Reply on Austrians and Math

(I apologize to any commentators for the slow response. I just got back from my honeymoon and as much as I love discussing economics with you, it wasn’t my first priority.)

We should not write so that we can, but that we must, be understood. – Marcus Quintilian

One might think that after 4 years at a good liberal arts college I might be able to write. You’d think I’d be able to make a small point. A las, that is not so. I will keep working. Thank you to all who put up with my poor writing.

My goal in my last post was simple. I wanted to encourage people, like myself, who are interested in Austrian economics to do one thing:

Give math a shot.

That is all I wanted to do. It wasn’t a bold claim and I don’t think anyone disagreed with that point. Most people probably dismissed it as trivial.

Yet, I didn’t believe there is a single post/article by someone friendly to Austrians urging people to study math. I still haven’t heard of one. If you know of one, please let me know and I will post it.

I didn’t want to get into discussions of the usefulness of continuity or the benefits of advanced mathematical economics. But people latched on to the continuity or mathematical economics. Those are interesting conversations, but they’ve been had other places.

I just wanted to say to someone like me during my undergrad, someone who had read more Mises.org than academic Austrian journals, “Hey, Austrian economics is really cool. Keep studying it. But also don’t be turned off to math. It can be helpful to understand the world if used right.” Continue reading

Study Math, My Austrian Friends

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(Update: I’ve posted a reply to some concerns here.)

Austrian economists hate math. That’s a broad brushstroke, but I stand by it.

And it’s a shame. I understand the Austrian concerns about math and agree with most. But the concerns call for hesitation when applying math to economic problems. Yet, justified hesitation wrongly became abstention. I want to fight that tide.

This is not a post to bash Austrian economists and their lack of math. If you came here for a smackdown of Austrian economics, you will get no such pleasure from me. I’m not sure advanced math has been a net gain for economists.

Instead, this is an apology, in the religious sense, for math- pleading to young scholars interested in Austrian economics: Put away your concerns for a moment. Learn math. Math can be your friend. You will be a better (Austrian) economist for it.

Let me echo something I’ve heard Bryan Caplan say: Austrian economists are among the most interesting in the profession. My criticisms come from a love for the tradition and a wish to keep improving it. People who understand Mises/Hayek/Rothbard/Kirzner will push our understanding of the world in the coming decades. I’m sure of it. You, my Austrian friend, will help in that.

From one friend to another

First, let me set up my street-cred within Austrian economics. I am no Trojan horse; I am truly a strong supporter of advancing Austrian economics. Whether other people will label me as an Austrian is up to them.

First, I am an Adam Smith Fellow at the Mercatus Center, which is THE heart of academic Austrian economics in the world. My job literally involves discussing Hayek and Mises with some of the best in the business. I believe they would vouch for me as a friend of Austrian economics.

Second, my research is clearly Austrian-inspired. One paper I’m working on examines the boom/bust Panic of 1907. The second looks at Hayek’s theory of spontaneous order, specifically when that spontaneous order breaks down. I see my research as following in the footsteps of the greats.

Third, look at this blog. It’s called EconPointOfView.com, a reference to Israel Kirzner’s first book. The site’s banner has Rothbard, Mises, and Kirzner- my way to show respect to those who I think are superb economists.

While none of what I’ve written makes me an expert on Austrian economics, I hope Austrians will be more willing to accept my point, coming from a friendly stance. I won’t belittle those who choose to do a more literary form of economics. Do your thing. But along the way, pick up a math book. Continue reading

A Better Understanding of Equilibrium

For economists

I’ve thought a lot about equilibrium recently. At the same time that I’m reading some excellent game theory books (including a nice little book by David Kreps that is accessible to non-economists), I am also studying agent-based modeling.

Game theory uses equilibrium heavily and distinguishes a billion different types of equilibria. Agent-based modeling rejects equilibrium as central to economic analysis.

Oh yeah, and I just got done with a full course on general equilibrium theory. Throw that on top of my skepticism of equilibrium as an important concept and you have one confused grad student.

This jumble has me thinking heavily about the meaning of equilibrium. Is it useful? When? How do we need to adjust our understanding? What is the role of disequilibrium?

Then I re-watched a speech by Mario Rizzo title “A Better Concept of Coordination.” In it, Rizzo is trying to clarify our understanding of coordination and equilibrium. He is trying to understand the relationship between aspects of the economy that lead to equilibration, or better coordination, and disequilibration, or when people’s plans don’t align.

