More thoughts on Kirzner: Incommensurability

Thomas Kuhn liked to remind his readers that Newton didn't have much to say about gravity.


That sounds odd to most people, but if you know the argument it makes more sense. What Kuhn meant was that for Newton gravity may have been very important but it was just assumed. There was no great effort expended on figuring out why it was the way it was and where it came from, etc. Although the idea of incommensurate scientific paradigms had to do with many things, this fundamental point that different paradigms sought to explain different pieces of the puzzle was an important one.


Einstein wanted to explain gravity and that was a major element of what separated Newtonian from post-Newtonian physics.


I think it's instructive to think about Kirzner's work on the market process in these terms. Economists aren't dunces. They know there is a market process operating in the world. But they're like Newton in that they don't have much to say about it. Kirzner has a lot to say about it and doesn't care very much for everything the mainstream has to say about equilibrium models, despite the fact that many reasonable people insist that you can get a lot of important mileage out of those models! It doesn't matter. Kirzner says a fundamental point is being neglected.


In prior posts I confessed skepticism about the importance of Kirzner's departure from the mainstream. However, if I'm right here that the market process is analogous to gravity it means that Kirzner is far more significant insofar as he might represent a new paradigm for thinking about the economy rather than simply a scholar interested in a side-point that most people acknowledge but don't think is worth delving into in any detail.


It's certainly worth a thought.


So if the mainstream is Newton, Kirzner is Einstein, and the market process is gravity that bodes really well for the modern Austrian school, right?


Maybe. Maybe not.


The first problem is that you need more for a paradigm shift than just focusing on something that other people don't focus on. It needs to be something which, when attention is turned to it, you are able to explain paradoxes that the existing paradigm struggles with. Does market process work fit the bill? Ehhh... I'm not so sure. Nothing obvious springs to mind. Certainly none of the things that really puzzle mainstream economists seem to be suddenly solved by market process theory. I'm happy to hear candidates in the comments, but let's be very specific please. Of course the market process undergird all market activity but grandiose talk like that doesn't answer how it address specific scientific puzzles.


The second problem, of course, is that assigning the mainstream to Newton and Kirzner to Einstein is not the only option available. Kuhn talks about how Descartes and others with a mechanical theory of gravity offered (like Einstein but unlike Newton) an explanation of gravity rather than just responding to the problem with hand-waving. And we all know what happened to the Cartesian theory of gravity: nothing.


So is Kirzner a Descartes (or worse, a post-Newtonian Cartesian!) or is he an Einstein?

More thoughts on Israel Kirzner: Dynamics

A couple days ago Pete Boettke shared speculation from Thomson Reuters that Kirzner could win the Nobel this year along with Baumol. I have no thoughts on that - I don't know his work well enough to assess its merits. But that post and yesterday's events got me thinking more about Kirzner than I typically do, and one thing that I've been puzzling over (but didn't have well formulated enough to ask him yesterday afternoon) was what Kirzner would think of "dynamic equilibrium" and really the transition dynamics of that sort of model.


As I noted before, Kirzner's concerned with out-of-equilibrium behavior and if there is convergence to an equilibrium how that behavior gets us there. Contrary to Kirzner's own assertions this is not something that the mainstream is unconcerned with. One answer to this question that has been particularly amenable to modeling is the idea of transition dynamics and dynamic equilibrium. As far as Kirzner's reservations about equilibrium economics go it's something of a misnomer. On the stable arm nothing is stationary, people often aren't satisfied and they aren't finished doing things. But they are acting rationally, and when we identify dynamic equilibrium we are talking about a sequence of rational decisions that lead to a more stable equilibrium. The rapidity of convergence depends on various conditions.


Kirzner is very skeptical of the mainstream theoretical apparatus so I doubt he would think much of the point. But I do wonder what people who see things a little differently but who still appreciate what Kirzner has to say think about how transition dynamics in these models relate to his thinking about the market process. What are agents doing and thinking in dynamic equilibrium that's similar to what they're doing and thinking for Kirzner, etc.


