Friday, October 14, 2011

LK on Michael Brady

Commenter Blue Aurora has alerted me to Brady's work before, and now LK has a post up on it. He writes:

"Michael Emmett Brady argues that Hayek’s concept of uncertainty and the role of knowledge are quite distinct from that of fundamental uncertainty as defined by Frank Knight and Keynes:
“Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole, the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals, understood only by savvy, knowledgeable entrepreneurs, [eliminate] … any uncertainty.” (p. 14)

“Keynes, Knight and Schumpeter deny Hayek’s claim that the market generates price vectors which concentrate the knowledge so that savvy, knowledgeable entrepreneurs can act on this information and solve the problem of uncertainty. Uncertainty means vital important information is missing. Pieces from the puzzle are missing and will not turn up in the future” (p. 14).

“Hayek could not accept the standard concept of uncertainty as defined by Keynes, Knight and Schumpeter because it would then be impossible for market prices to concentrate knowledge that did not exist. In conclusion, nowhere in any of Hayek’s three articles on Knowledge in Economics in 1937, 1945 and 1947 does Hayek deal with the standard view that uncertainty means knowledge that is not there.” (p. 15).
Brady charges that the “Austrian use of the term ... uncertainty actually means dispersed knowledge” (p. 16), which bears further investigation."


  1. Jonathan M. Finegold CatalanOctober 14, 2011 at 5:50 PM

    Apart from his work on the knowledge problem, which I'm not so sure deals with uncertainty (specifically), I'm not sure Hayek writes on uncertainty. I think Mises is a much better Austrian to study for a real vision of the Austrian concept of uncertainty. I think, though, that with the concept of 'radical ignorance' the Austrian concept of uncertainty has been improving (even though I'd say that 'radical uncertainty' is present in the work of Mises).

    But there has been inner Austrian debates, I believe, on the nature of uncertainty. For example, there are differences between 'Rothbardians' and 'Kirznerians' (and the debate is closely tied to entrepreneurship).

  2. Jonathan Finegold Catalan: Weren't Ludwig von Mises's views on uncertainty influenced by that of his brother, Richard von Mises?

    On a separate note, I think Brady has dealt with Richard von Mises's mathematical theory of probability elsewhere, but I'd have to ask him again if he has any draft papers somewhere..

    And which side do you side with in this internal debate? The followers of Rothbard, or the followers of Kirzner?

  3. "But there has been inner Austrian debates, I believe, on the nature of uncertainty. For example, there are differences between 'Rothbardians' and 'Kirznerians' (and the debate is closely tied to entrepreneurship). "

    With respect to uncertainty and the issue of subjective expectations (which follows from uncertainty), the schism in the Austrian school is between (1) moderate subjectivists and (2) Lachmann/the radical subjectivists.

    Lachmann and the radical subjectivists hold that there is no consistent, reliable tendency to plan/pattern co-ordination in free markets.

    Gene Callahan notes the conseqeunces of that:

    “Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at any time. Lachmann thought that the government had a role to play in stabilizing the economic system and increasing the coordination of entrepreneurial plans. We call his position ‘intervention for stability.’ (Callahan, G. 2004. Economics for Real People: An Introduction to the Austrian School (2nd edn), Ludwig von Mises Institute, Auburn, Ala. p. 293).


  4. Peter Klein seems to have been influenced by Knight's concept of uncertainty. I saw somewhere that he is writing a book dealing with this topic. Here is an article of his discussing this.

    Nicholas Glenn

  5. Jonathan M. Finegold CatalanOctober 15, 2011 at 12:22 AM

    Lord Keynes,

    Lachmann considered Mises to be squarely in the camp of radical uncertainty. He says as much in his review of Human Action. But, it is true that Lachmann was probably less confident in market stability than Mises -- I would say, though, that Lachmann believed more in the idea that there could be forces he was unaware of that could cause discoordination without a correcting movement. I believe that Garrison says something like this in his book on capital theory (Garrison also writes, though, that Lachmann definitely did lean towards the market stability extreme).

