Coordination Problem

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?

 

Mario Rizzo on Rationality, Behavioral Economics and Public Policy

|Peter Boettke|

Here is Mario Rizzo discussing his new book at Escaping Paternalism.

 

Happy 90th Birthday to Professor Israel M. Kirzner (February 13th 1930)

|Peter Boettke|

The greatest living scholar of the Austrian School of Economics, and its most accomplished practitioner in the contemporary era turned 90 yesterday.  His classic work Competition and Entrepreneurship has garnered over 10k in citations, and his JEL survey of contemporary Austrian economics has close to 5k.  Moreover, through his teaching and organizational efforts at NYU and beyond, he was personally responsible to carving out a scholarly place for the next generation of economists and political economists to work in developing the ideas of Menger, Bohm-Bawerk, Mises, and Hayek in their own unique way.

He was the advisor of my advisor -- Don Lavoie -- whose these Rivalry and Central Planning met with professional acclaim and had such a significant impact on my own career path.  I had the good fortunate to basically begin my academic career as an Assistant Professor at NYU working alongside of Professor Kirzner and Professor Mario Rizzo.  It took me a year of his insisting that I call him Israel before I ever did, he was, and has always remained PROFESSOR Kirzner to me.  He is a professors Professor, and simply one of the most humble, hard working, and generous scholars one can ever meet.  A special scholar and a wonderful man.  I never could thank him enough for the opportunity he gave me at NYU, and the joy I have received from wrestling with his work over the years.

In 2019, the final volume of the 10 volume Collected Works was published. Fred Sautet and I viewed that project with Liberty Fund as a pure pleasure and a great honor to be able to make available the full corpus of Kirzner publications.  In the last volume, we include a comprehensive bibliography of his writings which Rosolino Candela so adeptly accomplished building on earlier efforts by us and others.  Please download that bibliography and share with your interested colleagues and students, and dig into the amazing insights that this great scholar has to offer in methodology of economics, analytical economics of the market process, the ethical and moral dimensions, and the history of political economy. There are so many extensions of his work possible, as well as opportunities for critical engagement that is at the center of the scholarly quest for improved understanding.

Here is a talk he gave at GMU from 2016 on the history and importance of the Austrian School of Economics.  Please take some time and watch and celebrate this great scholars 90th birthday.

 

 

Symposium on F A HAYEK (Palgrave, 2018)

|Peter Boettke|

New issue of Cosmos + Taxis has been published.

Some Recent Papers That Might Be of Interest, as well as some essays

|Peter Boettke|

This will just be links to some of my recent papers that have been posted at SSRN and are slated for publication in a variety of outlets.

 

    1. The Positive Political Economy of Analytical Anarchism (with Rosolino Candela)

    2. They Never Walked Alone (with Alain Marciano and Solomon Stein)

    3. Where Chicago Meets London (with Rosolino Candela)

Last year, the Collected Works of Israel M. Kirzner was completed (10 volumes), and in the final version we provided a fully updated and comprehensive accounting of his publications.  This compilation built on earlier efforts by myself and others, but the final version was due to the effort and care of Rosolino Candela.  It warrants special attention in my mind for all students of Austrian economics, entrepreneurship, market process, and liberal political economy.

    4. The Publications of Israel M. Kirzner

 

In addition to my writing for journals and books, I have started to write more regularly at both AIER and EconLib.  Two recent essays might be of interest.

 

    A. The Four Pillars of Economic Understanding

 

    B. Why Did Armen Alchian Have To Teach Economists About Property Rights?

 

I am most grateful to both Jeff Tucker and Amy Willis for giving me this opportunity, respectively, at AIER and EconLib.  I hope teachers and students of economics will find these columns helpful in exploring the wonderful new world of economics that our discipline opens up to all if taught with an eye to unleashing the natural curiosity in our students.

 

 

The Beautiful Patterns of Nature

|Peter Boettke|

Watch this video and consider the beautiful patterns that are painted by nature.

 

Now, consider the following passages from Alfred Marshall's Principles of Economics, 8th edition (1920), 287-288.

Such an equilibrium is stable; that is, the price, if displaced a little from it, will tend to return, as a pendulum oscillates about its lowest point; and it will be found to be a characteristic of stable equilibria that in them the demand price is greater than the supply price for amounts just less than the equilibrium amount, and vice vera.  For when the demand price is greater than the supply price, the amount produced tends to increase. Therefore, if the demand price is greater than the supply price for amounts just less than an equilibrium amount; then, if the scale of production is temporarily diminished somewhat below that equilibrium amount, it will tend to return; thus the equilibrium is stable for displacements in that direction.  If the demand price is greater than the supply price for amounts just less than the equilibrium amount, it is sure to be less than the supply price for amounts just greater: and therefore, if the scale of production is somewhat increased beyond the equilibrium position, it will tend to return; and the equilibrium will be stable for displacements in that direction also.