As a side note, Vernon Smith made a vague reference to my line of thinking here in his speech (after Kirzner's). He started by talking about how he's been right a lot in his career, but he's also been wrong a lot and how he doesn't know much about the long-term future of things but he does know the next step and if he takes a series of good next steps he gets along pretty well (he broadened this point to people in general who get along pretty well in the world).


Too me this sounded in a very rough way like Smith was solving a Bellman equation. In this approach to dynamic programming you just worry about being optimal at every point in time. The future is nicely tucked away in the value function and you come to that when the future comes around. You don't waste time or energy worrying about planning and optimizing a long stream of decisions.

Forty Years After the Hayek Nobel: Thoughts on Israel Kirzner

Yesterday I attended an event at George Mason University celebrating the fortieth anniversary of Hayek's Nobel Prize. There were two sessions open without invitation - a keynote by Israel Kirzner and a panel discussion with Eric Maskin, Vernon Smith, and Ed Phelps. I was very much looking forward to hearing Phelps but unfortunately he was ill and his remarks were read. I'll talk about my thoughts on the Kirzner session in this post, and the laureates' session in another.

Israel Kirzner, professor at NYU, was described by Peter Boettke in his introductory remarks as the leading light of the modern Austrian school. Kirzner's work focuses on "the market process" (essentially how agents get to equilibrium - or at least how they get to wherever they're getting to) and the role of entrepreneurship in the market process. Kirzner is very much in that line of Austrians where, if you tell him you're a subjectivist he'd trump that by insisting that he (and not you) is a radical subjectivist. Indeed, "radical" came up several times in his talk, primarily to describe the advances made by Hayek and Mises in the 1937 to 1945 period. Kirzner presented what he called a revisionist history of thought to explain the lack of appreciation of Austrian economics between the late 1930s and the 1970s and the reason for the Austrian revival in the 1970s.

Kirzner's proposition is that after the debate with Keynes Hayek and Mises both turned their attention to other matters and the result was a "radical" advance in our understanding of the market process through Hayek's work on knowledge and Mises's work on socialist calculation and Human Action. Allegedly the mainstream did not appreciate how radical these contributions were and so they missed the boat until forty years later Hayek got the Nobel (for other work), the mainstream refocused their attention on the Austrians, and economists like Kirzner, Lachmann, O'Driscoll, Rizzo, and others were ready to demonstrate what the fruitful advances of 1937-1945 really had to offer. The lull and revival was therefore not all that surprising, and it mainly rested on the failures of the mainstream rather than the failures of the Austrians (a rather attractive narrative for an Austrian of course!).

I don't entirely buy this revisionist history, but what I do like about it is that it refocuses us on the work on knowledge, subjectivism, and economic calculation. I suspect the lull in interest in the Austrian school had far more to do with the failure of Austrian macroeconomics than the failure of the mainstream to appreciate this other work, but I like the opportunity to put the 1937-1945 work center stage nonetheless.

What bothers me about the revisionist account is that it relies too heavily on an implausible story about how mainstream economics is full of dunces. Kirzner argues that mainstream economists are preoccupied with equilibrium models where genuine competition and discovery doesn't really go on and most importantly nobody talks about how you get to equilibrium. There is a germ of truth to this insofar as mainstream economists don't spend a large share of their time on this problem (Kirzner does), but the idea that the market process is lost on them strikes me as misleading at best and borderline libelous at worst. I had to laugh to myself when Kirzner went through these points because just a week ago when I was covering an intro micro class for my adviser we were talking about market equilibrium and optimal decision making, and I posed precisely this question to them - what do agents do when they're not at an equilibrium that gets them to equilibrium? The students had a much easier time providing sound answers to that question than when I threw the Slutsky decomposition at them later in the discussion, and the answers more or less conformed to what Kirzner presents. What's more I think every economist has these market process stories in mind when they think about why getting to equilibrium (even if it's a constantly moving target) is reasonable.

