Knowing and Making

I have just remembered to link to Turbulence Ahead , the blog of Gerard O'Neill, who spoke on a panel with me last year at the Geary Institute. His latest post has a nice quote from Sean Corrigan: "...prosperity cannot be forced, but must be built one exchange at a time as individuals further their own self-interest by catering to the interests of others..." Corrigan intends this as an argument for his Austrian, laissez-faire philosophy. And it does support that case. But when we think about it a little more deeply, it also illuminates a different view. The quote hints at, but perhaps underplays, the role of the entrepreneur. Presumably each consumer knows about a certain range of available goods, and they are already choosing whichever subset is best for them (I'd usually insert a critique about economic rationality here, but this time I'll leave that alone and make a different point). Given this starting point, in order to get economic growth we need one o...

Another example of how Austrian economics is nearly right but, at the last minute, gets it all wrong. This article from Peter Boettke on Coordination Problem makes an insightful distinction between order and complexity in two different dimensions. He says: I often use a 2 x 2 matrix to communicate to students the different schools of thought in economics. The rows reflect the problem situation we are find ourselves in (simple or complex), the columns reflect the outcome of our interactions (order or disorder). Neoclassical economics is found in the simple/order cell; Keynesian and market failure theory is found in the complex/disorder cell; Marxism and critics of economics are found in the simple/disorder cell. What does that leave? The complex/order cell and that is the intellectual home of the Classical economists such as Smith-Say, the Austrian school from Menger to Mises to Kirzner, and the New Institutional school of Alchian, Buchanan, Coase, Demsetz, North, Olson, Ostrom,...

From Mario Rizzo's comment on Coordination Problem (an Austrian blog): Keynes...does turn certain virtues (like saving) into vices -- from an economic or consequentialist perspective. What is particularly disturbing is that from a long-run perspective surely saving is a "virtue." But surely it's not. Investment  is a virtue; and saving, usually, is what enables investment. Saving in itself is a neutral act, because one person's savings are another person's debt. In the Keynesian model, attempts to increase saving while investment is falling simply lead to a spiral of shrinking income. It's investment that creates future wealth. According to the savings identity , total savings does equal investment, but that statement is misleading for two reasons: one, because this definition of investment includes inventory (which may be built up involuntarily, and is not especially "virtuous"); and two, because it hides the effects of savings in one peri...

As I've mentioned here before, I'm conflicted about Austrian economics. While I disagree strongly with most of its political conclusions, I think it asks many of the right questions - especially in its seminal works, such as von Mises' On Human Action . Pete Boettke in this post  shows that, despite being surprisingly wedded to a narrow, libertarian strand of political opinion, the Austrian movement is still interested in much bigger and more intriguing questions than what the right level of taxes is. His colleague Virgil Storr has been appointed editor of the journal Studies in Emergent Order . Let me use this opportunity to briefly mention some of my ideas in this area, placing a marker for future, deeper exploration of them. First: the notion of emergent order is critical to economics. The high level behaviours and structures of many complex systems arise from low-level components that apparently have little in common with them. The human brain is perhaps the cano...

From Rory Sutherland , current president of the Institute of Practioners in Advertising: "We need to broaden the definition of what we do to reflect the new reality of the market place because if we don't create a new model based on human understanding, then we are in danger of using 1950's packaged goods persuasive techniques to solve today's communications problems! With behavioural economics we can align ourselves to a recognizable science..." I'm a great supporter of Rory's campaign to bring science into the marketing world - the field today is too driven by gut feeling, and treats creativity as an end instead of a means. Science lets us clearly understand the business problem, create a solution and demonstrate that it will work. I disagree with him on one point in particular, but we'll come back to that. In the meantime, I've been reading Sam Delaney's book  Get Smashed , a history of the British advertising industry from the 1940s onwa...

I’ve spent some time over Christmas reading a comprehensive review by Mario Rizzo of recent work in Austrian economic theory. Regular readers might have noticed that, though this is a school I broadly disagree with, I have given it a lot of attention. It does seem to hold a fascination for me. I think the reason for this is that the founding thinkers of the Austrian school picked some really important issues to think about, and I instinctively agree with their choice of territory. Here is the list of topics Rizzo identifies: “(1) the subjective, yet socially embedded, quality of human decision making; (2) the individual’s perception of the passage of time (‘real time’); (3) the radical uncertainty of expectations; (4) the decentralization of explicit and tacit knowledge in society; (5) the dynamic market processes generated by individual action, especially entrepreneurship; (6) the function of the price system in transmitting knowledge; (7) the supplementary role of cultural norms ...

Thanks to Lucas Engelhardt for a thoughtful answer to my questions about Austrian economics. He points out a few ambiguities and flaws in my posting and explores the "something happens" phrase which I neglected. I would like to continue the debate on three main points: Why those sectors? Lucas says: When money is cheap, interest rates drop. When interest rates drop, assets that provide payoffs further in the future gain value relative to assets that provide payoffs closer to the present. Therefore, sectors that are expected to offer high returns in the far future will see resources diverted toward them. So on this argument, all investment assets rise in value compared with goods for immediate consumption. But is this what we saw in 2001-07? Lucas and I agree that there were too many resources in residential construction, but on his argument we should have seen a general excess of investment as a whole, and a reduction (relatively) in consumption. Contrary to that, most peo...

Greg Ransom comments on Marginal Revolution today that we have: ...a Hayekian artificial boom and inevitable bust with a very, very slight secondary deflation, and non-market clearing price controls on entry level labor. This is a reasonable summary of the Hayekian story, for which Greg consistently argues on my three favourite libertarian/monetarist blogs: MR, TheMoneyIllusion and Worthwhile Canadian Initiative . The idea is that easy money leads to overinvestment in certain sectors, which end up consuming more resources than their stable long-term share of the economy. Housing being the key example in the 2001-07 boom, or Internet technology in the previous one. When something goes wrong, the availability of capital rapidly shrinks and there's no more money to spend on all those houses in Nevada or foosball tables in San Francisco. Lots of housebuilders or programmers are thrown out of work and need to learn a new trade. In this story, government stimulus just delays the inevit...