Interview with Gerald O’Driscoll

by Mario Rizzo

I am happy to post a very interesting interview with my long-time friend and Cato senior fellow, Jerry O’Driscoll. As readers of ThinkMarkets know, Jerry frequently contributes to this blog. This is from the Lara-Murphy Report. The entire report can be accessed immediately below. The interview with O’Driscoll begins at page 24.

LMR Interview with Odriscoll

O'Driscoll Interview
O’Driscoll Interview
First Page of Interview
First Page of Interview

Herbert Davenport: The Economics of Enterprise

Economics of EnterpriseHerbert davenport

by Richard M. Ebeling*

This year marks the hundredth anniversary of the publication of Herbert J. Davenport’s (1861-1931), The Economics of Enterprise, which appeared in the early months of 1913.

Both mainstream economists as well as many “Austrians” seem to have long since forgotten Herbert Davenport. But during his time he was recognized as one of the early formulators of a subjectivist conception of opportunity cost, a harsh critic of Alfred Marshall’s attempt to partly preserve the “real cost” doctrine of the Classical Economists, and a lucid expositor of the central role of the entrepreneur in a dynamic vision of the market process.

His earlier article, “Proposed Modifications in Austrian Theory and Terminology” (Quarterly Journal of Economics, May 1902), and his book, Value and Distribution (1908) were “friendly criticisms” meant to clarify inconsistencies or ambiguities in the “Austrian” approach with which he was, in general, highly sympathetic.

Born in Vermont, he earned a PhD in economics under J. Laurence Laughlin (a strong defender of laissez-faire economics) at the University of Chicago, but was also influenced by (though critical of) Thorsten Veblen. For many years he served as the Dean and Department Chair of the College of Business at the University of Missouri. He later served as a professor of economics at Cornell University.

According to Paul Homan, he was a captivating classroom professor: “One remembers him most vividly and typically leaning back in his chair, his penetrating eyes touched with the shadow of a smile, as of triumph, while he deployed his arguments, humorously but with devastating order and precision, usually at the expense of someone, preferably Marshall, whom other people took seriously and whom he regarded as hopelessly muddle-headed.”

The Economics of Enterprise presents his full analysis of the market order in terms of subjectivism, causality, and entrepreneurial competitiveness. Continue reading

Austrian Economics: An Empirical and Experimental Science

by Mario Rizzo

I have been doing research on the ideas of the first-generation Austrian economists (Menger, Wieser and Boehm-Bawerk) as they relate to contemporary developments in behavioral and experimental economics. I have come upon a number of interesting things. I expect to share some of them here as well as in a soon-forthcoming paper. Today I wish to share this quotation from Friedrich von Wieser. These sentences are the opening words of an article commissioned by the Economic Journal to explain the ideas of the Austrian school to English-speaking economists:

“The historical school of political economists in Germany, and the Austrian, or as it is frequently termed, the abstract school are more nearly related than is at first sight apparent. Both follow the spirit of the age in rejecting speculative theory and in seeking their highest laurels in the field of observation. In art, as in science, naturalism must be distinguished from truth to nature, and we Austrians, while we have certainly no wish to be disciples of naturalism, we are wholly set on being experimentalists.”

Friedrich von Wieser, “The Austrian School and the Theory of Value,” Economic Journal (March,1891). Continue reading

Notes on a General Theory of the Social Cycle

by Gene Callahan

Monday past at our colloquium Andreas Hoffman presented a fascinating paper attempting to depict Austrian Business Cycle Theory as a special case of a more general business cycle theory based upon Hayek’s later work on spontaneous orders. Hoffman’s general idea (I won’t do it justice in this brief summary, so please have a look at the paper) is that business cycles occur when a “displacement” creates a situation in which people are uncertain how to make “adjustments” to move back closer to equilibrium. The period during which people are groping about for what to do creates the slump, and the upturn comes, of course, once they have gotten the hang of the new situation.

A lively discussion followed, during which Israel Kirzner, Mario Rizzo, and others pressured Hoffman on just what he meant by an “adjustment,” a “displacement,” and why these things would create a cycle, rather than merely ongoing “churning,” to use Kirzner’s word. (He also mentioned Lachmann’s notion of the “kaleidic society” in this context.)

