Economics as a Coordination Problem Redux

I was recently asked to discuss the Austrian school and its continuing relevance in an interview.  At one point in the interview I tried to explain the unity in Hayek's research program from his first works on imputation to his efforts in law, politics and sociology.  The common thread, I argued, was Hayek pre-occupation with intertemporal coordination, and his method was both to increase the complexity of the problem situation in which coordination takes place and focus more on the institutional background that enables coordination.  Hayek's revolutionary contributions in economics were tied to his focus on the coordination of economic activities through time.

Gerald O'Driscoll's Economics as a Coordination Problem is fundamental to understanding this unity of Hayek's project over his long career in economics, law, politics, sociology and the history of ideas.

Comments

[Greg Ransom]

One of the great turning points for Hayek was his breakthrough 1928 paper in which he introduced the idea of an intertemporal equilibrium construction -- there becomes a unity in Hayek's problematic when you look at the effort to make sense of the role of the replacement of non-permanent capital goods in a) a socialist economy; and b) in the up and down of the trade cycle. If you suddenly realize that prices and quantities are not "given" to economic agents as they are in the logic of the intertermporal equilibrium construction, then the task of making sense of the order of the economy through time is transformed.

This is the stepping off point that separates Hayekian economics from the economics of the "idiot savants" -- i.e. the "mainstream" economists at the 10 ten schools and at every community college in the country.

[Robert]

I would like to raise a question about what modern Austrians say. I find they usually describe a notional coordinated state as an Evenly Rotating Economy. Unlike in an ERE, spot prices are generally expected to change through time in an intertemporal equilibrium.

Do you agree with me that many modern Austrians seem insensitive to the distinction between an ERE and an intertemporal equilibrium? Is so, why do you think that is?

[dglesvic]

The topic, here, as I understand it, is the relevance of the Austrian School, as represented by the work of Hayek.

But, as usual, there is no reference to the topic that Hayek himself considered the most important of all, redistribution.

There had been a promise here to discuss it. But that promise was never fullfilled. What was supposed to have been a discussion of redistribution promptly degenerated into a discussion of myself, since I had dared to offer a new theory of redistribution, and, unable to attack the theory, you all attacked the man.

Until you attack the theory, the Austrian School remains irrelevant, and "disingenuous," at least by Hayek's standards.

So, go ahead and delete this, and ban me altogether from this site, and the real Hayek with me.

[dglesvic]

My god, you haven't deleted it yet.

Are you all asleep?

[Rafe Champion]

While Austrians sleep, Australians are awake. If you accept the broad division between descriptive/explanatory issues (about the way the world works) and moral/policy issues (about the policies that might be put in place to improve the human condition) then it is possible to envisage the matter of redistribution as the major issue on the second side, but that does not mean it helps to import that topic into a thread directed as a major issue on the descriptive/explanatory side.

[Peter Boettke]

Mr. Lesvic,

First, the idea of imputation of value and the pricing of factors of production, which is central to the issue of intertemporal coordination, also has something to say about distribution issues.

Second, I put up a post on redistribution very recently and I don't think I need to address that issue every time.

Finally, I never deleted any posts yet, though I have on one occasion turned off comments. I urge you (and others) to try to focus the comments on the relevant issues, not to engage in off-point comments, and certainly not to impunge the character of any of the participants. We are all just trying to "figure it out" and we can experience great mutual gains from understanding if we just interact with one another the right way.

Pete

[Anon]

Peter Boettke is a nut if he thinks there is any benefit from engaging in discourse qwith Mr Lesvic. What does he make of Lesvic's refusal to look at Boettke's 'economic way of thinking' text?

[Greg Ransom]

Robert has nailed an important issue. The categories of the "ERE" are essentially pre-marginalist, pre-"Austrian". They are the categories of Ricardo, defined "non-economically" from the perspective of the logic of marginalist valuation.

Hayek did something almost no other economist has had the onions to do -- he thought about the ordering of heterogeneous capital goods through time from the perspective of marginalist valuation. In doing so he showed that there was a dynamic valuational interplay between time preference and capital goods productivity through time. Hayek also bumped up against the fact that there is no complete "gods eye" or "tractable" set of mathematical equations which utterly limns this interplay -- Hayek shows us several dimensions of this pattern, but these dimensions don't make for an entirely mathematized pretend "economy" which economists traditionally have been so fond of mistaking for the real economy.

[dglesvic]

Rafe:

My theory addresses both the moral and economic aspects of redistribution. For, if taking from the rich to give to the poor does not reduce but increases inequality, it is immoral as well as uneconomic, by the redistributionist’s own standards.

Prof. Boettke:

I like you way too much to hold you strictly accountable for everything here. So let us just say that you have not been paying attention.

My comment above for Rafe is for you as well.

Since the left depends entirely upon the assumption that taking from the rich to give to the poor reduces inequality, it would be utterly demolished by the opposite-most conclusion, that it didn’t reduce but increased inequality.

But does it reduce or increase it?

That is my question, and, if it is simply my “pet project,” what is more important, more important than economics, and demolishing the left?

If I must be “off-point,” in terms of lesser issues, to get you “on-point,” in terms of the greater issue of all, I will continue to be so.

And, as you validated my “off-point” efforts before on behalf of a discussion of redistribution, by acceding to my request for it, I trust that you will do so again, as I request, "off-point" again, if necessary, that you follow through with the discussion.

[dglesvic]

And, by the way, Prof. Horwitz, I want you to know that I have been making a very special effort where you are concerned, and can now say that I like you too.

[G]

Peter, I have a (probably stupid) question:

We all know Hayek introduced the idea of interest rates serving as inter-temporal coordination to the mainstream of economics. As anyone who has taken entry-level business classes (i.e., present and future-worth analysis) knows, the rate of interest effects all business decisions that extend forward in time.

