World Series 2018

The Boston Red Sox won the World Series for the 4th time this century. They were favored to win, given their regular season W-L% (wins/games) was .667 versus the Los Angeles Dodgers' .564.

The Dodgers won only one game, the third. I made an error reporting on that game. My wife and I were visiting Nashville, TN with two other couples. We went to the Grand Old Opry on October 26. Returning to our motel afterwards I looked on my cell phone to see the result of the game. It was well past midnight, and I saw the score as Red Sox 2, Dodgers 1. Assuming the game was over by then, I reported the score to my companions.

The next morning I was mildly chided by my companions, because the Dodgers had won. Looking on my cell phone again, I found that the 2-1 score was after the Red Sox scored a run in the top of the 13th inning, but before the inning ended. (The score was tied 1-1 after 9 innings.) I had unintentionally reported fake news and didn't heed Yogi Berra: "It ain't over 'til it's over." The Dodgers scored a run in the bottom of the 13th inning to tie the game 2-2. The game continued until the bottom of the 18th inning when the Dodgers scored again to win 3-2. It easily broke the record for the longest game in World Series history -- 7 hours, 20 minutes, 18 innings. (link). 

Modern Austrian Economics #5

In Volume 3 Karen Vaughn wrote about Hayek's theory of market order, which he sometimes characterized as a complex, adaptive system and other times as a spontaneous order.

In some of his writing, he described an economy, or market, as a complex phenomena. The complexity of a system depends on a sufficient number of elements showing a pattern of characteristic attributes. The more the number of elements, the more complex it is. Complex systems demonstrate emergent properties, characteristics that cannot be simply reduced to an account of the individual elements.

Hayek took evolutionary biology as a prime example of a complex system to illustrate that the exact outcome of evolution depended on relationships between an overwhelming number of variables, the exact relationships among which could never be fully specified.

Hayek used Walrasian general equilibrium (#1, #2) as an example of a complexity system in social science. General equilibrium describes a pattern of price relationships more or less observed in the real world but the theory itself can never be predictive of actual prices because the initial conditions can never be fully specified. The primary value of general equilibrium theory, he argued, was not to predict the future course of events, but only to provide a general description of a particular kind of order.

Vaughn says that Hayek focused on the number of variables and the complexity of relationships among the elements, but he did not identify the defining features of modern complex adaptive systems: non-linearity of the elements and the path-dependent interactions among them. On the other hand, his emphasis elsewhere on the process of learning in a market suggests non-linearity and path dependency.

He described a spontaneous order as a social pattern that that emerges as "the result of human action but not of human design," that is, "from the bottom up" through the actions of individuals directed to their own purposes. The order is unplanned in the sense that it was not designed by some higher intelligence or a central planner. The reason that order can emerge from the self-directed actions of individuals is that their actions are not only purposeful but the actors are also rule followers. These rules consist of laws, customs, and habits that emerge as an unintended consequence of individual action -- "emergent properties" in the parlance of complexity theory.

Piecing together Hayek's description of a market economy from his various writing, Vaughn thinks that his understanding of markets is much closer to a complex, adaptive system than it is an example of Walrasian general equilibrium, in terms of a system of simultaneous linear equations. She gives several reasons for this.

Vaughn concludes:

"While many may remain skeptical, I am cautiously optimistic that the science of complexity, by clarifying the characteristics of non-linear, adaptive systems may prove to be an aid in articulating a more Hayekian understanding of market order. For instance, the mature theory of complex adaptive systems can help support Hayek's central argument against central planning.
     Consider the "mathematical solution" which held that all one needed was to set up a system of simultaneous [linear] equations to generate equilibrium prices that could guide planners. At the time of the economic calculation debate, computers were not available to attempt to set up and solve those equations, so even the socialist sympathizers agreed that such a scheme was "practically" impossible, at least for the immediate future. Oskar Lange's "trial and error" solution to the problem of factor pricing was a fall-back to achieve the same goal without computers. However, Lange never gave up on the possibility that one day, computers could be used to direct a centrally planned economy, making his clumsy trial and error solution obsolete. The science of complexity can finally put that fantasy to rest, and at the same time, vindicate Hayek's insight" (p. 344).

