Sunday, July 29, 2012

Is This What Vulgar Austrians Mean by “Economic Calculation”?

In a talk on April 9, 1975 that Hayek gave to the American Enterprise Institute in Washington DC, he made the following comment on the nature of the business cycle:
“These discrepancies of demand and supply in different industries, discrepancies between the distribution of demand and the allocation of the factors of production, are in the last analysis due to some distortion in the price system that has directed resources to false uses. It can be corrected only by making sure, first, that prices achieve what, somewhat misleadingly, we call an equilibrium structure, and second, that labor is reallocated according to these new prices.

Lacking such price readjustment and resource reallocation, the original unemployment may then spread by means of the mechanism I have discussed before, the “secondary contraction,” as I used to call it. In this way, unemployment may eventually become general.

The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.” (Hayek 1975: 6–7).
This passage is recycled ad nauseum by certain Rothbardians such as “Bob Roddis,” with the astonishing comment that it contains “simple basic [sc. Austrian] concepts that … all the other anti-Austrians refuse to comprehend.” Speaking of this very quotation, that same Rothbardian declares:
“Like every other non-Austrian, you guys just do not understand the essential concept of economic calculation or the concept of the equilibrium price structure that does not yet exist.”

“[t]here is no essential dispute between Hayek, Mises, Rothbard, Lew Rockwell or me regarding the following which states the basic Austrian understanding of the economic galaxy” [my emphasis – LK].
But, on reading the Hayek quotation, one is struck by the fact that the central concept is the notion of a tendency to a price vector that will clear all markets (with flexible wages clearing the labour market). This is not an “Austrian” idea at all: it is a Walrasian or neo-Walrasian neoclassical idea, straight from general equilibrium theory. The Austrians did not invent this, but simply borrowed it from Walrasian neoclassicals.

A fundamental theoretical point of Post Keynesian economics – and indeed much heterodox economics in general – is the rejection of the notion of a market tendency to general equilibrium, with extensive arguments why there is no such tendency, owing to the presence of fundamental uncertainty, subjective expectations, the failure of Say’s law, the non-neutrality of money, and the falsity of the gross substitution axiom.

Here we have the most astonishing sight of vulgar internet Austrians complaining that the critics do not understand “basic Austrian” concepts, yet these same Austrians are unaware that the very concepts in question they invoke are nothing but mainstream neoclassical equilibrium fictions, which are held by all orthodox economists such as New Classicals, monetarists and (to some extent) even the New Keynesians.

And, more seriously, certain Austrians such as the radical subjectivists do even accept that idea of market tendency to general equilibrium. Other Austrians such as Rizzo and O’Driscoll have substituted the notion of “pattern coordination” for general equilibrium theory.

If this does not prove how absurd and ignorant is this type of internet Austrian, with their endless carping about “not understanding basic Austrian concepts,” then frankly nothing will.

BIBLIOGRAPHY

Hayek, Friedrich A. von. 1975. A Discussion with Friedrich A Von Hayek. American Enterprise Institute, Washington.

24 comments:

  1. LK, I tried to engage Mr. Roddis on his own blog a ways back - and I believe I succeeded, towards the end of the discussion, in demonstrating that his fundamental argument about calculation is not economic but ethical in character.

    However, I found the whole discussion to be a frustrating exercise, as he seems to have some issue with approving comments. He claimed that my comments "didn't seem to appear in the 'awaiting moderation' folder," and blamed Google. Odd that you've never had such a problem.

    It's been well over a month since my last comment, and he's made any number of other posts since then, but still hasn't approved it. At this point, I've long since lost interest in the argument. So, basically, don't engage Roddis where he has any control at all over the medium.

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    1. While I don't have a problem with people vetting comments on their blogs (e.g., it is a mistake to let Rothbardian trolls hijack your comments section in my view), Roddis stands as the perfect example of a vulgar Austrian - witness the sight of him endlessly lecturing people that they don't understand "basic Austrian concepts," except the concepts in question are just neoclassical ideas held by all mainstream economists.

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    2. I'm a-ok with vetting, too, but one ought to at least own up to it, rather than blaming Google or whatever. Personal responsibility and all that.

      Of course, it could also be that he just hasn't fully mastered Blogger, yet. Far be it from me to assume malice when etc etc.

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    3. Oh please, he hasn't mastered blogger yet?! My 12 year old has a little blogger blog with his mates and he seems to have mastered it quite well.

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  2. I think 'Bob Roddis' is actually the proper name of a Michigan, USA politician (unsuccessful office-seeker) with views consistent with our own "Bob Roddis", so perhaps the quotes around his name are unnecessary.

