This is a collection of blog posts written by me in 2008, when I was twenty-one years old. I had a strong interest in Austrian economics and political economy, and I endeavored, by means of a blog, to re-invigorate critical research and discussion into libertarian-oriented scholarship.
I decided to re-post these old entries to serve primarily as an introduction to students interested in this exciting literature. Unfortunately, many of the links no longer work and the stimulating comments have been lost.
Please enjoy.
Sunday, March 27, 2011
The Tyranny of Reason
I am reading an excellent book now: Max Horkheimer's Eclipse of Reason. After slugging through Dialectic of Enlightenment (which, admittedly, I did not fully understand), this book is really a joy to read. The author argues that our current conception of reason is dangerous and tyrannical.
He calls this subjective reason: "It attaches little importance to the question whether the purposes [ends] as such are reasonable. ... The idea that an aim can be reasonable for its own sake --- on teh basis of virtues that insight reveals it to have in itself --- without reference to some kind of subjective gain or advantage, is utterly alien to subjective reason. ... There is no reasonable aim as such, and to discuss the superiority of one aim over another in terms of reason becomes meaningless. From the subjective approach, such a discussion is possible only if both aims serve a third and higher one, that is, if they are means, no ends."
This is the Austrian (Misesian, really) conception of rationality. Ends must be taken as given, because there is no way we can arbitrate between them. We can only speak of the appropriateness (rationality) of the employment of means in relation to given ends. Here we can say, for example, that one set of means is more reasonable than an alternative one in fulfilling a given end. But ends must be taken as given.
Horkheimer thinks this sytem of rationality is tyrannical. Here he is:
"The formalization of reason has far-reaching theoretical and practical implications. If the subjectivist view holds true, thinking cannot be of any help in determining the desirability of any goal in itself. The acceptability of ideals, the criteria for our actions and beliefs, the leading principles of ethics and politics, all our ultimate decisions are made to depend upon factors other than reason. They are supposed to be matters of choice and predilection, and it has become meaningless to speak of truth in making practical, moral, or esthetic decisions."
Now Horkheimer believes in an objective reason. But I will come to this later. Let us first see just what is so tyrannical about subjective (Misesian) reason. Here are some examples:
1.) It puts ethics in a different category from science.
2.) It prohibits passing judgment on man's actions and thereby contributes to cultural relativism.
3.) It emasculates critical inquiry (see this example:)
"Today, when you are summoned into a traffic court, and the judge asks you whether your driving was reasonable, he means: Did you do everything in your power to protect your own and other people's lives and property, and to obey the law? He implicitly assumes that these values must be respected. What he questions is merely the adequacy of your behavior in terms of these generally recognized standards. In most cases, to be reasonable means not to be obstinate, which in turn points to conformity with reality as it is.
4.) It actually destroys rationalism (in the tradition of Spinoza et al.) and privileges empiricism, whereby "Reason has liquidated itself as an agency of ethical, moral, and religious merit."
5.) Similarly, it turns reason into a mere instrument: "Meaning is supplanted by function or effect in the world of things and events. ... Truth is no end in itself." Also:
"What are the consequences of the formalization of reason? Justice, equality, happiness, tolerance, all the concepts that, as mentioned, were in preceding centuries supposed to be inherent in or sanctioned by reason, have lost their intellectual roots. They are still aims and ends, but there is no rational agency authorized to appraise and link them to an objective realty. ... According to the philosophy of the average modern intellectual, there is only one authority, namely, science, conceived as the classification of facts adn the calculation or probabilities. The statement that justice and freedom are better in themselves than injustice and oppression is scientifically unverifiable and useless."
6.) It creates the possiblity (and increases the liklihood) of political tyrrany:
"Since ends are no longer determined in the light of reason, it is also impossible to say that one economic or political system, no matter how cruel and despotic, is less reasonable than another. According to formalized [subjective] reason, despotism, cruelty, oppression are not bad in themselves; no rational agency would endorse a verdict against dictatorship if its sponsors were likely to profit by it [because it is useful to them in a purely instrumental sense]."
I could go on, but I think you get the idea. Now against this model of reason is presented a different kind of reason, what the author calls "objective reason." He defines it in the following way:
"This view asserted the existence of reason as a force not only in the individual mind but also in the objective world. ... The emphasis was on ends rather than means. ... [For example,] freedom by nature is not identical with freedom in fact. His political doctrine is based on rational insight and deduction rather than on empirical research.."
And here:
"Less and less is anything done for its own sake. A hike that takes a man out of the city to the banks of a river or a mountain top would be irrational and idiotic, judged by utilitarian standards; he is devoting himself to a silly or destructive pastime. In the view of formalized reason, an activity is reasonable only if it serves another purpose, e.g. health or relaxation, which helps to replenish his working power. In other words, an activity is merely a tool, for it derives its meaning only through its connection with other ends."
I like this contrast, and think it has a lot to tell Austrians. Where does praxeology, natural rights, etc. fit into all this? One thing I cannot yet accept, however, is the claim that this system "calls for a specific mode of behavior in each specific case ... there are more comprehensive structures demanding other lines of action equally independent of personal wishes and interests. "
In this sense, objective reason prescribes ends, while presumably subjective reason creates scope for the arbitrary selection of them. For this reason I think that objective reason also facilitates "the emergence of barbarism" if misused. Also, if two sides are making philosophical statements of absolute truth founded on reason, how do we arbitrate between them? Cannot subjective reason help us here? It seems that it would have to because the discovery of universal truths still remains fundamentall a subjective experience, and is therefore subject to variations in its interpretation and material application.
