Posted by David in Reflections.
If you’re having problems establishing (or maintaining) a relationship because you are no good at saying appropriately romantic things to the person you desire, may I suggest a number of suitable utterances. These statements and questions are not only good for initiating desired mutual utility gains, they also demonstrate your knowledge of economics, which as we all know is the sexiest subject you can study in college. Sarah Skwire and others at www.modifiedrapture.com created all but two of these 20 useful lines.
1 You have got the curves to supply my demand.
2 Let’s go to bed and try to disprove the law of diminishing marginal utility.
3 You’re my favorite kind of moral hazard.
4 I have a feeling you really understand “the nature of the firm.”
5 I love you so much I’m willing to forgo my exit option.
6 Wanna talk about our private goods?
7 How about a little horizontal integration?
8 Now those are some tangible assets!
9 I’ll reveal my preferences if you will.
10 Bottom up or top down (Hayek vs. Keynes 2nd Round)
11 Hey, baby, let’s make our utility functions interdependent (S. Horwitz).
12 Care to help me violate some social norms?
13 Let’s reduce some entry barriers together.
14 You make my demand curve perfectly inelastic!
15 You’re my stimulus package.
16 Your invasive activity causes me no negative externalities.
17 How about a little mutual adjustment.
18 If you go down on my factor of production I’ll churn out a consumption good.
19 We’ve got to internalize the positive externalities that are caused by the nature of your firm.
20 May I use my invisible hand to explore our interactive consumption behavior after a merger?
HT: Steve Horwitz at Coordination Problem
Posted by David in Personal stuff, Politics, Reflections.
I generally like to claim that I don’t like political extremists, whether extreme left or extreme right (which to me seem almost identical in their intolerance and penchant for violence). But maybe we’re all extremists in some way or other. Anyway, that’s a relatively new belief of mine, which is loosely related to the idea that we all have some sort of (explicit or implicit) hard core that we’re not prepared to give up or question.
On the other hand, it seems as if most people combine extremism in one domain with moderation in most other parts of life. For example, I know several academics who are extreme in their conviction that education is the most important thing there is, and hence that is should always be the first priority of both people in general and the government. I also know religious people who are adamant that faith is the most important thing in life, but who are political and cultural moderates in most other domains. And it’s instructive to notice how the extreme atheist Richard Dawkins combines extremism in the religious domain with very uncontroversial middle-of-the-road political opinions. Politics and religion aside, it is also clear that some people define their lives by their unwavering belief in and support for a particular soccer club, by a passionate interest in a particular music genre, or by an intense conviction that correct grammar is absolutely essential for the good life.
Having observed all this, I started to examine if I also have extremist attributes, given that I have voted for boring centrist political parties, that I am skeptical of both religious fundamentalism and Dawkinsian atheism, like soccer in general (but no specific club), enjoy listening to a variety of musical genres, and think that good writing is enjoyable but still think that substance is more important than style.
The short answer is that I, too, am an extremist. When I teach institutional economics, I like to point out that we need to distinguish between (political and/or legal) formal institutions and (cultural, unwritten) informal ones. And my extremism is that I am not prepared to question – and believe passionately in – the essential desirability of a great deal of circulation of ideas, people, and goods. In other words, I strongly favor free expression, free emigration and immigration, and free trade. My extremism manifests itself as an inability to concede any points to people who want to restrict free speech (think flag-burning, Nazi hate speeches, and pornography), free migration (think Arizona and anti-Muslim political parties in Europe), and the free flow of consumer and capital goods (think France and labor unions).
But I realize that a desirable lack of laws and regulations is not enough. Sustainability requires that there is cultural support for the free circulation of ideas, people, and goods. And the cultural support that matters is tolerance, which is one of the reasons why I am quite enthusiastic about Richard Florida’s work on the importance of tolerance for creativity. And therefore I think that tolerance is the essential social value, not love (which is personal), nor politeness (which is nice but can distract from honesty), nor creativity (which can be nasty if the creator is intolerant).
Fortunately, I am an optimist when it comes to the future of “free circulation” and its tolerant underpinnings. Economic development means that intolerance and isolationism become increasingly costly (since creativity and innovativeness become more important with increases in the overall complexity of the economy). Increasing tolerance of different races and culturally similar immigrants was an important aspect of mature industrial societies. During the post-industrial revolution that we are witnessing at present, it is clear that an increasing number of people tolerate culturally dissimilar immigrants, sexual minorities, and less conventional lifestyle choices. Hopefully all (non-violent) lifestyle choices will become tolerated by almost everyone in the mature post-industrial society of the future.
Posted by David in Economics, Life in Taiwan, Reflections.