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  3. If you meet somebody who defends the validity of General Equilibrium as a guide for economic analysis, there's no need to tell him that "Post Keynesians reject market equilibrium" (I'm a Post Keynesian too). You should simply ask them: "have you ever heard of Debreu-Mantel-Sonnenschein theorem?" If he hasn't, then he should read them and stop talking whatever he says. If he has and still talks about the usefulness of general equilibrium, then you should called him a dishonest liar. For all the ignorant Austrians, New Classicals, New Keynesians, etc., a quick summary of DMS here: http://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2%80%93Debreu_theorem.
    Pablo

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    1. Why would you call somehow "a dishonest liar" just because they have a different interpretation of a theory concerning general equilibrium to you ? Just curious.

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  4. I don't think you've quite nailed it here. But I think it's more Hayek's fault because his entire theory is a complete muddle on this point. Zoom in for a moment on this part of the quote:

    "It can be corrected only by making sure, first, that prices achieve what, somewhat misleadingly, we call an equilibrium structure..."

    Note that he calls equilibrium structure "somewhat misleading". This is because when Austrians talk about free markets they are not talking about Walrasian markets at all. Instead they are talking about economic mechanisms that generate prices that lead entrepreneurs to make new "discoveries". It seems to me that for them entrepreneurs actually move the price system itself in order to create new wants and desires in the general population of consumers.

    Inflexible wages, then, distort the price system in such a way that resources are not redirected from moribund industries to the new industries by the entrepreneurs. It is this situation that I think Hayek is vaguely calling the "equilibrium structure of prices and wages". And this accounts for why he says that we cannot know it beforehand. It quite literally has not been discovered yet.

    Of course, this is all complete Utopian nonsense that no sensible person lacking a level of narcissism bordering on Messianism and cult devotion could possibly take seriously. But still, this seems to be what the Austrians mean.

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  5. While Walrus demonstrated mathematically the existence of a general equilibrium it was Austrians such as Menger, Bohm Bawerk, Mises and Hayek who developed a model of how the tendency to such a general might operate in a capitalist society that is significantly different from the neo-classical model.

    I have not seen a convincing Post-Keynesian critique of this Austrian model. PK's generally settle for attacking weaknesses and contradictions in the neo-classical model, most of which are not relevant to Austrian theory. I think today's post - where LK tries to change the debate to the irrelevant issue of who invented general equilibrium theory an whether its unique to Austrian theory as typical of the discussion of Austrian-ism on Post-Keynesian blogs.

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    1. "While Walrus demonstrated mathematically... "

      You mean "Walras".. it is news to me that a walrus invented neoclassical GE theory.

      More seriously:

      "the existence of a general equilibrium it was Austrians such as Menger, Bohm Bawerk, Mises and Hayek who developed a model of how the tendency to such a general might operate in a capitalist society that is significantly different from the neo-classical model. "

      I am utterly unconvinced that Hayek or Mises used GE in a way "significantly" different from the neo-classical model. Yes, Mises invented his own equilibrium states like the ERE or final state of rest.

      But on the contrary, these Austrians and the neoclassicals are in the same boat when they argue that markets have a strong long term tendency to some GE state (however defined).

      In fact, Austrian scholars these days see the 4th generations Austrians as "lost" to neoclassicism:

      "The entire fourth generation of Austrian economists—brilliant young men like Hayek, Machlup, Haberler, Morgenstern, and Rosenstein-Rodan—were thus shaped by the Wieserian mold before they set off on their own intellectual paths. Largely ignorant of Menger’s Principles (out of print since the 1880s), they were trained in the spirit of the neoclassical synthesis. As a result of these circumstances, there was strictly speaking no fourth generation of “Austrian” economists in the Mengerian sense. All the young men who are commonly held to be fourth-generation members were in fact lost to the neoclassical school ...” (Hülsmann 2007: 160–161).

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    2. I don't buy what Hülsmann is selling. Hayek was not a neoclassical. Again, this all comes back to what I said above. Here's a good paper that argues that the cleavage came with the socialist calculation debates:

      http://mises.org/journals/rae/pdf/rae2_1_1.pdf

      "What occurred, then, in the quarter century following Mises' original
      paper on socialist calculation is that a single, blurred picture of the market,
      common to most economists, came to be resolved into its two separate, distinct, and well-focussed [sic] components. The one component came to be perceived as the completely static general equilibrium market model; the second component came to be perceived as the dynamic process of entrepreneurial discovery."

      "We know now that for Mises, the description of states of market equilibrium is mere byplay — the description of something that will
      never in fact occur and that provides us with little of direct relevance to real world conditions (conditions that at all times display the characteristics of markets in disequilibrium). We know now that for Mises, competition is an entrepreneurial process, not a state of affairs."

