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« Do People Say Silly Things About Monetarism, New Institutionalism, and Public Choice as well? | Main | Adverse Selection, Gresham's Law, and the Austrian School »

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Excellent post, Dr. Boettke.

And it makes perfect sense based on my understanding of economics. But then, being that I learned economics with the unfettered role of prices at the very core of all activity, it's not at all surprising.

However, I do have a question.

Based on my limited reading of Neo-Keynesian Macro Theory, "Price Stickiness" is a key concern and its adherents claim it's a remarkably predictable and real problem. Strange that Mankiw and Krugman are both guided by this.

But anyway, when you say:

Market economies are amazingly resilient, as long as prices are free to adjust, changing circumstances are accomodated for in price movements relatively quickly --- expectations are embedded in this market information.

what would a Neo-Keynesian say to that? Krugman, to me, seems to be driven by the fact that prices and wages do not adjust fast enough and intervention is therefore necessary.

Thoughts?

John,

Now it's time for the real macro guy to take over. ;)

Austrians need not adopt the strong RE/GE type view that free market prices adjust very quickly and accurately to changes in the underlying data to still argue that prices work best when left alone. For one thing, there is always the "as compared to what?" question: how will intervention do any better? A Mengerian understanding of the market process can and should recognize that price adjustments take time AND that government intervention will make those adjustments less effective.

That said, there is another point here. Pete's right that markets are very resilient and that when there are changes in the underlying data, prices do their job in reacting more than well enough. However, what if there's a change on the "money side?" The argument of the monetary disequilibrium theorists (Davenport, Yeager, Robert Greenfield et. al.) is that when money is the source of the disruption, price stickiness is a real and dangerous problem, *even if markets are otherwise unhampered.*

Parth Shah has a wonderful piece in Vol 4. of Advances in Austrian Economics comparing the neo-Keynesian price stickiness arguments to those of the MD theorists. It remains one of the most underappreciated articles of the last 15 years as Shah shows why downward price stickiness exists in this situation, why it's problematic, and how markets will eventually, but only after a recession occurs, get their way out of it.

Faced with an excess demand for money, there are game-theoretic reasons why even free-market prices will not immediately adjust (as Rothbard argues they would), leading to excess supplies of goods, including labor. That is, a recession.

So, to link to Pete's post, if the Fed is screwing up by not producing *enough* money (not so likely in a world where the Federal government is heavily in debt), the existence of price stickiness will turn that error into a recession. Note that it is *intervention* that is the problem, not the cure. If free market money (for me, free banking) will avoid monetary disequilibria, then economy-wide price stickiness will never be problematic.

Put differently, both inflation and deflation cause havoc because prices are unable to react immediately and accurately. The ABCT is the inflation version, while Yeager et. al. provide the deflation version. There are indeed macroeconomic questions (what happens when there's too much or too little money) but only microeconomic answers (the price coordination process is undermined).

Professor Horwitz,

I haven't read all the monetary equilibrium theorists you point to, but you restate your view, Austrian or not Austrian, on monetary policy, by invoking two arguments : 1) you define inflation in a monetarist fashion as an "excess supply of money"; but relative to what levels of supply or demand for money, may I ask, given the non-neutral Cantillon effects of money? 2)secondly, you start your discussion of price stickiness by appealing to the mengerian notion of time, but then you switch the argument and state that there are game-theoretical reasons for downward price adjustment. However, from a strictly game-theoretical point of view, the reasons you invoke are not at all necessary, a prisoner dilemma is not the only game possible in this case and even if it were the only possibility, after a few "trials", i.e. a few deflations, evolutionary game theory tells us that people should in fact learn to coordinate better and avoid the situation (as entrepreneurs should learn to avoid the business cycle in Carilli and Dempster's framework); but is it that easy in reality ?

Professor Boettke,

You say that all credit induced business cycle fallow the Austrian pattern, but that they do not constitute all the business cycle that may be caused by goverment intervention in the economy : what are the others ?

Steven: This is where you need to quote yourself from Microfoundations and Macroeconomics, specifically the discussion beginning on page 200, headed as "Price-coordination and monetary equilibrium." Barriers to "price coordination" (including government-fostered barriers) will lead to a situation where "maintaining monetary equilibrium will not be sufficient to avoid widespread idleness and a decline in output and income." So, rather than do anything about price stickiness, the monetary authority resorts to inflationism, the ideology of the age.

