The Austrian Economists

Entrepreneurship in Basketball and the Coaching of Economics

In the movie Glory Road, basketball coach Don Haskins recruits young players for his team at Texas Western College. For the first time, a team made of black and white players represents a university from the south. The Miners of Texas Western become legend when they win the most respected College basketball tournament at the end. In the final of the NCAA, an all-black Texas Western team defeats an all-white University of Kentucky team. The year is 1966.

I recommend the movie to those of you who like basketball but also to those who are interested in social change. Indeed, beyond the sheer exploit of winning the NCAA (especially against the Kentucky Wildcats who were one of the dominant teams in the late ‘60s), the movie also shows how sport can induce changes in social norms and attitudes. Don Haskins had no claim to fame when he took the job and his main experience was coaching women’s basketball. He was told there was not much money for him to run the team and hardly any scholarships were available to help him recruit players.

So what did he do? He acted entrepreneurially. He discovered talent where others believed there wasn’t any. He noticed under-valued (human) resources (the black players) and offered them to come and play for Texas Western. He went against established social norms because he knew the team could win. Haskins and his players were mocked and ridiculed, but it didn’t stop him from showing that talent and hard work matter more than skin color. The story of the Miners of Texas Western is a story about entrepreneurship. Haskins was an entrepreneur not only because he recruited the right team but also because his success opened the door to new social norms that people would regard as acceptable.

An important aspect of the movie is Haskins’s training rules. For instance, the players are not allowed to go out with girls, they have to sleep early and think about only two things: basketball and grades. Haskins also gradually gives the black players greater latitude to play their own game. While the players try to break the rules and go out with girls, they slowly come to realize how important the discipline is if they want to reach the NCAA final. The story of the Miners of Texas Western is one of entrepreneurship and creativity within rules.

Watching the movie, I thought of the way Pete Boettke teaches economics. I realized that Pete in fact coaches economics. He acts as a coach for his team of students (and I guess Chris Coyne and Pete Leeson would agree on this), he imposes rules that they need to respect if they are to reach the final, and he gives them the latitude to be creative within these rules. Also, the students must breathe and live economics, the way Haskins's players lived and breathed basketball. Pete Boettke is perhaps the only economics coach in the land, and I believe we will one day win the championship under his leadership…

Addendum

Chris Coyne, Justin Isaacs, Jeremy Schwartz, and Tony Carilli have a paper coming out in the Review of Austrian Economics that looks at a similar issue using the integration of black baseball players in Major League Baseball (MLB). The paper explores the connection between discrimination and entrepreneurship. They show how MLB team owners had to weigh the benefits of integrating versus the costs of alienating consumers who had a taste for discrimination against hiring blacks. They find that the owners whose teams could profit by contending for the league pennant with the addition of black players were the ones who were willing to take the risk of integrating even though integration often stood in contrast to revealed consumer preferences. The paper provides a mechanism for the integration of black players and shows how consumer preferences for discrimination could shift via entrepreneurial activities.

Austrian Economics Seminar at FEE

I am currently at the Austrian Economics Seminar at FEE.  As usually the Ebeling's are outstanding hosts and the seminar is proving to be a great experience for the students and faculty.  Speakers this year include Richard Ebeling, William Butos, Mario Rizzo, Lawrence White, Peter Lewin, Sanford Ikeda, Steve Horwitz, Israel Kirzner and myself.  Israel gave two lectures today, full of amazing insight and delivered in his classic and sophisticated style.  Kirzner truly is among the best professors anyone could be exposed.  And I believe his lecture style has even improved since his formal retirement from NYU.

FEE is one the grand institutions of classical liberalism and of Austrian economics, and continues to be one of our most important institutions.  FEE represents the place of first contact with liberal ideas for many young people (high school and college age students), but also the intellectual home of the ideas of Mises and Hazlitt.  Its mission is clear and vital to the advancement of the cause of economic education and building the case for a free and prosperous society.  I recommend everyone to visit FEE's website and see the array of programs that Richard and Anna Ebeling are conducting.  They are doing outstanding work and deserve our admiration and support.

Keep up the great work!

Krugman and Income Inequality

Russ Roberts at Café Hayek has a very good analysis of Paul Krugman’s NYT column of July 14 on income inequality (see here). What is puzzling for anyone who has studied economics is the policy solution Krugman derives from Piketty’s and Saez’s analysis: raising the minimum wage. Even if the stats were correctly interpreted (which, as Roberts points out, is not the case), it is hard to see how raising the minimum wage would be the best policy response, considering the unintended consequences it creates (this echoes what Pete Boettke said a few days ago on the coherence of economic discourse - see here).