Riding home on the subway afterwards, what struck me was that we lacked a general framework of accepted definitions for talking about things like adjustments, displacements, and social cycles. (I will justify the use of “social” later.) As soon as I noticed this, the following thoughts entered my mind, essentially all at once. Some of them were drawn directly from the discussion. And they are all very preliminary: but that is one thing that blogs are for, is it not? In any case, feedback on these presently sketchy ideas is welcomed. Continue reading

O’Driscoll and Rizzo Got There First

by Gene Callahan

I had believed that Tony Carilli and Greg Dempster (“Expectations in Austrian Business Cycle Theory: An Application of the Prisoner’s Dilemma,” The Review of Austrian Economics, 2001) made a major advance in Austrian Business Cycle Theory by hitting upon the correct solution to the challenge presented by, for instance, Gordon Tullock, who once wrote:

“The second nit has to do with Rothbard’s apparent belief that business people never learn. One would think that business people might be misled in the first couple of runs of the [Austrian] cycle and not anticipate that the low interest rate will later be raised. That they would continue unable to figure this out, however, seems unlikely.” (“Why the Austrians Are Wrong about Depressions”)

By posing the situation as a prisoner’s dilemma, where businessmen are rational to exploit the short-term profit opportunities offered by the boom phase (since if they don’t their competitors will) Carilli and Dempster adequately answered Tullock’s complaint. (I especially liked their solution because I independently had hit upon the same idea, which I was working out while writing my book, Economics for Real People. Well, I wasn’t the first to print, but at least I was the first to reference their paper!)

But yesterday, while editing someone else’s work, I discovered that Gerald O’Driscoll and Mario beat us to the basic insight by several decades, although they did not give it a game-theoretical formulation:

“[T]here are profits to be made from exploiting temporary situations. . . . Though entrepreneurs understand [the macro-aspects of a cycle] they cannot predict the exact features of the next cyclical expansion and contraction. . . . They lack the ability to make micro-predictions, even though they can predict the general sequence of events that will occur. These entrepreneurs have no reason to foreswear the temporary profits to be garnered in an inflationary episode. . . . From an individual perspective, then, an entrepreneur fully informed of the Austrian theory of economic cycles will face essentially the same uncertain world he always faced. Not theoretical or abstract knowledge, but knowledge of the circumstances of time and place is the source of profits.” O’Driscoll and Rizzo, The Economics of Time and Ignorance

Note: I still think what Carilli and Dempster did, in giving this a game-theoretic formulation, is great work. I just see it is not quite as original as I had thought.

Radical Ignorance in the Financial Crisis

by Sandy Ikeda

Jeffrey Friedman and Wladimir Kraus have a new book out, Engineering the Financial Crisis, (Univ. Penn Press) that grew out of research that first appeared in Critical Review back in 2009 on the “Causes of the Crisis.”  Friedman’s lead article in that issue did an excellent job of providing a detailed but readable description of the institutional setting of the crisis and an account of the complex events, domestic and international, that led to it.  I’ve only skimmed the book, but it appears offer a similar kind of useful description and analysis of these and many other events surrounding the crisis.

What distinguishes this book, and what may be of particular interest to readers of this blog, is it’s explicitly Austrian perspective on the role of ignorance, in the private but especially the public sector, as the analytical starting point of the crisis.

The meta-mistake that economists make in ignoring ignorance (or in reducing it to “rational” or deliberate ignorance or to “asymmetric information,” where one party does know the truth) is suggestive, we think, of the problems that modern democracy faces:  If economists are our most important advisers, but their worldviews have no place for genuine human error, we are in deep trouble (151).

A rationalist constructivist hubris led public authorities to create a “hybrid capitalism” that incited entrepreneurs to ever riskier investments, the consequences of which no one could foresee though they perhaps might have imagined.  The book’s title Engineering the Financial Crisis captures that idea well.

Chicago and Vienna

by Jerry O’Driscoll

In the last two days, two prominent economists have asked me essentially the same question: what is the difference between Chicago and Austrian economics? It is interesting that both asked, particularly since one has a Ph.D from Chicago.

The second economist asked me specifically if Armen Alchian wasn’t really an Austrian. I’ll respond as I did to him. I learned most of my Austrian economics in the UCLA graduate economics program. (At that time, UCLA was known as Chicago West.) I was never an Alchian student, but one read lots of Alchian anyway. And his influence pervaded the department. It was obvious to me that Mises had influenced Alchian. Also Hayek, as is made clear in a video of Alchian interviewing Hayek.