For Rizzo, equilibration and disequilibration are like yin and yang. They cannot be separated.

I just love the quote he starts out with from Oskar Morgenstern.

I’m not sure I have any more insight to add to Rizzo’s speech. It is clear to me that a focus on equilibrium has killed much of the interested parts of economics. What is a better option to replace it? I don’t know. I just enjoyed the speech and thought you might too.

History Rhymes: Growth in Money Supply -> Panic of 1907

Believe it or not, I don’t only hang out on Twitter and read books. Sometimes I blog. Rarely I do this thing called “research.”

One area that I do this so-called “research” about is banking panics, specifically the Panic of 1907. For historical purposes in the U.S., it’s a fascinating story. The Panic of 1907 changed the future of banking, specifically leading to the Federal Reserve.

For us in the post-2007 world, the Panic of 1907 might help shed light on the mechanisms that lead to a banking crisis. From my vantage point, 2007 mimicked 1907, but with flashier technology. Instead of runs on the trust companies, in 2007 shadow banks experienced a run. History rhymes.

The actual banking Panic (people screaming, running to get money) is worth reading about. It sounds like 2007, where a few players dictated what happened. It’s a good tale. The United Copper Company tried to corner the copper market, like the Duke brothers in Trading Places did for oranges.

That failed. Panic ensued. Fun stuff.

If you want to learn about the personalities and the anecdotes surrounding the Panic, pick up Robert Bruner’s The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. It’s not Michael Lewis, but the stories are interesting.

So that’s the sexy stuff about the Panic of 1907. Yeah… That’s not what I study.  Sorry.

I look at the build-up to the Panic. For reference, instead of looking at the Lehman and Bear Sterns of 1907, I look at the equivalent of the recent housing bubble. There are none of Michael Lewis’s fascinating characters, but it’s the real driver.

So what happened before the Panic of 1907?

Continue reading

Top Posts of 2014

2014 was an eventful year for me, which doesn’t help my blogging. For those who don’t know, I started the year in Barcelona where I was finishing up my master’s degree. After moving to Minnesota, I got married (the real highlight of the year) and then started my Ph.D.

Along the way, I was able to squeeze in a few posts. Here are the most popular posts of 2014 (with stats since around August 1st):

  1. Which School of Thought Are You? (3,244 views)- A short post with a table about different schools of thought. Not a particularly enlightening post, but it did well on Reddit. Reddit leads to traffic, but not interactions.
  2. 5 Life Lessons Economics Taught Me (2,433 views)- My personal favorite, this post highlighted a few of the lessons I’ve taken away from economics. I’ve extended this post into a short e-book, but it looks like the Ph.D. has successfully killed that project.
  3. One Semester in an Economics Ph.D. (463 views)- This recent post has done well (for my little blog). In it, I reflect on my first semester at Minnesota. It explains the process a little to my friends and family who have no idea what an economics Ph.D. is like.
  4. Reflections on the Advanced Austrian Seminar (253 views)- This summer was the first time I had met anyone interested in Austrian economics. Before that, I just assumed everyone was fake. Nope. Not true. Here I wrote down my thoughts after spending some time learning about Austrian economics from people like Pete Boettke, Pete Leeson, Chris Coyne, and Larry White.

These aren’t Marginal Revolution stats, but I’ve enjoyed every minute of it. Next year, I will keep pushing to make this site interesting for both of my followers!

Happy New Year :)

I LOVE BOOKS- My Favorite Books From 2014

Seeing other people’s lists of their favorite books of the year, like Ryan Decker’s, inspired me to read a few more books and add A LOT to my “To Read” pile. Perhaps my list of the best books I read in 2014 will inspire others.

Economics Books for Everybody

I fell in love with economics through books written for non-economists, like Thomas Sowell’s Basic Economics. Even during my academic work, I try to continue reading economics books that highlight the beauty of economic reasoning in the world around us. Here are two books to help you see the world as an economist:

  • The New World of Economics by Richard McKenzie and Gordon Tullock- Long before Freakonomics, and even before Steven Landsburg’s fantastic An Armchair EconomistThe New World of Economics showed the wonder of economics. If you’re first economics class was deathly boring, this little book could have spiced it up. Published in 1975, this book still enthralled me with vivid insights about the world. Even economists who think they know supply and demand analysis could benefit from a (re)reading of this classic. With whole sections on sex, it’s not some boring textbook.
  • An Economist Gets Lunch: New Rules for Everyday Foodies by Tyler Cowen- I love food. One of the highlights of the past few years has been my discovery of better food. Tyler Cowen largely influenced me through his older book, Discover Your Inner Economist. If you’re interested in learning about food, which you should be, and are interested in how an economist looks at the problem, which you definitely should be, pick up An Economist Gets Lunch immediately. You’ll start finding cheaper and better food without much effort. I certainly have.