Thomas Piketty and Emmanuel Saez are good examples of the kind of scientists who come out of French universities. They are both highly skilled mathematicians (they both went to the Ecole Normale Supérieure) and then went abroad for their PhDs (EHESS, which is in France, and LSE for Piketty and MIT for Saez).

France has a long tradition in mathematics (along with Russia and others), which is reflected in the importance of a few schools/universities such as the Ecole Polytechnique and the Ecole Normale Supérieure. F. A. Hayek has a very interesting discussion of this topic in relation to the attitude towards planning in his Counter-Revolution of Science.

Looking at Piketty’s and Saez’s publication record, it is probably fair to say that their favorite subject is income inequality. This, in my view, reflects the obsession that many European economists have with market outcomes rather than trying to understand market processes. However important these questions are, they do not justify the rejection of first principles. That the minimum wage is a policy response (at least in Krugman's eyes) to a perceived income distribution problem shows how technical virtuosity can make one blind to the teachings of economics.

Transition Analysis

I have been asked recently to discuss transition analysis.  In a post last month I suggested that successful transitions are characterized by (a) creative adaptability, and (b) resiliency in the face of crisis.  But in that post I never really addressed how we might approach the study of transition.  Professionally, my career started out with a focus on theory, practice and failure of socialism in the former Soviet Union. I earned my PhD in 1989, so transition studies were thrust upon me.

At a fundamental level the Austrian school should have been my main intellectual inspiration in this task with its focus on changing circumstances, enterpreneurial adjustment, and dynamic efficiency.  But much of the Austrian theory of the market process takes place against a given framework of institutions, and the transition period is defined by the reconfiguration of that framework.  James Buchanan's work in constitutional political economy proved to be more relevant on this particular point -- especially the distinction Buchanan draws between the pre-constitutional and post-constitutional levels of analysis.  But Buchanan's social contract approach --- however useful for some analytical purposes --- fails to address the endogenous evolution of rules; so Hayek enters once again.  On the other hand, Buchanan's focus on the existing status quo as the starting point of political economy analysis of viable bargaining in the realm of politics enables us to avoid Hayekian flights of fancy.

So on an intellectual level this is who I would argue are the important figures to study and what they bring to the table to understand transition studies:

1. Ludwig von Mises --- why socialism as traditionally defined cannot achieve its stated goals
2. F. A. Hayek --- the unintended and undesirable consequences of real world socialism
3. James Buchanan and Gordon Tullock --- the undesirable consequences of unconstrained political bargaining, and the possibilities of effective governance when constitutional restraints on government are enforced
4. Milton Friedman, F. A. Hayek, Israel Kirzner -- on the power of the market economy to satisfy the multiplicity of consumer preferences and to self-police "bad behavior"
5. James Buchanan --- on the relative position of the status quo in political bargaining for reform
6. F. A. Hayek --- on the spontaneous emergence of norms, conventions and law that provide the foundation for a liberal constitutional order
7. Ludwig von Mises, Murray Rothbard and Robert Nozick --- on the promise of in terms of peace and prosperity of the classical liberal order, and the possibility of an ideal libertarian society

Now the art of transitional political economy is to put these different elements together to analyze the possibility of positive social change.

Rule #1: Must start with the HERE AND NOW

The first rule of transition analysis --- know what is the existing status quo and in particular how it really operates and not how people say it operates on paper.  It is the de facto system that is in operation in the real world.  There is no normative weight attributed to the status quo, only a pure positive descriptive weight.  It is what it is. And this is where we must start from.

Identify who benefits from the current system, what is the nature of the benefit and who are the current losers from the existing status quo.  Viable reforms must start from this recognition and begin political negotiation from that point to move in the direction desired.

Rule #2: Must have a clear vision of the END POINT DESIRED

Political negotions and realignment are intended to produce a movement toward some desired state of affairs.  We cannot make much progress on the path from here to there unless we define the "there" that we hope to arrive at.

Most transitional analysis of the post-communist situation failed due to a failure to correctly identify the "here and now" and the lack of courage to offer a vision of the desired destination of the journey.  Among Sovietologists circa 1990, Ed Hewett of Brookings probably identified the "here and now" must better than any of his contemporaries, but he did not share the classicial liberal vision of a free market economy with a limited government to offer the significant reforms required.  Edgar Feige  of U of Wisc had a decent vision of where he hoped reform would lead, but had no concept of the latent interest groups that dominated the real existing Soviet economy.  Their confusion was simply  a product of their times and was shared also by the real reformers in the post Soviet situation --- Gaidar, Fedorov, Chubais, etc., in Russia.  And this was true also with the reformers in East and Central Europe --- Klaus, Balcerowitz, etc.  Eventually, the desired destination simply became the European Union, and the regimes muddled along in their treatment of the previous status quo.  Life is certainly much better than what it was under the old regime, but an opportunity was lost.

