Arnold Kling  

Recognized but Marginalized

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In this week's conversation with Russ Roberts, Pete Boettke talks about Ludwig von Mises. A number of interesting issues come up. One phrase that recurs a few times is "recognized but marginalized," which describes the fact that although many Austrian economists have been honored over the years, they and their contributions are not included in the standard curriculum at the leading graduate schools.

As Boettke points out, the profession is split between economists who work out the properties of equilibrium and economists who focus on institutional processes. The latter are marginalized, although they include many Nobel Laureates, including Douglass North and Elinor Ostrom.

The focus on properties of equilibrium attracts interventionists. You point out an undesirable property of an equilibrium, and then you propose a fix. For example, Stiglitz and Rothschild pointed out that a health insurance market could collapse because of adverse selection, so it follows that government should impose a mandate to purchase health insurance.

The focus on institutional processes attracts libertarians. You see the benefits of the forces of competition and creative destruction. You see the adverse institutional properties of government.

To the equilibrium theorist, the institutional economist is ignoring market failure. To the institutional economist, the equilibrium theorist is ignoring the reality that technology is changing, tastes are changing, there is no Walrasian auctioneer to set prices, and government far from omniscient.

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CATEGORIES: Austrian Economics

COMMENTS (13 to date)
John Goodman writes:

Adverse selection is an indication that you didn't get the original prices right, not that government needs to intervene to enforce a mandate.

Brian Clendinen writes:

Interesting from a political theory standpoint also. The founders goal of the U.S. was strong institutions not personalities. That is a person or select few people cannot make a strong goverment. I personally thing this is the biggest problem with the conservative movement. To much of for changing ideas, not enough about changing the institutions who would manage the ideas. I think institutions are not studied enough in Business, Economics, and Politics. They are more important than any other single area studied.

AJ writes:

I thought that the reverse was true in the 1955-1975 period: the neoclassical (equilibrium types) were generally more conservative while the leftists were the institutional types; leftists being the ones, who, during this period, wanted extensive government intervention regardless of what conventional economic analysis showed.

Ted writes:

A few points:

i) von Mises is mostly ignored because his economic theories were largely incorrect or already known and his institutional work is now rather obvious. What major insight did von Mises contribute to economic thought that wasn't incorrect or trivially true? I have trouble of thinking of one. He was better as the economist philosopher mold, which is what he is remembered for rather than some major insights he provided on business cycles or macroeconomics.

ii) It's hard to argue economists who study institutions are "marginalized." You basically can't do any work in contract of firm analysis without running into Ronald Coase or Oliver Williamson. I don't think people like Alchain, Cheung, or Demsetz are marginalized. Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert Vishny started the explosion in the "legal origins" literature. The development literature is now chock full of institutional economics work from people like Bill Easterly, Daron Acemoglu, James Robinson. Ricardo Caballero did important work on institutional features of creative destruction in the process of recessions. I don't see how you can argue these people are "marginalized."

iii) The big thing now is combining institutional economics with general equilibrium analysis. This is what Daron Acemoglu has been doing for the last decade now. Which is obviously the way to go.

Lori writes:

Maybe Von Mises is being judged, not by the company that he kept, but by the company that's keeping him, so to speak; too many gold bugs and other conspiracists.

MichaelM writes:

Mises' theories were largely incorrect?

That's not the first time I've seen this claim, but I've never seen it substantiated.

twv writes:

Not incorrect, not trivially true:

1. BEFORE Slutsky and that crowd, an ordinal conception of marginal utility. Demonstrating that cardinal utility - Irving Fisher and fellows - was wrong, quite misguided.

2. The Wicksell-Mises business cycle theory, showing the systemic effects of changes in monetary policy, was something new. It is far more nuanced and plausible than the macro theories that replaced it, and is still discussed. There seems to be something there, though no necessarily the whole story.

3. Socialist calculation. While other economists generally stood around in a state of conceited make-believe, Mises contributed something quite useful: That central planning must be a mess.