Tags: Chris Clausen, James Taylor, Kevin Hoeltschi, Ranjit Dash, Ronald Coase, Trent Prestegar
Ronald Coase turned 100 on December 29, and in his honor we arranged a seminar with cake and coffee yesterday. The idea was for students to present Coase’s 1937 and 1960 papers, followed by a discussion of how all this relates to institutional economics (the seminar was part of my MA course entitled Introduction to Institutional Economics).
One student, James Taylor, decided to commemorate the day with a poem:
And then it was time for Kevin Hoeltschi to explain social cost and Ranjit Dash to explain why firms exist:
And, at the end we indulged in specially ordered cakes while giving Kevin a chance to display his aesthetic talent:
We agreed that we are all looking forward to Coase’s 2011 book on Chinese capitalism, which is an unusually appropriate subject at a business school in Taiwan. It will be interesting to see if Coase manages to be the first economist to publish a book after 100 without perishing first (yes, I know, he has a co-author, but I want it to count when I co-author something, so my enlightened self-interest compels me to give Ronnie C the benefit of the doubt!)
Happy 100 to RHC and Happy 2011 to everyone else!
Posted by David in Economics, Personal stuff, Politics, Reflections.
Tags: Karl Popper, Mario Vargas Llosa, Mises
Mario Vargas Llosa is the recipient of this year’s Nobel Prize for Literature. I have read two of his novels (Aunt Julia and the Scriptwriter and Notebooks of Don Rigoberto), both of which I enjoyed more than most of the novels that I have read. Vargas Llosa manages to be profound and entertaining at the same time, which is not a very common combination.
But Vargas Llosa is not only a great novelist. He is also a man with strong political convictions, and was an unsuccessful presidential candidate in Peru (Fujimori won). What is most interesting from my personal point of view is that he tends to express exactly my views. This feels somewhat weird, since I tend to at least partially disagree with virtually all political philosophers, economists and politicians.
I just read two interviews with Vargas Llosa that were published in Swedish. One interview was published in Dagens Nyheter and conducted by Bjorn Wiman, while the other one was conducted by Johan Norberg in Magasinet Neo. For those who don’t understand Swedish, I have translated some of the highlights.
About Sweden:
“It is a country that has always been very open. And even though the Social Democrats were in power for so long they were still able to give up that power. This is something I find admirable. My differences of opinion with social democracy are mainly that I have observed in many places how the state causes inefficiency and corruption. I therefore believe that political power benefits from decentralization, and my impression is that this is what is happening in Sweden right now, with a number of reforms that have been more liberal [in the continental European sense] than socialist.
Choosing between Borges and Sartre:
“Today I would choose Borges, without any doubt whatsoever. Sartre has aged badly: both his political convictions and his philosophy have contributed to increased confusion. His political positions became unsustainable and sometimes downright crazy.”
On Carlos Menem and Argentina:
“Look at what Carlos Menem did in Argentina. Government monopolies were restructured as private monopolies that his friends administered, and nothing really changed. Liberals want privatization, but in the shape of open competition that improves service quality and cuts costs.”
On liberalism in Latin America:
“If you only think about liberalism as liberal parties there are only a few of them in Latin America and they are weak. But as the Austrian thinker Ludwig von Mises explained, liberalism is not a party, but should rather be considered as a cultural milieu, which can encompass a wide range of political tendencies and parties that share basic liberal traits, from social democrats to conservatives. In this wider sense one can say that liberalism is very much alive in Latin America. Left-wing parties like the Chilean one have been deeply influenced by liberal principles, both regarding politics and economics. Under ex-president Ricardo Lagos Chile made a lot of progress: democracy is stable, the economy is growing, and poverty is receding. If we have to label his politics it is predominantly liberal. Or look at President Lula in Brazil, a socialist with a populist background. He could have become an economic disaster, but when he gained power he changed his direction totally with economic stability and encouragement of private enterprise. Of course there is too much corruption in his party and government, but in spite of the rhetoric – which is always anti-liberal – liberal reforms are pursued. An example from the other end of the traditional spectrum is Colombia. President Alvaro Uribe is from the conservative camp, but his economic policies are much more liberal than conservative. He is also deeply committed to democratic values and fights effectively against the threats from the extreme left against democratic institutions.”
On borders:
“The gradual dismantling of borders is very good for humanity. Borders create prejudices against other traditions and other religions. The differences in the world are wonderful – the diversity of languages, cultures, faiths, and institutions – but much more important is what unites us, and the ability to enjoy diversity while living together without violence. All ideas can not live peacefully together. The terrorists take advantage of globalization in a very smart way and we have to fight against them. But the rest - almost all of the rest consists of a global democratic culture where we can live together despite differences.”