    Blue Aurora: Indirectly, perhaps. Richard influenced Mises' view on probability, which does have to do with his views on uncertainty.

  6. A good test of an economics theory is whether we can categorically assess which assumptions it does and does not make.

    In the case of neoclassicism, it's tricky. Steve Keen argues many of their models depend on a creditless, even moneyless economy where there is only one consumer whose preferences do not change (in other words, an economy without trade).

    In the case of Austrianism it is also unclear. Austrians pay lip service to things like uncertainty and non-equilibrium and say they have incorporated them, but I'm not so sure they have. They also pay lip service to the fact there is no natural interest rate but then support the theory regardless (???)

    The basic fact is they won't accept anything that deviates from their preordained conclusion of government = bad.

  7. “Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole, the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals, understood only by savvy, knowledgeable entrepreneurs, [eliminate] … any uncertainty.”

    This strikes me as way off base. Where does Hayek ever say the aggregation is perfect? His only point is that the market knows *more* than the planner can, not that it knows everything!

  8. Gene Callahan: Did you read Brady's working paper in full? I think it'll help you understand the context, but in my view at least, Hayek does have a legitimate hole in his argument on knowledge and the market.

    Jonathan M. Finegold Catalan: I'm fairly sure Ludwig von Mises was, as I do remember reading more than just one article supporting the notion that Richard von Mises's mathematical theory of probability did have some sort of impact on Ludwig von Mises.

    That stated Catalan, which side do you lean to in the Austrian internal debate? Rothbard's, or Kirzner's?

  9. Jonathan M. Finegold CatalanOctober 15, 2011 at 3:09 PM


    I'm not sure that Austrians pay "lip service" to uncertainty and disequilibrium. How much Austrian literature have you seen? It's true that some Austrians focus on these topics less than others, but generally Mises heavily emphasized both and modern Austrians certainly emphasize these concepts very heavily.

    And, Austrian economic theory -- for the most part -- isn't built from prior assumptions (that government is bad).

    Blue Aurora,

    Like I said, Mises was heavily influenced by Richard in probability. There is a long section on this in Human Action; it plays a role in how he sees the entrepreneur.

  10. Catalan: We're on the same page then, and that's good. Keep in mind however, that Richard von Mises's probability theory has been criticised as being elegant in formalism but not very useful or accurate in reality. While Hugo A. Keuzenkamp was critiquing techniques in econometrics in his classic work "Probability, Econometrics, and Truth", the criticism of Richard von Mises's limiting frequency approach to probability still holds. Keynes's theory of probability is different from Richard von Mises's theory of probability.

  11. Jonathan,

    I mean lip service in the sense that they talk about it but do not think through the definition or implications. Mises used the term a lot, as did Hayek, but as Brady shows, they did not mean 'uncertainty' in the Boolean/Knightian sense and have not explored the implications that for economics (shock horror the implication is liquidity preference!)

    Also, Hayek starts P&P with a statement tantamount to the ergodic axiom. Mises' praxeology was less about equilbrium, sure, but he still held that markets had some sort of natural state and the hand of government was distortionary.

    To me, it seems Austrian theory was perpetauted by Mises and Hayek with prederived conclusions about government due to their personal experiences. Both were willing to concede things like government regulation and public goods at certain points, but the Austrian stance is generally a 'free market' one with similar policy implications to neoclassicism. That's why their claim for being outside the mainstream confuses me.

  12. Sorry, he doesn't *open* P&P with the statement. But there are a couple in there about equilibrium, anyway.

  13. And to be clear - the Austrians were not "out of the mainstream" until Hayek and Mises purposefully took them there.

    Menger, Bohm-Bawerk, etc., were all considered to be mainstream neoclassical economics - mainstream economists, it should be noted, that were well known to be in the "Austrian school". "Austrian School", until Mises and Hayek, was mainstream and comparable to references to the "Cambridge School" of economics. Menger and Bohm-Bawerk offered a slightly different flavor and emphasis, and in some cases even different conclusions - but they were in the same tradition.

