Emphasis of Economics and Math

Yesterday's post tried to lay out why I believe the fundamental difference between Austrians, Chicago school, and Samuelsonian economists is only one of emphasis. Thinking more about it, I was reminded about an interview with Kirzner that also bring in the use of math in economics (one of my favorite topics to get myself in trouble).

In an interview for Liberty Fund, Kirzner says the following (54:20):

If one believes that the description and analysis of equilibrium states constitutes the central task of economic analysis, then the role for mathematics is clear and indisputable because mathematics can and should and is able to grapple with the meaning of an equilibrium state... and to the extent that's all one has to do, then mathematics would be fine. The problem is, as Austrian see it, is that that is mere footnote to what economists ought to and should be doing, that is understanding the market process.

If I keeps things like this in mind, I am forced to be more sympathetic to different approaches. The reason some people don't use mathematics is because it is not well equipped to analyze what those people think is important. The reason other people force everything into mathematics is because they do want to analyze equilibrium states.

The same applies to non-math differences. In Becker's textbook, the focus is on describing how whole markets work. If that's what I want to do, his aggregation techniques might appeal to me. If I think the study should be that actions of individuals, I will not want to aggregate in such ways. It's a difference of emphasis, compared to anything antithetical.

This whole point might be trivial, but I forget it. I doubt I'm the only one.

Of course, that just kicks the can. Then the question becomes, not what techniques and models should we use? But, what is worth studying? And I wish I had an answer for that... If you do, let me know.

Update:

Michael Harris tweeted at me something I found quite interesting.


I think that gets at one important aspect. If Austrians wanted to study the same things as non-Austrians, they would use the same tools. I'd bet the reverse is also true.

Well Put My Friend

The following comes from page 54 of New Directions in Austrian Economics. It's an essay by Mario Rizzo called "Praxeology and Econometrics."

We do not have a choice as to whether we shall make methodological decisions. Our choice, rather, is whether we shall make them explicitly, examining the various implications and subtleties of meaning, or whether we shall make them implicitly, blind to everything but technique.

We can ignore the questions about what it means to do economics. That doesn't mean the questions and problems go away. This is our science and we should know what we are doing as scientists. We can be more clear (at least to ourselves) about what good economics involves.

Well Put My Friend

From page 5 of Israel Kirzner's The Meaning of Market Process-

For Austrians, however, mutual knowledge is indeed full of gaps at any given time, yet the market process is understood to provide a systemic set of forces, set in motion by entrepreneurial alertness, which tend to reduce the extent of mutual ignorance. Knowledge is not perfect; but neither is ignorance necessarily invincible. Equilibrium is indeed never attained, yet the market does exhibit powerful tendencies towards it. Market co-ordination is not to be smuggled into economics by assumption; but neither is it to be peremptorily ruled out simply by referring to the uncertainty of the future.

How do we best understand knowledge? Austrians have staked out a middle ground between the two extremes for a long time. It's proven a tough place to be.

Perfect knowledge is easy to deal with. Radical uncertainty amounts to throwing our hands up. An important area in economic research going forward is a refinement of this middle ground.

Well Put My Friend

From page 24 of Alchian and Demsetz's 1973 article "The Property Right Paradigm"-

If private rights can be policed easily, it is practicable to resolve the problem by converting communal rights into private rights. Contrary to some popular notions, it can be seen that private rights can be socially useful precisely because they encourage persons to take account of social costs. The identification of private rights with anti-social behavior is a doctrine as mischievous as it is popular.

The instability inherent in a communal right system will become especially acute when changes in technology or demands make the resource which is owned communally more valuable than it has been. Such changes are likely to bring with them harmful and beneficial effects which can be measured and taken account of only by incurring large transaction costs under the existing property right structure. In such situations, we expect to observe modifications in the structure of rights which allow persons to respond more fully and appropriately to these new costs and benefits. The coming of the fur trade to the New Continent had two consequences. The value of furs to the Indians increased and so did the scale of hunting activities. Before the coming of the fur trade, the Indians could tolerate a social arrangement that allowed free hunting, for the scale of hunting activities must have been too small to seriously deplete the stock of animals. But after the fur trade, it became necessary to economize on the scale of hunting. The control system adopted by the Indians in the Northeastern part of the continent was to substitute private rights in land for free access to hunting lands.

Property rights and how they are defined have very different implications under certain situations. Sometimes social pressure can mitigate the problems of communal living. However, this is not likely to hold up well in times of drastic change or once social pressures fade.

The Role Of Political Economist

After solving problem sets, which require assuming the role of a "social planner" for a society, it was refreshing to read this from Pete Boettke-

The task of the political economists is to assess alternative institutional arrangements with respect to their impact on the ability of free individuals to realize peaceful social cooperation and productive specialization.  This does require mastery of the technical principles of the discipline of economics, which not everyone can possess.  But with those tools in their possession, the economist still does not have any claim to privilege position in the democratic decision process that constitutes collective action.  All he can do is offer his proposed reforms as hypotheses to be tested in the public conversation.  He can try to persuade his fellow citizens of the value of his perspective, but he has no expert claim to impose his solutions on the body politic.  Buchanan's work is both a counsel of humility while also being a cause for hope that reform can improve our situation.

We economists must stay humble in our role as observers of society. We are certainly not social engineers or social planners with any advanced understanding of how to manipulate people within an economy.