Hayek’s classic essays on prices and information were on various reading lists at UCLA. Continue reading

Another step down the road to serfdom

by Roger Koppl

Peter Orszag, former director of the Office of Management and Budget, has written an article for The New Republic entitled “Too Much of a Good Thing: Why we need less democracy.”  “To solve the serious problems facing our country,” he says, “we need to minimize the harm from legislative inertia by relying more on automatic policies and depoliticized commissions for certain policy decisions. In other words, radical as it sounds, we need to counter the gridlock of our political institutions by making them a bit less democratic.” Continue reading

Thomas Mayer: “I am an Austrian in Economics”

by Andreas Hoffmann

In today’s publication Thomas Mayer writes that he is “an Austrian in economics.” Mayer is the chief economist of Deutsche Bank Group and head of Deutsche Bank Research. Mayer argues that Austrian theory fits recent events well.  He suggests that

“Failure of the liquidationists to overcome the Great Depression of the early 1930s prepared the ground for an era of interventionist economic policies. Modern macroeconomics and finance nourished the belief that we can successfully plan for the future. But the present crisis teaches us that we live in a world of Knightian uncertainty, where the ―unknown unknowns dominate and our plans for the future are regularly thwarted by unforeseen and unforeseeable events. Continue reading

Of Interest to All Market Process Economists

by Gene Callahan

Dan Klein responds, on the meaning of economic coordination, mostly to Israel Kirzner, and secondarily to several others, including me. Here is Klein’s abstract:

The Fall 2010 issue of the Journal of Private Enterprise featured a complicated set of papers. The lead article was a long paper by Jason Briggeman and me, on Israel Kirzner’s work on coordination and discovery. The thrust of our paper was an affirmation of Kirzner’s central claims, but with two alterations. First, we propose that the coordination that figures into the central issues ought to be understood as what we call concatenate coordination. Second, the central statements at issue ought not be asserted as holding 100 percent of the time, but rather should be by-and-large statements, making for a strong presumption, not a categorical result. Israel Kirzner then replied to our paper. The pair of papers was then the object of commentary by Peter Boettke and Daniel D’Amico, Steven Horwitz, Gene Callahan, and Martin Ricketts. Here, I respond to Kirzner, and, in an appendix, more briefly to the others.

Happy Birthday, Carl Menger

Carl Menger, the birthday boy.

by Mario Rizzo 

Today is the birthday of Carl Menger, born February 23, 1840. Menger was, of course, the founder of the Austrian School of Economics. His Principles of Economics, a great achievement for its time, is still well worth reading. It conveys like no other book at the time (and unlike most basic texts today) the importance of mind, knowledge, ignorance, causal relationships between goods and wants, and of course marginal utility. I think we can still learn from Menger’s book today, especially about the importance of knowledge in economic development. Austrians should be pleased to have such a great mind as the founder of their school.    Continue reading

Further Thoughts on The Sensory Order

by Roger Koppl

Over at Austrian Addiction, Dan D’Amico responds to my recent post on The Sensory Order.  Dan wants to know “what Hayek’s theory of neuorscience is really adding here that a more basic understanding of subjective preferences does not already imply?”  Dan is not the only one with this question.  I think enthusiasts for The Sensory Order have given pretty good answers to Dan’s question, but it seems clear that we need to do a better job. Continue reading

What Austrian Economics IS and What It Is NOT

by Steve Horwitz*

Since the start of the financial crisis and recession, there has been a renewed interest in the ideas of Austrian economics by scholars, public intellectuals, and even the media.  For the first time in a long time, the analytical framework of Austrian economics is being taken note of, if not taken seriously, by a variety of opinion makers.  This is, of course, a good development.

However, at the same time, this popularity has led to many people using the “Austrian” label to refer to their views on issues beyond those involving the analytical framework they bring to economics.  In particular, “Austrian” has become the near-equivalent of “free market” or “libertarian” not only indirectly, but directly through the use of terms such as “Austro-libertarian” to describe particular policy preferences or broader worldviews.  The result is that, despite the additional publicity, what Austrian economics IS has often been distorted into something it is NOT. Continue reading

The Sensory Order

by Roger Koppl

Over at Marginal Revolution, Tyler Cowen recently said The Sensory Order is “Hayek’s most overrated book.”  In part he was complaining that “many call it his most underrated book.”  Unfortunately, he does not name names.  In any event, Tyler has other gripes including the mistaken suggestion that the science in it was not current.  As I said in a comment, “I don’t understand why TSO gets lukewarm to negative reactions from serious people who are otherwise keen on Hayek.”  The most salient example of TSO bashing may be that of Dan D’Amico and Pete Boettke, who criticize “neuro-Hayekians.” Let me go on record as an enthusiast for The Sensory Order.  The latest expression of my enthusiasm is forthcoming in JEBO. Continue reading

The Second Austrian Moment

by Mario Rizzo  

This is an important time for Austrians. During the Great Depression and for many years thereafter, J.M. Keynes and his followers dominated macroeconomic theory (some say they created it) as well as the conventional wisdom about the historical lessons of the Depression and the New Deal.  

We are now witnessing many important developments that will affect economics and public perceptions for a long time to come. Continue reading

Berlin on Hayek

by Chidem Kurdas

Reading a volume of Isaiah Berlin’s letters – Enlightening Letters 1946-1960,  edited by Henry Hardy and Jennifer Holmes (London: Chatto & Windus, 2009) – I came across a puzzling comment on Friedrich Hayek.

