"The Impossibility ... [Of] ... A Single Magnitude Representing ... The Quantity Of Capital"

Figure 1: From Sraffa's Production of Commodities by Means of Commodities

Suppose people save more. A neoclassical and Austrian school¹ idea is that then the supply of capital will have increased, in some sense. One would expect its price, the rate of interest, to be less, absent intervention by the monetary authorities. Entrepreneurs, if they were alert, would adopt more capital-intensive - that is - longer techniques of production. After these techniques came online, output per worker would be higher.

Suppose that the length of the period of production of a technique were defined in terms of purely physical data. Given a complete list of inputs and outputs, including the times at which they flow into and out of the production processes, one would be able to measure the (average) period of production of the technique composed of those processes. Then reswitching shows the above story cannot be universally valid.

Austrian-school economists and economists sympathetic to the Austrian school have had at least two reactions to this demonstration of the logical invalidity of the above story. One reaction is to assert that an aggregate measure of capital-intensity, such as a physical measure of the average period of production, is not needed for the story to go through. Supposedly, entrepreneurs shift resources, in response to low interest rates, to time periods further before the production of consumer goods. In the technical jargon, entrepreneurs tend to move resources towards producing goods of higher orders and away from producing goods of lower orders. I have shown² that this response fails to evade a critique based on reswitching.

The second reaction is to define the average period of production as dependent on the interest rate, as well as physical properties of techniques of production. Thus, the average period of production for a given technique will be different at the interest rates associated with different switch points. Apparently, Edmond Malinvaud, drawing on some work of J. R. Hicks, made this argument in a 2003 paper about Knut Wicksell's contributions. Saverio Fratini, in his paper presented at the recent 50th anniversary conference on Sraffa's book, took the opportunity of Malinvaud's paper to argue that this reaction also cannot be sustained as a response to a critique based on reswitching and capital-reversing.

I associate this second reaction with Leland Yeager, who, in a couple of papers in the late 1970s, argued that waiting has the dimensions of the product of value and time (for example, dollar-years). I find it hard to find a valid non-tautological argument here. I think Fratini's paper could be revised to point out that he refutes Yeager, as well as J. R. Hicks and Edmond Malinvaud. I would like to be referenced too, although I don't know about the conventions of referencing working papers.

Footnotes
¹ Both William Stanley Jevons and Eugen von Böhm-Bawerk expounded this idea.
² Due to a recent hard-disk crash, I have lost originals from which I generated some PDFs, as well as reviewer comments on recent revisions.
References

• Saverio M. Fratini (2010). "The Hicks-Malinvaud Average Period of Production and 'Marginal Productivity': A Critical Assessment", Sraffa’s Production of Commodities by Means of Commodities 1960-2010, Roma, Italy (2-4 Dec.)
• Robert L. Vienneau (2010) "Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory"
• Leland B. Yeager (1976). "Towards Understanding Some Paradoxes in Capital Theory", Economic Inquiry, V. 14: pp. 313-346
• Leland B. Yeager (1979). "Capital Paradoxes and the Concept of Waiting", Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes (ed. By Mario J. Rizzo), D. C. Heath and Company

Please Remember Victor Jara, In the Santiago Stadium

As the title suggests, history gives us plenty of stories of people, when put to the test, of being more heroic than anybody should be expected to be. But I am telling the story, I am sorry to say, of somebody willingly signing up to be a zero.

Apparently, in 1981, Hayek visited Chile. Given the context, I cannot read this interchange in an interview as an abstract discussion:

Lucia Santa-Cruz: "There is reference in your work to the apparent paradox of dictatorships that may be more liberal than a totalitarian democracy. But it is also true that dictatorships have other characteristics which contradict freedom, even if it is understood negatively as you do."

