Coordination Problem

Some GMU History, Karen Vaughn, and Smith/Schumpeter/Stupidity Once More

|Peter Boettke|

Here is my version of a postcard from the edge to provide links to potentially interesting conversations to join during these tumultuous times.

Prior to the breakout, I was able to do two podcasts with the GMU Econ Society. Part 1 and Part 2.

2020 is the 40th anniversary of Mercatus Center, and as part of celebration I had the opportunity to sit down with one of the pivotal players in the history of the Center -- Professor Karen Vaughn.  This conversation is focused on her scholarly career.  During her visit, Professor Vaughn also had the opportunity to talk with my colleague Dr. Jayme Lemke on the being a woman in the economics profession.

Finally, I published some reflections on the use of colorful examples in the teaching of economics with the hope of placing some emphasis on the critical importance of unleashing the creative powers of a free society to address our current situation. 

Since I  have great faith in the creative and clever imaginations of entrepreneurs in the private, public and independent sector, I am asking readers to send me all the examples they find of new innovations being offered to communities under duress to help ameliorate the situation, or to offer new products and/or services that will lower the risk that individuals face with respect to public health. I am interested in curating these examples of the resourcefulness and resiliency of individuals to deliver robust results in the face of difficult odds.

Coordination Problems in a Post Pandemic World

|Peter Boettke|

A mantra we have used on this site since changing our name a decade ago is that we study economics as a coordination problem, and we see entrepreneurship as the solution to that problem.  In various works the different authors on this blog have pursued and reported on here, they have studied entrepreneurship in the public, private and independent sector to see how a variety of coordination problems are in fact solved or at least ameliorated.  These are never trivial acts ex ante but often acts of bold courage; of voyages into an unknown and uncertain world. But unless these acts are taken, the coordination problem persists and opportunities for gains from trade and gains from innovation are unrealized.  In short, absent the productive specialization and peaceful social cooperation that is realized when coordination problems are solved improvements in the human condition are lost.  This is not exclusively a loss of material progress, but a loss of all the things that lead to human betterment that material progress delivers for us.

Within the set of serious coordination problems to be address we must include macro volatility problems associated with the manipulation of money and credit, and the corresponding misallocation of capital and labor.  In short, a standard boom-and-bust story in the Austrian Theory of the Business Cycle.  But not all macro volatility problems are money induced distortions and corrections.  One type of coordination problem is the Robert Clower and Axel Leijonhufvud coordination Keynesian type problem, and another would be an exogenous shock such as a natural disaster, or a pandemic.  These external shocks can be, and often are, compounded by errors in the policy responses to them.  When we were conducting the Katrina project at Mercatus, one of the issues we focused on repeatedly was how to try to avoid "compounding the fury of nature with the folly of mankind." Unfortunately, that problem is almost as difficult to manage as the consequences of the external shock itself.

But collective action will be required.  The great economists Thomas Schelling put his finger on this in an interview in the LA Times back in 2005.  As he put it:

“There is no market solution to New Orleans,” said Thomas C. Schelling of the University of Maryland, who won this year’s Nobel Memorial Prize in Economic Sciences for his analysis of the complicated bargaining behavior that underpins everything from simple sales to nuclear confrontations.

“It essentially is a problem of coordinating expectations,” Schelling said of the task that Vignaud and her neighbors must grapple with. “If we all expect each other to come back, we will. If we don’t, we won’t.

“But achieving this coordination in the circumstances of New Orleans,” he said, “seems impossible.”

 

But, private, public and independent sector entrepreneurs figured creative and clever ways to serve as focal points of orientation for individuals to come back and rebuild in New Orleans.  The task was daunting, but it was not impossible. They solved the coordination problem through ingenuity, grit and determination, and once their bold and courageous acts were taken, others found hope.

