Econ881 Spring 2008 Final Exam

Answer all questions.

1.    In which ways is the economics mainstream becoming more Austrian?  Less Austrian?  Discuss, using specific examples.

2.    Which idea in Austrian economics has been most neglected by the Austrians themselves?  How might it be applied to resolve some outstanding economics questions, puzzles, or issues?

3.    One of Hayek’s main criticisms of Keynes was that his economics was overly aggregated.  In the intellectual defeat of Keynes, Robert Lucas argued that by consistently applying the microeconomic foundations of macroeconomics would correct for the failures of Keynesian economics.  First, what is the common ground between Hayek and Lucas?  Second, what are the main points of disagreement between Hayek and Lucas?

4.    Ludwig von Mises argued that rational economic calculation under socialism was impossible.  Explain Mises’s argument and the debate that emerged surrounding it.  What are the strongest points of the argument?  What are the weakest points in Mises’s argument?  Does the argument possess any relevance today given that socialism as a policy option seems to have faded from history (or has it)?

5.    Pick 1 of the following areas and explain the contributions that Austrian economics has to offer in addressing the contemporary policy question and/or contemporary literature:

a.    The failure of development aid in Africa;
b.    The housing bubble and the subprime mortgage crisis;
c.    Antitrust policy and Microsoft;
d.    The situation in Iraq;
e.    The problem with failed and weak states.

6.    What do you understand to be the relationship between praxeology and catallaxy?  Is catallaxy reducible to praxeology, or is the relationship more complex; and if it is more complex how would you characterize that relationship?  Action is a praxelogical category, but such things as prices, contracts, and organizations are catallactical, as these are not phenomena that would be recognizable to Robinson Crusoe. 

7.    In your opinion what are the main virtues and vices of the Austrian school of economics.

8.    Bruce Caldwell titled his intellectual biography of F. A. Hayek, Hayek Challenge.  What does he mean by that?  What are the continuities and discontinuities in Hayek’s long research career?

9.    In Frank Knight’s review of Mises’s Human Action he states that while he agrees with Mises on method and more or less on policy implications, that Mises’s book is ultimately about a unique approach to capital theory and that he could not follow Mises in that regard because the Austrian theory of capital is flawed. Make sense of Knight’s positive claim about Human Action being a book about Austrian capital theory, and critically discuss his claim about why the theory is wrong.

10.    Several of my colleagues and your teachers have forcefully argued that Austrian economics is either fundamentally flawed or outlived its usefulness.  Reconstruct their arguments and formulate an effective counter-argument to those claims.

Comments

[Phil]

If Austrian economists are spending their research time looking at pirates then may be it has outlived its usefulness. Perhaps resources could be more efficiently and beneficially put into more relevant studies.

[Me]

What are your objective criteria for assessing questions #1, 5, 6, 7, and 10?

[ron]

If this is a real exam, its the kind I hated when I was in school... too much name dropping and subjectiveness, IMHO

[Ex-Austrian]

We'd be interested in your answers to these questions Dr Boettke.

Any chance you'll post on these?

[Phil]

I take that back. I meant to say that I've outlived my usefulness.

[matthew mueller]

I think Phil has a point. The new generation of Austrian scholars aren't taking the field in any new or challenging directions. And I think this is wrong. They are doing mainly "applied work." They have uncritically blended Mises and Hayek's arguments into an extreme decentralization approach and have applied it to problems related to war, piracy, prisons, etc. Austrian economics is so rich with implications, and I think we are doing a great disservice to the school by refusing to challenge its fundamental 'tenets'. We all know that there are problems with Austrian economics, ranging everywhere from the Austrian Business Cycle Theory to the way it looks at capital and time (i.e., ignoring entirely the importance of uncertainty). But rather than confronting these issues directly, we have chosen instead to ignore them or address them in a very paltry way. And the unique methodology of the Austrian school is seriously philosophical, and yet no Austrians have attempted to investigate the implications, in fact we have been told to ignore philosophical problems! (See Leeson's 10 vices of Austrian economics post).