Modern Austrian Economics #4

The first chapters of Volume 3 (by different authors) are about "institutional economics." There doesn't seem to be much in common among the institutional economists.  Some focus on the role of institutions and others on change and evolution. They seem most similar as a contrast to neoclassical economists, who strongly assume stable preferences, rationality and equilibrium.

Peter Boettke argues that Austrians are "insitutionalists" due to their focus on change. For example, Hayek wrote about the evolution of institutions -- markets, laws, and rules of conduct -- as they evolve spontaneously as individuals interact. They are the result of human action, not human design.

William Dugger disputes Austrians being in anyway institutionalists. He declares the essence of institutionalist economics is dissent from the mainstream. He says institutionalism is inherently egalitarian. To be an Institutionalist means to be for the "underdog", the poor and workers. The Austrians are inherently elitist, for the rich and entrepreneurs.

Modern Austrian Economics #3

Another chapter in Volume 2 of Modern Austrian Economics is 'Austrian and Neoclassical Economics: Any Gains From Trade?' by Sherwin Rosen. (The article can be read for free on JSTOR with a free account.) Rosen is not an Austrian economist, but the article gives a decent overview of how the two school differ on the importance of some concepts and their meanings. The bold text  following come from some of Rosen's section headings.

Process and Equilibrium

Neoclassical economics is much more concerned about equilibrium under known conditions of resource availability, technology and preferences. Equilibrium is an overall solution in which individual decisions are mutually compatible and can be implemented by all. There is a well-defined solution to resource allocation.

Austrian economics gives far more attention to entrepreneurship, and entrepreneurs disturb the equilibrium. Economic activity is a process. The economy is in a perpetual state of disequilibrium: things are always changing and in a state of flux. It is ever evolving, creating unforeseen profit opportunities that agents are trying to find and exploit.

Me: Ludwig von Mises made an imaginary construct that he called an evenly rotating economy. Production and consumption are unchanging from one time period to the next. It has no room for entrepreneurs. They induce change.

Coordination and the Invisible Hand

In neoclassic economics an 'invisible hand' coordinates the rationality of individual decisions and the fact that commonly known market prices exhaust all gains from trade. Austrians find this misleading. Specialized, individual participants produce and consume only a tiny fraction of the huge set of goods that are actually traded. Many of the goods and services and how they systematically fit can't be identified well by anyone.

Evolutionary Processes

In Austrian economics the fundamental issue is assessing how all the individual pieces fit together and how to make sense of the whole. They don't specify empirical criteria for assessing the performance of the economy as a whole.

The Austrian view is built up from the spontaneous activities of myriad expert specialists single-mindedly pursuing and perfecting their own component businesses, including intermediaries who buy and sell from the most economical suppliers and assemble and market the final product. There is no overall plan.

Markets, Socialism and Central Planning

Before WW II it was popular among economists to claim that a central planner could compensate for various market "imperfections" (monopoly, costs of dislocation, unemployment, and so on). The alleged result would be superior to uncontrolled market forces. Austrians, led by Mises and Hayek, argued that this vision of market socialism was impossible, and it was based on a misguided vision of markets and prices. The central planner doesn't have the information and knowledge to do what markets with decentralized decision-making.

Empirical Content and Justifying Methodology

The building of macro economic models using empirical statistical data goes hand in hand with attempts at political control of the economy. Austrian economists don't want such control.

The Role of the Entrepreneur

Entrepreneurs are important to Austrian economics and rarely mentioned in neoclassical economics.

Me: Entrepreneurs induce change. The longer the time period, the more markets change. Neoclassical economics is far more interested in stability with little change over fairly short time periods.

Modern Austrian Economics #2

In Volume 2 of Modern Austrian Economics Murray Rothbard opines on other economic schools and the other sub-schools of Austrian economics. The chapter's title is 'The Present State of Austrian Economics' (also here). Rothbard was highly polemical and made strawmen of his Austrian school competitors. For example:

"My contentions are: that the correct Austrian paradigm is and can only be the Misesian, that is, the paradigm of Misesian praxeology; that the competing Austrian paradigms, in particular the fundamentally irrational “evolved rules,” “knowledge,” “plans,” and “spontaneous order” paradigm of Hayek and the more extreme “ultra-subjectivist” or nihilist paradigm of Lachmann, have both been fallacious and pernicious" (7).