Now Austrians may wish to stick to their subjectivism and criticize "objective reason" for its emphasis on an "objective reality," but I think that Horkheimer attacks instrumental (subjective) reason quite effectively in this little book. He criticizes positivism, empiricism, pragmatism, and many other schools founded on subjective reason. I am inclined to agree that it is very dangerous to transform reason into a mere tool in the service of useful activities. We first have to rationally deduce the appropriate ends. Subjective reason cannot help us here.
He calls this subjective reason: "It attaches little importance to the question whether the purposes [ends] as such are reasonable. ... The idea that an aim can be reasonable for its own sake --- on teh basis of virtues that insight reveals it to have in itself --- without reference to some kind of subjective gain or advantage, is utterly alien to subjective reason. ... There is no reasonable aim as such, and to discuss the superiority of one aim over another in terms of reason becomes meaningless. From the subjective approach, such a discussion is possible only if both aims serve a third and higher one, that is, if they are means, no ends."
This is the Austrian (Misesian, really) conception of rationality. Ends must be taken as given, because there is no way we can arbitrate between them. We can only speak of the appropriateness (rationality) of the employment of means in relation to given ends. Here we can say, for example, that one set of means is more reasonable than an alternative one in fulfilling a given end. But ends must be taken as given.
Horkheimer thinks this sytem of rationality is tyrannical. Here he is:
"The formalization of reason has far-reaching theoretical and practical implications. If the subjectivist view holds true, thinking cannot be of any help in determining the desirability of any goal in itself. The acceptability of ideals, the criteria for our actions and beliefs, the leading principles of ethics and politics, all our ultimate decisions are made to depend upon factors other than reason. They are supposed to be matters of choice and predilection, and it has become meaningless to speak of truth in making practical, moral, or esthetic decisions."
Now Horkheimer believes in an objective reason. But I will come to this later. Let us first see just what is so tyrannical about subjective (Misesian) reason. Here are some examples:
1.) It puts ethics in a different category from science.
2.) It prohibits passing judgment on man's actions and thereby contributes to cultural relativism.
3.) It emasculates critical inquiry (see this example:)
"Today, when you are summoned into a traffic court, and the judge asks you whether your driving was reasonable, he means: Did you do everything in your power to protect your own and other people's lives and property, and to obey the law? He implicitly assumes that these values must be respected. What he questions is merely the adequacy of your behavior in terms of these generally recognized standards. In most cases, to be reasonable means not to be obstinate, which in turn points to conformity with reality as it is.
4.) It actually destroys rationalism (in the tradition of Spinoza et al.) and privileges empiricism, whereby "Reason has liquidated itself as an agency of ethical, moral, and religious merit."
5.) Similarly, it turns reason into a mere instrument: "Meaning is supplanted by function or effect in the world of things and events. ... Truth is no end in itself." Also:
"What are the consequences of the formalization of reason? Justice, equality, happiness, tolerance, all the concepts that, as mentioned, were in preceding centuries supposed to be inherent in or sanctioned by reason, have lost their intellectual roots. They are still aims and ends, but there is no rational agency authorized to appraise and link them to an objective realty. ... According to the philosophy of the average modern intellectual, there is only one authority, namely, science, conceived as the classification of facts adn the calculation or probabilities. The statement that justice and freedom are better in themselves than injustice and oppression is scientifically unverifiable and useless."
6.) It creates the possiblity (and increases the liklihood) of political tyrrany:
"Since ends are no longer determined in the light of reason, it is also impossible to say that one economic or political system, no matter how cruel and despotic, is less reasonable than another. According to formalized [subjective] reason, despotism, cruelty, oppression are not bad in themselves; no rational agency would endorse a verdict against dictatorship if its sponsors were likely to profit by it [because it is useful to them in a purely instrumental sense]."
I could go on, but I think you get the idea. Now against this model of reason is presented a different kind of reason, what the author calls "objective reason." He defines it in the following way:
"This view asserted the existence of reason as a force not only in the individual mind but also in the objective world. ... The emphasis was on ends rather than means. ... [For example,] freedom by nature is not identical with freedom in fact. His political doctrine is based on rational insight and deduction rather than on empirical research.."
And here:
"Less and less is anything done for its own sake. A hike that takes a man out of the city to the banks of a river or a mountain top would be irrational and idiotic, judged by utilitarian standards; he is devoting himself to a silly or destructive pastime. In the view of formalized reason, an activity is reasonable only if it serves another purpose, e.g. health or relaxation, which helps to replenish his working power. In other words, an activity is merely a tool, for it derives its meaning only through its connection with other ends."
I like this contrast, and think it has a lot to tell Austrians. Where does praxeology, natural rights, etc. fit into all this? One thing I cannot yet accept, however, is the claim that this system "calls for a specific mode of behavior in each specific case ... there are more comprehensive structures demanding other lines of action equally independent of personal wishes and interests. "
In this sense, objective reason prescribes ends, while presumably subjective reason creates scope for the arbitrary selection of them. For this reason I think that objective reason also facilitates "the emergence of barbarism" if misused. Also, if two sides are making philosophical statements of absolute truth founded on reason, how do we arbitrate between them? Cannot subjective reason help us here? It seems that it would have to because the discovery of universal truths still remains fundamentall a subjective experience, and is therefore subject to variations in its interpretation and material application.
