Arnold Kling  

Shorter Dierdre McCloskey

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She writes,


What works? Creativity. Innovation. Discovery. The Austrian core. And where did discovery come from? It came from the releasing of the West from ancient constraints on the dignity and liberty of the bourgeoisie, producing an intellectual and engineering explosion of ideas.

I assume that sums up her latest book. The quote comes from a recent talk.

There has been much discussion of Austrian economics in the blogosphere recently, stimulated by an essay by David Warsh taking the view that Hayek should not be viewed as a major figure in macroeconomics. I would say that Warsh was being a troll, but he is not that sort of persona at all. I am not even sure that he knows what trolling is. I think he genuinely believes that modern mainstream macroeconomics has ignored Hayek, and if you want to debate that as a factual issue, I think I would rather argue on Warsh's side.

My problem with framing things as Keynes vs. Hayek or what have you is that it turns what should be an argument over an ideas into an ad hominem. Also, energy that might otherwise go into arguing the merits of idea X instead goes into arguing over whether idea X is what Keynes or Hayek really meant.

As it happens, I am not persuaded that McCloskey is telling us what Kirzner really meant. Instead, I think she is reading into Kirzner a more sophisticated model of entrepreneurship than most others would find there. But whether I am right or wrong about that is not so important. Just forget about what comes from Kirzner and what comes from McCloskey. The ideas are worth examining.

I was explaining to someone at dinner the other night that I came to Austrian economics in a very odd way. I did not study the sacred texts. I spent the prime of my career outside of the academy, experiencing the behavior of organizations. I saw first-hand the challenge that large organizations have in dealing with innovation. I saw the tenuous grasp that bosses have over their organizations. Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.

I came to Austrian economics because that is how business in the real world felt to me.


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CATEGORIES: Austrian Economics



COMMENTS (13 to date)
J Storrs Hall writes:

The elephant in the room of academic economics is the enormous conflict of interest that results from the fact that not only the bulk of economists' salaries, but more importantly their source of power and influence as a group, comes from government expenditures. They would be superhuman if that didn't influence their thinking in a thousand subtle ways. Bit by bit, over the 20th century, these have added up to a major cluster of errors in the received wisdom in the mainstream -- in fact, I think one could tell quite a Hayekian story about it.

Daniel Kuehn writes:

Definitely agree on focusing on ideas rather than the fighting about the people, but then why in the world did you toss this zinger in:

"Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics."

Usually when we that are more in the mainstream try to highlight that management doesn't have access to the information it need - even when we're talking about private contracting solutions to the problem - we are dismissed as harping on "market failure". And then when we talk about the information problems associated with theoretical Pigovian taxes and go on to discussing other solutions we're just ignored and treated as if we only talk about government solutions!

Anyway - I suppose this is just an illustration that the tendencies that produced the Keynes v. Hayek fighting our widespread. Personally I take all those things seriously in your last paragraph, and don't feel any tension with the mainstream at all over it.

John writes:

I find it interesting - puzzling, really, that your observations of private institutions lead you to question, not those private institutions, but government.

I'm a non-academic PhD myself (computer science) whose observations of the private sector are similar to yours, I'd imagine, but I would not ever have thought to go Austrian because of them - quite the contrary. The public sector, it seems to me, that it has arrows in its quiver that the private sector doesn't, despite the similar problems with information. Primarily, the private sector is limited to actions based on the profit motive, whether that's appropriate in a larger sense or not; not so of the public sector. And, economies of scale favor the public sector, ceteris paribus. Scale is not so much an issue for information, at least not anymore, relative to issues of scale in market terms.

Not being an economist, it seems to me that WalMart provides a counterexample to Hayek regarding information and its utility. My industry calls the solution to his economic calculation problem "supply chain management" and its not really a big deal. WalMart manages a global supply chain, and has leveraged it into the largest retailer in the world, larger in GDP terms than many countries.

Hayek, apparently, didn't foresee the information age, for better or ill. But he's certainly not alone in that respect.

John writes:

Another thought on the subject of innovation. I don't see it at all like capitalists do in terms of linear notions of incentive. I've been an innovator - still am - and I think the lessons, e.g., of the open source movement are missed (I've been involved with Linux and the open source movement for roughly 2 decades now).

http://www.youtube.com/watch?v=u6XAPnuFjJc

It should be food for thought, e.g., that after having spent more than $1B for Palm and WebOS, HP just open-sourced WebOS. It should also be food for thought that Steve Jobs and Dennis Ritchie passed within days of each other, and despite all the fanfare attention paid to Jobs, Ritchie's passing went almost unnoticed. In my view, Ritchie's contribution dwarfed Job's; Jobs just made lots more money.

Which, I think, begs the question: what is innovation, anyway? Is it only to be estimated in terms a capitalist, not a technologist, approves?

fundamentalist writes:

Nice post! Mark Skousen wrote in his "Structure of Production" that a lot of practical people, such as financial advisers and business people, practice Austrian econ without knowing anything about it. They just come to it naturally after years of experience.