  14. I'm not saying that was a necessary split. The only thing - as far as I can tell - that keeps Austrians out of the mainstream is their own exclusionary stance towards certain methodological and epistemological claims. Look I don't have an epistemology that everyone in the mainstream shares - but I don't use that as a wedge to self-exile myself into heterodoxy.

    All the ABCT stuff can be easily incorporated into the mainstream. They just don't want to do it.

    Look at Caplan and Boettke go back and forth about subjectivism. Nobody is ostracizing Austrians about this sort of thing: Austrians are exiling themselves.

  15. Jonathan M. Finegold CatalanOctober 17, 2011 at 12:15 PM


    I don't think that liquidity preference is a necessary implication of uncertainty. This point is debatable, and has been debated. If there is an issue with deduction it's because Austrians don't see the link, not because their views on uncertainty aren't developed enough. This is doubly as true since the Austrian concept of uncertainty has gone through a lot of development since Mises (and, like I write above, Hayek did not develop uncertainty really; Mises did).

    Hayek was an economist in the equilibrium tradition. You see him move away in The Pure Theory of Capital as he moves towards a dynamic equilibrium model, but he used the state of equilibrium as an ideal type. This has been debated, as well, but I think it's more or less clear that Hayek (early on) used the state of equilibrium often. But, Hayek does not represent the entirety of the Austrian School, and even supposed decedents of Hayek rarely accept the state of equilibrium as a realistic economic model (just read anything by Rizzo, Selgin, et. al.).

    Mises, in Human Action, is quite clearly against any concept of equilibrium -- it's just a matter of reading the book. He doesn't say that the market has a "natural state". Mises clearly suggests that the market has no static state; the market is a process. What Mises argues is that government intervention will distort this process, or will consume capital, disallowing wealth creation. This has nothing to do with the concept of equilibrium.

    They both considered themselves well inside the mainstream until the late 1930s. Both of them refused to see marked differences between them and others, since both of them considered the socialists and historicists the "true enemies" of economic science. What really made the differences between them and the mainstream obvious, though, was:

    1. The Keynesian revolution
    2. Lange's use of equilibrium as a means of justifying socialism. (This is what inspired Hayek's The Use of Knowledge in Society, which rejects equilibrium as a realistic model; for Hayek, equilibrium was an ideal type [as it was for Knight et. al.])

    Menger was considered to be mainstream, but at that time subjectivist economics wasn't really well developed. Few people really caught on to the important differences between Menger and Walras -- even Menger's disciples. Very importantly, few caught on to his causal approach to price formation, which has really been lost since then (instead, we use neoclassical price theory). Böhm-Bawerk is highly respected, but his work on capital theory is not in the mainstream. It was held serious for some time and then rejected/forgotten (and, this may be blamed on Böhm-Bawerk since his conception of interest and capital is flawed; it took Hayek, Mises, and others to flesh it out, and even at this stage a lot of the theory is wrong).

    And, "all the ABCT stuff" cannot be incorporated into the mainstream. If it could be, then it would already have been. One of the major things which sets the Austrians apart is this belief in a specific theory of capital. This was rejected by the mainstream during the cambridge capital controversies. Without the Austrian theory of intertemporal coordination you cannot have the same type of intertemporal discoordination -- you instead have the Keynesian discoordination, which is a simple disconnect between savings and investment.

    Subjectivism is a broad topic, so citing this as an example of similarity is ridiculous. "Hey look, both the Austrians and the mainstream believe that money is a medium of exchange! Both are close enough in thought, then!" It's a very naïve approach to economic history, sorry.

  16. re: "And, "all the ABCT stuff" cannot be incorporated into the mainstream. If it could be, then it would already have been."