It is not obvious that Berlin and Hayek, both of them critics of communism and in particular of the Soviet Union, belong to diametrically opposite political camps. But apparently Berlin thought so. Then he read Hayek’s 1952 book, The Counter-Revolution of Science. Continue reading

Hayek’s Knowledge Problem, as Applied to New Paternalism

by Glen Whitman

Mario Rizzo and I have recently published another article on the new paternalism, titled “The Knowledge Problem of New Paternalism,” in the BYU Law Review. (Mario briefly blogged about it here.)  The article lacks an abstract, but here’s a lightly edited portion of the introduction:

The “new paternalism” spawned by behavioral economics faces a severe knowledge problem akin to the knowledge problem that Friedrich Hayek argued afflicts centrally-planned economies. If well-meaning policymakers possess all the relevant information about individuals’ true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough. Continue reading

Hayekian Escape from Circular Argument

by Chidem Kurdas

Gene Callahan’s incisive post and the absorbing discussion that it generated here on ThinkMarkets can be taken as support for a Hayekian rather than a Hobbesian framework, not the least because by starting with Hayek, you can get to a substantive answer to Hobbes.

Gene, with his usual razor-sharp logic, points out that “if Hobbes is right, and without Leviathan we are in the ‘Warre of all against all,’ then the sovereign is justified in doing whatever is necessary to keep us out of that state.” Ergo, to argue that taxes are an unjust coercion, you have to show “that the State is not a necessary element of social order.”

After 82 comments and counting, there is no resolution. This all-or-nothing way of  looking at government coercion always leads to a dead end. Of course most people fear a short, nasty, brutish etc. life, so they settle for Leviathan with all the trimmings. Put that way, there is no argument against the tax collector. Continue reading

Austrian Economics Meets The New Decade In The New Century

by Mario Rizzo

My survey article, “Austrian Economics: Recent Work” has now been published by The New Palgrave Dictionary of Economics. You can find the site here.

You need either an individual subscribution or access to an institutional subscription to get to the article. However, you can look here for the almost-final version. There is also my blog discussion here.

As I have said many times, the boundaries between Austrian economics and other schools of economics are fluid and not precisely defined. I do not view the policy conclusions of particular Austrian economists, regardless of their status, as having the same defining features as their analytical or theoretical contributions. Policy is part of the art and ethics of economics and not just the science as John Neville Keynes argued in 1890. It is not, and cannot, be the straightforward implications of economic theory.

I am a classical liberal, but that is not equivalent to being an Austrian economist (in my broad sense of the term!). I do not belittle the other roads to classical liberalism. When we talk about Austrian economics we are not talking about liberalism and when we talk about liberalism we are not necessarily talking about Austrian economics.

In The Economics of Time and Ignorance Jerry O’Driscoll and I explored the interrelations between Austrian economics and Post Keynesian economics. This was not meant to be an exclusive, exhaustive or even definitive connection. We wanted to shock Austrians out of the self-satisfied slumber that some were in.

In the years that have passed, there have been other connections with New Institutional Economics, experimental economics (in the hands of the great Vernon Smith), public choice-constitutional economics (in the hands, especially, of James Buchanan and Richard Wagner), and so forth.

I look forward to the new contributions of Austrians of every stripe. Some will be good and some will be poor. This is way of science. Errors all over the place. Gems of insight here and there. The process goes on.

Bleeding the Economy

by Roger Koppl

At the Cobden Centre‘s website (and here), Steve Baker discusses recent Fed signals in the context of Big Players theory.  The more active the Fed (or other central bank), the greater the fraction of entrepreneurial attention devoted to Fed watching rather than productive activity.  As Baker says, “traders must pay attention to the Big Player and not the fundamentals.” Continue reading

What Is Austrian Economics?

by Mario Rizzo

Many years ago (around 1982, I think) Jerry O’Driscoll and I wrote a paper that was the basis of an American Economic Association session. The paper was called “What is Austrian Economics?” The paper gradually evolved into our book, The Economics of Time and Ignorance.

The purpose of this book was to present Austrian economics in an updated fashion. To do this we needed to do two things: (1) uncover many of the fundamental ideas implicit in the tradition but not, as of then, sufficiently elaborated or made explicit; and (2) confront Austrian ideas with recent developments in economics, both mainstream and outside of the mainstream.

We faced many initial negative criticisms of the book. I will say that I was very disappointed by some of the old-guard reaction to the book. But do not confuse “old guard” with age because some of the greatest encouragement we received was from Professor Ludwig Lachmann who well understood the necessity of going beyond what the previous generation of Austrians had bequeathed us. Continue reading