On intellectuals:
“[Most intellectuals have accepted democracy] without enthusiasm. They are not happy, because democracy isn’t perfect, and intellectuals are often utopians who want perfection. Sure, perfection is fantastic in art and literature. To strive for perfection as an individual is excellent, if you for example want to become a saint or a fantastic athlete. But you cannot strive for it at a collective level by trying to create a perfect society, or a society where everyone lives according to a certain pattern. That is a big mistake and it has created the most monstrous oppression and the most brutal violence in human history. We must accept that mediocrity is the best way to attain progress: gradual reforms by means of consensus. It is not perfect, it is not paradise, but consider the alternative. The dream of the perfect society caused hell.”
On Karl Popper:
“The last time [Popper] visited Spain, just a few months before his death, Popper was asked about the state of the world and he answered: ‘yes, a lot of things are terrible in our time, we have to be aware of that, but please, please, don’t forget that never before in the history of civilization have we had so many scientific, intellectual, and practical instruments to combat all the scourges of humanity: poverty, exploitation, oppression, disease.’ I think this is absolutely true and this provides grounds for hope.”
As I said, I agree with all of this. What surprised me most is that this is a novelist who has read the Austrian economist Ludwig von Mises and the Austrian philosopher Karl Popper! Unlike most economists or philosophers, I have also benefited from the writings of both of these great thinkers. Is that why our ways of thinking are so similar?
Posted by David in Economics, Politics, Reflections.
Tags: Constitution of Liberty, Hayek
Over the past two weeks, I have been reading the Constitution of Liberty at a much slower pace than the first time I was reading it about 15 or 16 years ago. I was surprised to discover that I actually like it better than the first time around. Why could that be?
I think there are two reasons, of which one is emotional and the other an effect of my personal learning process. To put it bluntly, I was full of resentment against government action in the early 1990s. The fact that I was forced to waste more than half a year just because the government would imprison me otherwise made me detest the lack of respect of what I perceived as my individual rights. Before Hayek, I had read Anarchy, State, and Utopia by Nozick, which was much more inspiring, given my state of mind. The opening sentence of that book, “Individuals have rights,” as well as the consistent rejection of all government activity beyond the minimal state were the most inspiring words I had ever read. After Nozick, I felt that Hayek conceded almost everything that modern states do, apart from downright stupidity such as protectionism or rent ceilings. More importantly, he explicitly stated that a limited period of national service is compatible with a free society. After reading that, I basically skimmed through the rest.
I have now changed my mind, even though I still think that national service is something that constitutes an unambiguous violation of those rights that should be protected by any society that wants to consider itself liberal in the individualist sense of the word. The problem with Nozick is that he was preaching to the choir. What about those people who do not believe that individuals should have exhaustively defined rights?
For those without strong individualist values, Hayek is better than Nozick. It is not necessary to believe that individual freedom is the ultimate value. It is enough to understand that protected individual property rights are necessary not only for material prosperity but also for the growth of knowledge, which seems to be the underlying foundational value that Hayek really cared about. This becomes especially clear toward the end of the book, where Hayek writes that “the ultimate aim of freedom is the enlargement of those capacities in which man surpasses his ancestors and to which each generation must endeavor to add its share – its share in the growth of knowledge and the gradual advance of moral and aesthetic beliefs, where no superior must be allowed to enforce one set of views of what is right or good and where only further experience can decide what should prevail” (p. 394).
The other difference from last time is that I know more economics now. In the early 1990s, I knew next to nothing about Austrian economics and even less about institutional economics. In the Constitution of Liberty, I can now perceive that all the arguments are based on a solid economic foundation and combine the insights of the Austrian and new institutional perspectives. But one has to be able to read between the lines most of the time. Over the past 15 years, I have read a lot of books and papers that evidently makes me now see what I couldn’t see earlier. Particularly important for an understanding of Hayek’s conclusions are basic Austrian economics such as Menger’s Principles of Economics and Mises’s Human Action as well as Hayek’s own contributions on dispersed knowledge. I think it is the case that if you have absorbed such works you can understand better why for example a flat tax is less destructive than a progressive tax or why indeed national service is less subversive of the market economy than the administered prices implicit in misguided policies such as rent control or a minimum wage.
Ultimately, however, I think that political decentralization coupled with free flows of labor, capital, goods, and services is the only viable method of preventing an ever more intrusive government. A constitution seems to be of little use, unless most people actually care about as well as understand the prerequisites of well-functioning markets. The US Constitution is an impressive document, but it has not prevented Congress from usurping ever-greater economic powers.