    I'm going to have to request some justification for this line of argument, Jonathan.

  17. Jonathan M. Finegold CatalanOctober 17, 2011 at 12:58 PM

    Is that a serious request? What about what I wrote in the rest of that paragraph regarding the rejection of Austrian capital theory? Like I said, you cannot have Austrian intertemporal discoordination without Austrian capital theory -- it just doesn't work. You have to accept that shifts in interest rate allow for changes in relative prices and cause changes in the structure of production. This just hasn't been accepted by the mainstream. In fact, it was rejected by much of the mainstream (Samuelson, Sraffa, et. al.). Even Hick's rendition of Hayekian capital theory is different in several important aspects and doesn't really allow for Austrian intertemporal discoordination (largely because Hicks rejected Hayekian business cycle theory).

    You would have to make several changes in mainstream thought. It would be more than an incorporation. It would be an important refacing of the body of mainstream theory. Also, acceptance of Austrian capital theory leads to many other Austrian conclusions which aren't necessarily really accepted by the mainstream, including specific assumptions about wealth creation.

    Most important of all, capital theory is not isolated. It's a part of coordination theory. As such, if you accept capital theory then you have to revisit how you think about economic coordination. You can say that this is already present in mainstream economics all you want, but when you read the literature you see differently.

  18. Yes of course it's a serious request.

    Look, you made a good point in your paragraph that I think is obvious: if ABCT gets incorporated into mainstream theory obviously intertemporal coordination would play a major role in that. That's practically definitional. This does not seem to be a major obstacle to me - this is already fairly mainstream. I remember doing multiperiod models with human capital investments that were influenced by there interest rate, etc. at GW years ago - that was my limited experience with it, but surely it's been done for things other than human capital.

    What seems not to have happened is this sort of intertemporal coordination specifically applied to the question of the business cycle.

    OK - so it could be applied to the business cycle and for ABCT to go mainstream it WOULD HAVE TO BE, because that's what ABCT is.

    I'm fine with all that.

    What I'm asking you to clarify is this idea that "if it hasn't been incorporated yet, it can't be incorporated". That makes no sense to me. There are presumably lots of ideas that could be incorporated into mainstream economics and WILL BE incorporated into mainstream economics, but haven't been incorporated yet.

  19. Jonathan I won't quote splice your post completely, but a couple of things:

    'What Mises argues is that government intervention will distort this process, or will consume capital, disallowing wealth creation.'

    This is the implicit assumption that 'the market' is in some sort of 'good' state and not simply a chaotic process. Use of words like 'distorting' and presenting government as outside the market also contribute to the view I am trying to highlight.

    I'll admit I'm not too experienced with Mises (honestly HA is very long and I got bored) but I really don't see much development of uncertainty in Austrian scholarship, at least not uncertainty as Keynes knew it.

    And the fact is, outside of gold standards/free banking, the policy implications for most Austrians are the same as neoliberals. That's why so many have chosen to jump into bed with Austrians rather than give themselves the evil Keynesian label.

  20. Good EconTalk this week:

    It concerns a monograph on the relationship between Hayek and Keynes, etc.; rather good stuff. I'll probably blog about it tonight.

  21. Jonathan M. Finegold CatalanOctober 18, 2011 at 12:14 AM


    Well, no kidding that it assumes that the market process is something that coordinates or is generally "good". That is the entire idea behind Mises' view on the free market economy. But, whether this is true or not has absolutely nothing to do with what we're talking about. We're talking about whether or not Mises was an equilibrium economist. He was not; he was a disequilibrium economist. He explicitly argues that if there were equilibrium there would be no room for the market process.

    If you haven't seen much on uncertainty in Austrian literature then you really haven't read a lot of Austrian literature. I'm really not sure what else I can write.



    You are not addressing the most important part of my argument. The integration of the Austrian coordination/pricing process and capital theory will force major changes in the mainstream body of theory. This isn't an integration; it's a theoretical revolution.

