GLS Shackle famously argued that while the future was unknowable, it was not unimaginable. Shackle's great strength as a thinker was to get his reader to take seriously the agony of choice in an uncertain world. However, Lachmann's notion of institutions as nodes of orientation, and Mises's idea of the necessity of a particular institution -- private property in the means of production -- for individual decision makers to be able to use the tools available to them to make rational economic calculation of alternative investment paths. The decision to Mises, I want to stress, is never trivial, it always entails both agony of choice, and a bold venture into the unknown. But the actor within a private property market economy is now cast upon that voyage without "aids to the human mind" that enable to them to pierce through the dark fog of time and ignorance and the system possess processes of coordination that sort from the imagined desirable to the reality constrained feasible to the economically viable. It all does begin with imagination, but our imaginations are not unchecked.
This is worth listening to from roughly a year ago.
On this day in 1973, the Mets beat the Reds in the National League Championship to make the World Series, where they would eventually lose to the Oakland A's -- who featured several star pitchers Catfish Hunter, Vida Blue and Rollie Fingers, and World Series MVP Reggie Jackson.
Also on this day, Spiro Agnew, the Vice President of the United States, was forced to resign in the face of allegations of corruption and tax fraud.
And, the world of economic scholarship and teaching lost ones of it towering intellects, as Ludwig von Mises passed away at the age of 92.
As was pointed out many times, if judged by the scientific contributions of his students, Mises must be considered one of the greatest teachers of economics in the first half of the 20th century. Those include not only Hayek, but Haberler, Machlup and Morgenstern. His scientific peer from the Vienna days was Joseph Schumpeter and his closest peer in the US would have been Frank Knight. A teacher of rare ability and a scholar of even rarer gifts, Mises played a major role in shaping directly and indirectly the development of property rights economics, law and economics, public choice economics, and of course market process economics.
I recently wrote a piece for The Independent Review discussing the contribution that Mises's great treatise Human Action has made, and continues to make, in the social sciences and social theory more generally. I have in other places discussed his Socialism as well. It is important to grasp the importance of his life and work. There is a new movie effort to do so.
But my sincere hope is not that we view Mises as a heroic figure from a bygone era, but instead we read him afresh and treat his ideas disembodied from the person and his time, and modify them and make them real and valuable for our time. Mises himself argued that economics, and indeed liberalism, is not a fixed doctrine, but a living body of thought. Just as he build upon the historical legacy left to him by the classical political economists from Smith to Mill, and the early neoclassical economists such as Menger and Bohm-Bawerk and Wicksell, we must appropriate from his work those concepts and theoretical structures that are most useful for understanding our world today and address the pressing policy issues of today.
I greatly appreciate the efforts by Karen Horn and Stefan Kolev, and of course Dan Klein to make this paper available in English translation. It is invaluable to scholars of the Austrian School of Economics and I would argue the broader community of intellectual historians of economics. I also think it is great collaboration to utilize young scholars to engage in such difficult translation projects.
That said, I also have rather strong views on the Methodenstreit. As background, starting in January of my junior year at Grove City College and continuing until I graduated a year and half later, I was the only undergraduate student participating in Sennholz's graduate seminar. The graduate students included visiting scholars from Europe, Latin America and the US, all older than me and more knowledgable than me. And to be honest, more serious about their studies than me at that time. But I was very serious, I just had a lot of other things going on that occupied my attention. During fall of my senior year, Sennholz incentivized me to write op-eds for the college newspaper and the Econ Society newsletter, which represented my first publications. But for Spring of my senior year, I was given the task to studying Max Weber and the Methodenstreit. And I had to present my findings to the group of graduate students. I had earlier that year witnessed my first dissertation defense in the Sennholz program, so I knew that presenting scholarly work could be an intense experience. So for months I read everything I could find on the topic.