Now Austrians may wish to stick to their subjectivism and criticize "objective reason" for its emphasis on an "objective reality," but I think that Horkheimer attacks instrumental (subjective) reason quite effectively in this little book. He criticizes positivism, empiricism, pragmatism, and many other schools founded on subjective reason. I am inclined to agree that it is very dangerous to transform reason into a mere tool in the service of useful activities. We first have to rationally deduce the appropriate ends. Subjective reason cannot help us here.
Stocks and Flows: In Response to Grant
In an earlier post Grant asks a question concerning Professor Maclachlan's treatment of savings and the interest rate:
"How could additional savings not affect rates of interest if they do affect bond prices? By definition, the price of a bond reflects its interest rate. Or was Maclachlan only referring to the safe rate of interest (T-bills), and if so, why is that rate necessarily more important in intertemporal coordination than the other rates of interest in bond markets?"
First, Maclachlan states what she means in the chapter entitled "Methodology and Definitions." She there writes that she is concerned with the rate on long-term bonds since "short-term rates can be seen as derivatives from long-term rates." She also argues that it is incorrect to conceive of the real (natural) interest rate apart from money and that it is useful to abstract from default risk, and brokerage (transaction) costs, in addition to the inflationary premium. Recognizing all the problems that follow these assumptions, Maclachlan concludes that "we seek to explain the nominal rate of interest that would exist if the inflationary premia were all zero." This enables Maclachlan to focus on "The theory of interest from an 'essentialist' perspective." Her work is theoretical.
As to the nexus between new savings and the interest rate, let me quote Maclachlan's best passage on this subject:
"On any given trading day, a certain number of bonds are sold to raise money to purchase investment goods and a certain number are bought to serve as a vehicle for new saving. But then there are trades that are unrelated to the current flows of investment and saving. Existing bonds are bought and sold by wealth-holders who are only rearranging their existing portfolios. It is customary to think of the latter type of trading as speculation. The primary motivation behind much of the trading is the expectation of securing a profit from future price changes. ... In an economy in where there are a large number of speculative trades between cash and bonds, there arises the possibility that, in any period, the non-speculative trades arising from saving and investment are overwhelmed to such an extent that they exert little effect. Such a situation could arise when speculators are highly responsive to small changes in the interest rate. Suppose, for instance, that there is a sharp increase in corporate investment causing an influx of new bonds into the loanable funds market. Traditional theory would predict a rise in the interest rate. But if speculators are active, they may see a small change in the interest rate arising from the new bond issues and immediately respond by selling or buying bonds: those who think that the small rise is an indication that bond prices have peaked will sell and those who think that it is an indication that they are on an upward trend will buy. No-one can say a priori whether the bulls or the bears will dominate but what one can say is that the resulting level of the interest rate will probably be different from what it would be if the speculators were not involved."
What a great passage, one of the best available. Maclachlan then spends the next few pages qualifying her statement by introducing several consideration involving elasticity, responsiveness the the state of financial markets. But the message is clear and direct: the loanable funds model is not as simple as it seems.
Other Post Keynesians have written on this subject, and let me quote a few passages:
Greg Hill:
"There is, however, another important dimension to the problem, for the market in which new bonds are issued is the same market in which existing bonds are traded. And the very same scheme of interest rates that must balance the supply and demand for new bonds must also balance the supply and demand for old bonds. What would happen, then, if there were a conflict between (1) the rate of interest that would balance the flows of new saving and investment and (2) the rate of interest that would balance the supply and demand for existing bonds? According to Keynes's account, the outcome will be determined by decisions concerning the existing stock of bonds because, at any given moment in time, the quantity of old bonds that can be released onto the market dwarfs the quantity of new bonds entering the market. ... Against the massive, preexisting stocks of old bonds and of money poised to enter the market in response to a change in the interest rate, the relatively small flows of new lending and borrowing can have little effect."
In another article (one in response to Professor Horwitz), Greg Hill writes:
"If a preponderance of those who hold these assets decide to sell bonds because they believe interest rates are going to rise and bond prices are going to fall, their fears will overwhelm any increase in the flow of saving. Horwitz does not come to grips with this problem (he does not even mention it), but as long as the interest rate remains tethered to the expectations of those who hold the pre-existing stock of financial assets, it cannot effectively carry out the task assigned to it by the neoclassical and Austrian schools." (my emphasis).
Another great economist, Victoria Chick, similarly writes:
"only sales of new issues represents borrowing and lending; the rest is transactions amongst current savers and existing security-holders. ... So long as there are existing as well as new assets, the direct link between saving and lending is broken. ... savings as money-flows were swamped in their effect on the rate of interest by transactions amongst existing wealth-holders."
Is anyone aware of how Austrians have responded to this challenge? I think it is a powerful argument. Greg Hill accuses Horwitz of not even mentioning it in their exchange.
"How could additional savings not affect rates of interest if they do affect bond prices? By definition, the price of a bond reflects its interest rate. Or was Maclachlan only referring to the safe rate of interest (T-bills), and if so, why is that rate necessarily more important in intertemporal coordination than the other rates of interest in bond markets?"
First, Maclachlan states what she means in the chapter entitled "Methodology and Definitions." She there writes that she is concerned with the rate on long-term bonds since "short-term rates can be seen as derivatives from long-term rates." She also argues that it is incorrect to conceive of the real (natural) interest rate apart from money and that it is useful to abstract from default risk, and brokerage (transaction) costs, in addition to the inflationary premium. Recognizing all the problems that follow these assumptions, Maclachlan concludes that "we seek to explain the nominal rate of interest that would exist if the inflationary premia were all zero." This enables Maclachlan to focus on "The theory of interest from an 'essentialist' perspective." Her work is theoretical.