Hayek does note the importance of political decentralization, but unfortunately he does not spend as much time on elaborating its mechanisms as he does on which types of state discretion ought to be banned for the benefit of almost all. On page 263, Hayek writes:
Hardly less important than the problems of international relations is that of centralization versus decentralization of government. In spite of its traditional connection with most of the problems we shall be discussing, we shall not be able to consider it systematically. While it has always been characteristic of those favoring an increase in governmental powers to support maximum concentration of these powers, those mainly concerned with individual liberty have generally advocated decentralization. There are strong reasons why action by local authorities generally offers the next-best solution where private initiative cannot be relied upon to provide certain services and where some sort of collective action is therefore needed; for it has many of the advantages of private enterprise and fewer of the dangers of the coercive action of government. Competition between local authorities or between larger units within an area where there is freedom of movement provides in a large measure that opportunity for experimentation with alternative methods which will secure most of the advantages of free growth. Though the majority of individuals may never contemplate a change of residence, there will usually be enough people, especially among the young and enterprising, to make it necessary for the local authorities to provide as good services at as reasonable costs as their competitors. It is usually the authoritarian planner who, in the interest of uniformity, governmental efficiency, and administrative convenience, supports the centralist tendencies and in this receives the strong support of the poorer majorities, who wish to be able to tap the resources of the wealthier regions.
Fortunately, the proportion of people who are willing to move from their “home community” has empirically tended to increase as economies become more knowledge-oriented. I think the topic of political decentralization is one of the most promising areas of research both in economics and in political philosophy. It also offers an agenda for moderate classical liberals of the Hayekian type: advocate political decentralization consistently and frequently; always resist “harmonization” and supra-national or large-area coercion; and promote the free flow of people, capital, goods, and services!
Posted by David in Reflections.
Tags: Hayek, S. Hayek
“The mind cannot foresee its own advance.” F.A. Hayek
“I keep waiting to meet a man who has more balls than I do.” S. Hayek
Who wins?
Posted by David in Economics, Personal stuff, Politics, Reflections, The Social Sciences.
Tags: Adam Smith, Carl Menger, Geoffrey Hodgson, Hayek, Helmut Schmidt, Jane Jacobs, Margaret Thatcher, Mises, Sandy Ikeda, Theodore Burczak
David: Why did you choose Hayek and Jacobs as your favorite thinkers?
DAVID: I chose Hayek and Jacobs because they’re the only thinkers who have transformed the way I think about whatever social phenomena I’m interested in. Jacobs’s “The Death and Life of Great American Cities” suddenly made sense of things of which I had been vaguely aware but which I could not articulate. I had been struggling with urban economic theory, but found the abstract models difficult to reconcile with observed reality. To this day, it remains my favorite book. This was while I was pursuing my PhD in regional planning around 1995. The first book I read that was allegedly by Hayek was the Fatal Conceit, which I liked but which was not one of my favorite books. That must have been around 1991 or 1992. Then at about the same time that I was reading Death and Life I came across Hayek’s paper entitled “The Use of Knowledge in Society” which made sense of why I couldn’t make sense of standard equilibrium models in economics. The interesting thing is that the Jacobs book and the Hayek paper tell essentially the same story. One could almost say that Hayek’s 1945 paper is a generalized and more abstract summary of the central arguments in Jacobs’s book. To this day, I consider Hayek’s paper the best short article ever written in economics. So I would say that Hayek’s 1945 paper and Jacobs’s 1961 book changed my approach to economics, urban planning, and politics for good.
David: Could you summarize in one sentence the intellectual transformation that Hayek and Jacobs caused in your own thinking?
DAVID: I went from a world where information and knowledge were disregarded into a world where knowedge is subjective, imperfect, and local.
David: Were there any political implications of your theoretical shift?
DAVID: Yes, I would say that it would be very difficult indeed to keep conventional political views while being converted to a Hayekian-Jacobsian understanding of the human world. We have to remember that Hayek was the guy who showed that central planning is associated with massive knowledge losses as compared with markets while Jacobs showed how centralized city planning disregards the valuable local knowledge of residents in specific neighborhoods. So all kinds of top-down policies and plans become suspect and inherently unattractive. So while I have had liberal, democratic, and individualist values since when I was about 19 or 20 years old, my interpretation of the desirability of various specific policies have changed. To give you an example, the middle-of-the-road (Swedish) Liberal Party recently proposed that schools should be the responsibility of the national government rather than municipalities in order to ensure higher academic standards. Before 1995 I might have said that this seems like a worthwhile policy, but today I’m resolutely against it. The education system needs decentralized local experimentation in the same way that shoe stores, restaurants, and health care need decentralized local experimentation. So it’s not just a matter of being in favor of markets, democracy, and science. It’s a matter of being in favor of entrepreneurial markets, bottom-up democracy, and science with competing research programs.
David: Both Hayek and Jacobs have been criticized for lacking a consistent ideology, even though each has influenced a number of ideologues, politicians, and movements (and not necessarily the same people). What are your thoughts about this?