I have written here already about the trade-offs, and about expectations, and there are plans such AEIs about how to reopen the economic system after this public health mandated shutdown.  These all must be studied carefully and dispassionately -- without over optimism or over pessimism.  But one thing is clear in my mind, we will need to solve once again a problem similar to what Schelling identified for New Orleans.  If we don't, expectations will guide actors aways from moving in the desired direction. The obvious focal point would be wide scale testing and antibody determinations, and/or effective treatment options so that despite whatever calm analysis of the numbers tells us, folks will believe that they are relatively safe to enter social spaces once again. The existing pressure on the medical system has to be reduced by ingenuity and innovation, not I would argue, by improvements in command and control management. The includes alternative supplies of needed equipment and personnel being guided to most urgent areas, by scientist working hard to discover effective treatment options by repurposing drugs or through creative combinatorial thinking. Again, the coordination problems we are facing will be addressed by creative and clever entrepreneurs (who are also erring but always striving to correct) in the private, public and independent sector.

When these entrepreneurial acts produce results that can serve as a focal point to others that its is within the reasonable calculations to return to social space in which we work, play, and live with one another, then additional work will be required to clean up the mess that the folly of mankind has created in the wake of the tragic fury of nature.  When we embarked upon our study of Katrina we found hope in a classic statement from the great classical economist J. S. Mill's Principles of Political Economy:

what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.

Just in the 20th century economic history of the US, calm resolve may be provided in these difficult times by looking at the economic consequences of 1918-1919; 1952; 1957.  Horrendous toll and tragedy befell so many families and yet economies recover, grow and develop due to expansion of the opportunity for gains from trade and gains from innovation. This doesn't diminish the tragic suffering. Social systems should be judged by how well they minimize human suffering, and instead maximize the opportunities for human flourishing -- that is what striving for a "good society" is ultimately all about.  I hope someday soon we will once again be having very rational yet vigorous discussions about these fundamental issues related to the liberal principles of justice and political economy.

The Modeling "Problem" in Economics

|Peter Boettke|

Consider the situation of a complex adaptive system with intricate moving parts, and the critical element in all of this has purposes and plans of its own. Welcome to the world of economics. As Carl Menger pointed out over a century ago, “… man, with his needs and his command of the means to satisfy them, is himself the point at which human economic life both begins and ends.” Principles of Economics (1871, 108) Friedrich Wieser in Social Economics (1927, 8-9) would stress this point about the social sciences versus the natural sciences in stark terms as follows:

The object of investigation is man in a condition of activity. Hence our mind ratifies every accurate description of the processes of his consciousness by the affirmative declaration that such is the case, and by the compelling feeling that it must be so necessarily. In this way the description becomes an exposition, although it may always be true that the final "why" is never brought forward, as no explanation is at any time forthcoming of stimuli which subconsciously affect consciousness. For all actions which are accompanied by a consciousness of necessity, economic theory need never strive to establish a law in a long series of inductions. In these cases we, each of us, hear the law pronounced by an unmistakable inner voice. What unequalled advantage to the naturalist, could he, too, appeal to the voice of nature for their confirmation of the laws prevailing in the organic and inorganic world! Where the natural sciences can only offer proof, the theory of economics can persuade; it can enlist the unqualified inner consent of readers.

And, in their own way this was a point stressed repeatedly by Mises, Hayek and Machlup.  But there are even very subtle issues of a technical nature that this point raises for those who want to follow a more unity of science research agenda, such as Morgenstern.  The Austrian School of Economics produced a rich debate on these issues ranging from the Menger-Mises strict dichotomy between natural and social sciences, to a more or less methodological dualism by degree as advocated by Hayek and Machlup, to a unity of science and consilience aspiration of say Morgenstern, to finally a more radical hermeneutical stances that stressed that all science is human science because only humans practice science as articulated by Lavoie (and McCloskey). I don't have any desire to adjudicate these ultimately philosophical positions here in this post, but I want to stress the implication for the modeling "problem" in economics from the fact that we are dealing with the study of human beings that have purposes and plans of their own that must be accounted for.  This problem is even deeper, I think (?), than a serious discussion of the fixed or free nature of the parameters in our modeling.  It is that our modeling has to constantly account for endogenous change in the behavior of those who populate the model which will then necessarily change the nature of the model.  In Morgenstern this is called the "theory absorption" problem, to the extent that actors in the model begin to believe the predictions of the model they will adjust their behavior to avoid the negative consequences and then as a result undermine the predictions of the model. And, this is ongoing.  Quick quiz -- think about the relationship between that point and the Lucas critique. Also, think about the difference or similarity between this point and the demand for placing the theorist within the model as well as stressed recently by both Levy/Peart, Escape from Democracy and Towards an Economics of Natural Equals and Koppl, Expert Failure.