The most accute case of a troubled transition might be Russia, where one could claim that the more things change the more they have stayed the same.  For a statistical analysis of the failure of Russia's transition that challenges most optimistic readings of Russian reform see the paper by Bill Trumbull and Pete Leeson currently under review at Post Soviet Economy.

Rule #3: Draw up a Road Map from Here to There

Transition is about negotiating.  Once you have a good understanding of the existing interest groups and a vision of the ideal end state you hope to achieve, then strategies can be drawn up that will enlist the existing interest groups to be partners in reform.  In the abstract, this just means policies must provide enough monetary benefits that the present value of the expected future income stream from the existing status quo is met in a lump sum transfer.  Of course, if the system had that sort of surplus to provide right now and the new regime could credibly commit to such a policy promise then no reforms would currently be necessary!!!  But that is the basic abstract concept that must inform our strategy in transition.

Rule #4: Think Through All Steps Using a Rational Choice Model, But Recognize the Role of Emotion

Draw up all plans for reform as if the world was populated by homoeconomicus.  The first test must always be incentive compatibility.  Don't expect reforms to work that require individuals to act against their interests or become better and smarter than they currently are as individuals.  Align incentives and make sure the penalties and rewards are clear cut.  And then build in some slack to recognize that emotional attachments will present individuals from behaving completely in line with the rational actor model.  But they will conform to that model more often than they will deviate from it.

Rule #5: Don't Throw Good Money After Bad

Know when a regime is hopeless because of an ideologically disturbed leader and realize that the only solution in that case is to articulate as coherently and persuasively as possible an ideal.  Stalin, Hitler, and Mao were not candidates for reform, nor would we want to help them realize a more efficient economy to help carry out their particular forms of barbarism.  Sometimes it is best not to try to fix a system but to help in its demise.  This is a tricky question which individuals must ask themselves because the cutt off point might not always be as clear as with Stalin, Hilter and Mao.  The point I want to make, however, is that abolitionism is a viable intellectual and political strategy, and in many cases THE only truly viable and intellectually honest strategy.

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So those are the five rules of transition analysis that I believe are reflected in my own work on the subject.  There are more concrete points, but in my mind they are derivative of these points of emphasis.

Finally, I want to stress that among the important concepts in transition analysis such as property rights, rent seeking, economic calculation, principal/agent, credible commitment, etc., one must always recognize the existence of an accumulated surplus from previous periods of economic growth.  Countries in crisis almost by definition do not have a surplus to draw on and thus cannot afford even mildly stupid economic policies if they hope to improve the situation.  Countries with a great deal of accumulated surplus can survive even the most stupid policies in the short run as they pay down the surplus.  This is another way in which the shortsightedness bias in politics is reinforced. And as we have learned from Buchanan and Tullock, good economics and good politics might not go together.  So again in putting the political back into political economy what we are trying to achieve in transition is to find those policies which align good economics with good politics and anything short of achieving that will result in failures of implementation and thus failure in terms of improving the lives of those we had hoped to help.

Robert Samuelson Makes Sense

Politicians might be shamless and senseless about government spending but Robert Samuelson does a good job of making sense of this silliness exhibited by both parties in an op-ed in the Washington Post today.

No economist did more to help us understand the problems of public debt than James Buchanan.  See his Public Principles of the Public Debt, and Democracy in Deficit (with Richard Wagner).

We better get the "shameless and senseless" spending behavior otherwise they will bankrupt the US economy beyond a point that would be salvagable.

'Big Players' and the Stock Market

Roger Koppl has pushed the idea of "Big Players" in economic analysis for the better part of two decades.  The idea comes from Fritz Machlup and it relates simply to the impact that key actors can have on market outcomes when their relative position represents a deviation from perfectly competitive conditions.  In other words, when individuals possess market power their decisions can have an impact that is quite different from what we see when no market power is evident.  In this situation, the markets do not exhibit the same stability that they would under ideal competitive situations.

Koppl has used the idea to great analytical and empirical effect in his work, culminating in his book Big Players and the Economic Theory of Expectations.  So when I read the article in today's Washington Post conerning Ben Bernanke's testimony, I couldn't help but think of Roger's work and its relevance for understanding market movements resulting from Bernanke's statements.  Especially when we consider the following picture that accompanied the article.

Progress in Economic Discourse?