DAVID: Let’s look at Hayek first. He started out as a moderate left-winger until he came under the influence of Ludwig von Mises, who is of course known as a consistent defender of classical liberal institutions and a very small state. The followers of Mises (so-called “Misesian Austrians”) are as far as I know nowadays without exception minarchist or even anarchist libertarians. Hayek was much more moderate in the degree of government activity that he considered possible to combine with a well-functioning market economy, although his specific policy proposals tended to shift over time. In the Consititution of Liberty, for example, he states that he has no problems with government provision of education as long as private producers are allowed to compete with the public sector. He also accepts a safety net such as a minimum income as well as municipal zoning policies. On the other hand, in the 1970s he advocated the denationalization of money. Then in the Fatal Conceit he comes across as a pro-market conservative, but I don’t think we should put too much faith in that book. According to reliable sources, that book was mainly written by his “editor” (Bartley) when Hayek was almost 90 and not in very good health. What I think is consistent in Hayek is not any specific policy proposal, but rather a sort of open-minded and open-ended liberal consequentialism that makes it possible to reassess policies when new information becomes available. It is also interesting that Hayek has had a much wider sphere of influence than Mises. Thatcher famously said that “this is what we believe in” while referring to the Constitution of Liberty. On the other hand, the moderate German Social Democrat Helmut Schmidt called himself a “Hayekian.” And two left-wing economists, Geoffrey Hodgson and Ted Burczak have recently either proposed (Burczak) or envisioned (Hodgson) post-capitalist economies with worker-controlled firms while acknowledging that Hayek won the Socialist Calculation Debate in the 1930s. What all these people have in common is that the Hayekian influence has made them more pro-market than others with similar values. Margaret Thatcher was more sensible than Richard Nixon; Helmut Schmidt was more economically literate than Michael Foot; and Ted Burczak ‘s socialism makes more sense than Oskar Lange’s.
David: And Jacobs?
DAVID: Jacobs had a great deal of influence on the “New Urbanism” movement, who understood the need for mixed uses but neglected the need for market feedback (unlike Jacobs herself). But then the New Urbanists are architects, and in my experience architects are especially hopeless when it comes to understanding the value of decentralized markets. Maybe that’s why so many of them like working for Arab sheiks and Chinese bureaucrats. She has also had some influence on the green movement, which tend to be strong on democracy and human rights (which I like) but weak on markets (which makes them impossible to vote for in my view). Fortunately, there are a few Hayekian economists who have discovered Jacobs and are attempting a much needed synthesis. Sandy Ikeda is probably the most obvious example of a Hayek-Jacobs economist, but there are others. So I guess that one can say that Jacobs has influenced an uncommon variety of people with very different ideologies, including greens, libertarians, and confused technocrats. But if you look at her various specific proposals they are actually quite similar to Hayek’s: open-ended and open-minded liberal consequentialism that in her case focused on local entrepreneurship, decentralized democracy and trial-and-error experimentation.
David: Are there any specific policy proposals by Hayek or Jacobs with which you disagree?
DAVID: Sure. I think Hayek was superficial and plain wrong when he gave his stamp of approval to conventional zoning regulations. Jacobs is much better on zoning. On the other hand, Jacobs’s hostility to cars and suburbs is too categorical. Now I happen to share her dislike of cars (I like to walk) and monotonous suburbs, but I think the fact remains that a large proportion of people actually like their cars and McMansions. I think we have to respect that, even if bustling and diverse downtowns are better for creativity and innovative start-ups. There are many other examples where I disagree with specific policies even though I agree with the big picture.
David: Speaking of creativity, do you think that Hayek and Jacobs were more creative than other 20th century social theorists?
DAVID: Indeed I do. I think Hayek to some extent and Jacobs to an even greater extent illustrate that while competence and creativity are great complements, these two by-and-large desirable characteristics are sometimes unfortunately substitutes. Consider the average guy defending his or her dissertation. For the most part, PhDs are competent in their chosen discipline but not terribly creative. They tend to specialize in a very narrow field and then spend a lifetime publishing a “theme with empirical variations,” say cost-benefit analyses of sugar mills. Now if you look at Hayek, in the first part of his career he undoubtedly emphasized competence over creativity. Hayek studied the Austrian variant of what was then the neoclassical mainstream, first under Wieser and then under Mises. What resulted was the most generally respectable part of his published output (let’s call it Hayek I). He extended a monetary theory of the business cycle and investigated the indirect effects of regulated rents in the housing market and so forth. It was all very competent and perhaps incrementally creative but not terribly exciting. It was only with his emphasis on subjective and dispersed knowledge (Hayek II) during the Socalist Calculation Debate that he created a totally new approach. I think it’s telling that this was also the start of his relative decline in his professional reputation among economists. And then he wrote a path-breaking book on theoretical psychology. And eventually he became Hayek III, with a focus on a mixture of economics, political philosophy, and cultural evolution. I think it’s noteworthy that Hayek himself said that he did not have the ability to construct the grand theoretical edifices for which Mises became famous; he said that he was instead experimenting and exploring at the margin. So Mises was probably more competent, but Hayek was more creative, I think that there can be no doubt about that. But more importantly, Hayek’s undogmatic open-endedness created a foundation for other social scientists to use as a strating point. “Misesian” economics, by contrast, has become a theoretical cul-de-sac where the members are repeating themselves. It is not a progressive research program, and I know of no eclectic Misesian fellow travelers. There are however plenty of Hayekian fellow travelers who are not usually considered Austrian economists — for example Douglass North, Vernon Smith, Oliver Williamson and so forth.