Economics Books for Economists

This list is geared toward economists. It is more technical, although all the books would be accessible for someone with an interest in economics. Continue reading

One Semester In An Economics Ph.D.

Everyone knows that feeling during a long drive where you don’t remember the last few miles. You’re almost in a trance.  You feel like you missed something. That is what the last few months have felt like.

I can’t believe it is already the end of my first semester as an economics Ph.D. student. While it feels like I’ve been here for a long time, it went by in a flash. It was all a blur. However, this post is a short reflection on the bit that hasn’t slipped through my mind.

A Flurry Of Math

Before the semester, I wrote down some of my thoughts on what I was expecting. While the specifics of this semester have varied, it has been what I expected overall. Lots of work. Lots of math.

Once I’d thought I’d learned more math than I could stomach, I learned some more. And that’s great. It’s has allowed me to better understand modern economics, even though I’m a skeptic of the supremacy of math in economics.

For better or worse, if I want to communicate as a professional economist (which I do), I need to speak the language. The language is math. (Actually it is only small subset of math that uses set theory and constrained maximization) and I have learned some of the language this semester. I’m at the point where I can identify the letters in the language, but not say anything intelligible. It’s a start.

On top of my micro courses, which cover math topics like convex analysis and the classic fixed-point theorems for general equilibrium, I also took a math course in real analysis. Basically, I learned how to rigorously prove some things I took for granted in calculus. Coming from a physics undergrad, the math use was completely new. Again, it’s not something I want to spend my life doing, but it was good to learn more about these topics. Whether they were the best use of my time…

Overall, the training I am receiving in mathematics helps. More importantly, it has opened my eyes to some of the possible tools that economics can use. I see no reason to restrict my tool set (or set of arrows in my quiver as Pete Boettke calls them) to exclude advanced math, computers or econometrics. If I see an arrow that allows me to tackle a problem, I hope I’m the type of economist who grabs that arrow. Sorry to all Austrians who believe logical deduction = economics. Of course, proofs are not necessary nor sufficient for doing economics.

Economics?

Continue reading

Compared To What? Ideology Edition

I’m a day behind the crowd (it’s exam time here), but I wanted to bring up something left out of yesterday’s econ Twitter and blogosphere conversation.

Maybe you didn’t follow this, but in my world a recent paper by Zubin Jelveh, Bruce Kogut, and Suresh Naidu received buzz all yesterday. Everything started with a 538 article by the paper’s authors with the headline “Economists Aren’t As Nonpartisan As We Think. (Let’s ignore the obvious question, what did we think?)

The article involved a few ready for social media images, like the buzzwords from the left and right economists.

The take away from the article is that, contrary to some people’s claims that economics is a science without ideology, ideology remains in economists’ published work.

We could then predict the ideology of any economist not in our sample by feeding his or her body of work into our algorithm. The results weren’t perfect, but the algorithm showed promising ability in distinguishing between liberal and conservative economists. To understand how well it performed, imagine that you randomly pick two economists and predict their ideologies. Random guessing would get it right 50 percent of the time and a perfect model would be able to produce the right affiliation 100 percent of the time. Our algorithm got it right 74.1 percent of the time.

Kevin Drum quickly followed up by pointing out that the slope, while statistically significant, is impressively small. I mean, the slope is basically zero, right? Drum’s concludes that it is amazing that economists, who deal with political topics, aren’t even more ideological.

Cheers to us economists. We can mask our political ideology, at least for these authors. Well maybe. Noah Smith seems to agree that the slope is small, although he expresses reservations about the authors’ ability to measure ideology. There are all interesting and important points about the 538 article, but they fundamentally miss one vital question.

Continue reading

Breakdown of Spontaneous Order: Smith and Hayek

While you would never know it from Ph.D. classes in economics, one of the most fundamental insights from economics is “spontaneous order theorizing.” Basically, many of the aspects of our society have arisen spontaneously without anyone planning them. These phenomena, like money, language, or law, are the result of purposeful human action, but are not of human design. It is a powerful model for understanding the world. For an overview of the topic, check out this article.