Hayek: "Evidently dictatorships pose grave dangers. But a dictatorship may limit itself (se puede autolimitar) and if self-limited it may be more liberal in its policies than a democratic assembly that knows of no limitations. I must admit that it is not very probable that this may happen, but even so, in a given moment, it may be the only hope. Not a sure hope because it may always depend on the good will of an individual and one can trust in very few individuals. But if it is the only opportunity in a given moment, it may be the best solution in spite of all. But only if the dictatorial government visibly leads to a limited democracy."
-- El Mercurio, (not my translation) Sunday, 19 April 1981

In the same interview, Hayek said:

Hayek: "Democracy has a task which I call 'hygienic', for it assures that political processes are conducted in a sanitary fashion. It is not an end in itself. It is a rule of procedure whose aim is to promote freedom. But in no way can it be seen in the same rank as freedom. Freedom requires democracy, but I would prefer temporarily to sacrifice, I repeat temporarily, democracy, before having to do without freedom, even if temporarily." -- ibid.

Furthermore, Hayek gave various presentations to various conferences. Apparently, in a chat with Jaime Guzman, Hayek said, "Pinochet is an honorable general."

Error Built Upon Error

This inspired the picture below. Of course, I have more in soft-copy.

My Dead Tree Austrian Library

Yeager Mistaken

Just when I planned on putting aside Austrian economics until receiving referee reports...

The Ludwig von Mises Institute has made Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes available. These 1979 proceedings were edited by Mario J. Rizzo. The conference at which these papers were presented was held at New York University on 7 January 1978.

For some reason, Austrian economists take Leland B. Yeager as having an authoritative response to the Cambridge Capital Controversy. So I reference his 1976 Economic Inquiry article in my recent refutation of Austrian Business Cycle Theory. These proceedings have an article by Yeager, "Capital Paradoxes and the Concept of Waiting", that I have not previously had access to. Also, Roger Garrison responds with a comment.

Yeager's supposed resolution to the CCC is, roughly, to take interest as the price of waiting, defined as "the tying-up of value over time". Since value is part of its definition, the amount of waiting embodied in a technique cannot be measured by the physical characteristics of a technique. The amount of waiting embodied in a technique can then be expected to vary with prices and interest rates. Thus, reswitching does not seem paradoxical to Yeager.

Yeager acknowledges that he has not resolved the puzzle of "perverse" switches. Presumably, a lower interest rate is associated with the adoption of a technique embodying relatively more waiting. Yet around a perverse switch point, a lower interest rate is associated with the adoption of technique that produces less consumption per worker. How can this be? If laborers work with more waiting - a factor of production - shouldn't they get more output?

Anyways, this incorrect claim shows that Yeager had not fully absorbed the lessons of the CCC:

"The demand for waiting, as for labor and land-use, derives from the factor's capacity to contribute to output - ultimately, output of consumer goods and services - and from consumers' demand for that output. The relative strengths of consumer demands for goods embodying relatively large amounts of particular factors affect producer demands for those factors and so affect their prices. A decline in consumer demand for a highly waiting-intensive good tends to lower the rate of interest." - Leland Yeager

The last statement is without foundation.

Peter Boettke With Nothing To Say

Peter Boettke goes on and on and on in this post. I'll confine my comments to Boettke's first numbered "point", even though I have views on some others. This point deals with Paul Davidson's review essay on O'Driscoll and Rizzo's The Economics of Time and Ignorance.

I believe Boettke's first point is an inadequate response to Matthew Mueller here and here. Boettke points out a verbal statement from Mises rejecting the claim that money is neutral. It never seems to occur to Boettke that Davidson's point might be that the logic of Mises and Hayek's positions requires them to accept the axioms of ergodicity (logical time), money neutrality, and gross substitution. Boettke cannot rationally challenge that view by citing statements where Mises or Hayek refuse to accept the first two axioms and therefore become inconsistent.

