F.A. Hayek, economist

by Russ Roberts on December 6, 2011

in Hayek, State of Macro, Uncategorized

David Warsh says Hayek wasn’t much of a macroeconomist. Krugman piles on. Tabarrok answers. Boettke responds here.

My take is that there are two parts to Hayek’s career as a macroeconomist. In the first part, which runs till roughly 1941, Hayek is a business cycle theorist who was on to something–the role of the manipulation and volatility of interest rates in disrupting production and employment. It is this Hayek that John Papola and I try to capture in Fear the Boom and Bust. Hayek’s (and other Austrians’) ideas about interest rates have garnered renewed interest because the Fed’s low interest rate policy followed by rapid increases at the start of this century had something (and maybe a lot) to do with housing boom and bust.

But Hayek’s response to the Keynes was first silence and then The Pure Theory of Capital (in 1941) which Hayek himself didn’t seem particularly excited about it. Keynes took the profession by storm. My mental image of this period of Hayek’s life is that of a crowd of thousands surging out of an arena after a rally about the importance of government saving the economy and Hayek trying to make his way toward the arena saying, “Wait a minute! You’ve forgotten old truths!” No one listened to him.

The Pure Theory of Capital was Hayek’s attempt at his own grand theory and even he found it deeply dissatisfying. Then came the second phase of Hayek’s macro. He wrote The Road to Serfdom, a warning about the dangers of central planning and top-down solutions to economic problem. He wrote his most important article, The Use of Knowledge in Society where he argues that prices and economic decisions driven by those prices emerge, wondrously, without anyone controlling them. Economic problems can get solved without centralized direction. Hayek’s writing on bottom-up emergent processes contain Hayek’s deepest insights. They are microeconomic in general but they have macroeconomic implications. I tried to capture some of that depth in my novel, The Price of Everything.

Astoundingly, Hayek wins the Nobel Prize in 1974. His Nobel Prize lecture for me represents the second phase of Hayek as macroeconomist. Rather than arguing that he has a better model of the economy or the business cycle, he argues that the economy is too complex to model. As John Papola and I put it in The Fight of the Century:

The economy’s not a class you can master in college
To think otherwise is the pretense of knowledge

In his Nobel Prize lecture, Hayek uses his microeconomic insights about complexity and emergence to argue that macroeconomic precision is beyond our abilities. Macroeconomics is not like physics. The lecture is a plea for humility, a plea for skepticism about what we can know and cannot know. It is an argument for embracing the limitations of reason and especially the limitations of experts in steering the economy:

Often all that we shall be able to predict will be some abstract characteristic of the pattern that will appear – relations between kinds of elements about which individually we know very little. Yet, as I am anxious to repeat, we will still achieve predictions which can be falsified and which therefore are of empirical significance.

Of course, compared with the precise predictions we have learnt to expect in the physical sciences, this sort of mere pattern predictions is a second best with which one does not like to have to be content. Yet the danger of which I want to warn is precisely the belief that in order to have a claim to be accepted as scientific it is necessary to achieve more. This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based – a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.

This is “The Use of Knowledge in Society” meets “The Road to Serfdom.” John Papola and I tried to capture some of these ideas in The Fight of the Century. Is it macroeconomics? A contribution to macroeconomics? All I know is that it helps me think about political economy–the interface between politics, policy, and economic outcomes. I also know that it is profoundly discomfiting to mainstream macroeconomists to suggest that if not totally naked, their clothing is not the ermine of a true emperor.

Was Hayek an important macroeconomist? I would argue that the macroeconomic skepticism of the later Hayek is more valuable than the macroeconomic theorizing of the early Hayek. But he wasn’t an important macroeconomist in the mainstream sense of the title. So what? That’s a badge of honor. He was merely a great economist, without any prefix. He helps me see things I wouldn’t otherwise see. That’s all that really counts.

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{ 158 comments }

GP Hanner December 6, 2011 at 1:52 pm

Well said. I remain amazed at the number of so-called macro-economists who seem to really believe all that Keynesian hoo-ha. I guess the penny has never dropped for them. Probably never will. That’s why we saw predictions of unemployment dropping below 6% when Obama’s economist high-priests first came on board. I note that they all have retreated back to academia, where the demand for useful output is apparently less stringent.

Speedmaster December 6, 2011 at 2:07 pm

>> “I remain amazed at the number of so-called macro-economists who seem to really believe all that Keynesian hoo-ha.”