Many "Austrians" are just economic thinkers who have been mugged by reality.

I have read two of McCloskey's books "Bourgeois Virtues" and "Bourgeois Values" and thought they were the best thing I have read since Hayek!

David Warsh taking the view that Hayek should not be viewed as a major figure in macroeconomics.

I agree completely with Warsh if he limits it to mainstream macro. Hayek had nothing to do with that mess!

Costard writes:

John - market transactions are voluntary, and this is a pretty effective check on ignorance. A business that doesn't understand what its consumers want goes bankrupt. Whereas government is in the position of dictating what people *should* want, and enforcing their compliance. If you think that politicians aren't governed by profit motive - or that altruism is a viable substitute for real knowledge - you're living on a cloud.

Craig writes:

Not being an economist, it seems to me that WalMart provides a counterexample to Hayek regarding information and its utility.

Interesting. I think just the opposite. Evidently, Arnold Kling worked for corporations similar to those I've worked for.

Walmart has, to a large degree, figured things out. Government never will. The incentive isn't there. And, yes, that's profit.

Andrea writes:

John,

I'm not sure that the difference between private and public institutions' ability to handle the information problem can ultimately be explained by incentives like the profit motive. Instead, it seems to me that private institutions have robust feedback mechanisms that prompt them to behave in a utility-maximizing way.

For instance, if a company puts a faulty product on the market, that company will start seeing monetary losses immediately and will suffer from bad PR. If the government passes a bad law or regulation, the consequences of that action may not be immediately obvious. What's more, even if the public *was* able to connect cause and effect, the liability of that law is nebulous. Perhaps the congressman who submitted the bill would be voted out of office when he comes up for reelection assuming that this issue stays in the public's consciousness.

Regardless of the purported economy of scale that the government might enjoy, public institutions lack the crucial feedback mechanisms that private firms live or die by. This, I feel, is the critical difference between the two.

John Papola writes:
I was explaining to someone at dinner the other night that I came to Austrian economics in a very odd way. I did not study the sacred texts. I spent the prime of my career outside of the academy, experiencing the behavior of organizations. I saw first-hand the challenge that large organizations have in dealing with innovation. I saw the tenuous grasp that bosses have over their organizations. Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.

Wow. Two years ago when I was first getting to know Russ, I explained how the knowledge problem was something I believed could be really easily grasped when put in terms of how much top management knows about particular jobs in a large firm like my former employer. Arnold, it appears that we’ve arrived at Austrian-style thinking in very much the same way.

I also think this explains why Austrian ideas seem more readily accepted OUTSIDE of academic “macroeconomists”. Having actual experience in real firms makes all the difference.

Troy Camplin writes:

The leap makes perfect sense to me. If the people who are literally in the middle of the economy, dealing with it on a moment-by-moment basis, where there own interests are at stake, face ignorance problems, then how on earth can people who are ignorant of the economy, who are not dealing with it in the trenches, on a moment-by-moment basis, where they have no personal interests at stake in the businesses in question, but do rather have personal interest in power, meaning they will be engaging in cronyism that benefits some at the expense of others, face fewer ignorance problems? They will face far, far, far, far, far more!

The salesman, for example, has the most immediate knowledge, which he passes up to the manager, who has to take all the information from all the salesmen into consideration -- meaning some information is lost. He and other managers send information up the line, meaning more information is lost. This information reaches the highest levels of the company, where even more information is lost. Of course, in an interventionist economy, things get worse, because now you have layers of government bureaucrats, who all take this information, which is pretty low-grade by now, and have to process and pass it up, reducing the information even more. The information becomes more and more abstract, until it becomes practically useless for making a rational decision. How, then, can one not realize that government officials are the most ignorant of them all? And we trust them to make good decisions with all of this bad information? Really?

Kimble writes:
Scale is not so much an issue for information, at least not anymore, relative to issues of scale in market terms.

Scale IS still a problem, for government. Information accumulation requires control. It must, as you need control to record the info, and then direct it where it needs to go. Businesses gain this control paying their workforce. Government doesnt have that option, or at least, the world would be awful if they did.

It is still very dangerous thinking to believe that technological innovation has made a planned economy possible or desireable.

Methinks writes:

So, Troy illustrates the problem of central planning - an issue that was supposed to have been studied to death and put to rest on the empirical evidence provided by command economies.

Add to the dilemma Troy illustrates the fact that unlike private for profit organizations, government bureaucrats have little incentive to treat information carefully to make sure that correct information is passed along and that politicians have even less incentive to make decisions we the public would consider "good" and you get closer to understanding the mess we're in.

Noah Yetter writes:

@John:

"Primarily, the private sector is limited to actions based on the profit motive, whether that's appropriate in a larger sense or not; not so of the public sector."

There's your error.

All deliberate human action has profit as its motive force. Last I checked, though it's painful to admit, politicians and bureaucrats are human too.

Your other error is in believing that profit always takes the form of money.

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