Austrian economics is still considered an important heterodox school. But is this the result of work being done today? The biggest mistake we could make is to think that the current Austrian program is incorrigible.

Well that was in response to Phil's post.

I think this exam is great. I think about these questions for fun during the day. I would have loved to take this course. I liked questions 2, 4, 6, 9, 10.

[Steven Horwitz]

Matt,

Can you identify those works by Austrians dealing with capital and time since the revival that have ignored uncertainty? Seems to me O'Driscoll and Rizzo (85) as well as Lewin's 1999 book take it quite seriously, just as two examples.

I could offer similar challenges to other assertions in your comment. It would be helpful when you make such sweeping assertions to point us to the works you think have failed to do what you say they should have. Don't spare the author(s)' feelings - that's part of academic discourse.

And, more generally, I'm all in favor of the applied work that we're seeing out of the current generation. We need theory too, but the near-corner solution that has dominated most of the post-revival era is the thing that has outlived its usefulness. It might have made sense when we were smaller and our framework was less well-developed, but now we need to move along that PPF to a better balance between theory and actually offering explanations of real-world phenomena. I can't specify where the right balance is, but I think we're a lot closer to it now than we would be if we did more theory and less applied work.

[matthew mueller]

Dr. Horwitz,

thanks for the reply. I want to be careful not to offend any accomplished Austrian scholars, because I am still a young gun with little experience in academia. My personal experience with scholars at Washington University researching New Institutional economics has taught me that sweeping criticism is usually not welcomed.

Ok, with capital and time (and the exclusion of uncertainty) --- I am here referring to Shackle's 1972 book and several articles written by Greg Hill and published in Critical Review. For example, I think Greg Hill is correct in writing that "the conception of 'capital as time' presuppose[s] a knowable and hence stationary future." And the importance Austrians attribute to the influential role of interest rates in guiding economic activity is mistaken. First of all, I think many post-Keynesians are correct in arguing that in a highly capitalist society, it is wrong to speak of 'real' variables. Everything depends on money. Minsky's work is great on this. Also, and this is something Austrians haven't written about but I find it profoundly interesting, the debate on stocks vs. flows shows that exchange of existing assets plays a greater role than the production of new assets. So, new savings and borrowing is unimportant when compared to the activity that occurs between existing asset holders (the effects of the latter often overwhelm the effects of the former). On this, I would recommend Fiona Maclachlan's book, Shackle's 1967 book, and Hugh Townshend's excellent 1937 article on liquidity preference. All of this raises problems for the Austrian Business cycle theory. And what is more, none of this will ever come to the attention of young Austrian scholars because these things are simply not talked about by Austrians. (I do not mean to suggest that you or Dr. Boettke are ignorant of these problems, I am just saying that had I not branched out, I would have never learned about these problems). The basic point is that since individuals (consumers and entrepreneurs) cannot know the future, they cannot make the necessary trade-offs between consumption and saving, and investment in consumers and producers goods.

About the Rizzo and O'Driscoll book. They do a good job in describing uncertainty as "the inherent unlistability of all possible outcomes." This is a correct understanding of uncertainty, and should be contrasted with other celebrated neoclassical works that deal with uncertainty, for example, Alchian's 1950 paper on evolution and uncertainty. In that paper, Alchian does describe uncertainty as being a range of possible probability distributions, and uncertainty applies only to our ignorance of particular outcomes, and not the range of possible outcomes. So R. and O. were right on that. However, they then proceed to argue that this understanding of uncertainty (which is correct) can be applied to many Austrian theories, for example, the Austrian Business Cycle Theory. They argue that the "Austrian business cycle theory is an example of systematic disequilibrium trading that results in a particular pattern of discoordinative behavior." This is contradictory. If we continue with our definition of uncertainty as being the "unlistability of all possible outcomes", then it doesn't make sense to ascribe "uncertainty status" to a theory that can predict the particular pattern of discoordinative behavior. True disequilibrium prevents us from saying anything positive about economic activity. All we can say is that economic phenomena is characterized by endless streams of "kaleidic shifts", as Shackle put it. This is in marked contrast to the Austrian account of the business cycle, which is emphatically equilibrium in its explanation (first this happens, then this, then this, and this is what results). I haven't read Lewin's book (the routledge one).