Steven,

Can you go into detail on the game-theoretic reasons why prices do not adjust as quickly as they should? Are there any reasons government can react more quickly?

Also, what do you think about this article?
http://paws.wcu.edu/mulligan/www/ABCSMC.htm
The author tries to model Keynesian menu costs as a rigidity of the same flavor as malinvested capital in ABCT.

Austrian economics is considerd by most to be a school of thought entirely distinct from neoclassical economics. Without going into defintions, I can say with confidence that this line from Boettke's post belies the distinctiveness of Austrian economics:

"There is no such thing as inherent instability of markets. Markets are self-correcting mechanism if left to their own devices. Economic distortions are a consequence of government interference in the operation of the market."

Now neoclassical economics, if intepreted and followed strictly, makes essentially the same point, and it is for this reason that I have come to see little difference between Austrian economics and neoclassical economics (unless, of course, one supplants the standard view of Austrian economics with a more Lachmannian one as Vaughn does in her fascinating book "Austrian Economics in America").

Perhaps the best book on this subject is "Against Mechanism" by Philip Mirowski. According to Mirowski, what distinguishes neoclassical economics is its commitment to 19th century physics. Mainstream neoclassical economics can be traced back to 19th century physics, and Mirowski documents all of this in fascinating detail. It is the inclusion of phsyics metaphors that gives the market process the appearance of organicism. To give an illuminating example, consider Jevons' theory of sunspots as an explanation for macroeconomic fluctuations. Now while this theory is now the subject of ridicule and derision among economists, Mirowski correctly notes the point Jevons was trying to make. He argued that any sort of disturbance or crisis has to come about externally; there is nothing in the market process that suggests crises are endemic to the system itself. Neoclassical economists (and Austrians!) have simply re-named sunspot theories "government intervention" and have continued to extol the virtues of "unfettered capitalism."

But these "laws" of economics are not as unproblematic as it may seem. It is important to understand the origins of these ideas. Basically, the view that free market capitalism is superior to any other alternative derives from concepts and metaphors borrowed from 19th century physics, such as conservation principles, entropy laws, and thermodynamics. Fortunately, physics as it was understood in the 19th century has since evolved, eschewing a lot of the static assumptions and unhelpful models that characterized their discipline. Unfortunately, however, mainstream neoclassical and Austrian economics are still expounding these flawed and misguided views.

Matthew,

You need to read Mirowski a little closer. He acknowledges that the Austrian variant of marginalism from Menger onward didn't suffer from physics envy.

The words mean different things. E.g., marginal utility in Austrian circles is NOT the first derivative of some concept of total utility. Also see the letters between Menger and Walras.

In addition, if you follow up with Mirowski's next book Machine Dreams, you can also see that Hayek's metaphor of the market as a telecommunication device is central for the development of cyborgnomics, but it is not the same thing.

Caldwell, in Hayek's Challenge, discusses "basic economics" and that is all I was talking about. There are economic forces at work that must be explicated. These do not entail the unquestioned acceptance of general competitive equilibrium models and their blind adoption.

Nothing I said in my post entailed the acceptance of "static assumptions and unhelpful models" --- you are confusing two different sets of arguments --- textbook perfect competition, and the self-organizing properties of complex adaptive systems.

Pete

Professor Boettke,

Mirowski's treatment of Menger is interesting. It is true that because Menger did not include math in his explication of marginal utility, he did not suffer from physics envy. However, in Mirowski's interpretation, this does not make Menger one of the three founders of neoclassical marginal utility. He also makes the fascinating point that had Menger not published his Grundsatze in 1871, and had Wieser not promoted Menger's status as one of the founders, and had Menger's book been more readily available at the turn of the century, Menger would not today be considered one of the three marginalist revolutionaries. This is quite the opposite of what many Austrians argue. If only Menger's book had been in print! If only he had finished the other two parts! If only Wieser did not ruin everything!

The history and development of utility analysis, and not the peculiar differences in interpretation between competing schools is what is at issue here. The marginalists, borrowing from the physics literature, simply began calling energy "utility". Now I haven't read enough physics to truly understand what all of this means, but from what I gather, for marginal utility ordinal rankings to be at all possible (a claim no Austrian would dispute) there would have to be some conservation rule that stated the conditions under which such activity could be successfully carried out. This conservation rule states, much like in physics were the outcome is independent of the sum of potential and kinetic energy, that all economic functions are conserved in the process of economic exchange, making this argument by definition successful absent all countervailing forces.