In most human endeavors I am an optimist -- tomorrow will be better than today.  The human imagination is able to see things that weren't noticed before and progress is made.  Pretty soon we live in a world with improved technologies that bring convenience to our lives at lower real cost than the previous generation.  But I am not sure that this argument for progress grounded in economics holds for economics as a discipline itself.  Tyler Cowen recently had a nice description of the three types of economists:  math jocks who advance through the professional ranks through their technical prowess, undergraduate teachers who relish the role of introducing young students to the power of economic reasoning, and iconoclastic thinkers who are able to find their way in the academic world despite their tinkering on the edges of professional respectability.

Consistent with that description I would also divide economic discourse into the following types: technical economics that goes on in the professional journals, policy economics that goes on in think-tanks and government agencies, public intellectual economics that goes on in the newspapers, magazines, radio and TV, and now-a-days to a considerable extent blogs.  As modern technologies have lowered the costs of publishing there has been an explosion of opportunities in these three different types of economic discourse.  This has many positive consequences, including lowering the professional costs of being an iconoclast.  But I also think there are some significant negatives that we should consider.

The most significant negative in my opinion is the disjoint that exists between the different types of discourse.  As I mentioned in an earlier post on John Kenneth Galbraith, in the 1960s when Milton Friedman and Galbraith were the public face of economics as a discipline, they also were important figures in the other types of discourse (professional and policy), and there was a coherence to the arguments that they would give across the types of discourse.  Friedman's technical arguments about the quantity theory resulted in his argument for a monetary rule rather than discretion, and both fueled his public stance in fighting inflation.  A similar coherence could be found in Galbraith's work.

In the economic discourse today, however, the coherence often disappears.  The same individual may argue one thing in his technical work, a different argument in his policy pronouncements, and yet another thing in his public intellectual work.  Greg Mankiw recently discussed a debate between Ed Lazear and Paul Krugman on inequality and returns to education.  Krugman is actually the poster-child for the problem I am suggesting plagues economic discourse.  As Mankiw says after quoting Krugman from his textbook where he holds basically the same position on the subject as Lazear:

I suppose that Paul has changed his mind since this book (copyright 2005) was written. It is a bit harsh, however, for Paul to be so hard on Eddie for believing what Paul believed not very long ago.

Perhaps Paul would reconcile the apparent disparity here by drawing a distinction between acquired skills and inherent talent. Eddie suggests that the increased inequality is mostly from higher returns to acquired skills, and Paul may think it is more from increased returns to inherent talent. But that is just conjecture on my part.

But the real problem is that Krugman is like wrestling with jello.  He is on three sides of any issue seemingly pulling arguments out of thin air.  Well, he is not that incoherent --- he rarely has seen a liberal pro-active government policy that he doesn't like and he rarely finds a conservative concern with big governemnt worth considering.  But his academic work doesn't seem to impact his policy position, or his public intellectual stance in any logical manner.

My concern is that Krugman's case is not isolated, but a general trend in economic discourse that is enabled by advancing in modern technology.  Multiple outlets have emerged in print, blogs, podcasts, etc. that have led to an expansion of opportunities for would-be economists to voice their opinion.  But whereas in the market economy, producers of goods and services are disciplined by the buying and abstaing from buying decisions of the consumers, in the "market for ideas" the discipline of profit and loss is either absent or deemly perceived.  So incoherence results and the discourse gets worse over time rather than better.  My general optimism turns to pessimism.

There are arguments, namely by Michael Polanyi in his "Republic of Science", that sees the scientific process as analogous to the market process.  Bill Butos and I have countered this argument in our essay "Kirznerian Entrepreneurship and the Economics of Science" and David Prychitko and I develop a similar argument to the organization of philanthropic activity as well in our essay "Is an Independent Non-Profit Sector Prone to Failure?"

File this under "Absurd"

The French government recently announced the creation of "Council for the Diffusion of Economic Culture" to communicate the benefits of capitalism, markets and entrepreneurship to French citizens.

Good idea.  There is nothing quite like a state run propaganda campaign to increase awareness of the importance of liberty and private property for the creation of wealth.

Article available here.

Thanks to Brian Cullen for the pointer.

Big and Incompetent: Allan Wolf gives us something to think about

Boston College Professor Allan Wolfe has an interesting essay in Washington Monthly discussing why conservative political leaders confront a problem in governing. They are critical of big government, but unwilling (and perhaps unable) to reduce the size of government and its role in our lives.  The consequences of this, according to Wolfe, is that when conservatives rule we get big, but incompetent government.

Read his essay "Why Conservatives Can't Govern."

Should a Free Society Limit Immigration?

Ben Powell and Victor Davis Hanson debate the issue - video and audio available here.