I would argue, though this idea needs to be much more subject to critical dialogue with others, that there is a subtle but significant difference between the knowledge assumptions in economics made by Hayek and made by Lucas. To Lucas the agents in the model know everything that the economic theorist knows, but to Hayek the economic theorist can never possibly know everything the agents in the economy know (that pesky knowledge of particular time and place upon which they act).  This matters and matters in a significant way for how we think about parameters and predictions, about the subject and object of our investigations, and the limits and promise of scientific economics.

Many years ago, Ulrich Witt wrote a wonderful paper on what he termed "the endogenous public choice theorist" where the very predictions of the model result in recommendations for improvement which if followed will mean that the predictions of the model will necessarily change.

And, yes, this modeling "problem" is relevant for the chaotic crisis we are living through at this particular moment in time.

The Planner's Problem and the Allocation of Essential Supplies During a Crisis

|Peter Boettke|

Before I start this post, let me suggest to everyone that you look at Chris Coyne's Doing Bad By Doing Good (Stanford University Press, 2013) and any lectures you can find by Coyne on this subject on YouTube.  Also, for the purposes of this post, it also might be insightful to watch some episodes of the old TV series MASH and focus on the character of Radar O'Reilly, and how he worked behind the scenes throughout the Korean War to try to procure the needed medical supplies because the planning apparatus failed to do so in an efficient manner to meet the most urgent needs of the doctors and nurses in the field.  

Andrew Koppelman explains the basic argument that will be provided for planning in times of emergency, like war, natural disaster, pandemic.  My good colleague Alex Tabarrok discusses this clearly in MRU video that is very relevant for current affairs.

 

 

The key point is to turn an economic problem that all societies confront -- the allocation of scarce means among competing and often divergent ends -- into a technological problem -- find the best means to achieve one end -- and voila! the planner's problem is solved. Right?

Well, when we look at these command and control measures closely in historical practice (and even in the most urgent of situations), we come to appreciate that transitioning from an economic problem to a technological problem does not eliminate opportunity costs, the move instead "hides" these costs from view. These costs must still be borne. This was an important part of the economic argument developed against the draft by Milton Friedman and others in the 1960s.  Suppressing the wants and desires of a great multitude to the command and control for a common cause may very well achieve its desired outcomes, but at what cost and how do we understand alternative courses of action that may have been discovered.  Having that conversation is not a lapse of moral judgement, but actually an example of judicious moral reasoning.

But what are we talking about here really.  In situations after natural disaster, we are talking about getting water delivered to populations cut off from normal sources.  In wartime, we are talking about having spare parts ready to fix needed military trucks and vehicles to wage battle.  Yet, history is filled with examples of command and control supply chain frustrations when the problem appears to be so easily solved.  Gordon Tullock's The Politics of Bureaucracy (1965) discusses the issue of spare parts and compares the military difficulties during war with the US trucking industry throughout the country.

Cotton Mather Lindsay (1940-2015) was a student of James Buchanan back at UVA, he then did a post-doc fellowship at LSE, and then joined the faculty at UCLA before moving to Clemson.  His thesis was on the National Health Care system in Britain, but later work would focus on the Veterans Administration Hospitals. There are planner's problems throughout these systems -- knowledge problems and bureaucratic/political incentive problems.  Interest groups form, and metastasize throughout producing frustrations and failures in delivering even basic tasks dictated by the command and control apparatus.  One example from Lindsay's work was the building of acute care and chronic care units in the VA hospitals, and the impact that an aging veteran's population eventually impresses upon that decision.  In short, younger population want acute care, while aging groups want to chronic care.  It is extremely expensive to allocate acute care units to chronic care use. Yet it seems the logic of interest group politics and the bureaucratic incentives at play, tend toward that unhelpful outcome.