      This is the key point. And it holds for Hayek as much as for Mises. Equilibrium becomes, as Hayek says in the quote you cite above, a "somewhat misleading" concept. Instead, when Big Guv'ment gets out of the way the competitive process allows entrepreneurs to "do their thing".

      And if Big Guv'ment steps in? Well, catastrophic misallocations of resources occur. This, for example, is what the Austrians claim about the housing boom. And after the catastrophic misallocations blow up we have to undergo a sort of morally purifying cold bath in the form of an economic depression.

      Now, I think this viewpoint is fundamentally different from the neoclassical general equilibrium framework. However, if you actually think about it for an sustained period of time -- and examine the methodology being deployed -- you soon come to realise that this is far more bizarre and far weirder than neoclassical theory. In its philosophical and methodological approach it is actually closer to Marxism-Leninism than to anything else. And it is based on a pure Leap of Faith in the religious sense of the phrase.

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    3. P.S. "Walrus" -- hahaha! Actually, it would give them a fairly good excuse if it was in fact a sea mammal that came up with GE theory!

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    4. Jan said: Lord Keynes,excellent!I actually think Carl Menger, Eugen von Ritter Böhm-Bawerk and Friedrich von Wieser etc.Austrian aristocrats would feel embarassed by have a lot of stupid American twits with no economic knowledge of any kind,runnin around like a wolf pack and push,by all means,loud, rude and unpolite their distorted interprentations of this old gentlemens economic foundings.This Bob Roddis and his fanatic hooligan comrades,i am pretty sure,do more harm for their cause then anything else. Most people are sick do death on those clowns stupid trolling on the internet,and this goes even for a great majority of more conservative likeminded that have one or two brain cells left i have been told.They have discredited them self,by their manors in away that is i guess unrepairable for them.They blame them self out,and their influence on policy issues are for ever washed away.So maybee we should be thankful for such as Bob Roddis!And i recommend him to actually ask for a book by "Lion Walrus" at his local library,i assume the librarians at least have one amuseing comical event that day.

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  6. "you soon come to realise that this is far more bizarre and far weirder than neoclassical theory. In its philosophical and methodological approach it is actually closer to Marxism-Leninism than to anything else"

    I enjoyed you post - but please elaborate - what part of the Austrian methodology do you find bizarre ?

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    1. I guess the best way to respond to both you and herrnaphta below is to link to a piece I wrote on precisely this topic. It runs through the history of what I see to the developments in the Austrian approach. They start with the neoclassical approach -- that is imagining a sort of timeless state in which everything balances (which is close to the theological notion of God/Heaven). But then they eventually bring this "down to Earth" in their knew "hero-based" methodology:

      http://www.nakedcapitalism.com/2011/12/philip-pilkington-libertarianism-and-the-leap-of-faith-%E2%80%93-the-origins-of-a-political-cult.html

      I believe it was this departure that allowed the Austrian methodologists to eschew empirical data altogether and seal themselves firmly into "political cult" status. They set up a sort of political system -- much like Marxism-Leninism -- that claimed its Truth could only be realised by carrying out the project to the end and that any data that appeared outside of this framework was False. (This gives the ideology a strongly Gnostic flavour, but unfortunately I didn't get into that in the piece).

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    2. If that linked-to post is representative of Post-Keynesian criticism of Austrian economics then we have a big problem.

      Its written in a sensationalists tabloid-style. It takes a couple of tenets of Austrianism - the theory of how prices are set based on marginal utility, and the theory of how entrepreneurial actions are key to how markets operate - and with no real discussion of them at all dismisses them as examples of metaphysical cultists beliefs.

      Now the Austrian model - more than any other economic model I can think of - is based upon carefully defined premises upon which the rest of its theoretical framework is then logically derived. One could undermine Austrianism either by showing that this methodology is wrong, by showing its premises are incorrect or by showing the logical steps from the premises to the conclusions are flawed.

      That post does none of this - and in consequences will only serve to confuse people who have never studied Austrian economics.

      I'm guessing that is its purpose.

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    3. TheIllusionist@July 30, 2012 8:32 PM

      "I guess the best way to respond to both you and herrnaphta below is to link to a piece I wrote on precisely this topic ....
      http://www.nakedcapitalism.com/2011/12/philip-pilkington-libertarianism-and-the-leap-of-faith-%E2%80%93-the-origins-of-a-political-cult.html


      That is a very interesting article.

      I agree with it.

      One point: while economic "value" defined simply as the pleasure, utility or satisfaction we derive from commodities is subjective, it is a mistake to think that prices are therefore subjective. For many markets, prices are determined by costs of production plus profit markup.

      One has to distinguish price theory from value theory.