I will end here. Blogs are not good spots for lengthy discussions.

[Pete]

Matthew,

If you have a theoretical innovation to share with us, by all means, you should share it. And no one, least of all me, would begrudge you acknowledging this theoretical advance, *if in fact that's what it is.* Until then, you might consider joining us ‘peons’ who have to content ourselves with ‘little’ advances through ‘unimportant’ applied work.

Further, if you’re in fact capable of “taking Austrian economics in new and challenging directions,” as you put it, by all means, lead the way. Of course, this will require producing actual output, the value of which needs to be judged, not by you, but by the scholarly community via a process called peer review. But you must have already done this, of course. Otherwise, your criticism would have about as much validity as, say, my criticism of those crappy PGA tour golfers who always fold under the pressure when big money is on the line. So, onwards and upwards, my friend. Show us the way.

PS—Thank you for pointing out this curious “Shackle” to us younger Austrians who haven’t come across him before. He sounds fascinating and I’ll do my best find out what I can about him.

[Peter Boettke]

Matt,

Just to put some perspective on your very provocative comments --- I was on Fiona's dissertation committee and was her colleague at Manhattan College for 1 year as well. I think her work is outstanding. However, I also think she fails to appreciate how subjectivism + price theory produces a slightly different story, than subjectivism - price theory. In other words, Mises (not necessarily Hayek) is the essential correction to Shacklean excess, just as Shackle is the essential correction to Ricardian excess in neoclassicism.

What you call an "uncritical blending" of Mises and Hayek is in fact no such thing, it is a critical reading that leads to an intellectual arbitrage opportunity.

New Institutional economics, Austrian economics, public choice, etc. are NOT heterodox schools of thought precisely because they maintain the logical structure of price theory at the core of their reasoning. Heterodox schools such as post Keynesianism, old institutionalism, Marxism, etc. are distinguished by their lack of price theory.

Price theory is a difficult subject and many people find it hard to follow the logical chain of reasoning and the intellectual discipline it imposes on thought. This is not the only reason people "reject it" but it is a working hypothesis.

There are "laws of economics" similar to the "laws of nature" and we deny them at our own peril.

Economists have often presented these principles in a trivial example situations, and it is the rare economist who has discussed them in the complicated problem situation. But it is in the context of the complicated problem situation where they are more valuable in disciplining our thought and framing our analysis.

And there is nothing "mere" about application. The very purpose of theory is to do history --- applied microeconomics and political economy is nothing more than the practiced art of weaving together pure theory, institutionally contingent theory into a framework for reading contemporary history. In other words, DOING ECONOMICS.

Pete

[matthew mueller]

Pete (Leeson?),

I would like to respond in kind to your post, since I read it as being unfriendly. You suggest in your post that my criticisms are valueless because they have not appeared in print. There is a reason why you don't publish in mainstream economic journals. It is because you are an Austrian. And there is a reason why I will probably never get published in the QJAE or the Review of Austrian economics --- it is because people like you peer review it. As Kuhn pointed out, we cannot hope to convince the elder scholars of the errors of their ways, we can only wait for them to die and then inspire the new generation.

[Steve Miller]

JLE and JPE aren't mainstream journals???

Maybe I'm naive, but I think if the quality of your work is high enough, you can publish anywhere, even at very highly-regarded mainstream journals, much as Leeson is doing. The book deal is no small accomplishment, either.

The only "unfair" part of it all is that maybe people outside the mainstream are held to a higher standard than people doing more mainstream (boring) work.

[Peter Boettke]

Matt,

You should really watch your claim to Pete Leeson that he doesn't publish in "mainstream journals". First, Pete of all the younger Austrians is the wrong person to say that about. He just published in the JPE, JL&E (2 times), JLS, and the JEP. And about 50 other pieces in journals such as Public Choice and JEBO. Pete doesn't publish in "our journals" he brings our iedas to the mainstream journals. So that was an error on your part that would be corrected by simply looking at his CV.