As to the nexus between new savings and the interest rate, let me quote Maclachlan's best passage on this subject:
"On any given trading day, a certain number of bonds are sold to raise money to purchase investment goods and a certain number are bought to serve as a vehicle for new saving. But then there are trades that are unrelated to the current flows of investment and saving. Existing bonds are bought and sold by wealth-holders who are only rearranging their existing portfolios. It is customary to think of the latter type of trading as speculation. The primary motivation behind much of the trading is the expectation of securing a profit from future price changes. ... In an economy in where there are a large number of speculative trades between cash and bonds, there arises the possibility that, in any period, the non-speculative trades arising from saving and investment are overwhelmed to such an extent that they exert little effect. Such a situation could arise when speculators are highly responsive to small changes in the interest rate. Suppose, for instance, that there is a sharp increase in corporate investment causing an influx of new bonds into the loanable funds market. Traditional theory would predict a rise in the interest rate. But if speculators are active, they may see a small change in the interest rate arising from the new bond issues and immediately respond by selling or buying bonds: those who think that the small rise is an indication that bond prices have peaked will sell and those who think that it is an indication that they are on an upward trend will buy. No-one can say a priori whether the bulls or the bears will dominate but what one can say is that the resulting level of the interest rate will probably be different from what it would be if the speculators were not involved."
What a great passage, one of the best available. Maclachlan then spends the next few pages qualifying her statement by introducing several consideration involving elasticity, responsiveness the the state of financial markets. But the message is clear and direct: the loanable funds model is not as simple as it seems.
Other Post Keynesians have written on this subject, and let me quote a few passages:
Greg Hill:
"There is, however, another important dimension to the problem, for the market in which new bonds are issued is the same market in which existing bonds are traded. And the very same scheme of interest rates that must balance the supply and demand for new bonds must also balance the supply and demand for old bonds. What would happen, then, if there were a conflict between (1) the rate of interest that would balance the flows of new saving and investment and (2) the rate of interest that would balance the supply and demand for existing bonds? According to Keynes's account, the outcome will be determined by decisions concerning the existing stock of bonds because, at any given moment in time, the quantity of old bonds that can be released onto the market dwarfs the quantity of new bonds entering the market. ... Against the massive, preexisting stocks of old bonds and of money poised to enter the market in response to a change in the interest rate, the relatively small flows of new lending and borrowing can have little effect."
In another article (one in response to Professor Horwitz), Greg Hill writes:
"If a preponderance of those who hold these assets decide to sell bonds because they believe interest rates are going to rise and bond prices are going to fall, their fears will overwhelm any increase in the flow of saving. Horwitz does not come to grips with this problem (he does not even mention it), but as long as the interest rate remains tethered to the expectations of those who hold the pre-existing stock of financial assets, it cannot effectively carry out the task assigned to it by the neoclassical and Austrian schools." (my emphasis).
Another great economist, Victoria Chick, similarly writes:
"only sales of new issues represents borrowing and lending; the rest is transactions amongst current savers and existing security-holders. ... So long as there are existing as well as new assets, the direct link between saving and lending is broken. ... savings as money-flows were swamped in their effect on the rate of interest by transactions amongst existing wealth-holders."
Is anyone aware of how Austrians have responded to this challenge? I think it is a powerful argument. Greg Hill accuses Horwitz of not even mentioning it in their exchange.
The New Critics of F. A. Hayek
Any serious student of Austrian economics should be familiar with the arguments made by its critics. A sustained and honest attempt at intellectual engagement should be made in addressing their arguments, and efforts should be taken in effecting a possible synthesis between different views. As an example, I will use the work of three important critics of F. A. Hayek of late, and show that Austrian economics has failed to confront their criticisms directly.
1.) Ted Burczak. Ted Burczak has published in many areas related to Austrian economics (Keynes and uncertainty, Kirznerian entrepreneurship, and Hayekian subjectivism), but I think his most important contribution has been his critique of Hayek's incomplete subjectivism. Burczak describes Hayek as a postmodernist, but criticizes him for *failing* to extend his subjectivism to the area of law and jurisprudence. Burczak shows that Hayek's own subjectivism prevents him from defending the principle of the rule of law. Common law is, according to Burczak, non-neutral, and depends on subjective knowledge and interpretation of the facts. Moreover, rules are indeterminate and do not invariably follow the rule of precedent.
Austrians have not addressed this argument. And it is an important argument. It is true that the SDAE has recognized this book as important, but no serious discussion has taken place. Steven Horwitz wrote a review of the book for Reason, but the central themes are not addressed. Horwitz instead makes a libertarian defense of what he sees as the free society. Austrians need to decide whether Hayek's subjectivism is incomplete and flawed, or complete and immune from this criticism. As yet, no serious discussion has occurred.