The planner's knowledge problem, Mises/Hayek/Lavoie taught us, exacerbates the planner's bureaucratic/political incentive problems.  If you do not know the right economic course of action to take, planners don't just throw up their hands and say "I don't know", then instead rely on the knowledge that is readily available to them --- the technological knowledge of marshaling means to achieve agreed upon end -- but along the way that knowledge is acted upon by flesh and blood human beings, who face incentives, and respond in predictable ways to the incentives that they face.

Why can't bottles of water get delivered from point A to point B?  Why can't we move medical supplies from areas currently very minimally impacted to high impact areas with the promise that other minimally impacted areas will backstop those first areas if they start to be impacted?  This all why production will take place to meet the increased demand.  But instead we have political gamesmanship and vested interests sticking their heels into the ground, mixed with moral posturing, all the while critical problems go unresolved.

The sort of economics practiced by Mises/Hayek, and Buchanan/Tullock is not a theory in search of an application, but a golden key to unlock the mystery of the observed reality we witness daily -- both in terms of the beautiful complex adaptive system of the price system, and the dysfunctions of public sector systems of command and control.  It is a huge error to ignore the tensions and troubles in private sector (both commercial and community) interactions, but it is also a huge error to blissful ignore these public sector dysfunctions and dismiss those that are too obvious to ignore as the consequence of particular incompetent actors rather than systematic problems that must be confronted by even the most well intentioned and most competent "generals" put in charge.  The fundamental question, I would argue, is the critical feedback mechanisms in place so that the necessary adaptations and adjustments are made quickly to reveal error, and set in motion actions to minimize the cost of the error and correct the previous errors and steer human decision making in a less erroneous direction in the future. We are, after all, fallible but capable human actors, making decisions in an uncertain and in many instances unknowable world.

Let's hope the human imagination is being pressed into action right now, and numerous nimble and entrepreneurial actors in the public and private sector are working toward solutions that will address the relevant trade-offs and minimize human suffering due to this shock we are experiencing.

Expectations, Historical Context, and Social Science

|Peter Boettke|

Like everyone, recent events has my mind racing.  What is going on?  Are my kids safe?  Family? Friends?  What just happened to my retirement account? But also my thinking races back to my parents and grandparents.

Take my grandparents. They had to live through WWI, the Great Depression, and WWII.  My grandfather came home from WWI, one of his brothers did not.  My grandparents -- both sets -- sent a son off to war in WWII but their son returned, their neighbors did not.

In addition to WWI, Great Depression and WWII, they had to deal with the flu in 1918 and 1957, and of course polio in 1949.

Why I bring all this up is I wonder about how these experiences (historical context) helps form expectations and mental models that human actors use in making their decisions concerning action in an uncertain and changing world.  How might this explain variation in historical experiences to exogenous shocks?  Rules of the game affect incentives and frame expectations, and those incentives and expectations of costs/benefits of alternative courses of action determine choices, and choices result in consequences.  Social interaction is directed and coordinated by the rules that participants know and follow.  Confusion over the rules, or poor enforcement of the rules, will create social dysfunctions and disruptions. But we also develop different risk tolerance for ambiguity in the rules depending on our historical experiences.

When we used to sneeze folks said "God Bless You" not just out of curtesy, but out of genuine concern. And when someone suffered a serious misfortunate, one might say "There but for the grace of God go I" to recognize the randomness of it all.  But for a people that have not experienced WWI, 1918 flu, Great Depression, WWII, 1949 polio, 1957 flu, Cuban missile crisis, Vietnam, the assassinations and unrest of the 1960s, Watergate and the stagflation of the 1970s, what sort of expectations would they have and risk tolerance they would possess as they went through their social interactions with others? How would that impact their assessment of trade-offs, and what would be considered within the reasonable set of tragic yet accepted outcomes?