Second, Pete's work does have theoretical innovations in it dealing with enforcement mechanisms in situations without a working state. So again it is mistake to suggest he has no theoretical innovations.

Finally, the claim that Austrians don't publish in mainstream journals. All of us who teach in PhD programs have succeeding in doing this at some level otherwise we wouldn't be teaching in PhD programs. So again take a look at CVs available online for anyone to see. The most successful at publishing are the ones at the higher ranked programs. It is really that simple.

P.S.: All the students at GMU know of Shackle and Loasby and all the post-Keynesian types, so I am not sure what you mean to suggest that "younger Austrians" don't know these writers. Also, while the tombstone theory of scientific progress is well known, it is not the best of manners to suggest it to someone who is your age or only a year or two older --- it is best to think that only for the 80+ crowd and even then to keep to yourself.

[Steve]

Wow. This has fired people ip.

Pete - I dig the questions and will give them a lot of thought, but the comments have gone in a different direction.

[Tom]

Although I think the criticisms of not getting into mainstream journals are harsh in the extreme, there do seem to be quite a few Austrians at GMU (and elsewhere too) who don't publish, or do so very rarely. For example, Mercatus policy papers are great and contribute a lot, but it'd be good to see more effort going into getting journal papers out there so that the Austrian can be spread.

Shoot me down if that is too harsh.

[Peter Boettke]

Tom,

Can you tell me who you think doesn't publish journal quality work? Graduate students! We lets look at the CV of recent graduates. Dick Wagner! Well I think you would be hard pressed to find a more productive academic throughout his career, including of late and just look at his recent book on Fiscal Sociology to see how creative his mind is. Me! Well again this seems a rather strange interpretation of the facts since I published or had accepted just this past year I think 5 or more papers in journals such as Public Choice, Journal of Institutional Economics, Quarterly Review of Economics and Statistics, Southern Economic Journal, and American Journal of Economics & Sociology. I admit these are not the JPE and the QJE, but just two years ago I published in the EJ, many years ago I was in the JEP, etc. If I was more successful, no doubt I never would have left NYU. But to say I don't publish in the professional journals would be a statement ignoring 100+ refereed journal publications, not to mention my books, chapters in books, and non-academic publications such as the WSJ or Christian Science Monitor.

So what Austrians on the faculty at GMU (Wagner, Leeson and myself) do not publish in academic journals?

Pete

[liberty]

Hm...I was expecting the comments to be full of replies to the exam questions, rather than bickering over who publishes where. Ah well.

I do have a question for Pete Boettke. You said:

"Price theory is a difficult subject and many people find it hard to follow the logical chain of reasoning and the intellectual discipline it imposes on thought. This is not the only reason people "reject it" but it is a working hypothesis."

This is confusing to me. I may not know what "price theory" is. For me, the laws of economics and "price theory" to the extent that I know the full spectrum of what you mean (and as opposed to how Marxists understand price formation) is what -simplifies- economics.

It imposes "intellectual discipline" but mostly through providing answers to questions, rather than making them more difficult. My biggest concern is that it may oversimplify or too easily provide answers, so that exceptions or complications - or greater complexity in a complex systems kind of context or evolutionary context - may be overlooked.

Don't get me wrong - I am not becoming a post Keynesian. I believe in economic laws. However, I am confused by the notion that price theory makes things harder.

It certainly forces people to look at dynamic effects, which is always a pain, especially if you're trying to do quantitative prediction. For policy analysis with quantitative results aggregation and more static models with a return to equilibrium are much simpler to create; that is true. Dynamic general equilibrium models are much simpler than whole system evolutionary agent based models, for example. But, for most economic theory purposes, the Austrian approach seems much simpler than the alternative.

I tend to think it is avoided not due to difficulty but to ideology. Why am I wrong?

[Tom]

Peter - apologies if I hit a raw nerve. I really didn't mean to. My main point is about the Mercatus centre and its research fellows. There seems to be a lot of good stuff in there, but a lot of it doesn't get to publication. It stays at policy primer level.

I was meaning to denigrate GMU. I think it is a phenomenal institution producing great work.