2.) Fiona Maclachlan. Professor Maclachlan's book "Keynes' General Theory of Interest" is one of the best books on Austrian interest rate theory I have ever read. Maclachlan is the economist responsible for taking me into the fascinating field of Post Keynesian economics. She is a serious scholar, and is deeply knowledgeable about both Austrian and Post Keynesian economics. It is a shame she is not more widely recognized. Two basic points are made in her book: (1) the stock vs. flow debate is important to Austrian economics; and (2) Hayek's Ricardo Effect theory is seriously flawed. On the first point, Professor Maclachlan shows that the link between new savings (flows) and movements in the natural interest rate is impeded by the movement of existing bonds (stocks). Any new addition of savings will influence existing bonds in ways that overwhelm the effects new savings would have on the interest rate. This is an important criticism of Austrian economics. On the second point, Maclachlan shows that while increases in consumer demand lead typically to a fall in investment, decreases in consumer demand will not lead to an increase in investment.
I am not aware of any Austrian attempt to address these concerns.
3.) And finally I come to the economist who has done more than any other in attacking Austrian economics: Greg Hill. Greg Hill has published several important articles in Jeffrey Friedman's Critical Review. Students of Austrian economics must read his two articles "G. L. S. Shackle and the Economics of Ignorance" and "Keynes' Moral Critique of Capitalism" (these are not the exact titles), in addition to the two exchanges he had with Professor Horwitz. Greg Hill follows Shackle in showing that radical uncertainty prevents markets from achieving intertemporal coordination. Greg Hill has been influenced by Paul Davidson and Victoria Chick (and also, I would argue, Fiona Maclachlan), and has used this to great effect in challenging Austrian economics. The exchange he had with Steven Horwitz will show readers how far behind Austrians are in coming to grips with these important criticisms. For example, Professor Horwitz spends most of the space in his replies making the distinction between neo-classical economics and Austrian economics, while it is clear that Professor Hill already recognizes this distinction. He thus fails to address the more important criticisms of Professor Hill. Greg Hill attacks Austrian economics on the subject of capital and time, and also attacks both neo-classical and Austrian economics on the areas in which they are similar (loanable funds model and marginal productivity theory).
Three Austrian critics to read:
1.) Ted Burczak
2.) Fiona Maclachlan
3.) Greg Hill
Am I missing anyone?
1.) Ted Burczak. Ted Burczak has published in many areas related to Austrian economics (Keynes and uncertainty, Kirznerian entrepreneurship, and Hayekian subjectivism), but I think his most important contribution has been his critique of Hayek's incomplete subjectivism. Burczak describes Hayek as a postmodernist, but criticizes him for *failing* to extend his subjectivism to the area of law and jurisprudence. Burczak shows that Hayek's own subjectivism prevents him from defending the principle of the rule of law. Common law is, according to Burczak, non-neutral, and depends on subjective knowledge and interpretation of the facts. Moreover, rules are indeterminate and do not invariably follow the rule of precedent.
Austrians have not addressed this argument. And it is an important argument. It is true that the SDAE has recognized this book as important, but no serious discussion has taken place. Steven Horwitz wrote a review of the book for Reason, but the central themes are not addressed. Horwitz instead makes a libertarian defense of what he sees as the free society. Austrians need to decide whether Hayek's subjectivism is incomplete and flawed, or complete and immune from this criticism. As yet, no serious discussion has occurred.
2.) Fiona Maclachlan. Professor Maclachlan's book "Keynes' General Theory of Interest" is one of the best books on Austrian interest rate theory I have ever read. Maclachlan is the economist responsible for taking me into the fascinating field of Post Keynesian economics. She is a serious scholar, and is deeply knowledgeable about both Austrian and Post Keynesian economics. It is a shame she is not more widely recognized. Two basic points are made in her book: (1) the stock vs. flow debate is important to Austrian economics; and (2) Hayek's Ricardo Effect theory is seriously flawed. On the first point, Professor Maclachlan shows that the link between new savings (flows) and movements in the natural interest rate is impeded by the movement of existing bonds (stocks). Any new addition of savings will influence existing bonds in ways that overwhelm the effects new savings would have on the interest rate. This is an important criticism of Austrian economics. On the second point, Maclachlan shows that while increases in consumer demand lead typically to a fall in investment, decreases in consumer demand will not lead to an increase in investment.
I am not aware of any Austrian attempt to address these concerns.
3.) And finally I come to the economist who has done more than any other in attacking Austrian economics: Greg Hill. Greg Hill has published several important articles in Jeffrey Friedman's Critical Review. Students of Austrian economics must read his two articles "G. L. S. Shackle and the Economics of Ignorance" and "Keynes' Moral Critique of Capitalism" (these are not the exact titles), in addition to the two exchanges he had with Professor Horwitz. Greg Hill follows Shackle in showing that radical uncertainty prevents markets from achieving intertemporal coordination. Greg Hill has been influenced by Paul Davidson and Victoria Chick (and also, I would argue, Fiona Maclachlan), and has used this to great effect in challenging Austrian economics. The exchange he had with Steven Horwitz will show readers how far behind Austrians are in coming to grips with these important criticisms. For example, Professor Horwitz spends most of the space in his replies making the distinction between neo-classical economics and Austrian economics, while it is clear that Professor Hill already recognizes this distinction. He thus fails to address the more important criticisms of Professor Hill. Greg Hill attacks Austrian economics on the subject of capital and time, and also attacks both neo-classical and Austrian economics on the areas in which they are similar (loanable funds model and marginal productivity theory).
Three Austrian critics to read:
1.) Ted Burczak
2.) Fiona Maclachlan
3.) Greg Hill
Am I missing anyone?
An Interesting Article on Karl Popper
I am now making my way through several back issues of Critical Review, the journal edited by Jeffrey Friedman. I just finished reading a very good article on Karl Popper written by Fred Eidlin. I have never heard of him before, but it is clear that he understands Popper, although his interpretation of Popper's work differs from my own. I know that there are some readers on here who are similarly interested in Popper, so I thought I would discuss the areas in which I believe my views on Popper differ from those of Eidlin.