Now the perfect competition model is admittedly and distinctly different from the more dynamic notions of spontaneous order and entrepreneurial discovery. However, a careful examination of the "basic economics" of both will reveal sriking similarities between both concepts, namely that, to quote again from Dr. Boettke,

"Markets are self-correcting mechanism ...[that]if left to their own devices ...[would show that]
[t]here is no such thing as inherent instability of markets. ... Economic distortions are a consequence of government interference in the operation of the market."

I just see in this quote an almost instinctive reaction to the postulates of 19th century physics that have in them a perfectly coherent modeling strucuture that suggests of no endemic tension or conflict. Internally, all is perfect in the market economy. If this perfection is not reached immediately, entrpreneurs will eventually help us get there. If we never reach it, we know where to place the blame: on external forces, like sunspots and government intervention.

Mathew, you say:
"...from what I gather, for marginal utility ordinal rankings to be at all possible (a claim no Austrian would dispute) there would have to be some conservation rule that stated the conditions under which such activity could be successfully carried out. This conservation rule states, much like in physics where the outcome is independent of the sum of potential and kinetic energy, that all economic functions are conserved in the process of economic exchange, making this argument by definition successful absent all countervailing forces."

I am not at all familiar with the history of economics you wrote about (there is really a connection between energy in classical physics and utility? That seems... bizarre), but I don't understand the logic here. I'm not quite sure what you mean by "such activity" or "economic functions", but obviously utility is not held constant over an exchange (or even necessarily over time). Mises quite explicitly states that the limits of human foresight mean that speculation of future utility is just that: speculation. Since there is a nonzero amount of time between a man's actions and the fulfillment of his ends, speculation is always present. As markets tend to reward successful speculation, participants should tend to adopt better and better speculative tools. Obviously, this doesn't mean perfection will ever be reached, even absent sunspots and governments.

G,

You raise a very good point.

All action, because it takes place through time, is speculative. I agree with this. But I agree with it in a way that is different from the view that suggests entrepreneurial activity underpins the process of adaptation and correction.

If we continue to emphasize the importance of time, there is nothing in this analysis that implies that entrepeneurs will on net act as stabilizing forces rather than destabilizing forces. This is becuase the conception or discovery of an idea takes place at a time that is different from the execution of it. Ludwig Lachmann always forecefull argued that "the data are always changing." This, he argued, makes even the possibility of stabilizing or correcting acts of entrepreneurship unlikely, since the temporal dimension inherent in all speculative human action in no way guarantees that the identification of error will result in the elimination of it. During this time, the data may change (i.e. preferences, resource availablitlies, knowledge, information, rules, etc. etc.) making the relative profitability of various opportunities highly indeterminate.

Now this is a view of the market process that I favor, one which I am sad to say is no longer carried on in the Austrian school. Let me recommend Karen Vaughn's "Austrian Economics in America" -- a wonderful book that gives a historical account of the Austrian School from a distinctly Menger - Hayek - Lachmann perspective (I wrote a review on amazon if you're interested).

I think this view of the market process is also consistent with my growing distrust of not only general equilibrium, but also equilibrating processes and "natural market forces."

Matthew,

You raise a lot of important points, but I think you are suffering from "what I read latest syndrom". BTW, look at Vaughn's acknowledgements and you will see a younger Pete Boettke getting a nod because I was both the most extensive commenter on his first draft. Also keep in mind that Vaughn's book is a "story of a movement" the individuals who she thinks the movement culminates in are Rizzo and O'Driscoll's The Economics of Time and Ignorance. Plus, I would recommend that you talk to Prof. White about Karen Vaughn's book and some fine details in economic theory that are brought up in the book that relate to equilibrium propositions, etc.

There are so many issues at stake here it is hard to figure out where to start.

On Mirowski --- look at the alternative readings of this period and the issues under discussion by Koppl, Caldwell, and A. M. Enders. I would also recommend Jaffe's "Menger, Jevons, Walras Dehomogenized" ECON INQ 1975.

Mirowski is probably the most interesting historian of thought, but I think you would be hard-pressed to find many that would agree that he is the most accurate reader of the historical record on fine details. You are raising a point about fine details, when what Phil gives us is a big picture reading. Same is true of his Machine Dreams. Both are fantastic stories that are interesting to read, but at points stretch credibility (same with his story about the Chicago school he is currently pushing).