[matthew mueller]

Dr. Boettke,

Heterodox scholars like post-Keynesians, Marxists and radical feminists do claim the Austrians as their own. Austrians may object to this association, but it is there. New Institutional economics and public choice is very different from Austrian economics, especially public choice. In fact, I don't see why many Austrians have embraced public choice economics ---- the underlying principle is that neoclassical economics positing rational self-seeking individuals is valid and can be applied to government. But Austrian economics is defined precisely by its rejection of neoclassical economics positing rational self-seeking individuals.

And this brings me to my next point. I have some experience with other Austrians my age (18-22). They are not very familiar with post-Keynesians or the work of Shackle and Loasby. In fact, most of them consider post-Keynesian economics as being essentially Neo-Ricardian economics, which is simply not the case. The Cambridge economists are all dead (Kaldor, Sraffa, Passinetti, and Robinson). The US post-KEynesians (Davidson, Minsky, Weintraub), moreover, were never that interested with capital and growth theory. They have quite correctly identified post-Keynesian economics as being the economics of uncertainty and money (store of value, not medium of exchange).

Most Austrians my age are Austrians only because they are libertarians (of the anarcho-capitalist kind, not the Cato and Reason kind) first and foremost. Now of course there have been some very talented students at GMU (Coyne, Leeson, D'Amico, etc.), but my experience with events like FEE and Mises Institute suggests that most students my age identify Austrian economics as the anarcho-capitalism philosophy of Murray Rothbard, and everything is just an extension of this, from socialist calculation to private property.

And I think you give a false picture of post-Keynesian economics by writing that "Price theory is a difficult subject and many people [post-Keynesians] find it hard to follow the logical chain of reasoning and the intellectual discipline it imposes on thought." MY impression is that post-Keynesian economics is far more technically sophisticated than Austrian economics. In fact, a careful reading will reveal just how flawed Austrian economics is in many respects. --- This is a provocative statement, but I think one example will suffice. --- In the Cambridge capital controversies, elaborate models were developed on both sides. One of the post-Keynesian arguments in that debate was that it is incorrect to believe capital and labor to have a high elasticity of substitution. But the Austrian Business Cycle theory depends for its validitiy on this very substitution effect. Other examples could be given, like the ones I provided above on the interest rate and uncertainty.

But I don't think it is correct to believe young Austrian scholars have made a detailed and thorough study of these radical post-Keynesians and have chosen correctly to reject it. Often how it works is that because you have rejected it, these young students don't even bother with it. Their attitude is dismissive rather than intellectually critical.

[Jacob]

Matt, I think a quotation of yours helps to explain this particular conversation.

"Economics has taught me that sweeping criticism is usually not welcomed."

I think every one of the authors of this blog would be more than happy to read a paper on the many issues you bring up. Have they not again and again shown willingness to not accept the traditional view and engage in conversation with you? However none of them are willing to accept back of the envelope 'theory' interspersed with ignorance and arrogance.

Matt, you make many provocative, incredible and interesting prenouncements in your posts; it could be because of the medium of the blog, but your reasoning is not exactly crystal clear in any matter.

"You suggest in your post that my criticisms are valueless because they have not appeared in print."
Your criticisms are most certaintly valueless, not because they have not been published, because most of them are completely empty! I am very interesting in the intersection of Mises and Hayek's theory, but do you bring anything at all to the table when you blindly dismiss it as "uncritical blending"? No!

You have many ideas, vague propositions on a blog post coupled with erroneous putdowns about productivity, fabulous "education" about the supposedly forgotten post-Keynesians, and application, is not the best place to gain adherents.

[Frederic Sautet]

Tom:

Many Mercatus researchers publish outside Mercatus. It ranges from law reviews to academic journals (see http://www.mercatus.org/people/default.asp?cFilter=0 ). For instance, Karol Boudreaux has many papers in both. As far as I am concerned, I try to publish in various outlets as well. For instance, Pierre Desrochers and myself have had four papers that came out in the last four years on urban planning, cluster policy and other issues from an Austrian perspective (the latest one is in ET&P which is a very decent journal). The goal of Mercatus is not only to publish in peer-reviewed journals but also to influence the policy debate and there are many avenues to do that. Ultimately, economics should help people make better policy decisions. This is why we are in this business.