Indeed. +1

azfaraz December 11, 2011 at 5:52 pm

So we can’t model the entire economy with precision. What’s new? So we can’t predict the future with accuracy. What else is new? We can make some pretty good guesses, and when we guess, it’s better to do it utilizing whatever knowledge we have rather than simply throwing darts at a board blindfolded.

Jon Murphy December 6, 2011 at 1:52 pm

Indeed, a very good post, Dr. Roberts, and timely as well.

Daniel Kuehn December 6, 2011 at 1:55 pm

When biologists give up and say its too hard to scientifically study, model, and measure biological systems because the biological world is too complex, we generally don’t call that “the second phase in their career as biologists”.

The other problem I have with this argument is that these arguments about the complexity and the emergent order of the economy are really Smithian arguments and they’ve formed the core of economic thought for over two hundred years. I am not saying Hayek’s work on complexity is worthless. I personally love it. What I’m saying is I’m seeing too many people (this post and others) pointing to the Smithian tendencies in economics and attributing it to Hayek.

Daniel Kuehn December 6, 2011 at 1:56 pm

re: “That’s a badge of honor. He was merely a great economist, without any prefix.”

This is very true. But Krugman was fundamentally right too. Warsh claimed too much, I think.

Daniel Kuehn December 6, 2011 at 1:56 pm

Scratch that “badge of honor”. I don’t see why it’s a badge of honor at all – one way or another. I was agreeing with the next sentence – that he was a great economist.

dsylexic December 6, 2011 at 2:20 pm

biologists can fiddle with their models all they want.atleast they dont harm others.modeling economists and their ‘policy’making harms the rest of human race.get it? first do no harm.

Richard Stands December 6, 2011 at 2:32 pm

Like

Daniel Kuehn December 6, 2011 at 3:10 pm

To the extent that we’ve gotten it wrong and hurt people, a lot of this blame lies with policymakers doing things that are widely agreed upon to be dumb. But even if everything were to have been done perfectly according to the state of economic knowledge, obviously things still wouldn’t be perfect. Nobody ever claimed they would be perfect.

But if you look at constitutional democracy implementing the best knowledge of economists and compare them to those that don’t, I would take the society that applied economic knowledge any day of the week. Look at the sorts of places that have flaunted economic science – however imperfect. Would you want to live in any of them?

re: “first do no harm.”

It’s actually a pretty dumb phrase if you think about it. We can’t help doing harm. My grandma was harmed very badly in surgery a couple months ago, for example. What we mean when we say this is “don’t knowingly hurt”. Does the application of economic science have risks? Of course. Does the application of medical science have risks? Of course. Don’t mistake that for doing harm in the way that this phrase is meant.

Ken B December 6, 2011 at 3:33 pm

It’s not so dumb in the original context, which was medical intervention before anyone had a clue about medicine.

Captain Profit December 6, 2011 at 4:08 pm

It’s not dumb in any reasonable context. Your first order of business when addressing a problem should be to avoid making it worse.

Daniel Kuehn December 6, 2011 at 4:09 pm

Well it’s still dumb taken literally. Unless you have a crystal ball you never know if you’ll do harm or not.

What it means is don’t knowingly harm. Economists in this country working in policy largely abide by that. It doesn’t mean they don’t do harm, of course – but then surgeons do harm too. We don’t abandon surgery because we aren’t absolutely perfect at it yet.

The simple point is this: are there any societies that reject the application of economic science to policy problems that you would rather live in than a society that does apply it? I can’t think of any. The freest, wealthiest, most progressive, most democratic countries in the world are those that have used economic science to guide policymaking. Yes we’ve had trouble – but like I said, surgeons screw up too. I’m not going to give up on surgery personally.

Greg Webb December 6, 2011 at 10:10 pm

Surgeons may only perform the surgery after the informed consent of the patient. Surgeons are also liable for their negligence whether intentional or not. Economists who advise politicians do not obtain the informed consent of those to be affected by such policies nor can they be held liable for their intentional or unintentional negligence in recommending such policies.

JoshINHB December 7, 2011 at 11:38 pm

@Daniel Kuehn

Well it’s still dumb taken literally. Unless you have a crystal ball you never know if you’ll do harm or not.

What it means is don’t knowingly harm.

No,

What it means is that doing something for the sake of doing something is likely to exacerbate the original problem. It is much more likely that uninformed action on complex system will be damaging than that it will be beneficial.

GAAPrulesIFRSdrools December 6, 2011 at 4:39 pm

“re: “first do no harm.”

It’s actually a pretty dumb phrase if you think about it.”