On the Austrian understanding of "marginal utility" I recommend that you look at Jack High and Howard Block's essay in HOPE on the history of marginal utility theory. Also look at Morgenstern's review of Hick's Value and Capital in the JPE where he talks about the need to move to Marginal rates of substitution is not necessary, etc.

You are engaged in a great intellectual adventure and give the passion you demonstrate toward these ideas, I think you really should be headed toward getting a PhD in economics. You will need to make sure to have the appropriate mathematical background to succeed --- take through calc 3 if you can. But try to get to graduate school as quickly as possible.

And, as for schools that you want to think seriously about attending. Duke and the new Center for the History of Thought should be up on your list, followed by GMU and NYU given your interest in Austrian economics. But Duke with Bruce Caldwell would be the ideal place.

Pete


BTW, Mirowski's main book on the marginalist revolution is More Heat Than Light. Look there for his discussion of Menger and Hayek.

His critique of contemporary economics is Machine Dreams. Look at his discussion of Hayek.

On the meaning of mechanism that I am utilizing see Jon Elster, A Plea for Mechanism, and also his Nuts and Bolts, and The Cement of Society. Elster is a brilliant writer. And finally, Nozick's discussion of invisible hand explanations in Anarchy, State and Utopia. It is the idea of explicating filter processes and equilibrium tendencies that I think we are looking at when explaining economic forces at work.

To claim market are not inherently unstable, is not to stay that are they are always and everywhere in equilibrium. Instead, the stableness of markets are a result of the filter process in operation and equilibrium tendencies the system exhibits (due to the play between the logic of action and the institutional contexts which provides feedback, etc.).


"You raise a lot of important points, but I think you are suffering from "what I read latest syndrom".

I am appalled that Dr Boettke would say such a thing to Mr Mueller.

Of course, Dr Boettke himself suffers from "which famous mainstream economists or conservative activists have I been trying to suck up to lately syndrome"

It appears that Dr Boettke objects to the fact that Matt does not immediately agree with the genius Boettke.

Matt,

You might also check out the essay by Larry White in vol 2A (1995) of Advances in Austrian Economics on "Is there an economics of interpersonal utility comparisons?" He offers a very clear understanding of what exactly utility means in the Austrian tradition and I think it's helpful in exploring some of the details Pete is noting.

More generally, to say markets are "self-correcting" is hardly to adopt the sort of mechanized view you are rightly criticizing. And "self-correcting" need not be read as strictly equilibrating or the like.

Matthew,

I'm most certainly not as well read in economics as you or the two PhDs we've got on here, but I'm not sure where I've seen any argue that the entrepreneurial process can't introduce instability. Didn't Mises stress that entrepreneurial discovery causes instability, meaning the ERE and stable economy are in impossible states to achieve in reality?

It seems to me that stability is a function of information (e.g., how long it takes for one business to fully realize that its plans have been made obsolete by an invention in someone's garage half the world away). As long as the feedback Dr. Boettke mentions isn't instantaneous, I don't see how stability is possible (or really even desirable).

Looking at it this way (and assuming I'm not totally incorrect), I wonder if one could argue that command economies are much less stable. The needed information typically comes much later than price signals do, often in the form of a revolution.

Time to reply to a few questions from yesterday:

Bogdan asks:

“you define inflation in a monetarist fashion as an "excess supply of money"; but relative to what levels of supply or demand for money, may I ask, given the non-neutral Cantillon effects of money?”

First of all, that definition is hardly owned by the monetarists. For example, there’s this definition of inflation: “an increase in the quantity of money … that is not offset by a corresponding increase in the need for money … so that a fall in the objective exchange value of money must occur.” Author? Mises (TTOMAC, p. 272 – Liberty Press edition). That definition of inflation goes well back in the history of economics and is legitimately an Austrian one. Again, it’s really only with Rothbard in the 1960s that inflation gets defined as “any” increase in the money supply beyond the supply of gold, or something similar.

So monetary inflation is a supply of money greater than the demand to hold money balances at the current price level. Define money broadly here and remember that the demand for money is a demand to hold real money balances.