1.) Eidlin spends most of the early part of the essay talking about Popper's failure in effecting a paradigm shift within the sciences. He believes this is because Popper was misunderstood (more on this later). Here is Eidlin:
"Outside the advanced natural sciences, however, there is seldom anything analogous to a crucial experiment that would tip the scales in favor of a new paradigm. Hence, in the "softer" disciplines it is far more difficult to upset dominant approaches by means of evidence or rational argument. The emergence, survival, and death of traditions of inquiry in these fields have a great deal to do with such factors as reputation, personalities, and the politics of academic professions."
Eidlin concludes by arguing that Popper's "personality" is responsible for his failure in establishing a "Popperian" school. Now just some thoughts on the quoted passage. Is it true that it is more difficult to effect a paradigm shift in the social sciences than in the natural sciences? One would have to argue, inter alia, that (1) the natural sciences operate by means of "crucial experiments"; (2) the natural sciences are not subject to "academic politics"; and (3) paradigm shifts do not occur in the social sciences (e.g. postmodern literary criticism in English departments?).
2.) Now the author connects this discussion to his conclusion, which is quite controversial. Eidlin argues basically that Popper has been misunderstood chiefly because his key followers have failed to consistently follow Popper's own philosophy. He writes:
"Popperians, no less than their adversaries, can be (and have been) dogmatic, insensible to falsification, and prone to identify themselves personally with their theories. This suggests that there may be a utopian aspect to Popperian norms. ... If we reflect on Popperian norms, it becomes clear how difficult they are to practice."
Now it may be true that falsificationism is difficult to practice, but have his key followers also failed to practice them consistently? Do Popperians avoid criticism and the discovery of mistakes in the explication of their own philosophy?
3.) I really enjoyed Eidlin's discussion of Popper's political philosophy. The author agrees with Bryan Magee (who wrote an excellent book on Popper) that Popper's political philosophy is a theory of "democratic socialism." He does this by arguing that in criticizing Marx and Plato, Popper was actually trying to improve their work, rather than "undermining" it. Now this was not my reading of The Open Society and its Enemies. It was quite clear to me that Popper selected Plato and Marx for criticism because he rejected their theories, not because he wanted to improve them. In fact, in the preface to the first volume, Popper writes that he has chosen to focus on Plato because of his positive reputation. Why "improve" a theory that is already revered? Popper, I believe, was trying instead to "raze it to the ground."
But Eidlin is not concerned with this. He takes it for granted that Popper was trying to improve the theories of Plato and Marx, and then uses this interpretation to attack conservatives who sympathize with Popper's work. Eidlin argues that Popper followed Marx in viewing economic freedom as unjust and inhumane. Eidlin writes:
"It is also a philosophy requiring that we do something to bring about a better society, and that we not rely upon something outside ourselves (whether the 'invisible hand' of the market or the 'inexorable laws of history') to do it for us. ... Even violent means may be permissible in the pursuit of just ends provided that sufficient consideration has been given to such questions as the liklihood that these means will actually lead to the expected ends."
I would have never thought that such an interpretation of Popper's political work would be possible. It has been some time since I read his Open Society, but I remember it as being the most sophisticated defense of a free and "open" society available.
It seems to come down to the interpretation of "piecemeal engineering." Now Eidlin wants to use this theory to positively implement "democratically socialist" policies. The problem I have with this argument is that it smacks too much of "utopian engineering." For Popper, the point never was to "make society better," but to "remove evils." This is more consistent with his falsificationist approach. A writer (I can't remember who) once used the example of public schooling: Our goal should not be to build the best school we can, but rather to improve the schools that are currently worst off. That is what "piecemeal engineering" is all about as I see it.
Anyway, this was an excellent paper. I would encourage anyone else interested in Popper to read it.
Source:
Fred Eidlin "Karl Popper, 1902-1994: Radical Fallibilism, Political Theory, and Democracy, Critical Review 10, no. 1 (winter 1996): 135-153.
1.) Eidlin spends most of the early part of the essay talking about Popper's failure in effecting a paradigm shift within the sciences. He believes this is because Popper was misunderstood (more on this later). Here is Eidlin:
"Outside the advanced natural sciences, however, there is seldom anything analogous to a crucial experiment that would tip the scales in favor of a new paradigm. Hence, in the "softer" disciplines it is far more difficult to upset dominant approaches by means of evidence or rational argument. The emergence, survival, and death of traditions of inquiry in these fields have a great deal to do with such factors as reputation, personalities, and the politics of academic professions."
Eidlin concludes by arguing that Popper's "personality" is responsible for his failure in establishing a "Popperian" school. Now just some thoughts on the quoted passage. Is it true that it is more difficult to effect a paradigm shift in the social sciences than in the natural sciences? One would have to argue, inter alia, that (1) the natural sciences operate by means of "crucial experiments"; (2) the natural sciences are not subject to "academic politics"; and (3) paradigm shifts do not occur in the social sciences (e.g. postmodern literary criticism in English departments?).
2.) Now the author connects this discussion to his conclusion, which is quite controversial. Eidlin argues basically that Popper has been misunderstood chiefly because his key followers have failed to consistently follow Popper's own philosophy. He writes:
"Popperians, no less than their adversaries, can be (and have been) dogmatic, insensible to falsification, and prone to identify themselves personally with their theories. This suggests that there may be a utopian aspect to Popperian norms. ... If we reflect on Popperian norms, it becomes clear how difficult they are to practice."