When demand and supply are in stable equilibrium, if any accident should move the scale of production from its equilibrium position, there will be instantly brought into play forces tending to push it back to that position; just as, if a stone hanging by a string is displaced from its equilibrium position, the force of gravity will at once tend to bring it back to its equilibrium position. The movements of the scale of production about its position of equilibrium will be of a somewhat similar kind.

But in real life such oscillations are seldom as rhythmical as those of a stone hanging freely from a strong; the comparison would be more exact if the string were supposed to hang in the troubled waters of a mill-race, whose stream was at one time allowed to flow freely, and at another cut off.  Nor are these complexities sufficient to illustrate all the disturbances with which the economists and the merchant alike are forced to concern themselves.

But who in the real-world must adjust and adapt to these constant changes in the market place and what tools do they employ in aiding them in this difficult task?  This is what the theory of the entrepreneurial market process as developed by Mises, Hayek and Kirzner was all about.  As Kirzner put it in Market Theory and the Price System (1963, 240): "If a market is not in equilibrium, we have seen, this must be the result of ignorance by market participants of relevant market information. The market process, as always, performs its function by impressing upon those making decisions those essential items of knowledge that are sufficient to guide them to make decisions as if they possessed the complete knowledge of the underlying facts."

As economists we must always put primacy of place in our explanations of market coordination on this ability of the price system to guide adaptation and adjustment, and the role of the alert entrepreneur in not only moving markets, but creating markets.  Relative prices guide us in decision making, profits lure us in our decisions, and losses discipline us in our decisions.  This is how the price system impresses upon us the essential items of knowledge required for plan coordination through time and in the face of ceaseless change.  This science of economics is born out of the puzzle that the coordination of economic activity through time presents to our imagination. The solution to that puzzle is the entrepreneurial market process. And the resulting social order produced should inspire our intellectual awe and amazement.  It is a beautiful pattern produced as productive specialization is pursued, mutual gains from trade and innovation are realized, and peaceful social cooperation among distant and disparate individuals is achieved.

G. L. S. Shackle on Alan Coddington's THEORIES OF THE BARGAINING PROCESS

|Peter Boettke|

This upcoming term I am teaching Microeconomics II, and in preparing for the class I have been revisiting so many ideas and concepts that I obsessed over with my good friend Dave Prychitko as we worked our way through the microeconomics sequence and our study of the theory of general competitive equilibrium.  We had a great teacher for Microeconomics II ... Michael Alexeev ... and while he demanded that we learn the technical material inside and out, he also encouraged Dave and I to explore different perspectives and the history of the debates/discussions, which we did in class, in directed readings, and in papers during our PhD studies.  Dave and I, a few years after our graduation from GMU, edited a 2 volume reference work that was made up of the various Market Process Theories we had studied with Alexeev's assistance and our own initiative/curiosity.  The publisher's description of the volumes reads:

Market process theory is principally concerned with explaining how the market moves towards a state of general economic equilibrium and how production and consumption plans become coordinated. Market Process Theories presents in two volumes the most important articles by leading economists which contribute to an understanding of the processes of economic coordination.

Volume I examines classical and neoclassical theories; it suggests that many classical writers can be interpreted as having anticipated a more dynamic disequilibrium analysis, and evaluates Marxian process theory also in this light. Other topics include analyses of price adjustment models, stability and disequilibria and a discussion of the challenge of increasing returns. Volume II deals with criticisms of standard theories such as institutionalism and post Keynesian criticisms. It also offers an exploration of the Swedish influence in the field with papers on the theory of savings and the concept of monetary equilibrium among others. Austrian economics is the subject of the final section, which explores such topics as the meaning of competition, process analysis and price and quantity adjustment.

The volumes consist of 37 articles from 1928 to 1995, and the content is divided as follows Volume I: Part I: Process in Classical Economics Part II: Marxian Process Theory Part III: Formal Market Process Models in Neoclassical Economics Part IV: The Challenge of Increasing Returns • Volume II: Part I: Institutionalist Approaches and Post Keynesian Criticisms Part II: The Swedish Influence on Market Process Theory Part III: The Central Concept of Austrian Economics: Market Process.

My theoretical interest have always been directed at price theory and market process theory from my undergraduate studies, that includes my obsession with the idea of economic calculation which I think is central to understanding economics.  But this also entails certain methodological and analytical commitments -- closed form models of choice, and single exit theorems of interaction simply are not attractive to me, however logically beautiful or intellectually disciplining they may be.  As an economic student you need to learn them, but not I would contend as either "as if" descriptors of human behavior or as "normative benchmarks" against which to judge human behavior, but as a "foil" which aids in our efforts to understand the open-ended nature of human choice, and the social process of economic coordination through time.

