Tuesday, August 28, 2012

I beg to differ

Jonathan Catalan is often an astute comparative thinker on economic theories, but I disagree when he writes this:

"Ironically, Krugman makes the best case as to why not consider Hayek fully a neoclassical,

What would truly non-neoclassical economics look like? It would involve rejecting both the simplification of maximizing behavior, going for full behavioral, and rejecting the simplification of equilibrium, going for a dynamic story with no end state.
That description, except for the reference to behavioral economics, fits Hayek. Austrians stress the reality and the necessity of disequilibrium — see previous posts here, here, (these two are on Mises and disequilibrium) and here (this one is on instability as a precondition for progress) —, and while L. Mises really set the stage for the idea that the pricing process is what allows for an efficient allocation of resources, he and other Austrians were/are never maximizers. Further, while, again, Austrians probably cannot be fit into the behavioral school, they do have much in common with complexity theory."

Well of course they talk about disequilibrium, but the adjustment from one point to another is the interesting thing about any model. That doesn't quite break the gravitational pull of neoclassicism. Yes, the disequilibrium interests Hayek but the whole structure of his economics is a series of re-equilibrating mechanisms! That's equilibrium economics. It's hard to even conceive of what disequilibrium economics really implies unless we completely jettison these re-equilibrating mechanisms.

Mises might get into that, I don't know him well enough. People get together and they act. That's certainly the makings of a non-neoclassical economics. But I'm guessing he doesn't wander too far from where Hayek took that, which was very neoclassical. Anyway - I wouldn't want to stake a claim on Mises.

But Mises on action brings us to the second half of Jonathan's retort:

"while L. Mises really set the stage for the idea that the pricing process is what allows for an efficient allocation of resources, he and other Austrians were/are never maximizers."

I think we should be very careful about too closely identifying utility or profit maximization with the actual math of optimization. No, Mises does not read like Mas-Colell. But if he says that agents choose a more preferred option to a less preferred option, then Mises is a theorist of maximizing agents. Whether he does calculus on functions or not is irrelevant. Utility and production functions are modeling conveniences. As I've noted before, we all believe in ordinal preference relations. The mainstream simply says "we seem to be able to get a lot more work done if we represent ordinal preference relations with a reasonable cardinal function".

I mean it in the kindest way when I say Hayek is a neoclassical. I like neoclassical economics.

Now you may have a point when it comes to those hippy-dippy hermeneutician Austrians, not that that necessarily reflects well on them.

11 comments:

  1. Mises didn't believe in "re-equilibration" (which implies that there has been an equilibrium reached at some point). He believed in "equilibrating tendencies," by which he meant entrepreneurs intended to take advantage of opportunities to profit. But, tendency is not used to imply a temporal transition, since this tendency is temporally undercut by change (change in preferences, et cetera). If we go further than that and incorporate Lachmann, who was heavily influenced by Hayek's work on expectations and equilibrium and Shackle (also influenced by Hayek), then even entrepreneurial action is disequilibrating in that there are conflicting expectations. So, ultimately, Austrians don't think there is a movement from equilibrium to equilibrium.

    It's true that maybe Hayek at first moved to such equilibrium models, as he moved away from equilibrium models in general during the late 1930s and early 40s, but I don't think he ever considered real world prices to ever be in equilibrium (although, according to Salerno he thought they were "close enough," which shows some difference with Mises [Hayek may have emphasized the ex ante role of prices, while Mises emphasized the ex post role of prices]).

    Further down, you write,

    "But if he says that agents choose a more preferred option to a less preferred option, then Mises is a theorist of maximizing agents. Whether he does calculus on functions or not is irrelevant."

    This is a sloppy comparison. Mises thought that a person would choose a more preferred end than one less preferred, but this isn't the same as optimization. If it were, then everyone would believe in utility optimization or maximization. The key difference is the emphasis on uncertainty and error, where the theory of efficient resource allocation doesn't require the individual to be omniscient.

    So, while it maybe a optimization theory very broadly conceived, there are subtle differences between the Austrian theory and the neoclassical theory that make the former more realistic and more flexible (which is also why Austrian theory can be compatible with post Keynesian theory).

    These are the kind of posts that neoclassicals like to write, and it shows that both sides are talking over each other. A neoclassical, like you and Glasner, write stuff like, "Look at all the similarities, when both sets of theory are looked at from a bird's eye view!" An Austrian, though, emphasizes the details that show how different the schools may actually be.

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    1. Note, again, ironically Krugman puts it the best when he writes "[i]t would involve rejecting... the simplification of maximizing behavior" (emphasis added). These kind of posts, on the other hand, ignore all the nuances.

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    2. re: "Mises didn't believe in "re-equilibration" (which implies that there has been an equilibrium reached at some point). He believed in "equilibrating tendencies," by which he meant entrepreneurs intended to take advantage of opportunities to profit. But, tendency is not used to imply a temporal transition, since this tendency is temporally undercut by change (change in preferences, et cetera)."

      Right, but does anyone think we actually sit at equilibria? Jiggling preferences, technology, etc. always keep us out of sitting at equilibria. The way you are defining it, nobody is a neoclassical economist and that's not a very useful definition. You seem to using the same strong definition with your Hayek paragraph, and that makes no one a neoclassical.

