would impose reforms. Instead, we get coalitions that go nowhere and only revere the status quo (see here for a counter to this argument).

4. Ideology (and secularization). Another important issue is the necessary de-communization (or de-Marxization) of Europe that has not taken place yet. Theodore Dalrymple calls it the “obsession with social security” (see here and here). A counter to that argument is that there is often a gap between rhetoric and reality (Europeans say they dislike free market capitalism but de facto they accept the rules of globalized capitalism). Perhaps not. I also think that the relative secularization of Europe (which goes hand-in-hand with its Marxization) is a serious issue. As James Buchanan explains in Afraid to Be Free, 19th century socialism has replaced God and the family by the State. This goes to the heart of the difference between America and Europe. In Europe, the State has become an idol (in France it is called la République). In contrast, Americans still turn to God for help (and not the State) and thus by and large tend to abide by the saying: God helps those who help themselves.

What do you think? I’d like to know what those who are interested in this topic think. Comments are open. (Also The Economist has had a few good articles on the subject recently—see here, here, and here.)

Why is Europe Stagnating?

I must confess --- I enjoy listening to NPR.  On Weekend Edition (Saturday April 15th), long-time commentator Daniel Schorr made a great observation about Europe.  When asked about the protests in France (in contrast to the recent demonstrations in the US), he said simply --- the old social contract in Europe with its elaborate health and pension benefits is incompatible with a vibrant economy.  Now Daniel Schorr may (or may not) lament this, but he recognized the fundamental point and also why Britain is escpaing the fate of the rest of the old Europe.  The European Union, he commented, promised so much with the common currency and policy harmonization. But the social contract upon which the welfare states of post WWII Europe was built are countering whatever positive impact the European Union might have had on economic growth.

A former colleague of mine at NYU, Jordi Galli, used to have a picture on his door demonstrating that the stagnation in Europe (with double-digit unemployment) was no mystery at all. The graph depicted the relationship between real wages and real productivity, and the wages in Europe were much higher than the productivity of the workers.  One of Dr. Sennholz's most practical lessons to his young students back at Grove City College was --- always make sure that your marginal productivity is greater than your wage rate.  Public policies which result in raising wages, but lowering productivity are a recipe for economic disaster and unfortunately for the people of too many European nations this has been the post WWII policy equilibrium.

One of the most sobering talks I have ever heard from a politician was by Maart Laar (former Estonian prime minister) and his message was simple --- the future of Europe will be determined by whether Europe followed the lead of New Europe as reprsented in the dynamic and free market policies of countries like Estonia, or the old Europe as represented by the protectionist and statist policies of countries like France.  France seems to be winning the day.