I've made this point about Kirzner before (and it's worth saying at this point that I haven't read a lot of him so if someone that has has thoughts to add, please do), and often people think I'm denigrating the guy. I don't think my point should be thought of in this way. It's quite clear that Kirzner has thought about the market process in more depth and in different ways than other economists. He definitely deserves credit for that. What I challenge is the idea that these fundamental points are lost on the profession, or that the profession has gone down the wrong path by working with models that include a lot of equilibria. It should also be clear that I'm challenging the idea that any of this is really all that "radical".

So far I have a disagreement in the emphases of Kirzner. But I also had a problem with many of his actual claims. One astonishing thing he said was that it is a disequilibrium situation when one agent subjectively values the production of a good at $50 while another subjectively values the use of that good at $100. The entrepreneur, in pursuit of profit, takes advantage of this "arbitrage" opportunity, but an equilibrium perspective misses this entire dynamic that's at the heart of the market process. This is nonsense (although it's possible he didn't explain it as clearly as he wanted to). Even if we imagine a market in stable, boring ol' equilibrium there are going to exist agents that differentially value goods in this way. We call the difference between those values and the market price "surplus", and there's nothing at all outlandish about this point. When Kirzner calls this a "disequilibrium" he is confusing values with prices. Values never have to be brought into equilibrium with each other. A price establishes an equilibrium of behavior in the context of widely varying valuations that are likely to continue to be widely varying. The only sense in which we can talk about values being brought into equilibrium is in the case of the marginal good sold, but even that isn't really bringing values into (out of) equilibrium (disequilibrium), it's simply a byproduct of the marginal behavior of rational actors. So this was just an abuse of concepts.

Another thing I actively disliked about the talk was the idea that the mainstream relies on perfect competition, fully informed homogenous agents, and zero profits. We teach freshman some very dumb models that look like this, but for Kirzner to indict the mainstream of the profession along these lines is not becoming of a guy that's supposed to be the modern leader of the Austrian school. This is the stuff of internet Austrians.

Kirzner is clearly a very intelligent man, and he was an interesting speaker. I think he's thought more deeply about the market process and the economic function of entrepreneurs than most anyone. If I had the time to work through his writing, I'm sure I'd find a lot of value along these lines. But I think his vision of his own research program is deeply problematic and too easily discounts how interesting and intelligent his fellow economists are.

It's Caroline Joy Kuehn's first birthday today!

Hard to believe it's been a year.

Brief Thoughts on Piketty on EconTalk

Piketty does a great job on EconTalk, discussing his book with Russ Roberts. This was my favorite part of the whole discussion. It comes after Russ is asking about people who get wealthy in various ways - including very legitimate ways. I think this encapsulates so many of the criticisms of the book:

"Roberts: But I think as economists we should be careful about what the causal mechanism is. It matters a lot.

Piketty: Oh, yes, yes, yes. But this is why my book is long, because I talk a lot about this mechanism."

The book is long for at least two reasons. First I think he adds a bunch of stuff in there that doesn't need to be in there (the policy stuff, the discussion of the social state, could probably all be in a separate book - he could probably cut a third of the book by removing this material). But the second reason is that he is far more exhaustive than many of his critics seem to give him credit for. There is this notion that the book is all about inheritance and ill-gotten gains. The latter is a relatively small discussion and the former is a more sizable discussion but comes way late in the book and is not some kind of exclusive focus.

Generally I think this was a great EconTalk. My only criticism is along these lines. Several times Russ chimed in with a different version of "but this guy is wealthy because he improved the world!", and each time Piketty basically said "right, I agree, and I've never challenged the point" (of course it's Piketty so he spends much longer saying that). If Russ didn't keep asking those questions or if Piketty just replied "asked and answered" I think they could have gotten much deeper into the material. But still a very nice talk.