      I don't think your paragraph on choice theory makes sense at all. max[U(a), U(b)] and max L = U(x) where x includes a and b and a bunch of other stuff are both maximization procedures, Jonathan. Mises does the first. Most of the rest of us do the second. And nobody is assuming omniscience. This is all subjective utility, after all.

      re: "An Austrian, though, emphasizes the details that show how different the schools may actually be."

      Actually what we are doing is disagreeing on the implications of the details. I've talked on as detailed a level as you have here, I've just disagreed with you about the details.

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    3. "Right, but does anyone think we actually sit at equilibria?"

      Actually, yes, quite a few neoclassical economists think we're sitting in equilibrium. For example, I think S. Sumner believes market prices are equilibrium prices.

      But, not only did Mises reject equilibrium in the real world, the market process model he helped develop was a disequilibrium one. His one equilibrium model, the ERE, is just as stepping stone towards his more advanced model, or theory, of the market process, which doesn't even require thinking about an equilibrium.

      In your paragraph about choice, it seems you missed my point. None of what you talk about actually addresses what I said!

      You write,

      "I've talked on as detailed a level as you have here, I've just disagreed with you about the details."

      Strange, since you haven't even brought the details into consideration! I'm not even sure if you know what the details even are!

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    4. To put it your way, your discussion about choice theory is so all-encompassing that everyone is a neoclassical economist!

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    5. "This is a sloppy comparison. Mises thought that a person would choose a more preferred end than one less preferred, but this isn't the same as optimization. If it were, then everyone would believe in utility optimization or maximization."

      Sounds like someone needs to google what maximization means. If you want a non-maximizing view of human behavior, check out agent-based models where agents are assumed to follow heuristics.

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  2. I can't speak for all Austrians on this, and I've gotten into one too many nasty conversations about this. Based on my reading of Mises, Rothbard, and personal conversations with Salerno, my view on the matter is:

    1)Mises and Rothbard were adamantly equilibrium economists in the sense that they used ceteris paribus thought experiments to deduce laws about the economy. Given a set of assumtpions for "State A", they would alter one element of the data (an exogenous change) and analyze the process from State A to State B.

    2)In the real world, we do not see these changes in isolation or even completely work themselves out because of exogenous changes in the data. Consumer preferences (tastes, time preferences, liquidity), resource availability, technology, etc. Equilibration takes place in analytic, not calendar time.

    HOWEVER, this does not prove the uselessness of equilibrium constructs in Austrian economics, because, unlike the natural sciences were data can be held constant, they cannot be held constant at all in human action. Mises was very correct to scorn "dyanmic" economic analysis:

    "In reality there is never such a thing as an evenly rotating economic
    system. However, in order to analyze the problems of change in the data
    and of unevenly and irregularly varying movement, we must confront
    them with a fictitious state in which both are hypothetically eliminated.
    It is therefore preposterous to maintain that the construction of an evenly
    rotating economy does not elucidate conditions within a changing universe
    and to require the economists to substitute a study of “dynamics”
    for their alleged exclusive occupation with “statics.” This so-called static
    method is precisely the proper mental tool for the examination of change.
    There is no means of studying the complex phenomena of action other than
    first to abstract from change altogether, then to introduce an isolated factor
    provoking change, and ultimately to analyze its effects under the assumption
    that other things remain equal. It is furthermore absurd to believe that the
    services rendered by the construction of an evenly rotating economy are the
    more valuable the more the object of our studies, the realm of real action,
    corresponds to this construction in respect to absence of change. The static
    method, the employment of the imaginary construction of an evenly rotating
    economy, is the only adequate method of analyzing the changes concerned
    without regard to whether they are great or small, sudden or slow."

    3)In Austrian economics, there is a difference between an endogenous change and an exogenous change in the marketplace. For example, demand curves for apples can increase "endogenously", i.e., from the income effect described by Rothbard where a change in spending on one good (e.g. oranges) changes the rankings of money and depending on that D.C's elasticity changes the demand curves for other goods (e.g. apples). This would be an example of an endogenous change.

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    1. "Ceteris paribus" isn't necessarily an equilibrium analysis, it just means you're abstracting from certain realities. There are non-equilibrium ideal types. And, of course, Mises is write; if you want to know the effect of a certain change, then you need to study that specific change in isolation. But, again, this isn't necessarily "equilibrium economics."

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    2. My point is that Mises embraced static, ceteris paribus "mental thought experiments", and did not use "dynamic" analysis for deducing market laws, he even says this clearly in the above passage. His analysis was to go from a point of no change, add in a change, and analyze how that change worked itself out through the system. In this sense, I don't see how Mises could be considered something other than an equilibrium economist.

      I'm not saying that Mises used equilibrium in the sense of all other economists who employ that term, but that he did clearly base his system on static analysis (i.e., equilibrium).

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  3. Austrians pay lip service to disequilibrium but many seem unwilling to concede that capitalism has underlying tendencies towards instability (even Schumpeter basically argues that the economy will naturally self adjust over time, even if it is violent), For this reason i find their claims about disequilibrium hard to take seriously.

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  4. DW MacKenzie had wrote a paper over this topic. He argues that Mises, Hayek, etc. were equilibrium economists.

    http://mises.org/journals/scholar/mackenzie12.pdf

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