The two most famous economists who worked within this framework are Hayek and Adam Smith. While many writers have lumped them together, they disagreed on many issues. This is understandable since both wrote on wide-ranging topics.

If you would, allow me to put down a few thoughts I’m having about their differences on the breakdown of spontaneous order. This differences don’t affect the spontaneous order model from a positive point of view, but might from a normative.

Problems within Spontaneous Orders

A split between the two giants occurs on the issue of “social justice” with Smith providing a list of exceptions to the benefits of spontaneous order. One explanation of the split is given by Laurent Dobuzinskis, who sees Smith as emphasizing both of the sentiments of liberty and sympathy. Sympathy is not a major concern for Hayek.

In contrast, Hayek focuses almost exclusively on liberty since he is a “classical liberal for whom private property rights were paramount” (Dobuzinskis, 2008, 94). The concern with sympathy explains why, in Smith’s worldview, nonmarket institutions can play a part in providing public goods such as basic education, regulation, and economic support for the poor (Sen 2011, 259). Indeed, Smith saw intervention in the interest of the poor as beneficial to the society. “When regulation, therefore is in favour of the workmen, it is always just and equitable” (A. Smith, [1776] 2001, 356). In fact, there is a list of interventions authorized by Smith.

In 1787, Jeremy Bentham complained that Adam Smith was unable to see all the virtues of the market economy, since Smith criticized the “prodigals and projects” that were a natural part of a market. Smith also supported state regulation of financial transactions (Sen, 2011, 258) since a totally spontaneous, unregulated market can easily pave the way for “a great part of the capital of the country” being “kept out of the hands which were most likely to make a profitable and advantage use of it, and thrown into those which were most likely to waste and destroy it” (A. Smith, [1776] 2001, 356).

Justice is commutative for Smith and requires negative obligations (justice requires that people not steal compared but people are not required to help the poor) to protect others. Ultimately, Smith believed that injustice could be reduced through governmental institutions (Sen, 2011, 267). This requires an intervention into the workings of spontaneous order, sometimes to a great extent.

Hayek sees the need for government (he was not an anarchist), but believes the purpose of intervention is quite different. While Hayek believes in general rules, such as those governing property and protecting peace. Yet, government cannot provide for “social justice”. While Smith sees legislation to correct what he saw as errors of spontaneous order, Hayek defines the nature of law as “purpose-independent rules” meant to give a framework for the interaction between people. Laws should apply to “an unknown number of future instances” in order to offer a “protected domain”. This would “enable an order of actions to form itself wherein the individuals can make feasible plans” (Hayek, 1973, 85–6).

Thus, he writes that a society should function under a rule of law, or ‘meta-legal doctrine’ (Hayek, 1960, 206), which prescribes legislation by the above definition. The purpose of judges and legislators is to select those rules which worked in the past and should be held up to make it more likely that individuals’ expectations will match the real rules (Hayek, 1973, 119). This system of order provides justice precisely because it develops from general rules of behavior and not in pursuit of any individual’s purpose. Society cannot possibly agree on ends; it can find agreement on means and the framework to create. These rules can proscribe types of action but should not reference the ends which any part of society aims. Hayek terms the order that spontaneously arises from such a process as a ‘cosmos’: an order which results from the adherence to abstract general rules with no agreement as to ends (Hayek, 1978: 76).

If you’d allow me to go make a bold claim. This difference between Smith and Hayek provides a major basis for a split between certain modern-day conservatives and libertarians. Small government conservatives have followed Adam Smith more and libertarians have followed Hayek.


References

Dobuzinskis, Laurent. “‘The Adam Smith Problem’ Revisited: Comparing Hayek’s and Fouillee’s Answers.” Studies in Emergent Order 1 (2008): 92-118.

Hayek, F. A. The Constitution of Liberty. London: Routledge, 1960.

Hayek, F. A. Law, Legislation and Liberty: Vol. 1, Rules and Order. Chicago: University of Chicago Press, 1973.

Hayek, F. A. Law, Legislation and Liberty: Vol. 2, The Mirage of Social Justice. Chicago: University of Chicago Press, 1978.

Sen, Amartya. “Uses and Abuses of Adam Smith.” History of Political Economy 43 (2011): 257-71

Smith, Adam. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. London: Elecbook, 2001.