Only to someone who doesn’t understand it. In writing “My grandma was harmed very badly in surgery a couple months ago, for example. ” you seem to believe surgery is a matter of mere will and skill, rather than a corporeal invasion fraught with dangers, anticipated and unanticipated-to be pursued when the devil you know is worse than the devil you might know.

There’s a reason that despite all the science employed by medicine, it remains an art, and an art best practiced by the restrained and cautious.

Daniel, as an economic “doctor” you don’t exactly exude restraint or caution. Your prescription would no doubt abound with iatrogenic pathologies, precisely because of the confident certitude you exhibit here and in your other posts. This phrase “I would take the society that applied economic knowledge” is telling. What makes you think that “economic knowledge” isn’t being applied? I’ve yet to meet anybody who doesn’t pursue self-interest. Even the most benevolent person often is motivated by soteriological concerns.

This forum wouldn’t exist if there WAS some universally accepted canon of “economic knowledge” and even if that were true that we all sang from the book of god ecomica-there are always dissenters. Implementing that “society” would necessarily require the acquiesence or elimination of the disstenters-inevitably using force-and thereby negating any economic basis of that society.

Daniel Kuehn December 6, 2011 at 4:48 pm

re: “Only to someone who doesn’t understand it.”

Exactly what don’t you think I understand about it. It was being applied literally as a cheap shot against economists, and I pointed out that literally it doesn’t make much sense. If you apply it as it’s meant to be understood, of course it makes sense.

re: “This forum wouldn’t exist if there WAS some universally accepted canon of “economic knowledge” and even if that were true that we all sang from the book of god ecomica-there are always dissenters. “

If you are interested in god, universal acceptance, a canon, or any of this stuff you should go to a religious blog. I’m talking about scientific consensus that’s always progressing.

Sam Grove December 6, 2011 at 6:04 pm

Apples and oranges.

People voluntarily submit to surgery to deal with very specific and very local issues. At that, it is known that there are too many surgeries performed. AND, even given the very specific and localized nature of surgery, things often don’t work out as intended.

Attempting to manage an economic system is playing king with the lives of unwitting, and often, unwilling subjects; many millions of lives.

Have you any concept of how an economy might function without political management?

Of course not, you never studied that.
Your econimics education is a very fancy conceptual box.

yet another Dave December 6, 2011 at 6:27 pm

To the extent that we’ve gotten it wrong and hurt people, a lot of this blame lies with policymakers doing things that are widely agreed upon to be dumb.

Since Keynesianism explicitly requires giving policymakers (sounds so much nicer than politicians) the power to meddle in economic affairs, Keynesians must share the blame.
The thing that’s not widely enough agreed to be dumb is giving politicians that kind of power. Doing so is profoundly stupid, so by extension, Keynesianism is profoundly stupid.

Ubiquitous December 6, 2011 at 7:38 pm

We can’t help doing harm.

The bumper-sticker slogan of the professional Keynesian interventionist.

Jack Fraser December 6, 2011 at 2:47 pm

I would point out that biologists tend to model discrete systems (sometimes discreetly!) rather than entire biospheres. The comparison doesn’t aid you as much as you might like.

Daniel Kuehn December 6, 2011 at 3:11 pm

Right, but economists don’t try to model “entire biospheres” either.

Hal December 6, 2011 at 3:37 pm
cmprostreet December 6, 2011 at 3:57 pm

“I would take the society that applied economic knowledge any day of the week.”

“Right, but economists don’t try to model “entire biospheres” either.”

I think, for his argument, the ‘entire biosphere’ was meant to be analogous to the ‘[entire] society.’

Your discouraged biologist is more analogous to a discouraged micro-economist than to a discouraged macro-economist. Macro is certainly not about modeling individual organisms (individuals) or ecosystems (markets); it is instead about modeling the entire biosphere (society).

Daniel Kuehn December 6, 2011 at 4:10 pm

re: “I think, for his argument, the ‘entire biosphere’ was meant to be analogous to the ‘[entire] society.’ “

Yes that was my understanding of it too.

cmprostreet December 6, 2011 at 4:35 pm

Then how can you possibly claim economists don’t try to model it?

Either:
1) You agree (macro)economists try to model entire societies, despite stating otherwise.
or
2) You prefer to live in a society with policies based on economic science which was never meant to apply to a society.

If (1), you’re being disingenuous. If (2), please explain how a science that is not meant to apply to society, and does not take into account its (proposed) effects on society, should be used to manage society. Though I expect (3), claims that you’ve been misinterpreted and actually meant something other than what you said.

GAAPrulesIFRSdrools December 6, 2011 at 4:40 pm

No just “aggregates”.