I am of the opinion that Austrian Business Cycle Theory is consistent with money non-neutrality only in the short run. Furthermore, Hayek's notion of intertemporal equilibrium is closely related to J. R. Hick's Capital and Value model of temporary equilibrium and to the Arrow-Debreu model of intertemporal equilibrium. Hicks came to recognize late in his life that his model could not be set in historical time. Hahn has pointed out the difficulties of introducing money in any essential way into the Arrow-Debreu model. I don't know that Austrians have ever grappled with these decades-old developments. I don't see that Boettke engages in arguments.

The 4,827th Reexamination of Hayek's System

In various blogs, John Holbo, Julian Sanchez, and Matthew Yglesias comment on Hayek. In commenting on Jesse Larner's views on Hayek, I have already mentioned my opinion that The Road to Serfdom can be read more as a jeopardy argument than a slippery slope argument. I've also noted Hayek's difficulties in analyzing mixed, mainly capitalist economies.

Update: Brad DeLong says that The Road to Serfdom was too a slippery slope argument, and Matthew Yglesias reacts.

Some Capital-Theoretic Fallacies of Austrian Economics

I have rewritten my demonstration of some errors in Austrian business cycle theory. In addition to making this article available on the Social Science Research Network, I have submitted it to some journal.

Enrico Barone, The Originator Of The Socialist Calculation Argument

Arguably, socialism, when implemented with a centrally planned economy, is guaranteed to not produce a fairly high standard of living. Market prices are needed. This argument was originated by Enrico Barone:

"25. But it is frankly inconceivable that the economic determination of the technical coefficients can be made a priori, in such a way as to satisfy the condition of the minimum cost of production which is an essential condition for obtaining that maximum to which we have referred. The economic variability of the technical coefficients is certainly neglected by the collectivists; but that it is one of the most important sides of the question Pareto has already very clearly shown in one of his many ingenious contributions to the science.

The determination of the coefficients economically most advantageous can only be done in an experimental way: and not on a small scale, as could be done in a laboratory, but with experiments on a very large scale, because often the advantage of the variation has its origin precisely in a new and greater dimension of the undertaking. Experiments may be successful in the sense that they may lead to a lower cost combination of factors; or they may be unsuccessful, in which case that particular organization may not be copied and repeated and others will be preferred, which experimentally have given a better result.

The Ministry of Production could not do without these experiments for the determination of the economically most advantageous technical if it would realize the condition of the minimum cost of production which is essential for the attainment of the maximum collective welfare.

It is on this account that the equations of the equilibrium with the maximum collective welfare are not soluble a priori, on paper.

26. Some collectivist writers, bewailing the continual destruction of firms (those with higher costs) by free competition, think that the creation of enterprises to be destroyed later can be avoided and hope that with organized production it is possible to avoid the dissipation and destruction of wealth which such experiments involve, and which they believe to be the peculiar property of 'anarchist' production. Thereby these writers simply show that they have no clear idea of what production really is, and that they are not even disposed to probe a little deeper into the problem which will concern the Ministry which will be established for the purpose in the Collectivist State.

We repeat, that if the Ministry will not remain bound by the traditional technical coefficients, which would produce a destruction of wealth in another sense - in the sense that the greater wealth which could have been realized will not be realized - it has no other means of determining a priori the technical coefficients most advantageous economically, and must of necessity resort to experiments on a large scale in order to decide afterwards which are the most appropriate organizations, which it is advantageous to maintain in existence and to enlarge to obtain the collective maximum more easily, and which, on the other hand, it is best to discard as failures.

27. Conclusions. From what we have seen and demonstrated hitherto, it is obvious how fantastic those doctrines are which imagine that the production in the collectivist regime would be ordered in a manner substantially different from that of 'anarchist' production.

If the Ministry of Production proposes to obtain the collective maximum - which it obviously must, whatever law of distribution may be adopted - all the economic categories of the old regime must reappear, though maybe with other names: prices, salaries, interest, rent, profit, saving, etc..." -- Enrico Barone, translated from "The Ministry of Production in the Collectivist State" Giornale delgi Economisti (1908)

"Malinvestment" in Ron Paul's Vocabulary

Ron Paul outlines mistaken Austrian Business Cycle theory:

"These governmental measures, combined with the Federal Reserve's loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.