"Hayek’s entire work, on the contrary, is devoted to a denigration of human reason. As David Gordon has pointed out, Hayek virtually assumes that human beings act unconsciously—of course, a contradiction in terms—and therefore that they neither know nor think nor choose. Therefore, their actions do not require understanding; hence Hayek’s emphasis that the best that can be done is rely on a blind and unconscious adherence to evolved rules" (23).

"Hayek presents three crucial concepts as ways of highlighting his reliance on human blindness and irrationality: “spontaneous order”; the “unintended consequences of human action”; and the product of “human action, but not human design.” We need not tarry on the phrase “spontaneous order,” except to note that the word “spontaneous,” once again, connotes lack of thought, activity that is not consciously chosen, but rather purely reflexive and tropistic. It would have been far more accurate to use a term such as “voluntary,” which would at least focus on voluntarily chosen, rather than coerced, actions" (25-6).

Hayek did denigrate "constructivist rationalism", but not human reason in the absurd, sweeping manner Rothbard claims. Hayek's main criticism was for advocates of central planning and their hubris and ignorance, not typical private sector producers and consumers. Hayek's "spontaneous order" was a contrast to the "command order" advocated by fans of central planning. Hayek's "unintended consequences" was mainly to identify consequences of implementing central planning that the central planners or their supporters did not intend or anticipate.

A clear case of Rothbard making a strawman is others' alleged misuse of "evolution."  Rothbard says evolution requires the existence of genes and mutations. That misses the point. When analogies have been made between economics and evolutionary biology, the noted similarity has been adaptation, competition, and comparing the trial-and-error method of entrepreneurs to mutations.

Rothbard was also very critical of the ideas of Israel Kirzner and Ludwig Lachmann. I skip more details.

The next chapter of Modern Austrian Economics 'Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics' (also here) by G. A. Selgin gives a much more balanced and objective view. For example, in Hayek's view:

"Praxeology, in seeking "apodictically certain" conclusions, had so drained itself of content as to become useless as an independent means for deriving useful truths about reality. Far from relying exclusively upon the fact of purposefulness, applications of praxeology to catallactic phenomena involve unacknowledged auxiliary assumptions about the dissemination and use of knowledge by market participants; assumptions "about causation in the real world"."

"The thrust of Hayek's essay is, however, unaffected by the specific type of empirical evidence it recommends. It claims that even pure economics, insofar as it concerns market phenomena and not merely isolated actions of individuals, must be partly an empirical or psychological science rather than a logical-deductive one. It must investigate the meanings attached by individual actors to their situation, and it must examine the particular motivations and stimuli that give rise to their choices. It must become a science, not just of action, but of people's reactions, and how these reactions may reflect the use and dissemination of knowledge."

Modern Austrian Economics #1

Modern Austrian Economics is a 3-volume set (link for volume 1) about the Austrian School  of  economics since about 1970. Ludwig von Mises was the prominent member of the school from about 1920-50. Then the school split into two main camps, one exemplified by Mises and the other exemplified by Friedrich Hayek. Mises died in 1973 and Hayek's attention turned mostly to law and political science. Subsequently leadership of the Austrian School more or less divided into camps led by three men -- Murray Rothbard, Israel Kirzner, and Ludwig Lachmann.

Rothbard is very loyal to Mises and anti-Hayek. Kirzner and Lachmann agree with Hayek in some respects, but not the same ones.  Kirzner and Lachmann have their own disagreements, especially about entrepreneurship.