“However, from a strictly game-theoretical point of view, the reasons you invoke are not at all necessary, a prisoner dilemma is not the only game possible in this case and even if it were the only possibility, after a few "trials", i.e. a few deflations, evolutionary game theory tells us that people should in fact learn to coordinate better and avoid the situation (as entrepreneurs should learn to avoid the business cycle in Carilli and Dempster's framework); but is it that easy in reality ?”

This is a great question and one underexplored by Austrians. I don’t have a good, complete answer to this. What I would say is that 1) it isn’t always easy to recognize when a deflation is underway, especially if it’s caused, as it more likely would be, by an increase in the demand for money rather than a fall in the supply. If so, wouldn’t the knowledge necessary for entrepreneurs to recognize the situation and avoid it be exactly the same knowledge we believe the central bank would need and can’t acquire to avoid the problem in the first place? 2) The prisoner’s dilemma game here is one involving a VERY large number of people. How easy would it be to coordinate them? Remember, monetary disequilibria are, by their nature, economy-wide.

Jule writes:

“Steven: This is where you need to quote yourself from Microfoundations and Macroeconomics, specifically the discussion beginning on page 200, headed as "Price-coordination and monetary equilibrium." Barriers to "price coordination" (including government-fostered barriers) will lead to a situation where "maintaining monetary equilibrium will not be sufficient to avoid widespread idleness and a decline in output and income." So, rather than do anything about price stickiness, the monetary authority resorts to inflationism, the ideology of the age.”

Well I always appreciate being quoted back to myself in a positive context, so thanks Jule! And this is a good point: to the extent that government intervention, even in the name of “unsticking” prices, actually makes price coordination more difficult, it can generate the cumulative recessionary process identified by Hutt (and discussed in the chaper Jule cites).

G asks:

“Can you go into detail on the game-theoretic reasons why prices do not adjust as quickly as they should? Are there any reasons government can react more quickly?
Also, what do you think about this article?
http://paws.wcu.edu/mulligan/www/ABCSMC.htm The author tries to model Keynesian menu costs as a rigidity of the same flavor as malinvested capital in ABCT.”

The standard story is a “who goes first?” problem. The most accessible explanation of it is in Robert Greenfield’s much-underappreciated “Monetary Policy and the Depressed Economy,” a short little book from Wadsworth Press 1994. With an excess demand for money, people try to replenish their money balances by reducing their expenditures, as that’s the one thing they can totally control. As they do, business begins to slack. Sellers would like to cut their prices, but are hesitant to do so without knowing 1) whether their suppliers will cut prices and whether labor will take wage cuts and 2) whether this slack is local to them or economy-wide. Workers would be willing to take wage cuts if they knew prices would fall, and so on.

The excess demand for money has created an economy-wide, and possibly inter-temporal, discoordination. Getting “re-coordinated” cannot happen instantaneously, but eventually prices start to give way, as do wages, and the economy restarts, but only after a period of recession in the form of unsold goods and unemployed labor. How quickly this recovery happens depends on the issues Jule raises above – if government steps in, it’s likely to make coordination less likely (see, for example, the Great Depression.)

What could government do in this situation? On the monetary policy end, it could try to reflate the money supply quickly to avoid the slowdown, but we have reasons to think central banks will react slowly and late to such situations. Surely government cannot try to tell producers what the new lower prices should be, for reasons Austrians are well familiar with. So it’s not clear at all how gov’t could do better.

Mulligan’s paper is a good one. I think he’s on to something there. Note that he doesn’t cite Shah’s paper I mentioned earlier, which was telling a similar story a decade ago. Otherwise, it’s good.

Dr Horwitz, is the Shah paper you mention online anywhere?

It isn't Mark. Email me and I'll see what I can do to get you a copy.

G and others,

Lets be clear as to what is being discussed here. Do entrepreneurial innovations reallocate resource and as such "disturb" the current pattern of exchange and production? Of course they do. Kirzner never denied this. See his essay on viewing capitalism from the inside versus viewing it from the outside in "creativity and/or alertness". From a birds-eye view, however, entrepreneurial innovations are moving the economy in the direction of a more appropriate allocation of resources given technological possibilities, relative scarcities, and consumer demands. From an actor relevant perspective, the entrepreneurial action is "disturbing", but from a system point of view it is "correcting".

The discussion of "self-correcting" is not an issue of "instantaneous" adjustment, but tendency and direction. It is about systemic feedback to detect and correct error in the economic system.