[Tom]

Of course - I meant to put that I WASN'T meaning to denigrate GMU. Not a Freudian slip, I promise.

[Tom]

Frederic, I stand corrected. I have read one of your papers on cluster policy with Desrochers and found it very thought-provoking. Apologies - I am stepping out of this debate now.

[Peter Boettke]

Matthew,

Again your comments reflect a level of careful study and thought well beyond reasonable expectations of an undergraduate education. I honestly believe you have a very bright future in academia.

However, let me respond to some of your claims. First, the young Austrian I meet at GMU both undergraduate and graduate students are willing to learn from a wide variety of sources and read widely in the social sciences and philosophy. So I think your impression of what goes on here is just wrong and I would encourage you to come and visit here to see the intellectual life on display at GMU during any week. The undergraduates closely tied to the Economics Assoc are very intellectually curious, though more interested in mainstream economics than you. The graduate students are interested in the discipline of economics as a whole and also very intellectual curious. To say they are only attracted to anarcho-capitalism is a mistake in my experience. Instead, there are a variety of interests ranging from methodology, analytical arguments, methods of empirical analysis, social sciences in general, philosophy, and even theology. I actually don't think you will find a more intellectually engaging and curious culture in an economics department throughout the US and perhaps even the world. See Arjo Klamer's comments on the GMU environment in the 1980s in his joint study with David Colander in The Making of an Economist. The environment, while imperfect, still has a sort of "buzz" quality which is not very common in graduate programs in economics.

Second, on the issue of heterodoxy. For many years of my professional career I was closely associated with the attempt to band together the various outsider schools to provide an alternative pluralistic economics to the hegemony of the mainstream. I have many close friends in the profession that are old institutionalist, post Keynesians and Marxists. However, I had a major sea change in my thought after my years of close association with Don Lavoie when I read Israel M. Kirzner's "The Meaning of Market Process" where he introduced the distinction between induced and underlying variables. This essay caused me to rethink several issues in the equilibrium debates and also the issue of error, uncertainty and disequilibrium. In addition, the pluralistic movement morphed into the post-autistic movement and I actually think the arguments do not resonate with one another. An example of this is the various chapters in Fred Foldvary's book Beyond Neoclassical Economics (to which I contributed the chapter on the Austrian school). Another example was the HOPE volume on the state of the art in history of economic thought in which I have the paper on The Use and Abuse of the History of Thought.

I still count heterodox thinkers as friends, but I disagree with their understanding of economics and economic reality. A classic example would be Minsky's dipiction of market instability versus a Hayekian understanding of malcoordination.

Also, your claim that Post Keynesianism is more complex and sophisticated than Austrianism reveals that you haven't come to appreciate the subtle technicalities of Kirzner, or the nuances of monetary theory found in White or Selgin. I am not saying that Austrianism is more technical or sophisticated, I am just saying that they are about equal in the intellectual rigor with which positions are argued.

You seem to have in mind some sort of lowest common denominator version of Austrian economics -- which certainly makes an ideological contribution but nobody seriously looks to these works for scientific contributions to the discipline of economics.

BTW, have you read the different comments written by Kirzner, Lachmann and Garrison on the Cambridge Controversy? Also Mark Blaug had some very interesting things to say on the controversy.

[Peter Boettke]

This is an "interesting" set of exchanges. Empirical claims are being made "Austrians do not publish in mainstream journals" and when empirical evidence is provided to counter the claim the accusation that "bickering about who publishes where" are made. OK granted, the more "interesting" conversation could have been a discussion of the answeres to the questions --- which btw do not rely on name dropping or "subjectiveness", but instead objective knowledge of what arguments are in fact made and evidence provided in the literature of professional economics.

However, a recent post has also revealed a certain confusion with my language. I did not mean that price theory makes things "hard", but that learning price theory properly is "hard" and as such does not "stick" in many students heads. Just as physics doesn't.

Pete