When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.

Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.

In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically." -- Ron Paul, 23 September 2008

(As an aside, I am aware of some discussion on the community forums at mises.org of some version of my article.)

Barack Obama has also already gone into more technical detail, on another topic entirely, than I expect from presidental candidates. Last year at Google, Eric Schmidt asked him for "the most efficient way to sort a million 32-bit integers." Obama said, "The Bubble Sort would be the wrong way to go."

Rejection By Review Of Political Economy

Rejection Letter By Steven Pressman
Dear Robert,

I have now received back two referee reports on your paper "Some Capital-Theoretic Fallacies of Austrian Economics". Unfortunately, neither of the referees liked your paper and both recommended that I reject the paper.

Given the two reports, I have no choice but to turn down your paper. Enclosed are the comments that I received from my referees. I hope that they are helpful to you in revising this piece and getting it published elsewhere.

Best wishes, Steve

One Referee Report
This paper revisits the Cambridge Capital Controversies (CCC) by presenting an internal critique of "Hayekian triangles" illustrating the existence of reswitching in Austrian capital theory and its importance for Austrian Business Cycle Theory (ABCT). On the basis of this criticism, it declares ABCT to be inadequate and in need of serious revision, if not outright rejection.

The strengths of this paper are that it revisits an important victory of early Post Keynesian/NeoRicardian economics and illustrates that the points raised then have not been addressed by recent Austrian writings on ABCT, even by some smart and well-read people, such as Roger Garrison. In the second half of the paper (starting page 10), the author goes on to give a capable demonstration of this failure, and (briefly) argues that the tired old defense that "no actual instances" of capital-reversing "have ever been identified" is an inadequate response -- theoretically or empirically. That these errors are still made by Austrian (and I might add Neoclassical) economists suggests that the lessons of the CCC remain unlearned. For this reason there is indeed value in raising these points again (As an aside, I would venture that only one or two of my economist colleagues could even tell you what the CCC was, much less recount its importance for the Neoclassical theory of income distribution, but I digress).

My problems with the paper are three-fold. First, I found the introduction both too lengthy and not lengthy enough. This is indeed a paradox, so let me explain. While I have not done so lately, I once spent a great deal of time reading and teaching the Reswitching literature, and I found this lengthy review to be somewhat hard to follow. The reason is that it was (as the author admits) rather one-sided, but consequently it seemed to jump from point to point. But, simultaneously, these ten pages were also too brief and too abstract to inform someone who has only a passing acquaintance with the issue and its most important debates and findings. As a consequence, these less informed readers might be inclined to "turn the page." My point is that the introductory material was too short to satisfy those of us who know this literature and would like a review, but too long to help someone understand it if they do not already know it. My suggestion would be to cut out much of the first half and simply start with Section 3 (page 10) and position the paper as a "Research Note", and simply reintroduce it as a more narrow contribution, for example a critique of Roger Garrison or Hayek. Those interested will jump in, those who are not will skip over it, but the fairly unproductive first half can then be reduced to some references to the core literature (Harcourt or Garegnani, etc.)

Second, I found the algebraic examples to be, I believe, overly difficult to follow. Why were the units expressed in 49ths? That is a hard number with which to conduct long division in one's head! This presents a barrier to a reader who wishes to puzzle through the examples in the Tables. Was there a rationale for this choice? If so, please state it. If not, please simplify the treatment so as to invite the reader to follow the narrative and better learn from the examples.

