Posted by David in Economics, Personal stuff, The Social Sciences.
Tags: Brian Loasby, GLS Shackle, Hayek, Ludwig Lachmann, Max Weber, Murray Rothbard, Peter Lewin, Roger Koppl
In my view, Ludwig Lachmann is the most underappreciated 20th century thinker. Perhaps for that reason, I’m adamant in my commitment to include some of Lachmann’s theories and ideas in all of the courses that I teach. I have also tried to build on his work in my two books, particularly in Property Rights, Consumption, and the Market Process from 2008.
While Lachmann belonged to the Austrian tradition in economics, he was without doubt its most unusual member. In part, this was a result of his educational background. From Berlin rather than Vienna, he first studied with Werner Sombart, before his encounter with Hayek at LSE in the 1930s. While not especially fond of Keynesian policies, he was nevertheless influenced by Keynes’s focus on expectations, and developed an approach to economics that was actually quite similar to that of George Shackle.
In the 1870s, the marginal revolution in economics owed much to the recognition that consumer preferences are subjective and the source of all economic valuations. Hayek’s great contribution was to extend the subjectivist framework to knowledge; information is not equally available to all market participants and the interpretation of this partial information is in itself subjective. Frank Knight and John Maynard Keynes stressed the structural uncertainty of the future, which rested on the insight that expectations of the future could not be assumed to be objectively true, since this would require knowledge of the future state of knowledge, which is a logical impossibility. Thus, expectations are also subjective. Lachmann, more than anyone else, stressed the threefold nature of subjectivity. Preferences are subjective, but so is knowledge and so are expectations.
Taking expectations seriously has enormous implications for our understanding of capital markets. The earlier conception of a homogeneous capital stock becomes untenable. Equilibrium and equilibration can no longer be assumed. Instead we are left with a capital structure that is in a state of permanent flux, as the different expectations of experimental entrepreneurs cause changes to the uses of various capital goods and changing market valuations that may or may not lead to greater coordination over time. However, in the Lachmannian framework market coordination is not automatically desirable. Economic development leads to increasing complexity, and the more rapid this development, the less likely it is that we will see stable equilibrium prices for various production factors.
This does however not mean that there is never any coordination in dynamic economies. For goods and services with a short time horizon, there may very well be market coordination along the lines that was described by Hayek in “The Use of Knowledge in Society.” Consequently, expectations become less important in markets for the short-term rental of services and the transfer of perishable goods. Still, the focus on equilibria, “circular flows,” and “evenly revolving economies” inevitably becomes less central if one adopts a radical subjectivist framework.
Lachmann realized that there were also stabilizing features in society. These stabilizing features are institutions, which implies that to the extent that relatively durable equilibria do in fact exist they will have to be explained by the role of institutions in making expectations converge. The influence of Max Weber was very much in evidence when Lachmann discussed such institutions. He even wrote a book called “The Legacy of Max Weber.” In that book, he uses the German political system as a case study of how institutions sometimes stabilize expectations, while sometimes they do not. In the post-war German political system, there has been a general expectation among all the major political parties that democracy is here to stay; there is thus an institutional equilibrium in the political sphere. The Weimar Republic was also a parliamentary democracy, but in that case there was no shared expectation or even shared desire for democracy to endure; it was at most regarded as a transitional compromise prior to achieving a socialist, nationalist or national socialist revolution.
It is this emphasis on institutions that sets Lachmann apart from Shackle, who otherwise shares a similar open-ended view of the economy. While Shackle claimed that there is no such thing as good policy advice (we know too little), Lachmann was more optimistic, being generally supportive of the market economy, entrepreneurship, and non-inflationary monetary policies. But it is still fair to conclude that Lachmann was never an ideological firebrand; he was more interested in economic theory than in the organization of society.
Perhaps this is the reason for Lachmann’s relative obscurity. It is simply not as easy to attract followers when the goal is theoretical rather than political reform. In this sense, Lachmann was the “anti-Rothbard” of Austrian economics (Rothbard had few original economic contributions, and instead developed an extreme version of libertarianism that would seek to abolish the state in its entirety). But it is my conviction that Lachmann will be read by more people in 100 years than read him now, whereas Rothbard will by that time be no more than a footnote in the history of political ideas.