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    4. @ Rob Rawlings

      They are a priori beliefs with zero empirical grounding. Yes, Austrian theory is logically consistent on its own terms -- just as a religious system or a paranoid delusion are logically consistent. But that makes neither Austrian theory or paranoid delsuions even remotely resemble a rational, detached way of looking at the world. Both are, in fact, austistic closed systems of thinking that have no explanatory value for reality. If you don't get the critique of methodology going on in that aticle then I fear that you're already too far down the line...

      As for it being written in "tabloid style", having actually been trained in writing in said style leads me to wonder if you have any idea what on earth you're talking about.

      @ Lord Keynes

      Yes, value theory is not price theory. And I agree that prices have objective determinates. But there is also a strongly subjective component. I think Post-Keynesian theory should take these more seriously (advertising etc.).

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  7. Hmm, I think vulgar Keynesians don't understand the concept of economic calculation because they can't think outside the vulgar Keynesian vulgar box, that has the word vulgar written on it, probably designed by a vulgar artist who lives in some vulgar city.

    But then again, even if vulgar Keynesians did understand it, they could not also be vulgar Keynesians.

    A fundamental theoretical point of Post Keynesian economics – and indeed much heterodox economics in general – is the rejection of the notion of a market tendency to general equilibrium, with extensive arguments why there is no such tendency, owing to the presence of fundamental uncertainty, subjective expectations, the failure of Say’s law, the non-neutrality of money, and the falsity of the gross substitution axiom.

    If there is fundamental uncertainty, subjective expectations, and so on, then Keynesian policy cannot bring markets out of recession for the same exact reasons, since the policy makers are people as well. No, violence does not work. Violence only exacerbates deviations away from alignment between consumer valuations, and production.

    You're undercutting your own worldview when you talk down on individuals being unable to solve their financial problems.

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    1. "If there is fundamental uncertainty, subjective expectations, and so on, then Keynesian policy cannot bring markets out of recession for the same exact reasons, since the policy makers are people as well."

      Knightian uncertainty does not mean private consumption or investment cannot be increased by people making free decisions to spend extra money they obtain by fiscal stimulus.

      Is it your belief that if a large tax cut was passed for both businesses and consumers that nobody would spend the money?

      The empirical evidence from history shows the success of expansionary fiscal policy, time and again.

      Tell us why Australia had no recession in 2008-2009 after the government passed a very quick Keynesian stimulus package.

      Tell us how Germany got of recession in 2009 after its large stimulus package was passed, or for that matter Sweden, Norway, France, South Korea, the UK etc. etc.

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  8. "However, if you actually think about it for an sustained period of time -- and examine the methodology being deployed -- you soon come to realise that this is far more bizarre and far weirder than neoclassical theory."

    Howso? I'd be interested in hearing your take on how the Austrians' distinct arguments here end up going off the tracks.

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  9. Tell us how Germany got of recession in 2009 after its large stimulus package was passed, or for that matter Sweden, Norway, France, South Korea, the UK etc. etc.

    Lord Keynes, you are simply dishonest. Simple math shows that Sweden's stimulus was .5% of GDP.
    I just looked up South Korea's as well, tiny. Germany, not very large.

    Other countries spent literally 10 or 14 times and I recall that advocates of stimulus were explaining the seeming failures by saying that they were not large enough, they should have been perhaps twice as large. Do you disagree with them? Considering how small these stimulus packages are, are you saying that far less is far more?

    Some of the countries you list are not even doing very well, such as the UK and France.

    Then there is the issue of possible unpopped bubbles, particularly for Australia, and perhaps Sweden.

    http://en.wikipedia.org/wiki/Australian_property_bubble

    It's possible that their boom phase has simply been extended and their bust delayed, the misallocation simply being continued.

    On the issue of general equilibrium, it is an outdated concept. Mises's Evenly Rotating Economy as well. They may be useful for analyzing some things, simplified models can be of convenience, but as Robert Murphy has written, and you've mentioned this paper, there needs to be a move toward dynamic equilibrium:

    http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

    Hulsmann has also refined ABCT by addressing the Cambridge Capital Controversy:

    http://menghusblog.wordpress.com/2012/07/15/the-structure-of-production-reconsidered-jorg-guido-hulsmann/

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  10. "Simple math shows that Sweden's stimulus was .5% of GDP.
    I just looked up South Korea's as well, tiny. Germany, not very large."


    Different nations experienced different recessions in terms of real output loss, differing levels of private debt, different asset bubbles, some even had no real financial crises.

    It never seems to occur to you that different levels of stimulus for different economies were quite appropriate.

    "It's possible that their boom phase has simply been extended and their bust delayed, the misallocation simply being continued."

    The ABCT is a cartload of nonsense.
    While some nations have indeed continued to experience some asset bubbles, other nations have seen asset bubbles pop.

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