I am drawn to thinking about expectations and social action along lines developed by Roman Frydman in his work on "imperfect knowledge" economics.  Of course, in my own way I read Frydman back into Mises/Knight/Hayek, and reading Mises/Knight/Hayek into Frydman's work. But I think the idea of "theory consistent expectations" is superior to the more traditional "rational expectations" and can account for what Lachmann often dubbed "creative expectations".  Conceptually, I believe we must begin our analysis with a clear conception that we are dealing with "imagined futures" and that all action is a voyage into an unknown yet not unimaginable future.  But how as an empirical matter, the past impinges on expectations and how those in turn shape those imagined futures is to me fascinating question to contemplate, though I am at a loss of how anyone would operationalize this idea without trivializing it with modern empirical tools. No, I can only imagine getting a glimpse of it through narrative empirical approaches -- private diaries, published memoirs, novels, first-person accounts in newspapers, and ethnographies.  This was the research program that Don Lavoie aspired to ignite with his "Interpretative Economics" program, and which we have in our small way continued within our work in comparative economic analysis of socialism, transition studies, post-war reconstructions, and post-disaster recovery. Someday the history of our present will be written, and the role of expectations in framing and guiding the actions and reactions will have to be fully accounted for.

Ludwig von Mises on Economics During the Time of Crisis and Within an Interventionist State

|Peter Boettke|

Ludwig von Mises remains in my judgement the greatest economic analyst of the 20th century.  He was sharp and pointed, and yet comprehensive.  His critique of socialism was decisive and his price theoretic rending of the manipulation of money and credit remains I would argue the top contender for an economic theory of macroeconomic volatility.  There are other theories -- psychological, random shocks, etc. -- that can use economic tools in analyzing, but an economic explanation that traces from individual decision making guided by relative prices to the pattern of exchange, production and distribution, and how distortions in that chain can result in coordination failure, that still belongs in my humble opinion to the class of theories that Mises pioneered.  And, in developing both his systematic critique of socialism, and his analysis of the monetary system and the problems association with the manipulation of money and credit, Mises would articulate a theory of the entrepreneurial market process that demands our theoretical respect and attention, and continued refinement and development.  Mises, the economic theorist, remains scientifically relevant today if not more so than he was during his lifetime.  His research program is a progressive one far from being exhausted.

On the other hand, Mises was also a broader intellectual -- both a policy analyst and a social philosopher.  I tend to pay attention to Mises the economic theorist and Mises the social philosopher of liberalism.  I tend to find Hayek a more compelling social philosopher, and Hayek and Kirzner the most astute developers of Misesian economics.  I realize these are all judgments calls that are a function of particular historical contexts and personal tastes so have no desire to debate these assessments.  But what I do want to do is think some about Mises as a policy economist.  This actually was a job he held throughout the formative period of his career.  These writings can be found in the Richard Ebeling edited 3 volume set of Mises's "lost papers" -- Selected Writings of Ludwig von Mises.  I have b been reading them closely lately for a variety of reasons. A different Mises emerges.  The Mises that I have spent my career studying is the Mises of: "The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor." Or, the Mises that told his readers that "I set out to be a reformer, but only became the historian of decline."

But this policy advisor Mises argues that: "When there is a fire, it is paramount to utilize fireman, hoses, and water; how to pay the fire brigade is a secondary consideration at that point." And, who argues that when it is an exogenous threat, "The favorable outcome of a war is not solely dependent on the number of soldiers, or the valor and brilliance of their military commanders. An equally important factor is the capacity to provide the army with supporting material, arms, and military equipment of every kind."

We can debate a lot of things about our current situation, and historians will do so. But there are two critical facts -- first, this is not a bust generated by manipulation of money and credit. No doubt our financial institutions are vulnerable because of policy choices made over that last several decades, and these vulnerabilities are being revealed.  The point is that this was not the impetus for this particular timing. And because of policies in place, capital and labor are not being allowed to be reallocated as they normally would in a time of adjustment. The self corrective mechanism has been shut off by dictate, not just made more difficult or confusing but locked down by government dictate.  In short, this downfall is a consequence of a government mandated work stoppage due to a public health crisis.  Second, the public health crisis is an exogenous shock, made worse by a host of government failures associated with preparedness and response.  But those issues are now not relevant for discussion, they are the constraint against which next steps must be made. We can adjudicate guilt and innocence down the road, as historians no doubt will.  This is also true about the debate over the statistics on this -- of which you can have a serious conversation about optimistic readings and pessimistic readings -- this I think will also be sorted out by the public health experts and epidemiologists in the coming years (I hope for optimistic reading, and pray if the pessimistic reading).  As an economist, we are trained to think in terms of trade-offs, and so as I said yesterday my attention is drawn to the reality of thinking through how we weigh the alternative paths forward that are effective at ending the public health crisis with policies that don't destroy the economic future.  So that is why I am turning to Mises -- he had to think about these issues in the face of WWI, Great Depression, and WWII, and during that period he didn't just think he lived through the horrors of war, the loss of the world of yesterday in Vienna, and dislocation.  So what he has to say might warrant our attention -- not that it has direct answers to our world today, but to how a committed rationalist and liberal tries to reason through demented times.