The institutional framework, as well as the various best strategy responses and the "aids to the human mind" in forming the responses, and pursuing those strategies move to center stage in economic analysis as a result.  In short, property, prices, and profit-and-loss, and the respective functional significance of each forms the core of any theory of market coordination.  Furthermore, I would argue that the problem situation to be analyzed in studying the complex coordination required of modern commercial society should never be trivialized through heroic assumptions introduced for mathematical tractability reasons, but always problematized if we hope to truly grasp the power of Adam Smith's "higgling and bargaining" to produce F. A. Hayek's "marvel of the market".  In this regard, consider the following passages from G. L. S. Shackle's foreword to Alan Coddington's Theories of the Bargaining Process (Routledge, 1968).

The behaviour of inanimate objects is not governed by their possession or non - possession of conscious knowledge . It follows that in assimilating the behaviour of a society to that of an inanimate system , economists of the mechanistic school have assumed away the problem of what men can and cannot know and the influence on their conduct of the beliefs and assumptions , right or wrong , realisable or inherently self - defeating , with which they complement their knowledge or by which they develop proxies for the unknowable . When a type of situation or process presents itself , whose essence is the exploitation by one party of the ignorance of another , it is plain that mechanistic models , and even the scheme of equilibrium , designed to make conceivable the possession by every man of all the knowledge which the scheme makes useful to him , cannot dissect the heart of things.

Not ignorance and uncertainty merely , but mistakenness , belief in something which in fact is false , and further , the deliberate cultivation of uncertainty and mistakenness by one party in the mind of the other , are of the essence of bargaining . Orthodox economic analysis proceeds by saying : It would pay this individual best , in such - and - such circumstances , did he but know that those are his circumstances , to do so - and - so , let us assume that he does know and that he will do it . Equilibrium is the means of being able , without impediment of logic , to ascribe to him that complete relevant knowledge of his circumstances , without which he cannot demonstrate to himself that one course out of all possible courses is objectively the best . But when our problem , of its nature and by its essential terms , precludes us from ascribing to the individual this complete relevant knowledge , how is the economic analyst to proceed ? He may content himself with rather general propositions , such as the insufficiency of the existence of a contract zone ( within which any agreement , once reached , is better for both parties than no agreement ) as a condition guaranteeing that an agreement will be reached ; or the proposition that a contract zone need not leave the actual agreement indeterminate . These two propositions seem worth having , if nothing more can be attained , and they can be established1 from rather general and basic considerations . But Dr Coddington has shown that much more can be attained , at a price .

A need is felt by many analysts to escape from the assumption that an achieved optimum is the only thing we can understand . How in detail , by what precise sequence of steps or flow of transformation , is a new such optimum attained when the governing conditions which shaped an earlier one have been destroyed ? Is there necessarily a path which inevitably leads to a new adjustment ? What can the effect be , when different parts of the system respond with various lags to disequilibrium pressures ? Such questions lead to the search for principles determining the path of movement which a system will follow , to the devising of dynamic models characterised by equations which associate with each other events or situations of distinct dates . However , it seems that the determining of an equilibrium situation or state of affairs calls for far fewer arbitrary assumptions than that of a path of movement . The former essentially requires us to assume that people seek to satisfy tastes which are characterised by diminishing marginal rates of substitution , by means of resources which show diminishing marginal productivities ; and that they possess all the knowledge of their own responses and the technological powers of their resources , and of each other’s tastes , powers and intentions , which bears upon their own problems of choice . These are very general and , except the last , very plausible assumptions . But no comparable appeal to the basic qualities of human nature and the basic geometry , as it were , of technology can be invoked to select one particular path of movement out of an infinity of such paths .

Our understanding of the complex coordination of commercial society -- Adam Smith's common woolen coat, e.g. -- turns on our ability to articulate the process by which a consistency between expectations and intentions is achieved.  The dovetailing of plans, that Hayek and then Kirzner articulated, is critical to understanding the market process.  To truly understanding it, again, we must be willing to problematize it, rather than trivialize it.  And, that requires methodological and analytical commitments that differ considerably from the orthodoxy.

With that in mind, revisit once more Buchanan's "What Should Economists Do?" and read closely why he objections to the depiction of utility functions as well as why he argues that the model of perfect competition is so flawed an apparatus.  If optimization and equilibrium are not the tools that best help us understand the economic process, then what are we economists to do?  Well, welcome to mainline economics from Adam Smith to Vernon Smith.