The claim that markets are inherently unstable does not deal with entrepreneurial innovation and the "lag time" in the feedback process, but instead a claim that markets are prone to disturbances that will not "balance out" over time. It is a denial of systemic feedback processes and that somehow the divorce between the underlying variables of tastes and technological, and the induced variables of prices and profit and loss is potentially permanent.

In short, what is at stake is an understanding market coordination and the role of incentives, information, knowledge, discovery, learning, and innovation.

The more common-sense interpretation of "stability" that many of you are invoking is more appropriately termed stasis. And yes, we don't find that sort of 'stability' economically desirable.

The market "stability" I am referring to is the dynamic adjustment processes within an economy that constantly accommodate changing circumstances.


Pete

Perhaps a better word than "stability" is "coherence." As Lachmann, Langlois, and others, have argued, all institutions need to have both "coherence" and "flexibility" in order to be sufficiently "stable" through time yet still react and adapt to change. This is what prices and markets do as well. "Coherence" is not "equilibrium" and "flexibility" is not "chaos."

In markets, things are always changing, but never so much as to overwhelm the forces of coherence.

It is instructive I think to note the commitment many economists have to this coherence (stability) theory of market forces. I emphasize again, this is merely a product of the 19th century physics program. Economic phenomena is an evolving process of change, interminable uncertainty and discoordination, and human creation and interpretation. In this sense, economic "science" can be seen as "culturally" and "socially" determined, rather than as a method of using economic rationality to explain complex social phenomena in mechanistic ways. In other words, our idea of equilibrating or flexible market institutions or forces (rules) is itself the product of an evolutionary process, and has not been delivered down to us by something that stands outside of time and the fallibility of human knowledge and understanding.

Now economists haven't come around to this yet, but philosophers of science have. In fact, in the physical sciences we no longer see this rigid determinism of natural forces. New discoveries and innovations like the theory of relativity, quantum mechanics, and the cultural contingency of scientic methodology. In fact, most physcists have rejected the idea of limitation and scarcity, and have instead embraced an interpretation of the world that takes into account the "boundlessness of chance, chaos, and emergent novelty."

Now the research program of many Austrians, and their commitment to ideas of processes, uncertainty, and change is a sign of progress and should be acknowledged as such. But for these theories to have "intellectual teeth", they cannot maintain the rigid determinism of inherently self-correcting market forces, because such explanations are simply reiterations of physics metaphors that have since been expunged in the natural sciences. A real commitment to the tenets of uncertainty, change, and processes cannot be explained adequately in language borrowed from the 19th century physics research program. In other words, such considerations, if they are to work in the way desired, cannot take anything as naturally given, for then such entrepreneurial functions would simply appear incoherent as superfluous. It would be a playing out of things already anticipated in advance, namely the self-correcting tendencies of entrpreneurial action.

A correct understanding of these ideas would seem to suggest that the world is not inherently orderly, but rather chaotic and confusing.

Oh, and one more thing. I really do enjoy all of the recommended readings you include in your posts and replies (to Horwitz and Boettke), but journal articles are painfully inaccessible for the typical undergraduate. I would much rather prefer recommendations of books than articles. Case in point: I actually was introduced to Philip Mirowski in a blog post authord by Dr. Boettke several weeks ago, when discussing the recent Nobel Prize and Mirowski's book Machine Dreams. Thanks!

Pete, there is a third option to giving your shortstop a bigger glove or replacing him, you could check whether there is some simple flaw in his technique that has hitherto eluded the notice of the coaching staff. That can easily be the case with kids and junior players (less now that everyone has a video camera) and then the question is whether the guy is teachable and how long it takes to fix the problem. How teachable are the guys at the fed?

Matthew,

Watch out for time travel!!! The idea of systemic order and the reconciliation of competing interests through market exchange was "discovered" by economists in the 17th and 18th century. We didn't need physics to tell us about "forces" and we didn't need biology to tell us about "evolutionary processes". In fact, at least in the case of Darwin we know that the intellectual flow of ideas went from economics to biology.

In fact, the science of economics begins with the empirical observation of systemic order --- Paris gets fed as they used to say. Let me point out again, this is where Caldwell's discussion of "basic economics" at the end of Hayek's Challenge is very useful.

Finally, on this issue of the order in chaos and subjectivism; this is where Lachmann and especially Shackle need Mises to keep them in line. It is the practice of economic calculation that coordinates in a world of radical subjectivism. Lachmann with price theory is what I often term it in my lectures. A lot of people get seduced by the Lachmann/Shackle allure and forget price theory that we know follows from preferences and constraints.