Third, and perhaps most distressingly, I am not convinced that the overall presentation is all that original. Perhaps I am misinformed in surmising this, and I am willing to be corrected. But I must confess that I did not get the sense that this paper showed me a new angle or insight on the reswitching theorem or its implications. Now, that does not in itself doom this paper, but I do think that it means that it needs to be "repackaged", perhaps along the lines suggested above in my first criticism -- that is to say as a narrower and more specific project, without the lengthy preamble, and making a simple and direct critique of recent Austrian writings on Capital Theory and the ABCT.

Other Referee Report
The paper attempts to show by counterexample that Austrian Business Cycle theory is false. The counterexample is a model in which the interest rate is exogenous and marginal adjustments in response to the interest rate are impossible by assumption. The paper reaches its climax when the author shows that an important remark of Austrian economist Roger Garrison does not hold in the paper's model economy. Garrison's remark is:

"In response to a policy-induced reduction of the interest rate, one leg of the triangle (measuring the stage dimension of the structure of production) lengthens; the other leg (measuring the final output of the production process) shortens. The forced saving, i.e. the reduced output of consumption goods allows for expansion of the early stages of production. This is pure malinvestment."

Garrison could be wrong. But the context for the remark is an economy in which the interest rate is endogenous and marginal adjustments in response to the interest rate are possible. It is legitimate to restrict one's attention to two discrete techniques for an individual enterprise and ask which is preferred under different assumed interest rates. That exercise reveals the theoretical possibility of re- switching. But it is not legitimate to force Garrison's discussion of malivestment into that box.

I couldn't understand the author's model economy. Table 2 was a complete mystery to me. It is true that if iron and steel produce iron and steel, then it is not so clear what "order of good" means. But I cannot understand how the author divides his two output into (apparently) and infinite rank of orders.

The Austrians insist that "waiting" has two dimensions, time and money. He (she or they) even quote Hayek saying as much way back in 1941. I don't see that Austrian notion reflected in the paper's analysis, however. As well as I can make out, Cohen and Harcourt's toss off remark that Yeager didn't know what he was talking about is taken to settle the issue.

I think the Austrians are far more vulnerable on capital theory that they recognize. Thus, I would welcome a strong challenge to Austrian capital theory. If a strong challenge was mounted in this essay, it was beyond my ability to grasp it.

Relevance of Austrian Business Cycle Theory to USA Politics

Matthew Yglesias blogs "Live from the Paul-Dome":

"I never thought I’d hear an arena full of people cheering and clapping for 'the Austrian theory of the business cycle.'"

Stephen Williamson, Fool or Knave?

Stephen Williamson quotes Narayana Kocherlakota, apparently a very stupid person:

"Kocherlakota says this...:

'But over the long run, money is, as we economists like to say, neutral. This means that no matter what the inflation rate is and no matter what the FOMC does, the real return on safe short-term investments averages about 1-2 percent over the long run.'

Again, uncontroversial." -- Stephen Willaimson

This, of course, is false. Communities of economists exist who set their theories in historical time and dispute that money is neutral in any run. I prefer to point to Post Keynesians, but Austrian School economists satisfy these criteria also. Furthermore, economists within such schools surpassed mainstream economists in the current historical conjuncture by having pointed out the possibility of the global financial crisis before its occurrence.

I think economists should strive not to tell untruths abouts what economists believe.

On The Road From Mont Pelerin

I have been reading The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective, a collection edited by Philip Mirowski and Dieter Plehwe (Harvard University Press, 2009). One theme I find emergent in this book is the influence of funders (e.g., Harold Luhnow, Jasper Crane) on the redirection of economic thought, without any corresponding empirical evidence.

But I'm not yet ready to offer too many thoughts on this book. Instead I'm interested in the cover photo, reproduced as Figure 1.

Figure 1: Cover Photo

I cannot find photo credits in the book. Presumably, this photo is of attendees at a Mont Pelerin society meeting, maybe the first. Can anybody identify these people? Figure 2 letters them to facilitate referring.