Richard Ebeling has an essay on Mises the policy economist that is an invaluable resource to start with.  It is not Mises the theorist and not Mises the philosopher, but Mises trying to take that theoretical perspective and apply in a way consistent ultimately with his liberal philosophy to address the pressing issues of a demented time.  We must, I would argue, do a similar thing in our time.

Getting at the Crux of the Matter as an Economist

|Peter Boettke|

In this piece by Pierre-Olivier Gourinchas, he states very clearly the reality constraint in public policy deliberations in the current crisis.  Without commenting one way or another, I think it could serve as a very useful point of departure for serious conversations about trade-offs, short-run/long-run, and public policy in a liberal society.

 

My sincere hope is that we will be able to deliberate our way to a consensus that will reduce regime uncertainty, and free up the creative powers of our civilization to both address our public health crisis and make sure the economic future is bright.  As I mentioned yesterday, Tyler Cowen has some ideas we might be able to build a consensus around.

When I wrote Why Perestroika Failed: The Politics and Economics of Socialist Transformation (1993) the conversation was different. The problem with the communist economies was a feature of those systems, and thus the policy conversation focused on changing those features as quickly and clearly as possible.  I discuss this in chapter 7 of the book.  This crisis is different.  It in not endogenously created, though the vulnerabilities of certain sectors are in my opinion a function of policy choices that were made over the years -- in particular since 9/11 and 08, but more generally -- the current situation is a result of an exogenous shock and the policy responses to that exogenous shock that have in effect shut down significant sectors of the economy. So in tackling the trade-offs, we need to think hard about how to meet the challenge and unleash the creative power to simultaneously reduce human suffering and restore economic prosperity and peaceful social cooperation.

 

 

The Virginia School of Political Economy and Public Policy Even in Times of Crisis

|Peter Boettke|

I have been reading closely the new book by David Levy and Sandra Peart, Towards an Economics of Natural Equals: A Documentary History of the Early Virginia School (Cambridge, 2020).  I want to explain briefly what I mean by closely.  The hardback book just arrived at my home on Monday this week.  I have had the Kindle version for over a month, the page proofs over 3 months, and I read each and every chapter and documents as the book was being produced over the past several years.  To put it mildly I am already familiar with this book and have been extremely impressed by it since I read their original paper on the Ford Foundation and the Thomas Jefferson Center for Studies in Political Economy at UVA.  By closely, I mean every single word, every footnote, every suggested lead.  I am doing research led by an outstanding study guide written by two mentors.  They see things others don't see until they show them, and they connect dots that simply are missed by others. The subtlety in this work combined with their mastery of the historical context of the exchanges is beyond compare.  I will have more to say in a review essay I am going to write, but today I want to stress two things -- I find some of this material so nuanced that despite my previous familiarity I am learning so much even about positions that I have believed were my own for years, and I want to draw out a critical point about the role of the economists in a free society that is being particularly tested in our current climate.