It was this background that probably gave me a head start when a year or so later Don Lavoie coaxed me to write a paper for a professional journal on the relationship between Austrian school of economics and the American Institutionalist School and Veblen in particular. That paper, along with Warren Samuels's paper on the same subject, led to a symposium in Research in the History of Economic Thought & Methodology and in many ways kick-started my career. My original paper -- "Evolution and Economics: Austrians as Institutionalists" was followed by a reply to all the discussants -- "Austrian Institutionalism". The position I carved out then, as a senior at GCC and then first-year PhD student, is still basically the position I hold to this day. There are 3 areas of economic science: pure theory, applied theory (or institutionally contingent theory), and economic history (including contemporary history which is public policy). The purpose of theory is to do history -- it is what allows us to produce both an interpretation of the world around us, and render intelligible our past. Theory is our set of eyeglasses, history is the human experience we are reading -- our eyesight is poor, so if we don't use those glasses our reading will be blurred, and if we use the wrong eyeglasses our reading will be distorted. We have to put on the right eyeglasses BEFORE we commence with reading. In some sense, Menger and Mises were not just right, but devastatingly right. There is no "theory less" observation in economic science -- there are readings that are based on articulated and defended theory, and readings based on inarticulate and undefended theory, but theory is always there and always prior to our reading.
There are some significant implications of that for the epistemological problems of the social sciences, but I will leave those aside for this post. What matters is that theory is essential to the scientific enterprise. Now, there is a more subtle issue which is the move from pure theory to applied theory, and in my rendering that move is where all the significant questions in economic science emerge from with respect to applied/empirical analysis. Pure theory is a necessary, but not sufficient component of a theoretical rendering of how the world works and the underlying governing dynamics of that operation. We cannot do without pure theory -- so once again Mises is correct -- but we cannot exhaust all of economic explanation with pure theory. It is not just Theory/History, but pure theory (logic of choice), institutional analysis (situational logic), and history (empirical analysis from natural history to computer simulations). And, when we are in the realm of institutional analysis, the empirically contingent nature of social context of choice and interaction must be recognized. This is why I have always found North's easy depiction of institutions as the formal and informal rules of the game and their enforcement to be perfectly acceptable for the purposes of political economy. There are rules and there are strategies chosen (or best response moves) as individuals strive to do the best that they can given their situation. Note something quick here -- I don't say that individuals achieve the best outcome from their point of view as there are errors of perception and errors of execution, but that they strive to do so. They are purposeful beings, with goals and aspirations, and command of various means to pursue these goals and aspire to a better situation. Rationality in this sense is omnipresent, but the manifestations of rationality are context specific -- just like optimal strategies in a sporting contest, or any other social engagement.
Menger's Principles gives us the pure theory of action and exchange, Bohm-Bawerk's Capital and Interest in his section of Value and Price, allows us to explore the applied theory of price, and Mises's Socialism deploys pure theory and applied theory to engage in an exemplary comparative institutional analysis of the most pressing issue of that time (and perhaps our time).
In Kirzner's preface to the reprint of Mises's The Ultimate Foundations of Economic Science, he explains why for Mises the epistemological status of economic science was so critical to the exercise, and why those who challenged it from the German Historical School to the American Institutionalist to the Instrumental/Positivists had to be challenged. Hayek was in agreement with Mises on this critical point, as is evident from his Counter-Revolution of Science, and I should add as a personal note, so was Don Lavoie, who after his two-pronged attack against socialist planning in 1985 -- Rivalry and Central Planning and National Economic Planning turned his attention to the modern-day Methodenstreit and embraced the post-positivist position of the Growth of Knowledge literature and eventually his own version of philosophical hermeneutics to oppose excessive formalism, excessive aggregation, and naive empiricism, as well as the deconstructionist branch of post-modernism, and offer a renewed philosophical argument for the uniqueness of the social sciences and the critical role of theory in that enterprise. Economics, in Lavoie's hands, as it was in the hands of Menger and Mises, is a human science that begins as it must with the perceptions and aspirations of the choosing individual in a world of scarcity, and move out from that essential building block to discuss the social arena within which these purposive actors interact with others and with nature. The pure logic of choice matters, the situational logic that emerges from placing those choosing individuals within specified social context matters, and the framework forged from examining the logic of choice and situational logic provides the social scientist with a set of eyeglasses for the reading and writing of history (either contemporary or in the past).