• F. Ludwig Von Mises
• G. Friedrich Hayek

Figure 2: Cover Photo with Annotations

Oversimplified

"Professor Harcourt reviews a body of doctrine challenging the foundations of standard economics. The challenges, if valid, would confer increased respectability on ways of organizing production and income distribution guided more by politics and oriented less toward profit than the ways most amenable to standard analysis." -- Leland B. Yeager (1976). "Review of Some Cambridge Controversies in the Theory of Capital", American Political Science Review, V. 70, N. 4 (December): 1270-1271

Keynes In Historical Time

Alex Tabarrok praises Phelps desire to develop a non-equilibrium, non-hydralic economics. “GVV”, a commenter, points out that Nicholas Kaldor and Joan Robinson have already developed this theme. This led to a question of whether Austrians or Post Keynesians were first to develop this theme. (Peter Boettke also responds to Phelps and comments by pointing to contributions of the Austrian school.)

I think both schools developed a receptiveness to this theme in parallel. Hayek’s student Shackle emphasized the uncertaintly and money in Keynes. Another of Hayek’s students, Ludwig Lachmann, was important, along with Kirzner, in the revival of interest in the U.S. in the 1970s in the Austrian school. And Lachmann lauded Shackle’s interest in disequibrium.

My point in this post is to point out that these themes of disequilibrum, uncertainty, and historical time were in Keynes’ revolution from the start. Consider:

”Actually, however, we have as a rule, only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences, even though time and chance may make much of them. But sometimes we are intensely concerned with them, more so, occasionally, than with the immediate consequences. Now of all human activities which are affected by this remoter preoccupation, it happens that one of the most important is economic in character, namely, wealth. The whole object of the accumulatin of wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of the [neo]classical economic theory. This theory might work very well in a world in which economic goods were necessarily consumed within a short interval of their being produced. But it requires, I suggest, considerable amendment if it is to be applied to a world in which the accumulation of wealth for an indefinitely postponed future is an important factor; and the greater the proportionate part played by such wealth-accumulation the more essential does such amendment become.

By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory Bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters there is no scientific basis on which to form any capable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benhamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed.

How do we manage in such circumstances to behave in a manner which saves our faces as rational economic men? We have devised for the purpose a variety of techniques, of which much the most important three are:

1. We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto. In other words we largely ignore the prospect of future changes about the actual character of which we know nothing.

2. We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture.

3. Knowing that our own individual judgement is worthless, we endeavor to fall back on the judgement of the rest of the world, which is perhaps better informed. That is, we endeavor to conform with the behavior of the majority or the average. The psychology of a society of individuals each of whom is endeavoring to copy the others leads to what we may strictly term a conventional judgement.

Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled board room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled and lie but a little way below the surface.

Perhaps the reader feels that this general philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Though this is how we behave in the market-place, the theory we devise in the study of how we behave should not itself submit to market-place idols. I accuse the [neo]classical economic theory of being one of those pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.” -- John Maynard Keynes (1937).

References

• John Maynard Keynes (1937). “The General Theory of Employment”, Quarterly Journal of Economics, V. 51: 209-223.
• Ludwig Lachmann (1976). “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society”,
• G. L. S. Shackle (1988). Business, Time and Thought, New York University Press

"The Most Notable Critic of Austrian Economics"

Apparently, that is me.

Scholarly Fantasies

Maybe many that read old books might find interest the rediscovery of works whose existence was previously unknown or thought to be gone forever. Some examples:

• The Gospel According to Thomas and other gnostic manuscripts: Two Egyptian farmers discovered the Nag Hammadi library in 1945. This story is fairly incredible. While these Egyptian brothers pursued a feud with one of their neighbors, they left them in the keeping of their mother. She, in turn, I guess, started a fire with them every morning, until a coptic priest recognized their importance. And then they were smuggled out of Egypt.
• Thomas Malory's Le Morte d'Arthur: While cataloging the Winchester College library, in 1934, Sir Walter Fraser Oakshott discovered a manuscript of this book. This manuscript suggests that Malory conceived his work as a collection of tales. Caxton, the printer, edited it into an unified tragedy.
• Third edition of François Quesnay's Tableau Économique: Marguerite Kuczynski, in the late 1960s, asked the heirs of Pierre Samuel Du Pont de Nemours if they had any printed works by Quesnay in their possession. And the Eleutherian Mills Historical Library told her "Yes".
• David Ricardo's unknown correspondence and manuscripts: Piero Sraffa's discovered, in 1934, a bundle in F. E. Cairnes castle at Raheny. Raheny is near Dublin, and F. E. Cairnes, son of a 19th-century economist, had recently died. The bundle contained 57 letters from Ricardo to James Mill and various manuscripts written by Ricardo
• Ludwig Von Mises' papers from his apartment in Vienna: Unbeknownst to Mises, the Nazis preserved these after Mises fled. The Soviets captured them from Germany at the end of WW II, catalogued them, and preserved them in the KGB archives. Richard Ebeling brought them back from Russia in 1996 after their discovery by western scholars after the collapse of the Soviet Union.

Hayek and Myrdal Quotations

Hayek had a good argument about the difficulties of central planning. The planners do not have a mechanism for using tacit knowledge distributed among agents. But when it came to describing how contemporary western economies work, Hayek gave up:

"It is important to realize in any investigation of the possibilities of planning that it is a fallacy to suppose capitalism as it exists today is the alternative. We are certainly as far from capitalism in its pure form as we are from any system of central planning. The world of today is just interventionist chaos." -- F. A. Hayek (1948). "Socialist Calculation", in Individualism and Economic Order

On a different topic entirely - I am amused by this Myrdal quote:

"It has been suggested that if one tried to construct a consistent system from Marshall's footnotes and reservations, one would arrive at something very different from the Marshallian system. But it seems to me that if the job were critically, one would not arrive at any system at all." -- Gunar Myrdal, The Political Element in the Development of Economic Theory (Trans. by Paul Streeten) pp. 127-128

One such reservation is Appendix H in the eighth edition of Principles of Economics, titled "Limitations of the use of statical assumptions in regard to increasing returns".

Economists Joining The Austrian School In The Wilderness

Around 1940, the Austrian school of economics collapsed. Who did most to propagate the Austrian school in the interval between this collapse and the 1974 South Royalton conference? I'd like to formulate this question so it's clear I'm talking about generations following Ludwig Von Mises and Friedrich Hayek.

David Friedman has recently refuted some fantastic claims on behalf of Murray Rothbard. (See also Friedman on Rothbard's willingness to advocate lying.)

For me, two names pop to mind - Israel Kirzner and Ludwig Lachmann. I don't think of Murray Rothbard as somebody that academics need pay any attention to, other than historians studying the American right during the second half of the twentieth century. I think one can draw many analytical parallels between Lachmann and Robinson's views on capital. I'm also interested, with Lachmann, in G. L. S. Shackle, a Post Keynesian economist. I don't find Kirzner's views on entrepreneurship as of as much interest. I like Kirzner better on the history of the Austrian school and in his attempts to differentiate Mises from Robbins in their views on methodology. What did Rothbard contribute, other than political polemics and rants for 'zines read by only a handful of true believers? I know some will cite his books. But I don't find much in Man, Economy, and State other than repetition of Mises, including Mises' unwillingness or inability to accurately state the views of his contemporaries.

Although I am quite aware of the difficulties of this metric, I looked to see who among these three managed to publish, after the Austrian-school revival, in economic journals I find of interest and that cannot be perceived as a ghetto for the Austrian school. I have handy what purports to be a complete bibliography for Lachmann, a couple of Kirzner collections, and google searches for Rothbard. I think impressive Lachmann's 1976 survey in the Journal of Economic Literature. I expected to find Kirzner had more impressive outlets for a few of his papers. Since I note that Kirzner contributed the survey article on the Austrian school for the first edition of The New Palgrave, I suppose I should also note his New Palgrave articles on "Economic harmony" and (with Roger Garrison) on Hayek, as well as Murray Rothbard's New Plagrave articles on "Catallactics", "Frank Fetter", "Imputation", Mises, and "Time Preference". I'm not sure this evidence leads to my conclusion.