The editor of Modern Austrian Economics writes: "Rothbardians have remained at the margins of this new development in Austrian thought, since the concepts of institutions and of societal evolution are hardly compatible with the Misesian emphasis on rationalism. In this respect, the criticisms directed at the Hayekian idea of cultural evolution is evocative. It focuses essentially on the Hayekian idea of the efficiency of institutions that have been selected throughout history. That an institution is the outcome of an Evolutionary process must not hide the fact that all human action is, by definition, based on reason and is, by no means, conditioned by habit or custom. 'Hayek's entire work, on the contrary, is devoted to a denigration of human reason' (Rothbard, 1992, p. 142). The core concepts of the theory of cultural evolution -- 'spontaneous order', 'unintended consequences of human action', 'product of human action but not of human design' -- are subject to vigorous objections. The notion of spontaneity makes choice appear an act of unawareness. According to Misesians, individuals take recourse to institutions to ensure a satisfactory outcome of their economic decisions, but not because they are conditioned, that is, because they would understand that their past choices have turned out to have been efficient. Rather, the individuals' choice is based on their own free will and is conscious, it is the outcome of a means--end calculus. Human action is always, by definition, intentional. ... The Hayekian critique of constructivism appears, in this respect, to collide head on with rationalism that is unable to grasp the reasons for its emphasis on the unintended consequences of human actions" (Volume 1, xxviii-xxix).

What did Mises mean by "rationalism"?

"Human action is necessarily always rational. The term "rational action" is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man" (Human Action, 18)

"When applied to the means chosen for the attainment of ends, the terms rational and irrational imply a judgment about the expediency and adequacy of the procedure employed" (20).

"Praxeology deals with the ways and means chosen for the attainment of such ultimate ends. Its object is means, not ends" (21)

Despite his avowed loyalty and contrary to Mises, Rothbard asserts that rationalism is about ends or goals as well as means. "At the core of the constellation of crucial differences between the Misesian and Hayekian paradigms is their respective attitudes toward human reason. Man, affirms Mises after Aristotle, is the uniquely rational animal; reason is man’s unique and essential instrument to find out what his needs and preferences are, and to discover and employ the means to achieve them. Mises’s stress on action, on acting man, therefore necessarily stresses the vital importance of human reason. Misesian Man acts, and therefore consciously selects goals, and decides how to pursue them.
      Hayek's entire work, on the contrary, is devoted to a denigration of human reason." (Modern Austrian Economics, Volume 2, p. 28; also here, p. 23).

To be continued.

Rothbard on Economic Paradigms

Murray Rothbard made a succinct summary of Thomas Kuhn’s notion of paradigms and some interesting comments about it related to economic theory in his ‘Ludwig von Mises and the Paradigm of Our Age’ (here, also here).

Rothbard’s summary: Professor Kuhn provided a comprehensive model of the adoption and maintenance of scientific belief. He states that scientists adopt a fundamental vision or matrix of an explanatory theory, a vision that he calls a “paradigm.” And whatever it is, it governs all scientists in that field without being any longer tested or questioned, and further research comes from minor applications of the paradigm, clearing up loopholes or remaining anomalies. But gradually the anomalies pile up, and the paradigm weakens. Rather than being give up, patches and ad hoc adjustments are made. When the unresolved anomalies are big enough, a “crisis situation” is recognized, until it can be replaced by a new, comprehensive, competing theory that avoids or solves the pre-existing anomalies. It’s a “scientific revolution.” Even then, there remain those who hang on to the older theory, at least partly.

Without adopting Kuhn’s philosophical relativism, it becomes clear that intellectual vested interests play a more dominant role than open-minded testing, it may happen that a successor theory is less correct than a predecessor. If true, we must be open to the possibility that as discarded theories are forgotten and not looked at again, they may have contained scientific truth.

To whatever extent Kuhn’s thesis is correct about the physical sciences, where empirical and laboratory tests are obtained fairly easily, how much more it must be true in philosophy and the social sciences, where no such laboratory tests are possible.

Until recent decades, the classics of philosophy, political theory, and economics were read not just for antiquarian interest but for the truths that might lie there. The student of philosophy read Aristotle, Aquinas, or Kant not as an antiquarian game but to learn about answers to philosophical questions. It was not assumed that, as in physical sciences, all the contributions of past thinkers had been successively incorporated into the latest edition of the currently popular textbook, and it was therefore not assumed that it was far more important to read the latest journal article in the field than the classic works.

In recent decades the social sciences have been increasingly divorced from reality. They substitute statistics for experiment, abstract math, narrow specialties, writing technical minutiae for journals and not writing treatises characterize the discipline.

Rothbard continues, lamenting the effect on economics. “Of all the tragedies wrought by this collective amnesia in economics, the greatest loss to the world is the eclipse of the Austrian school.”