Now it may be true that falsificationism is difficult to practice, but have his key followers also failed to practice them consistently? Do Popperians avoid criticism and the discovery of mistakes in the explication of their own philosophy?
3.) I really enjoyed Eidlin's discussion of Popper's political philosophy. The author agrees with Bryan Magee (who wrote an excellent book on Popper) that Popper's political philosophy is a theory of "democratic socialism." He does this by arguing that in criticizing Marx and Plato, Popper was actually trying to improve their work, rather than "undermining" it. Now this was not my reading of The Open Society and its Enemies. It was quite clear to me that Popper selected Plato and Marx for criticism because he rejected their theories, not because he wanted to improve them. In fact, in the preface to the first volume, Popper writes that he has chosen to focus on Plato because of his positive reputation. Why "improve" a theory that is already revered? Popper, I believe, was trying instead to "raze it to the ground."
But Eidlin is not concerned with this. He takes it for granted that Popper was trying to improve the theories of Plato and Marx, and then uses this interpretation to attack conservatives who sympathize with Popper's work. Eidlin argues that Popper followed Marx in viewing economic freedom as unjust and inhumane. Eidlin writes:
"It is also a philosophy requiring that we do something to bring about a better society, and that we not rely upon something outside ourselves (whether the 'invisible hand' of the market or the 'inexorable laws of history') to do it for us. ... Even violent means may be permissible in the pursuit of just ends provided that sufficient consideration has been given to such questions as the liklihood that these means will actually lead to the expected ends."
I would have never thought that such an interpretation of Popper's political work would be possible. It has been some time since I read his Open Society, but I remember it as being the most sophisticated defense of a free and "open" society available.
It seems to come down to the interpretation of "piecemeal engineering." Now Eidlin wants to use this theory to positively implement "democratically socialist" policies. The problem I have with this argument is that it smacks too much of "utopian engineering." For Popper, the point never was to "make society better," but to "remove evils." This is more consistent with his falsificationist approach. A writer (I can't remember who) once used the example of public schooling: Our goal should not be to build the best school we can, but rather to improve the schools that are currently worst off. That is what "piecemeal engineering" is all about as I see it.
Anyway, this was an excellent paper. I would encourage anyone else interested in Popper to read it.
Source:
Fred Eidlin "Karl Popper, 1902-1994: Radical Fallibilism, Political Theory, and Democracy, Critical Review 10, no. 1 (winter 1996): 135-153.
Cowen and Fink on the ERE
I finally got around to reading Cowen and Fink's great article on the "Inconsistent Equilibrium Construct" of Mises and Rothbard's Evenly Rotating Economy (ERE). This short piece is really great, and, in my view, strikes a death blow to the Austrian model of equilibrium.
Cowen and Fink describe the model accurately: (1) it is used to predict the direction of change; (2) it freezes all the data so that it can be used as a first step toward an analysis of complex change; and (3) it is used as a foil.
The paper makes three important criticisms of this model. First, Cowen and Fink claim that there is no tendency for a market to move toward equilibrium because "sequential transactions are not consistent with the notion of an intertemporal general equilibrium." In other words, for a tendency toward equilibrium to prevail, the equilibrium system must already be pre-ordained.
Second, and perhaps most important, is the idea that there can be no prices in equilibrium because "prices are institutions that have evolved over time in order to help coordinate the plans of market participants. [Therefore,] in a world in which all plans are already coordinated, and actors possess all relevant information, prices would not serve any function." This is an excellent point, and illustrates the absurdity of the Austrian ERE model. Technical general equilibrium theorists (for example, Frank Hahn) have recognized that money cannot exist in equilibrium, and have rightly excluded it from their analyses of equilibria.
And third, the ERE cannot be used as a foil because in equilibrium there is no human action. "If, as Mises claims, the ERE has no human action, then we cannot claim there is a tendency towards equilibrium, since this would imply the nonsensical conclusion that there is a tendency for human action (and human institutions) to disappear."
I thought this short article was really great. For anyone familiar with this literature, has there been any Austrian responses to this piece? Have Austrians accepted these criticisms, or simply ignored them? My impression is that Austrians have still retained the ERE as a model for analyzing change, although they are quick to admit its real world inapplicability. I would be very interested in reading any Austrian responses to this article.
Reference: Tyler Cowen and Richard Fink "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard" The American Economic Review, vol. 75, no. 4 (September 1985), pp. 866-869.
Cowen and Fink describe the model accurately: (1) it is used to predict the direction of change; (2) it freezes all the data so that it can be used as a first step toward an analysis of complex change; and (3) it is used as a foil.
The paper makes three important criticisms of this model. First, Cowen and Fink claim that there is no tendency for a market to move toward equilibrium because "sequential transactions are not consistent with the notion of an intertemporal general equilibrium." In other words, for a tendency toward equilibrium to prevail, the equilibrium system must already be pre-ordained.
Second, and perhaps most important, is the idea that there can be no prices in equilibrium because "prices are institutions that have evolved over time in order to help coordinate the plans of market participants. [Therefore,] in a world in which all plans are already coordinated, and actors possess all relevant information, prices would not serve any function." This is an excellent point, and illustrates the absurdity of the Austrian ERE model. Technical general equilibrium theorists (for example, Frank Hahn) have recognized that money cannot exist in equilibrium, and have rightly excluded it from their analyses of equilibria.