Jacobs is an even more clear-cut case. She never got a college degree, choosing instead to spend two years auditing a very diverse set of courses at Columbia University. So her competence was sketchy. But in her case that was a good thing, given the extremely unhelpful theoretical constructs used in urban planning. Maybe she could have used some more theoretical competence – her discussion of economic theories in some of her books sometimes betrays a lack of depth - but on the other hand it enabled her to offer a totally new approach to urban planning and urban economics which was based on observed reality rather than Platonic utopias. It is difficult to imagine any of her books had she gotten a PhD in urban planning or economics. They would probably then have been totally forgotten dry academic treatises that applied the theories favored by her advisor.
I like to use an analogy from jazz, which also benefits from creativity among its practitioners. Friedrich Hayek is like Keith Jarrett – a classically trained pianist who switched to free-form solo improvisations and eclectic modern jazz – first with two quartets and later with his own trio. Nevertheless, he managed to record pieces such as the Goldberg Variations and the Well-tempered Clavier (by Bach) as well as modern pieces by Shostakovich. Jane Jacobs is more like Miles Davis – the enormously creative jazz trumpeter who created three new genres (cool, modal jazz, and fusion) but who would never be able to play a classical concerto with the required competence. Most social science professors, however, are like Wynton Marsalis – a jazz and classical trumpeter with a very high level of competence (“virtuosity”) but with no style to call his own.
David: How come you have not listed any of the thinkers who had a decisive influence on Hayek among your favorite thinkers? I’m thinking of people like Adam Smith, David Hume, Carl Menger, and Ludwig von Mises.
DAVID: Now, Smith, Hume, and Menger are clearly at least as creative as Hayek. Smith created economics as a discipline, Hume a school of philosophy, and Menger created the distinctive Austrian schoold by generalizing his real-world observations while working as a financial journalist for the Wiener Zeitung (Menger was in this similar to Jacobs). Mises filled in the gaps in Menger’s system, although unfortunately he tried (and thought he succeeded) to bring closure to economics as a discipline. I think Mises’s Human Action is the best textbook there is in economics, but please skip the first 100 pages, where he more or less delimits economics as equal to Human Action (Mises was only interested in those economic laws that are universally true – in other words if it’s not true of all rational economic actors it’s not economics, which makes interesting empirical economic problems something else than economics). Now Menger is very open-ended; unfortunately his work is also very incomplete although with a number of insights that were revolutionary at the time. Smith is still interesting and mostly correct, but some parts are downright wrong such as his view of economic value. The good thing about Hayek is that he integrates all the really valuable parts in Smith, Menger, and Mises into his theoretical framework, while not keeping the questionable parts. So Hayek is indispensable in my view, whereas Smith, Menger, and Mises are good and interesting but not truly required reading any longer.
David: Are there any undeservedly neglected parts in Hayek’s and/or Jacobs’s work:
DAVID: In Hayek, I think that most of the really important stuff is being reused and expanded by at least a few economists. However, Hayek’s idea of spontaneous orders has rarely been applied to other fields than markets or perhaps the legal system. Fortunately, the Foundation for the Study of Spontaneous Orders has been sponsoring a new journal and a few conferences where contributors are encouraged to apply spontaneous order theory to new domains (I have been involved in this). Regarding Jacobs I think her excellent little book entitled “Systems of Survival” offers up a new approach to informal institutions with her description of two patterns of moral behavior — Moral Syndrome A and Moral Syndrome B. Moral Syndrome A gives priority to values such as honesty, workmanship, and openness whereas Moral Syndrome B favors honor, duty, loyalty and so on. Jacobs hypothesizes that Moral Syndrome A is more common among businesspeople, scientists, and traders whereas Moral Syndrome B dominates politics, the military, religious hierarchies and so on. I can think of interesting empirical applications for studying cross-cultural and international conflicts on the basis of this dichotomy, but so far I don’t think that anyone has attempted this.
David: To what extent have Hayek and/or Jacobs penetrated your own work.