Jacob Oost writes:

I'm with AJ. "Institutional economics" is one of those monikers that seems to have a half-dozen or so kinda-related definitions, all of which are too vague to be of any use. You'd have to actually slog through the literature to get a feel for it (ugh). Hey, maybe an aversion to slogging through literature that one may not enjoy is what keeps so many left-of-center economists from studying public choice theory or Hayekian price theory in-depth, hmm?

Back to the main point, can somebody clarify this for me? (and AJ)

jc writes:

Yeah, the rub for many is how broad the conceptualization of institutions can be. And as if it weren't a broad enough topic already, North, for one, wanted to call it institutional social science, rather than institutional economics (per Arnold's interview, Coase won that battle), as economics simply wasn't big enough to accommodate it.

Fwiw, I think North is right, as the natural follow up questions to "which institutions seem to result in high living standards?" are "why do institutions vary b/w countries?", "why don't poor countries simply copy what rich and/or newly rich ones are doing", "why do rich countries sometimes stop doing what got them there?", "why do institutions change/how do they form?", "how do we adapt institutions to contexts so that they can be successfully adopted and implemented?", and so forth.

Unique histories, cultures, and sets of vested interests need to be taken into account, as well as widespread cognitive biases that seem to undermine legitimate attempts at positive institutional change. Regarding cognitive bias, evolution didn't seem to equip us, for example, w/ an appreciation for markets, while it did render us quite prone to populism. Too bad...

(Btw, I'd love to see Bryan, Robin and a friendly behaviorist take a stab at coauthoring a book that explains *why* anti-market bias exists and how it might be overcome, why all it takes is one simple intermediate step for people to condone and even call for coercive behavior they'd decry if they had to do the coercing, etc., i.e., a book about how cognitive biases cause us to reject institutions the literature suggests make us all better off. North, of course, sometimes puts down libertarians. Heck, he is a former Marxist - though his favorite economist these days is Hayek. When I read that literature, though, the stuff that seems to work sure sounds to me like what a libertarian would vote for, were those institutions offered.)

So cultural studies, sociology, psychology, political science, and even biology, have a lot to add on top of what folks like Hayek and public choice scholars have to say. (Ostrom, of course, was also quite interdisciplinary; she undoubtedly realized she had to be, if she hoped to come close to actually answering these questions.)

Interestingly enough, I've read (was this also in FP2P?) that one prominent exception to the age-genius curve is meaningful contribution from economic historians like North. Rather than breakthroughs before the age of 40 or so being fairly typical, it may take these guys 20 years of research to hit their stride.

I guess there really is a lot of literature one has to slog through to get the feel for it. :)

fundamentalist writes:

Nice summary of the divisions.

fundamentalist writes:

Ted, Mises was ignored because he was anti-socialist and socialism in the guise of Keynesian econ has swept the US and Europe. Mises was the first to reshape monetary theory with the rediscovery of marginal utility and subjective value, something which mainstream econ has not caught up with yet. And the reason it hasn't is the ongoing love affair with socialism and the hope that they can make it work. As Mises wrote, mainstream economists rejected the monetary theory of trade cycles because it is such a threat to socialism. Socialists, parroting Marx, insisted that capitalism is inherently unstable and prone to regular collapses. Mises showed that it the business cycle resulted from the expansion of credit by banks. Socialists could not accept that theory and remain socialists. So they chose ideology over sciences. And they still do.

Julien Couvreur writes:

"To the institutional economist, the equilibrium theorist is ignoring ..."

The most important thing they are ignore, and which you didn't list, is rather entrepreneurial change.

If a real market problem exists (for example, information asymmetry), there is an profit opportunity to solve that problem and improve the situation. If a risk becomes apparent, then some entrepreneurs will adapt his behavior and take steps which benefit him and society simultaneously.

Troy Camplin writes:

And they are ignoring an important fact: equilibrium is a fiction. The economy is in a far-from-equilibrium state. A complex adaptive system that is at equilibrium is dead. There is nothing equilibrium economics can tell us about how a real economy actually works. That is why almost all the errors that have been made in economics to this point can be traced to the concept of equilibrium. The rest can be traced to the attempts to make economics look like physics.

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