But mainstream economists largely reject the idea that price-setting of the rate of interest causes significant problems. The Austrian Business Cycle Theory doesn't seem to be well-liked among most economists today.

Is it me, or is there quite a bit of cognitive dissonance here? How can economists accept Hayek's and Mises' arguments of prices coordinating the marketplace, and at the same time defend price-setting of the rate of interest? If they do not believe that interest rates coordinate inter-temporal actions, what do they think does coordinate these actions?

[Alex]

How about a symposium on this blog on Mr Lesvic's ideas. All the bloggers write on redistribution and Mr Lesvic's new pathbreaking theory. And then Mr Lesvic responds and corrects the bloggers errors, etc?

[Alex]

Or better still. How about inviting DG Lesvic to guest blog here?

[Steven Horwitz]

G,

I know you directed your question to Pete, but let me take a three sentence stab at what I think the source of that dissonance is.

In the end, a good number of differences between Austrians and other neoclassical economists boils down to capital theory. For Austrians, it's not just that interest rates guide our aggregate present-future tradeoffs, but that they guide the businessperson's decisions about which production processes to use and therefore which capital goods to produce; the interest rate matters for *microeconomic* decisions not just macro ones. It is that process that produces the intertemporal coordination that is the focus of this thread and when you see things that way, the potential for mischief that can come from a faulty interest rate signal is much broader and more complex than in standard models.

[Bob]

To which "interest rate" are Austrians referring? Real, nominal, short-rate, long-rate, etc?

Writings on the 'natural rate', etc just confuse me (aside from the fact that Sraffa exploded Hayek's single 'natural rate' in his piece on Prices and Production i thought). Which interest rate is it supposed to be?

[dglesvic]

The topic here is still the relevance of Austrian economics.

To understand the relevance or irrelevance of your discussions of interest rates, we must understand the difference between economics and political economy.

In a completely free market, there would be economics, but no political economy. The designers of competing communities would still need economics, just as the designers of competing automobiles needed automotive engineering. But the rest of us wouldn't need the one any more than the other, economics any more than automotive engineering. All we would need was the freedom to choose among the competing end results, the car that ran better, or community that worked better, without our knowing how or why the one worked better than the other.

The politicization of economics is as though we had decided that there should be one automotive design to the exclusion of all others, and, if 51% wanted Ford's design, and 49% GM's, there would be a Ford in everyone's garage.

So, why the politicization of economics any more than of automotive engineering? Why aggression on behalf of economic designs and policies?

There is only one logical explanation for it, the desire for plunder and redistribution. For the majority could have anything else it wanted, with or without unwilling minorities.

The majority says that it wants protection from free market predators, a rational, planned, socialist economy, or interventionism of one sort or another, public, socialized medicine, education, religion, morality, the public regulation of employer-employee relations, race relations, age and gender group relations, the public regulation of every aspect of life down to the color of one's necktie.

It could have all of that with or without unwilling minorities, its socialism alongside a minority's capitalism, and anything else it wanted, alongside a minority's alternatives, each in its own communities.

But it couldn't have plunder without the minority to be plundered. Live and let live and the victims of plunder would surely choose to live free of it. Plunderers cannot allow that choice. They must leave their intended victims no choice, no escape, no plunder-free communities. They must extend their reach to every habitable corner of the Earth, to every community, state, and nation, to a United Nations.

So the problem is not the majority's unwillingness to live in a free market, but to let others do so, not the fear that the non-aggression principle wouldn't work, but work too well, against its own aggression, plunder, and redistribution.

The task then is not to show the majority that the market could work, but that its redistributive interventions in it could not.

The task is the de-politicization of economics, to make it no more political than automotive engineering. And the only way to do so is to show that plunder doesn't pay.

That is the only logical strategy, and those who can't be bothered with it are not leaders in the fight for freedom but irrelevant to it.

[Max]

Does Mr lesvic claim that plunder does not pay for anyone at all?

[dglesvic]

No, but simply that it makes its intended beneficiaries, the poor as a whole, poorer than they would otherwise have been, in both absolute and relative terms.

[dglesvic]

There is one major exception to the rule that redistribution makes the poor poorer.

The rule applies to redistribution from the richer to the poorer among the employed themselves, but not necessarily to redistribution from the employed to the unemployed. That could be a different matter. For, assuming no private, voluntary charity, and that without redistribution the unemployed got no share of the cake, and, with it, some, they'd have to be better off with than without redistribution, with some than with no share of the cake. But there is a limit...

For the rest of this, see the whole ugly mess, The Forbidden Theory of Redistribution, which you can get to by clicking my name below, and then, Comments.

[Max]

"No, but simply that it makes its intended beneficiaries, the poor as a whole, poorer than they would otherwise have been, in both absolute and relative terms."

So some of the poor do benefit from redistribution then?

[dglesvic]

See my comment immediately above yours.

[CD59]

Greg,

"then the task of making sense of the order of the economy through time is transformed."

Can you finish this sentence by stating how it now makes sense? (Not by restating the subject). I agree but I think I might express it differently so am wondering if you have a good sound bite to use instead. - Thanks

[dglesvic]

A scientist is "bound to reply to every censure" and "either unmask logical errors in the chain of deductions...or...acknowledge their...validity." Mises

And there was no third alternative offered, such as indefinite stonewalling.

So, the question now is whether there are any scientists here.

[anon]

I don't know if there are any scientists here, but there is at least one foolish old man who is too stupid/lazy to understand the difference between quantity supplied and supply.

Yes my friends, the Lesvic curse has chosen to ruin this blog once again.

[Max]

Serious queston for DG Lesvic. What does he deduce from the fact that the Professors who blog here do not deign to address him or his pet theory?