We must put on those eyeglasses, it is to me that simple, and that profound in implication for how we do social science. Hayek's later emphasis on highlighting the fundamental complexity of the social world (a point that must be stressed was in fact emphasized by both Menger and Mises) does not substitute for the earlier argument about knowledge from within and the primacy of the human actors purposive action, but actually augments the argument for the uniqueness of the human sciences, or cultural sciences as they were often referred to in the German context. In short, the Austrian school was right in the late 19th century, they were right in the middle of the 20th century, and they are right in the 21st century.
The first part of my three-part review of Janek Wasserman's *The Marginal Revolutionaries* is now up at EconLib. Parts 2 and 3 will follow on Monday and Wednesday. Here's the intro paragraph:
In the world since the 2017 publication of Democracy in Chains, Nancy MacLean’s near-slanderous “history” of public choice economics and the contributions of James Buchanan, it is understandable that a reader sympathetic to Austrian economics might approach Janek Wasserman’s 2019 history of that school of thought with some trepidation. The good news is that Wasserman’s book is a far better effort than MacLean’s, as he suffers from none of her problems with accuracy of source material and he understands the economic ideas he’s working with well enough to convey them accurately to a general reader. His careful work with archival sources provides a richly detailed account that adds to our understanding of the Austrian school’s evolution and the roles its members played in influencing 20th century economic policy. The book is not without its flaws, however. In much the same way that MacLean starts with the assumption that classical liberal ideas are racist and otherwise evil (rather than attempting to provide evidence for that claim), Wasserman’s progressivism affects his broader narrative, though in much more subtle ways than MacLean’s. In particular, he assumes that the liberalism of the Austrians was simply ideological cover for defending the power and privileges of the elite. As a result, his history of the school’s evolution in the 20th century tells an incomplete tale.
Of some interest to CP readers might be my new entry on "Economics" at the Encyclopedia of Libertarianism at Cato's libertarianism.org site.
"At the most general level, then, economics is the study of human choice and its consequences, both intended and unintended. In understanding the unintended consequences of choice, and how those choices can be coordinated to produce social benefit, economics continues to rely on the idea of the “invisible hand” found in Adam Smith. Individuals choosing in their own broad self‐interest are led through the institutions of the market to benefit others. For some economists, this is framed in terms of the tendency of markets to reach an optimal equilibrium. For others, it is described more loosely as “coordination,” or as “emergent” or “spontaneous” order. Either way, the core idea remains the same: economics studies how people choose facing scarcity and how social institutions (usually) channel those choices into unintended order. Noticing the existence of that unintended order is the beginning of social science and economics specifically."
My new monograph introducing Austrian Economics is now available for free download from Cato's libertarianism.org website. In addition, there is a companion set of short video lectures that can be found on YouTube.
As you might expect, when it comes to the Polanyi brothers, my intellectual tastes align more with Michael than with Karl. But, since my return to teaching Economic Sociology to graduate students, I have studied Karl Polanyi's work and its lasting impact in the field. To be honest, I do not find Karl Polanyi that impressive either analytically or observationally. But the reality is that The Great Transformation had an oversized influence and continues to do so, and thus I need to listen more carefully to why others are so moved by a work that I find to be so pedestrian in terms of economic theory, historical scholarship, and political economy implications.
Upon reading a first draft of chapters of what would become Hayek's The Fatal Conceit, I often said that Hayek had provided the perfect antidote to Karl Polanyi with that book, as he clearly states the underlying philosophical anthropology of the long process of economic and political development from pre-history of man through antiquity to modernity.
Watch these series of short clips from an interview at Institute for New Economic Thinking with Kari Polanyi (his daughter and a scholar of her own right).
Remember I said, I need to listen, not to critique, and certainly not to indict, but just to learn what is attractive and compelling about the ideas and the way they are presented and the insights that are promised. This seemed like a genuinely good place to start that process.