DAVID: Everything I write on economics is built on a Hayekian foundation. And everything I write about problems with a spatial dimension has a Jacobsian foundation. This does not mean that I always refer to them, but it’s the default position for me. On the other hand, I don’t slavishly follow everything Hayek or Jacobs claim. I stick to their core assumptions, but not necessarily to their more detailed analyses. I do however not accept Hayek’s methodological individualism, even though I share his normative individualism. Hayek almost rejected methodological individualism himself in a footnote to Law, Legislation, and Liberty, but ultimately I think we have a rare instance – in Hayek’s case – of too much competence (read: too much Mises) and not enough creativity.
David: Is there anything outside of their theoretical contributions which you find particularly inspiring?
DAVID: Yes, I find Hayek’s insistence that the state should have no goals of its own very inspiring. What he was saying was that the state is ok if it is like the municipal provision of a power grid or street-cleaning but it has exceeded it’s authority if there are any national goals or ideas about a shared collective purpose. These are ultimately very liberal sentiments in the European sense of the word, but then again I’m a European liberal. The most inspiring part of Jacobs’s message is her belief in cities rather than nations as the basic unit of political organizations, and further that governance within cities should itself be decentralized to neighborhoods. I also find their anti-nationalism inspiring. Hayek became a British citizen and claimed that it’s possible and perhaps common to feel more at home in a culture other than the one into which one is born (he expressed a preference for British over Austrian culture). Jacobs emigrated from the US to Canada because she preferred it there and because of opposition to the Vietnam War. Particularly in the Jacobs case, there is therefore also a strong dose of anti-militarism that I share.
David: Any hopes for the future?
DAVID: Yes, I hope that the combination of ideas from Hayek and Jacobs will become the future mainstream in urban economics and urban planning.
David: Thank you for taking time to answer these questions!
DAVID: My pleasure.
Posted by David in Reflections, The Social Sciences.
Tags: Hayek, Jane Jacobs
Friedrich August Hayek (May 8, 1899 [Vienna] - March 23, 1992 [Freiburg]) 
Jane Jacobs (May 4, 1916 [Scranton, PA] – April 25, 2006 [Toronto, ON])
I have come to the conclusion that it’s impossible to say who I regard as the most persuasive thinker in the social sciences; Friedrich Hayek and Jane Jacobs have both been equally important in influencing my weltanschauung. Since Hayek and Jacobs are much better known that the other eight thinkers on my list (with the possible exception of Schumpeter), I will not summarize their respective contributions. Instead, the next post will feature a conversation: “David interviews DAVID about his relationship to the ideas of Hayek and Jacobs.”
Posted by David in Economics, Reflections, The Social Sciences.
Tags: Douglass North
There is no economist who has been more useful to me as a teacher of institutional economics than Douglass North. This is because he is the main provider of a unified and consistent conceptual framework for the study of institutions and their effects. Using the Coasean concept of transaction costs, North understands institutions as the main influence on overall transaction cost levels in specific societies.
North’s starting point is that institutions constrain human behavior, which reduces uncertainty and thereby transaction costs, which in turn explains long-term processes of economic development. And institutions do not only refer to the formal codified rules of the game as embodied in legal and political systems; they also refer to various cultural norms and habits that act as informal constraints on human action. On the basis of this conceptual framework, North studied the comparative institutional frameworks of England, the Netherlands, Spain, and Portugal as a means of explaining the long-run economic performance not only of these societies, but also of their colonial offshoots in North and South America.
The main conclusion of his analysis is that institutions that promote well-defined property rights and free trade generate higher long-term growth than unstable institutions and barriers to economic or political entry that protect a dominant rent-seeking elite. North’s analysis thereby illuminates the “macroeconomic” framework that supplies the rules of the game for firms and other organizations. The organizational analysis of Oliver Williamson and others can thus be seen as the microeconomic counterpart to North’s analysis within the research program that has become known as the New Institutional Economics.
North belongs to a select group of economists whose theorizing is constantly evolving, unlike most economists who keep repeating the same basic theory with few changes except for some minor theoretical or empirical details. It is therefore not the case that the reader of North’s work confronts a situation of rapidly diminishing utility when consuming an increasing quantity of his output. In his early work, the approach is much more neoclassical than later on. After about 1990, North has seemed increasingly disillusioned with the maximizing assumptions of mainstream models. As a result, he has come to rely to an increasing extent on the results of cognitive science and tends nowadays also to refer to the “non-ergodic” economic environment (which brings to mind some of the more heterodox Post Keynesians and Austrians).
He has also recently written about the effects of the long-term evolution of the human brain on economic outcomes, referring repeatedly to the transition from primate to human communities and from pre-literate to textual societies. So while he was always more of a big-picture guy than the average economist, he is perhaps now the biggest-picture economist ever, surpassing even Hayek in this respect (who tended to avoid discussing other primates than homo sapiens).