Well Put My Friend

Yesterday, I was discussing regulations with some friends. They believed that actions by individuals are unplanned and lead to chaos without sufficient governmental interference with these actions.

They failed to appreciate the fact of human nature that Murray Rothbard addresses on pages 278-9 in Man, Economy, and State.

Ex ante (a person who acts) appraises his situation, present and prospective future, chooses among his valuations, tries to achieve the highest ones according to his “know-how,” and then chooses courses of action on the basis of these plans. Plans are his decisions concerning future action, based on his ranking of ends and on his assumed knowledge of how to attain the ends. Every individual, therefore, is constantly engaged in planning. This planning may range from an impressive investment in a new steel plant to a small boy's decision to spend two cents on candy, but it is planning nevertheless. It is erroneous, therefore, to assert that a free market society is “unplanned”; on the contrary, each individual plans for himself.

But does not “chaos” result from the fact that individual plans do not seem to be coordinated? On the contrary, the exchange system, in the first place, coordinates individual plans by benefiting both parties to every exchange. In the second place, the bulk of the present volume (Man, Economy, and State) is devoted to an explanation and analysis of the principles and order that determine the various exchange phenomena in a monetary economy: prices, output, expenditures, etc. Far from being chaotic, the structure of the monetary economy presents an intricate, systematic picture and is deducible from the basic existence of human action and indirect exchange.

Just because sometimes things appear chaotic does not mean that there is no order. Instead, human institutions and interactions develop a spontaneous order.

We economists need to differentiate between things we do not understand and seem chaotic and things that are actual chaos.

Nobel Laureates as General Experts

Chris House responds to a recent statement by Ed Prescott on monetary policy, but goes a step deeper than other responses. He is concerned about the treatment of Nobel Laureates as general economics experts.

All of the Nobel winners are extremely smart. They are a special group though. Nobel Prize winners have typically devoted their entire careers to a rather narrow study of a particular area. I’ll use Paul Krugman as an example. Paul Krugman’s opinions on trade have to be taken very seriously. When it comes to the best understanding of international trade, Krugman is the master of the universe. When he moves on to topics outside of trade however, his assessment loses a lot of its authority. Krugman is an excellent economist so it’s perfectly reasonable to expect that his opinions on heath policy, tax policy, business cycles, finance, etc. will be reasonable and it’s worth listening to him. That said, he is not an expert on any of those topics the way he is on trade.

He goes on to stress that Nobel Laureates are awarded for groundbreaking work, not consensus building. We should keep that in mind when reading or listening to them.

The whole article is worth reading.

Well Put My Friend

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On page 63 of Knowledge and Decisions, one of my all-time favorites, Thomas Sowell reminds readers how expensive knowledge is. Particularly, one of the favorite business relationship for people to complain about, the farmer and the dreaded "speculator", is actually less costly for everyone than the alternative-

The fact that costs differ vastly with respect to individual knowledge and preferences creates an opportunity for people who specialize in bearing particular kinds of risks. A farmer may have considerable knowledge of how to grow a particular crop, but little knowledge of the economic data or complex principles which cause the prospective price that he can expect for his harvest to vary by large amounts as of planting time. Someone else who has specialized in studying the economic facts and principles may have a much narrower range of expectations of future prices for that crop, even if he could not actually grow the crop himself if his life depended on it. Either individual could directly acquire the knowledge that the other possesses by investing the time needed for both the theoretical understanding and the practical experience to apply it. A less costly alternative may be to transact with one another on the basis of their existing knowledge.

Sowell is giving social scientists insight and giving everyday people advice. Look for those who know more than you about a topic and trade (knowledge) with them.

 

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Well Put My Friend

From page 435 of Elinor Ostrom's Nobel lecture-

The most important lesson for public policy analysis derived from the intellectual journey I have outlined here is that humans have a more complex motivational structure and more capability to solve social dilemmas than posited in earlier rational-choice theory. Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century. extensive empirical research leads me to argue that instead, a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans. We need to ask how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of more effective, equitable, and sustainable outcomes at multiple scales.

As I said in yesterday's post on materialism, people have diverse interests. They also have creative solutions to solving problems that economists think are impossible, i.e. Prisoner's Dilemna. The entrepreneur in people is a powerful force, but the only for good under proper institutions. This is the economic question of today.

Money, Growth, and the Materialistic Society

Many people believe that advanced economies, particularly the U.S., are materialistic. We only care about things that are bought and sold. Everything is about markets. This is a complaint often levied against economists.

On page 214 of Man, Economy, and State, Rothbard argues something I have never heard in this exact way. When discussing the increase in production and goods that are possible in a monetary economy, Rothbard argues-

"As a matter of fact, the existence of the money economy has the reverse effect. Since, as we know from the law of utility, the marginal utility of a unit of any good diminishes as its supply increases, and the establishment of money leads to an enormous increase in the supply of exchangeable goods, it is evident that this great supply enables men to enjoy unexchangeable goods to a far greater extent than would otherwise be the case. The very fact that exchangeable consumers’ goods are more abundant enables each individual to enjoy more of the nonexchangeable ones." (emphasis in original)

His reasoning is simple diminishing marginal utility. Monetary economies are so rich that they care less about consumer's goods.

This is true for me. I am mostly interested in things that money cannot buy, experiences, relationships, and knowledge. However, 300 years ago, you can be certain I would be very concerned about basic consumer's goods.