Back in the 1980s, I got interested in the work of Lin and Vincent Ostrom as it pertained to the disjoint between how different economic and political systems were supposed to operate (de jure) and how they actually operated (de facto) and the institutions that emerged to govern the actually practices. It was my interest in the Soviet experience that first alerted me to this ... one of my main professors in graduate school was Michael Alexeev, and along with Gregory Grossman and Vladimir Treml, Mike was also involved with research on the Soviet black-market economy. So with his guidance I studied everything I could on that subject, and that led me to thinking about this disjoint between de facto and de jure rules. From that moment, I saw how in the Austrian literature they also made this distinction -- from Mises's discussion of money, to Hayek's discussion of law, and Rothbard's discussion of prohibition. Prior to that, I think it is probably accurate to say that I thought there was sound economics and their was public policy, and if public policy matched sound economics then good things would follow, and if public policy was based on bad economics, then bad things happened. So the job was to make sure people understood sound economics.
I still believe that deep in my gut, but I became more fascinated after this realization in understanding economic life and the multiple and varied margins of adjustment and adaptation to circumstances that are made by creative and clever human actors. The work of the Ostroms (both Lin and Vincent) were vital to that quest to provide understanding. At the same time, I was a student of James Buchanan and not only his work in political economy and social philosophy, but in public economics. At NYU, I taught graduate seminars not only in comparative economic systems, but also Public Choice and Public Finance throughout most of the 1990s. Lin Ostrom had published Governing the Commons (1990), and Vincent had published The Meaning of Democracy and the Vulnerabilities of Democracies (1997), but they had also pioneered work on the "institutional analysis of development".
It was during this time that I met and eventually worked with Paul Dragos Aligica. One of our first projects was on Global Economic Development and the role of private enterprise and entrepreneurship in generating economic prosperity in developing and transitioning economies. It is in this work that we focused on the blending of public choice (Buchanan), Austrian economics (Hayek-Kirzner), and the Bloomington School (Lin and Vincent Ostrom). I edited a special issue of JEBO (2005) to highlight the contributions of Lin and Vincent, and Paul and I published our book summarizing the contributions of the Ostroms, Challenging the Institutional Analysis of Development: The Bloomington School (2009). A significant part of that book was a reconsideration of the municipalities debates that the Ostroms were involved in during the 1960s and early 1970s. I published with Chris Coyne and Pete Leeson a reassessment of the subsequent literature in this debate and after in a paper on Quasi-Markets in Public Choice, but that paper was more conceptual and analytical. But in a series of papers with Jayme Lemke and Liya Palagashvili, we engaged in a reassessment of the empirical work in local public economics with a focus on the delivery of policing services.
Back to the original impetus for this line of research as laid out here -- the distinction between de facto and de jure rules that govern the economic interactions of individuals in any given society -- it is vital to remember that if we pursue catallactics (study of exchange), then the subject of our studies is exchange and the institutions within which exchanges take place. With all the limitations noted, I always thought that the most operational definition of institutions was the formal (de jure) and informal (de facto) rules of the game and their enforcement. Governance is a vital aspect of social order -- do note I said governance. Covenants with and without the sword. But for agreements to be enacted their enforcement must be secured. The protection of persons and property is something Adam Smith noted long ago, and Edward Stringham notes often today. But precisely how are the institutions structured so that a norm of protection and security of persons and property governs the relevant jurisdiction?
So we head back to the municipalities debate -- what are the responsibilities of the public sector, who is responsible for the services to be rendered, and how are they going to be paid for? The Ostroms stood against the consolidationist movement and in particular UNIGOV. They championed instead a polycentric system of governance that put more direct authority in local communities and citizens, and held the public entities to be responsive to the demands of the local communities. Jayme, Liya and I published a series of papers individually, jointly and in different combinations over the past decade looking at policing services and the frustrations with the failure of these services to meet the demands of the local communities that they supposedly serve. What the Ostroms have to say about ways to improve policing has tremendous relevance for today's discussions. Consider this essay by Rashawn Ray, "Bad Apples Come From Rotten Trees in Policing", and what solutions would both be desirable and feasible. Fixing the problem is imperative, doing so in a way that actually achieves the goal must become paramount.
Please watch this video with Jayme and Liya discussing our work, and also look out for work by Tate Fegley, who just defended his PhD and also works on the thorny issue of policing.