Here is the first critical take away, what appears to be ideological disagreements between the Virginia School of Political Economy and the orthodox approach of, for lack of a better designation, Samuelsonian economics is really a deep methodological divide.  Until folks understand that point, they end up talking past each other, and confusing the matter rather than clarifying.  My colleague Richard Wagner made this point as well in his James M. Buchanan and Liberal Political Economy (Lexington, 2019), and Rosolino Candela and myself (both jointly and separately) have tried to make this point.  But Levy and Peart stress is over and over again with the direct documentary support from the archives.  Buchanan sums this up in a letter to Kermit Gordon during the discussions with the Ford Foundation, where he states that there are "two essential ways of approaching the study of problems of political, social and economic organization." The first approach Buchanan mentions is the orthodox approach, and can be described as "social welfare function" or "social engineering" approach.  In this approach the economists first establishes a independent criteria or goal for achievement, and then addresses in the policy design space how to identify failure to achieve that goal and design the appropriate response so the goal can be met.  The second approach, and the one Buchanan and his colleagues following Knight wished to pursue in establishing the Virginia School of Political Economy (and I would add one that the Austrian economists as 'students of society' sought to pursue), avoids the establishment of any independent criteria (be that efficiency, growth, etc.) and "instead examines the behavior of private individuals as they engage in the continuing search for institutional arrangements upon which they can reach substantial consensus or agreement."

The implications of this methodological difference are significant as Levy and Peart detail throughout their brilliant work.  "By removing the supposition of fixed goals," they state, "the Virginia School fundamentally altered the role of the economist.  No longer was the economist to offer policy advice to attain the known goals of society.  Instead, the role of the economist was a more modest one of offering suggestions for public consideration."  In a letter to Mancur Olson in 1971, Buchanan writes: "Mainstream economists conceive of themselves to be members of an 'establishment elite' who somehow have a divine right to advise whatever governments may exist toward doing things that this elite knows is really 'good' for society at large. The difference between this and the radical way of putting this is to say that the mainstream economists are hardly 'democrats' at all, whereas maybe, at base, both my position and the radical position could be treated as this."  It is this Knightian thrust of democracy by discussion that underlies the discussion of the role of the economist in a free society. And, by a free society, the Virginia School political economists (Vinning, Buchanan, Nutter, Coase, Tullock, etc.) meant not a cartoon caricature of laissez faire, but a republican notion of a society of the citizens own choosing.

As Levy and Peart conclude their book, "If we suppose that the difference between real harms and negligible harms is a matter for experts -- and perhaps only for experts -- then the door is open for the economist as physician to enter with a policy prescription: 'This is good for you; it will do no real harm.'  A great service, we believe, of the Virginia School has been to oppose this view of the economist from inside the community of economists."

Now consider the world we are current ensnared within -- a global public health crisis combined with extreme uncertainty -- what is the right response by economists.  Consider three different proposals.

First, my colleague Tyler Cowen's proposal. This proposal seems to want to build a consensus, offers the policies as a suggestion, and admits the trade-offs and in doing so submits the suggestions as potentially falsifiable.

Second, my colleague Garrett Jones's defense of expert guided policy.  Garret is concerned with democratic dysfunction is a time of crisis, Aristotle's polity would be better served by rule by elite in this instance. And, to be honest, hearing the various proposals from Senator Warren, or Congresswoman Alexandria Ocasio-Cortez as deliberations over the policy choices to combat the crisis certainly should give one great pause.  (Go back up to Cowen in contrast)

Third, consider the proposal from Gabriel Zucman and Emmanuel Saez for government as a buyer of last resorts.

There are many more I could list ... see the different briefs at Economics for Inclusive Prosperity.

Now, not ideologically, but instead methodologically ask yourself which of these proposals align with the orthodox approach of social engineering, and which ones align with students of society, and furthermore which one fits easier with the idea of economists as enlightened elite who advises government to rule over, or the economists as possessing of no special privilege in a free society which strives for democratic self-governance.

All those knowledge problem arguments that Hayek developed, and those incentive alignment problems that Buchanan developed, where not window dressing on a pre-programmed ideological agenda, they follow from a methodological perspective that follows from not only epistemological positions but ontological positions concerning political, social and economic life and the role of the economist in a free society.

I hope we can have this conversation -- if not today, then perhaps in the future.  It matters.  In the meantime, read Levy and Peart while you practicing social distancing.

Be safe, be smart, stay sane.