New Review of Industial Organization article is up!

It's not assigned to an issue yet, but a paper I co-authored titled Explaining Variation in Title Charges: A Study of Five Metropolitan Residential Real Estate Markets is available here.


It's an interesting situation - you'll notice I have two affiliations (American University and Urban Institute). This work started several years ago as a project for the Department of Housing and Urban Development when I was at the Urban Institute. Since then I left for AU and now have put the finishing touches on it back at the Urban Institute after being gone for three years.


The lead author, Bob Feinberg, is a great guy that's on my dissertation committee. I can't speak highly enough of two other co-authors, Signe-Mary and Doug, both at Urban. I've learned at least as much econometrics from Doug Wissoker as I have from any of my econometrics professors (and that's a compliment to Doug, not a knock on my econometrics professors who have really all been excellent). Sisi was at the Urban Institute, and is now teaching in China.

An alternative Venn Diagram for Mark Perry

I really hope I don't have to explain to everyone what's so wrong about this post by Mark Perry on the minimum wage.

All the law of demand says is that demand curves slope down.

No one that I know that is doubtful about modest minimum wages hurting employment disagrees that demand curves slope down. If you think they are arguing demand curves slope up you need work a little harder at understanding the conversation you are inserting yourself into.

Documents on Koch intentions on FSU econ department hiring

Here.

Note, this is an internal memo about the Kochs' expectations. Because of the outrage this caused (even in the absence of these documents) the advisory group was eventually restricted in how much they could impact these decisions.

This is really not good for anyone that cares about economics as an objective science and people who receive Koch money (which is not inherently bad at all of course), should be saying that.

If movies tell me anything it's that the Sudanese need to watch out

My minimum wage paper is out at EPI

You can find it here. The idea is to communicate to a broad audience the fact that the "credibility revolution" in econometrics matters a great deal for the minimum wage debate, and that if we divide studies according to whether they employ quasi-experimental methods or fixed effects models the quasi-experimental methods (which are strongly preferred) tend to produce the "no disemployment effect" results. That should matter for the debate.

I also include some cautions about how to apply this research to policy. These are every bit as important. I've had one discussion with a journalist so far about the paper and the fast-food strike for a $15 minimum. I did the math for him on how big an increase that $15 would entail and compared it to Figure A in my paper and flatly told him that you can't justify this with the existing research - our strong priors ought to be that it will reduce employment, with perhaps a few high wage metropolitan areas as the exception.

An excerpt from the report I like ("matching methods" is a more user-friendly term that I use to talk about quasi-experimental methods - that is all well-defined up front and defined in even more detail in the endnotes - the idea is that in all quasi-experimental methods you are matching some treatment case to some comparison case):

"It is difficult to overstate how uncontroversial it is in the field of labor market policy evaluation to assert the superiority of matching methods to the nonmatching approaches described above.⁹ The seminal evaluations of the effects of job training programs, work-sharing arrangements, employment tax credits, educational interventions, and housing vouchers all use at least some sort of matching method, if not an actual randomized experiment. In their widely cited survey article on non-experimental evaluation, Blundell and Costa Dias (2000) do not even mention state-level fixed-effects models when they list the five major categories of evaluation methods. In a similar article, Imbens and Wooldridge (2009) do mention fixed-effects models as a tool for policy evaluation, but clarify that these were used before more advanced methods were developed, noting that the modern use of fixed-effects models is typically in combination with other more sophisticated techniques. For example, Dube, Lester, and Reich (2010) also use a fixed-effects model, but more importantly it is a fixed-effects model that utilizes rigorous matching strategy to identify the effect of the minimum wage. Sometimes fixed-effects models are the best available option if no natural experiment or other matching opportunity emerges to provide a more rigorous approach. Well specified fixed-effects models can still be informative. But faced with the choice between a well matched comparison group and a fixed-effects model, the former is unambiguously the stronger study design."