Bibliography

• Edwin G. Dolan (editor) (1976). The Foundations of Modern Austrian Economics, Sheed and Ward.
• Israel Kirzner (). "Entrepreneurship, Entitlement, and Economic Justice", Eastern Economic Journal.
• Israel Kirzner (). "Menger, Classical Liberalism, and the Austrian School of Economics", History of Political Economy.
• Israel Kirzner (1987). "The Austrian School of Economics", in The New Palgrave: Dictionary of Economics (Ed. by J. Eatwell, M. Milgate, and Peter Newman), Macmillan.
• Hansjörg Klausinger (2006). "'In the Wilderness': Emigration and the Decline of the Austrian School", History of Political Economy, V. 38, N. 4: 617-664.
• Ludwig Lachman (Mar. 1976) "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society", Journal of Economic Literature: 54-62.
• Ludwig Lachmann (1980). "Review of Hayek's Law, Legislation, and Liberty, Vol. III", Journal of Economic Literature, V. 18: 1079-1080.
• Louis M. Spadaro (1978).New Directions in Austrian Economics, Sheed Andrews and McMeel.

Judt On The Influence Of The Austrian School

I continue to find writers characterizing Austrian school economists as influential.

I think some might quarrel with this description of the influence of the Austrian school on Chicago:

"We are the involuntary heirs to a debate with which most people are altogether unfamiliar. When asked what lies behind the new (old) economic thinking, we can reply that it was the work of Anglo-American economists associated overwhelmingly with the University of Chicago. But if we ask where the 'Chigago boys' got their ideas, we shall find that the greatest influence was exercised by a handful of foreigners, all of them immigrants from central Europe: Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Karl Popper, and Peter Drucker." -- Tony Judt (2010) Ill Fares the Land, Penguin Press, pp. 97-98

I don't think differences in details (e.g., aggregation in economic models) adequately refutes Judt's point.

Judt does read, for example, Hayek as more nuanced than some of his followers:

"The intellectual refugees - and especially the economists among them - lived in a condition of endemic resentment toward their uncomprehending hosts. All non-individualist social thought - any argument that rested upon collective categories, common objectives or the notion of social goods, justice, etc. - aroused in them troubling recollections of past upheavals... Men like Hayek or von Mises seemed doomed to professional and cultural marginality. Only when the welfare states whose failure they had so sedulously predicted began to run into difficulties did they once again find an audience for their views: high taxation inhibits growth and efficiency, government regulation stifles initiative and entrepreneuship, the smaller the state the healthier the society and so forth.

Thus when we recapitulate conventional clichés about free markets and western liberties, we are in effect echoing - like light from a fading star - a debate inspired and conducted seventy years ago by men born for the most part in the late 19th century...

It is perhaps worth noting here that even Hayek cannot be held responsible for the ideological simplifications of his acolytes. Like Keynes, he regarded economics as an interpretive science, not amenable to prediction or precision. If planning was wrong for Hayek, this was because it was obliged to base itself on calculations and predictions which were essentially meaningless and thus irrational. Planning was not a moral misstep, much less undesirable on some general principle. It was simply unworkable - and, had he been consistent, Hayek would have acknowledged that much the same applied to 'scientific' theories of the market mechanism...

In the United States, among a younger generation of self-confident econometricians (a sub-discipline of whose bostful scientificity both Hayek and Keynes would have had much to say), the belief that democratic socialism is unachievable and has perverse consequences has become something close to a theology. This creed has attached itself to every effort to increase the role of the state - or the public sector - in the daily lives of American citizens." -- Tony Judt (2010): pp. 102-104