There are already encouraging signs that Lachmann’s theories are being taken more seriously. Peter Lewin has produced a historical account of the development of capital theory which presents Lachmann more or less as the guy who corrected the flaws in Bohm-Bawerk and Hayek. With his Big Players theory, Roger Koppl has attempted to look at the interplay between expectations and institutions within the framework of long-term economic development. Other economists who have extended Lachmannian ideas include Mario Rizzo, Don Lavoie, Brian Loasby, Nicolai Foss, Paul Lewis, and Jochen Runde.
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.”
Posted by David in Economics.
Tags: Brian Loasby, Hayek, Israel Kirzner, Lachmann, North, Oliver Williamson, Schumpeter
This semester I’m leading a seminar course on institutional, economic, and social change. One of the topics that we’re covering is entrepreneurship. Last week the theme was Schumpeter’s Theory of Economic Development and this week it’s Kirzner’s turn.
Our seminar format is for one of the students to give a two-hour interactive “lecture” on the relevant book, followed by a discussion led by one of the other students. The lecturing student also has to write a 20-page term paper that consists of a summary and a critique, if possible with references to related papers in the literature. For example, the term paper on Schumpeter (by Vincent Bata) referred to papers by Geoffrey Hodgson, Ulrich Witt, Murray Rothbard, and Michio Morishima.
Tomorrow it’s Nolan Boulanger’s turn, who will be presenting Kirzner’s theory of entrepreneurship. Reading his term paper gave me a feeling of déjà vu, in that Nolan’s reaction to Kirzner is very similar to my first reaction, that is, a very positive assessment. Since I have been criticizing certain aspects of Kirzner’s theory lately – especially his asset neutrality assumption and the lack of genuine Knightian uncertainty in the theory - it was good to be reminded of how much more interesting the theory is than sterile depictions of equilibrium states. And indeed, I still think that had mainstream economists integrated Kirznerian theory as the out-of-equilibrium part of mainstream theory, then the resulting fusion would have represented a major improvement, with Kirzner as the key theorist rather than Walras.
So my partial disillusionment with Kirzner should not blot out his achievement. And, yes, I think Kirzner is more deserving of the big Swedish prize than most laureates to date, and especially compared with the 2008 one (the ones I have personally benefited from reading are Hayek, Coase, Buchanan, North, V. Smith, Schelling, and Sen; Kirzner belongs in that same category).
So my disagreements with Kirzner’s conceptualization of the entrepreneur are diametrically opposed to mainstream criticisms of Austrian economics; I’m no Sherwin Rosen. The problem as I see it is that Kirzner only goes part of the way in rejecting artificial general equilibrium constructs and rational expectation assumptions. True, he does not start out with a “circular flow” and he does not assume that entrepreneurship is the prerogative of a small innovative minority. That is indeed one of the strengths of the theory. But the impossibility of unchanging knowledge in a dynamic economy is something that Kirzner simply assumes away. Now, if unchanging knowledge is an impossibility, then the assumption of unchanging technology, preferences, and resources during the process of innovative or speculative entrepreneurial equilibration turns the theory into a rather artificial construct; not as artificial as Walrasian equilibrium theory, but still counterfactual in relation to real-world market processes.
In many ways Kirzner reminds me of some new institutional economists: a big improvement on mainstream theory, but still curiously attached to some of its rather unhelpful assumptions. Oliver Williamson is a good example of an NIE economist in a “Kirznerian” position vis-a-vis the mainstream. So while Austrian and new institutional economics in my opinion amount to the two most productive and fascinating research programs in economics, many of the associated economists still cling to a greater chunk of their shared neoclassical heritage than seems to make sense to me when I attempt to play the role of “impartial external observer.”
I’m however not implying that I mostly prefer self-described heterodox economists. A smaller chunk of neoclassicism does not equal a non-existing chunk. We still need to think about changes at the margin. It is still useful to assume profit-seeking producers and utility-seeking consumers. Imperfect rationality is still a more useful tool than complete irrationality. And so forth. It’s a balancing act at which very few economists have been entirely successful. Hayek and North spring to mind, but only after they had reached normal retirement age. Definitely Loasby, but unfortunately he has been better at discussing the work of others than at developing anything as substantial as Kirzner’s theory. Lachmann is also an obvious candidate, but unfortunately he didn’t write as much as one could have hoped for — and he had the problem of clinging to the methodological individualism prescription at least as desperately as the others have clung to the equilibrium construct. It’s no doubt difficult to find — and keep — an approproiate balance between Occam’s razor, conceptual clarity, and open-ended complexity.