 

Going online -- the experience

|Peter Boettke|

Two weeks ago I, along with all my colleagues at GMU, learned two things -- moving classes online for a few weeks and restrictions of travel due to concerns over the Coronavirus.  Since that time, I have been learning how to move my class online and canceling upcoming professional and personal travel.  I have never taught online, so my learning curve is quite steep.  And to make issues worse, this term I am teaching what I take as a professional responsibility as one of the most important classes one can teach in a PhD program -- Advanced Microeconomics.  We will muddle through, and with a use of mix between videos and readings, and discussion forums, as well as other assessment tools, hopefully the students in the class will learn their lessons in price theory well and be able to draw on this human capital investment for a good part of their professional careers as economists.  Failing in this task as an educator, even in these unusual circumstances, is unacceptable and would be a professional failing on my part.

My course is now up on Blackboard, and I shared this slide from earlier in the semester to all the students to remember what we are exploring as thoroughly as we can throughout the term. 

I also learned last night that GMU has decided to go online for the rest of the Spring 2020 term.

We have another week of break and then back at it on March 24th, with a discussion of property rights and the issue of coordination and cooperation within firms and within society -- from Alchian to Oliver Hart and beyond.  I find this stuff fascinating to think about, and think through, let's hope I can communicate that fascination with the material in this new medium.

I will communicate my experience as we progress, and anyone who might have tips please send them to me at my GMU email.

Manipulation and Deception in Society

|Peter Boettke|

Rosolino Candela and I have published a series of papers on the history of price theory since Alfred Marshall.  In these papers we distinguish between not only microeconomics and macroeconomics, but also within microeconomics those theories that could be dubbed price theoretic as opposed to those that are more appropriately labeled choice theoretic.  Furthermore, we distinguish between three different approaches found in the literature in response to thinkers that stress social problems (poverty, ignorance and squalor) and market failures (monopoly, externalities, public goods). Those responses can be summarized as:

Conceptual Clarity

    it is important to make sure folks are telling the story to the end and thus drawing the curves the right way and in the right place

Entrepreneurial Alertness

    today's inefficiency is tomorrow's profit opportunity for the alert and creative entrepreneur that effectively responds

Institutional Innovation

    individuals are amazingly creative at finding contractual solutions that in effect allow them to bargain out of potential conflict into cooperative solutions

 

In our history of thought, we attribute these positions respectively to Stigler (conceptual clarity), Kirzner (entrepreneurial alertness) and Coase (institutional innovation).  However, we also hold out a special place for Alchian and Buchanan, who we believe have contributed in significant ways to all three.

Last week in my Advanced Microeconomics class, we were talking in part about the difficulties that manipulation and deception present to social order working from the arguments laid out in Akerlof and Shiller's Phishing for Phools.  As I was reading through the various papers and numerous examples given I was thinking of these distinctions Rosolino and I have identified.  While no doubt, a lot of the thinking about market manipulation suffer in my opinion from loose thinking that must be disciplined by conceptual clarity, I also think emphasizing conceptual clarity can almost be invoked too easily and thus serve as a sort of immunizing stratagem that is unhelpful.  Instead, we must face up to the imperfections of human beings and the scope for opportunism that are always lurking around each corner.  We are vulnerable not only to nature which is red in tooth and claw, but to other human beings that seek to identify the ignorant, the weak of will, and the gullible.  The line between cooperating partner and potential predatory is thinner than we want to admit.  But that is why we have strong social institutions (both informal and formal) to try to reinforce that line.

This means, I would argue, that we must talk more about the entrepreneurial and institutional responses if our goal is to stress the robustness of the market economy to the threats of manipulation and deception.  And, I do believe we have to address robustness for the simple reason that if we are consistent our first point should be to insist that any discussion must be about comparative institutional analysis -- manipulation and deception are omnipresent and thus potentially exist across all human realms -- commerce, politics, romantic, and even the sacred. The question is what disciplining devices can be relied upon to protect us in these different realms.  And, once put that way, Milton Friedman's discussion in Free to Choose on "Who Protects the Consumer?" comes to the forefront.  Market discipline doesn't say there aren't serious problems that can be identified, it just says those who commit them will be challenged in the market place by competitors and the buying and abstaining from buying decisions of consumers.

 

Watch this video, how would you update and what new challenges do you think must be met if the argument is going to hold?