Yes Virginia, there is a science of economics that is fully subjectivist yet objective (at least to the level that is humanly possible). Kirzner has written several very important articles on this.

Pete

Matthew,

As a follow up, see Vol. 1 of Advances in Austrian Economics --- it is on "Whether or Not Economists Can Handle the Concept of Change?"

Pete

Peter Boettke's current views = neoclassical intermediate price theory - lachmann - lavoie - horwitz - prychittko

Profs,

Thank you, this (and other) discussions have been most enlightening for me. I've gotten more in-depth responses than my (engineering) profs ever bothered with when I was in school ;)

Matthew,

I'm not sure if this is what Dr. Boettke meant, but I believe Mises most certainly grounds his case for markets in something which has been "delivered down" to us in every practical sense. That is, his argument for why markets work is based in the fundamental axiom of action.

Of course, this does not mean that civilizations with markets will always tend towards stability (e.g., a market may produce devices which allow some men to rule over others utterly, destroying markets and civilization with them), but I don't think the scope of economics really lets it comment on extra-market forces (such as politics, falling meteors, or orbital mind-control lasers).

I've always seen the evolution of society as being one of Hofstadter's strange loops.

Matt,

I just don't see how the social world is chaotic and confusing in the way you insist. From day to day, Paris does get fed, prices don't change radically, institutions evolve slowly, and I'm able to, as Pete said, use monetary calculation to guide me sufficiently well through my moment to moment actions.

Yes, novelty is there. We do not know *with certainty* what's around the corner. But we have coherent, yet flexible, institutions that have evolved precisely to help us navigate that fog of uncertainty.

Your vision of the world seems to me like we are adrift in a foggy sea with no means to make heads or tails of where we are going. Instead, I would argue we are sailing in a somewhat foggy sea, but we have maps and lighthouses and maybe even a GPS to help us navigate. Are they perfect? Nope. Are they "mechanistic" or "inherently self-correcting?" Nope. But they are good enough to help us navigate the foggy seas and find land, even if sometimes we hit the occasional reef or other ship.

Think Homer and Bart in the episode where they are adrift in the foggy sea only to be rescued when Homer's nose smells out a very underpatronized Krustyburger outlet on an oil platform. :)

(And wouldn't "Homer's Nose" be a great band name?)

Finally, I actually agree that the social world isn't "inherently" orderly. It's human institutions that provide it with whatever degree of order it is has, and it is bad institutions that can cause serious disorder. The social world is as orderly as keeping our hubris in check allows it to be.

Wow! This is an awfully elevated and polite discussion for a blog; extremely refreshing.

I found curious something Prof. Boettke said:

"The discussion of "self-correcting" is not an issue of "instantaneous" adjustment, but tendency and direction. It is about systemic feedback to detect and correct error in the economic system."

Because it would seem to me that the first sentence here is not at all equivalent to the latter; 'tendency' and 'direction' might be towards an ugly equilibrium (in the case of an especially pernicious coordination failure or path dependence and myopia in choosing to develop a technology, say), or even away from any sort of equilibrium. Brian Arthurs early work on increasing returns spent a fair bit of time illustrating how path dependence could plausibly produce inefficiency in technological innovation or industry locations; and coordination failures are similarly abundant in the today's literature.

Schumpeter illustrates the second case (and here I'll suffer from a bit of my own 'what-I've-most-recently-read' syndrome, though I haven't been much enamored of the book as a whole) in Capitalism, Socialism, and Democracy, where he relates a quick hypothetical about farmers over-producing in response to a price rise, in turn under-producing all the more the following year to 'correct' the surplus they'd created last year, etc. and so on -- swinging back-and-forth more wildly each year.

In either case, the economy would be [i]coherent[/i], to use Prof. Horwitz's term (and in the sense of a self-organizing; complex, but not chaotic, system, ala Wolfram's Class III automata), but that sounds very close to Prof. Boettke's tendencies and direction, without being so very close to Prof. Boettke's economy as an error detection-and-correction mechanism. But tendencies don't offer much defense (or critique) of Austrian (or many schools of) economics; and where the error detection-and-correction mechanism conception is correct would seem to be the subject of heavy dispute (and an, though not the, appropriate direction for an argument about interventionism in some case or another).

That is a little confusing to take.

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