And third, the ERE cannot be used as a foil because in equilibrium there is no human action. "If, as Mises claims, the ERE has no human action, then we cannot claim there is a tendency towards equilibrium, since this would imply the nonsensical conclusion that there is a tendency for human action (and human institutions) to disappear."
I thought this short article was really great. For anyone familiar with this literature, has there been any Austrian responses to this piece? Have Austrians accepted these criticisms, or simply ignored them? My impression is that Austrians have still retained the ERE as a model for analyzing change, although they are quick to admit its real world inapplicability. I would be very interested in reading any Austrian responses to this article.
Reference: Tyler Cowen and Richard Fink "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard" The American Economic Review, vol. 75, no. 4 (September 1985), pp. 866-869.
Tyler Cowen on Keynes' General Theory: Chapter Four
I have been following Professor Cowen's discussion of Keynes' General Theory with some interest, and found his post on chapter 4 particularly provocative. Cowen claims that this chapter attempts to address the problems raised by Hayek concerning capital theory. A few thoughts:
(1) I am not sure how this chapter destroys Austrian capital theory; Keynes' more immediate concerns appear to me to be quite different.
(2) Keynes is concerned in this chapter rather with the volume of current output, and not its money value. This is important because in chapter 6 (Income, Saving, Investment) Keynes shows that value is not difficult to measure; only volume is. (Thus the equation A + G - A1. G measures the value of equipment.)
(3) With volume thus occupying a predominant position, Keynes next concerns himself with the question of net output (viz. physical additions to the capital stock). This of course is difficult to calculate because capital is heterogeneous. Thus Keynes proposes that we deal with this "as for example when all the items of one output are included in the same proportions in another output."
(4) The measures proposed by Keynes concerning the problem of net output are "quantities of money-value" and "quantities of employment." For Keynes, money-value is "strictly homogeneous," and labor "can be made so."
(5) Now in trying to understand how Keynes attempts to make labor homogeneous, it is important to refer back to his chapter 2 (postulates of classical economics). It will be recalled that Keynes abandoned only one of the postulates, namely, "the utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment." Keynes shows this to be false. However, Keynes retained the presumed validity of the first postulate, namely, "the wage is equal to the marginal product of labour." We can see now why he chose to do this. Keynes' unwillingness to abandon postulate 1 in the classical theory can be traced to his need to measure changes in output, and he could do this only by assuming that labor is homogeneous. In support of this view, please consider this passage:
"This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great differences in teh specialised skill of individual workers and in their suitability for different occupations. For, if the remuneration of the workers is proportional to their efficiency, the differences are dealt with by our having regarded individuals as contributing to the supply of labour in proportion to their remuneration. ... We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment" (pages 41-42, emphasis mine).
However, I follow Shackle in his abandonment of both of the postulates of classical economics, and I think Keynes was wrong in retaining the first postulate. But we can see why Keynes chose to do so; it was essential for chapter 4.
I think Tyler Cowen missed the whole point of this chapter. But this is just my reading. I would urge Professor Cowen to try to tie in the various arguments from different chapters into the one he is currently considering; you cannot read chapter 4 in isolation. It is very important to know how it relates to chapters 2 and 6, and possibly many others.
(1) I am not sure how this chapter destroys Austrian capital theory; Keynes' more immediate concerns appear to me to be quite different.
(2) Keynes is concerned in this chapter rather with the volume of current output, and not its money value. This is important because in chapter 6 (Income, Saving, Investment) Keynes shows that value is not difficult to measure; only volume is. (Thus the equation A + G - A1. G measures the value of equipment.)
(3) With volume thus occupying a predominant position, Keynes next concerns himself with the question of net output (viz. physical additions to the capital stock). This of course is difficult to calculate because capital is heterogeneous. Thus Keynes proposes that we deal with this "as for example when all the items of one output are included in the same proportions in another output."
(4) The measures proposed by Keynes concerning the problem of net output are "quantities of money-value" and "quantities of employment." For Keynes, money-value is "strictly homogeneous," and labor "can be made so."
(5) Now in trying to understand how Keynes attempts to make labor homogeneous, it is important to refer back to his chapter 2 (postulates of classical economics). It will be recalled that Keynes abandoned only one of the postulates, namely, "the utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment." Keynes shows this to be false. However, Keynes retained the presumed validity of the first postulate, namely, "the wage is equal to the marginal product of labour." We can see now why he chose to do this. Keynes' unwillingness to abandon postulate 1 in the classical theory can be traced to his need to measure changes in output, and he could do this only by assuming that labor is homogeneous. In support of this view, please consider this passage:
"This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great differences in teh specialised skill of individual workers and in their suitability for different occupations. For, if the remuneration of the workers is proportional to their efficiency, the differences are dealt with by our having regarded individuals as contributing to the supply of labour in proportion to their remuneration. ... We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment" (pages 41-42, emphasis mine).
However, I follow Shackle in his abandonment of both of the postulates of classical economics, and I think Keynes was wrong in retaining the first postulate. But we can see why Keynes chose to do so; it was essential for chapter 4.
I think Tyler Cowen missed the whole point of this chapter. But this is just my reading. I would urge Professor Cowen to try to tie in the various arguments from different chapters into the one he is currently considering; you cannot read chapter 4 in isolation. It is very important to know how it relates to chapters 2 and 6, and possibly many others.
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