As an octogenarian, North has yet again developed a new framework for analyzing economic development, this time together with the political scientist Barry Weingast. The main idea is that the state arose to suppress violence among contending groups, and that these contending groups form a sometimes divided elite in what North and Weingast call “limited-access orders.” Such orders are essentially rent-seeking coalitions that enforce limited access to sources of economic and political power (i.e. they exclude most of the population). All states before 1800 and most states today are limited-access orders, which is why North also calls them “natural states.” A few dozen countries are however open-access orders, where the rule of law guarantees more-or-less equal rights to entry into markets and politics for all citizens. Certain preconditions (rule of law for elites; elite organizations with perpetual life; centralized control of violence) have to be met for a limited-access order to make the transition into an open-access order, and these preconditions are not always achieved, nor do they automatically lead to a successful transition. (One might add that even after a successful transition, problems with rent-seeking interest groups and discretionary market distortions may persist, although not solely for the benefit of a small power-wielding elite). All in all, the natural state framework is quite depressing, but nevertheless mostly persuasive.
As should be evident from this brief overview, Douglass North has been a major supplier of intellectual nourishment for the past 50 years.
Posted by David in Economics, Reflections, The Social Sciences.
Tags: Brian Loasby
I discovered Brian Loasby by accident as I was browsing the shelves of a college library. Being generally interested in institutions and evolution, I was attracted by the title of his 1999 book; “Knowledge, Institutions and Evolution in Economics.” It turned out to be a challenging read. Indeed, this book is the only one I have read four times. Nowadays, I assign it as one of twelve books in my Ph.D. seminar course, and students tend to find it much more difficult than the two books that precede it (Schumpeter’s Theory of Economic Development and Kirzner’s Competition and Entrepreneurship). Loasby’s texts are not only difficult because of their density of ideas; they are also difficult because they combine ideas that are not usually combined.
It goes without saying that Loasby does not belong to any single school of thought. And yet his thinking is remarkably consistent in its subjectivism. While radical subjectivism is usually associated with Ludwig Lachmann and George Shackle, I would argue that Loasby’s subjectivism is at least as radical. Sometimes I even find him too extreme (and being criticized by me for being too extreme a subjectivist is quite a feat). For example, Loasby has stated that policy implications offered by economists are almost always unfounded. I’m not at all convinced by this, but maybe the difference between me and Loasby is that I believe that institutions stabilize expectations to a greater extent than he thinks they do (he is more Shackleian — institutions make people march together in an arbitrary direction – while I am more Hayekian — some such institutional directions are more likely to spread because they promote survival and material accumulation).
In spite of this reservation, I wholeheartedly recommend Loasby for providing numerous insights. His discussion of economists’ conventional treatment of evolution deserves to be considered a classic (Alchian made some minor mistakes which led to greater mistakes by Friedman and even greater ones by Becker). His notion that the history of economic thought is not a history of continuous progress but rather a sequence of confused detours down blind alleys punctuated by the occasional brilliant insight is spot on. And his analysis of entrepreneurship is a very creative combination of ideas from Schumpeter, Kirzner, and Popper.
Indeed, it is in his wide-ranging knowledge of economic ideas that Loasby’s thought becomes most challenging, since the reader is not likely to be as erudite as the author (I assume here that I’m a typical reader, which is not necessarily true). A typical paper by Loasby may discuss topics as different as Adam Smith’s observations about the development of astronomy, Menger’s view of the emergence of money, Marshallian economics, Hayekian psychology, the philosophies of Popper and Ryle, Penrose’s resource-based view of the firm, Chamberlin’s theory of monopolistic competition, and Shackleian surprise functions. His criticisms of various economists may not even be noticed by the uninformed reader, since they often take the form of understated but nonetheless lethal asides. His endorsements are also somewhat vague, and can usually only be identified as such by an absence of parenthetical observations that subtly undermine the theory in question. Loasby’s own conjectures and hypotheses are similarly elusive: he has a penchant for what I would like to call “carefully considered and precise imprecision.”
The conclusion is that reading Loasby can be a very rewarding experience, but only if one is patient and shares some of his disillusionment with mainstream economics. In particular, I would recomment the above-mentioned book as well as his book dealing separately with a number of prominent economists; “The Mind and Method of the Economist.”
If my interpretation is correct, Loasby has a generally favorable view of A. Smith, Menger, Marshall, Chamberlin, Coase, Hayek, Popper, Ryle, Penrose, Richardson, and Lachmann. But he seems closest to Shackle. He is mostly critical of another almost equally prominent group of economists: J. Robinson, Alchian, Friedman, Becker, Lucas, Baumol, and Williamson. I have still not figured out his overall views of Schumpeter, Keynes or Kirzner, even though they figure prominently in his narratives. The resulting fusion in terms of new ideas is perhaps best described as “an evolutionary radical subjectivism which is powered by entrepreneurial imagination and cumulative knowledge.”