  22. Jonathan we might be splitting hairs here but:

    - My point is the implicit framing of issues as markets vs government. To me, this is analytically incoherent and a source of massive cognitive dissonance among the right. It's why I often find reading what they say so weird.

    - I have read a decent amount of literature. I used to read Mises but I find they can be quite rude so now I only read Selgin and Murphy. I didn't read PToC for obvious reasons.

    I see the term 'uncertainty' pop up a lot, yes, but I *don't* see it explicitly stated as 'risks to which we cannot asign a probabilistic value'; it is generally used quite vaguely.

  23. Perhaps I might add that Michael Emmett Brady's working paper contains a reference to an Austrian School economist by the name of Stefan W. Schmitz. Quoting from Brady's working paper:

    "Furthermore, problems of dispersed knowledge in society are hardly mentioned in
    ACT(insert-Austrian Capital Theory).That seems to imply that complete information is
    assumed throughout any capital theoretic argument in Austrian economics...neither
    uncertainty nor incomplete knowledge receive much attention in the arguments. The
    decomposition has to be based on two dimensions: time and uncertainty...Over the past
    100 years, ACT has centered solely on the time dimension..."(Schmitz,2004,p.72).

    Keynes (and other people who have contributed to the field of decision theory like Daniel Ellsberg or Itzhak Gilboa) seems to have fixed this problem with a "weight of evidence" type of concept. There doesn't seem to be a corresponding type of concept in the Austrian literature, in what I've been able to gather, except for statements about subjectivism and uncertainty.

    P.S. Cahal, what kind of Keynesian are you exactly? And what's your background in economics like?

  24. Jonathan -
    re: "You are not addressing the most important part of my argument. The integration of the Austrian coordination/pricing process and capital theory will force major changes in the mainstream body of theory."

    Again, you are confusing not agreeing with your point with not addressing your point. I've said my piece - I've even sketched out in more detail elsewhere what this would entail, and you're well aware of that. If you honestly think that without the Austrians all the mainstream would have is the Keynesian disconnect between savings and investment, then I would suggest you are not sufficiently familiar with mainstream work on inter-temporal coordination. Anyway, it's still my intention to write something about this as soon as I move past the treading-water-to-stay-alive stage of this program.

  25. Jonathan M. Finegold CatalanOctober 18, 2011 at 11:06 AM


    Please; the mainstream has no incorporation of Austrian capital theory. Like I said, it was almost nearly completely rejected by Samuelson et. al.


    Like I said, you need to read Mises. He has an entire chapter dedicated to probability and uncertainty in Human Action. I would also read Kirzner, Rizzo & O'Driscoll (The Economics of Time and Ignorance), and then newer work on radical ignorance.

    By the way, nowhere does Mises use his ultimate political preference for limited government as justification for any of his economic theory. Mises' theories were value-free; that's the entire idea behind praxeology, even if you see it as a flawed methodology.

    Blue Aurora,

    I think Mises would slightly agree with Brady's criticism of Hayek. Mises writes this himself. He doesn't see why changes in the interest rate would lead only to lengthening or shortening of the structure of production. Mises' capital theory is much more "radically subjectivist" than Hayek's -- but Hayek was not a general theoretician. He focused on a formalistic model of capital theory until he shifted to political theory.

  26. I never said mainstream capital theory was Austrian capital theory (although as I understand it Austrian capital theory itself is an underdeveloped project). I said ABCT could easily be incorporate into mainstream theory.

  27. Catalan: Can you provide me some passages in Human Action (or any of Ludwig von Mises's writings) to support your statement? In fairness to you, Brady does not mention Ludwig von Mises in this working paper, but from what little I've seen, Ludwig von Mises doesn't seem to address the problem of uncertainty (as in "unavailable/missing knowledge) very well.

    P.S. Dan, what's your position on the excerpt of Brady's working paper?


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