Darren December 6, 2011 at 3:42 pm

No one’s ideas are %100 original. Everyone relies on previous work. People who technically don’t really contribute all that much get the credit all the time. Am I talking about Hayek or Keynes?

Josh S December 6, 2011 at 3:46 pm

Pigs fly; I agree with Kuehn. Finished Wealth of Nations recently, and noticed Smith discusses Book IV with a paragraph on this sort of “pretense of knowledge” stuff Hayek talks about. Hayek is of course much more thorough on the subject (as is Mises in his work on socialism), but it should be seen as building on Smith.

Daniel Kuehn December 6, 2011 at 4:11 pm

Hayek isn’t just thorough. He is utterly indispensable for thinking about the economy as a complex system.

But that is not an excuse for identifying the fact that all economists are fundamentally Smithian with Hayek.

John Papola December 6, 2011 at 9:24 pm

No, they’re not.

Economists who claim that tsunamis can lead to “some economic strength” or that fake alien invasion war buildup can restore healthy growth and prosperity are ABSOLUTELY NOT in the Smith-Hayek strand of economic thought. They are in the old Malthusian/William Spence crank land.

Only very very slightly less worse that he above nonsense is the repeated claim that this or that program will be good for the economy because it will encourage consumption, such as the frequent call for money being given those lot lesser means because they have a “higher marginal propensity to consume”. This, too, is nonsense.

JS Mill got it right when he bottled up such talk with the recognition that the demand for commodities is not the demand for labor. Consumption is not production. It’s the opposite. Production creates wealth and the means to consume it. It is the means. Consumption uses up wealth. It is the ends. The ends are NOT the means.

JoshINHB December 7, 2011 at 11:43 pm

+1

I_am_a_lead_pencil December 6, 2011 at 4:00 pm

“When biologists give up and say its too hard to scientifically study, model, and measure biological systems because the biological world is too complex, we generally don’t call that “the second phase in their career as biologists”.

You’ve purposefully characterized the argument to broadly. The problem is that the PREDICTIVE value of econometric modeling is extremely limited. It’s complexity necessarily limits accurate prediction.

Hayek:
“It’s a general problem of having complex phenomena. You encounter this already in the field of biology, to a very large extent. You certainly encounter it in the theory of biological evolution, which has not made any prediction–it can’t possibly make any predictions. I think it’s true of linguistics, which is the most similar in structure to economics. Well, I don’t know where there is another social science proper, except economics.”

Brad Hutchings December 6, 2011 at 4:13 pm

Daniel, let’s grant perfect knowledge to all involved in what led to the housing bubble. Let’s also grant the best of intentions to today’s macro economists. Let’s assume that they want to learn from this collapse and advocate policies that would not result in the same groundhog day next time.

Here’s the problem. These same geniuses can’t get behind the narratives that had the best chance of predicting this downturn. That is, we created this problem by effectively forcing lenders to make bad loans, then allowed investors to bundle the risk and have it guaranteed by government. Moreover, we can’t get the macro geniuses to pick the right goals going forward. It is still seen as “bad” that housing prices decline and “good” that they go up. And yet, we can’t even reconcile that with the general policy goal that housing should be “affordable”.

That’s where it blows up for me (a non-economist). The Keynesians continue to pick the wrong goals. They might be (crudely, and likely by coincidence) pulling the right levers, but the results will always be bad if they aim the wrong direction.

Scott Murphy December 6, 2011 at 4:55 pm

When biologists give up and say its too hard to scientifically study, model, and measure biological systems because the biological world is too complex, we generally don’t call that “the second phase in their career as biologists”. I think this isn’t true at all, Steve Jay Gould comes to mind.

Plus biology is not as much about public policy.

Automatic December 6, 2011 at 11:01 pm

Daniel,

It is disingenuous to equate exploring and acknowledging the limits of knowledge with giving up.

It is also far more useful when the attempt to model complex economic interactions is made that the would-be-modeler be honest about the limits of his or her model than it is to assert knowledge that he or she does not possess.

Andrew Bissell December 9, 2011 at 10:52 pm

Oftentimes, a significant result in mathematics is achieved by proving that a particular problem *has* no solution. If someone manages to prove that P =/= NP I can assure you he or she will be lauded as a great mathematician. I don’t see why the same could not be true in economics, a field which is obviously characterized by less rigor and more uncertainty than mathematics.

Manfred December 6, 2011 at 1:56 pm

Professor Roberts,
you say “Astoundingly, Hayek wins the Nobel Prize in 1974.”
Why astoundingly?
Now, there *are* some ill-intentioned people who say that Hayek won the Nobel *only because* Gunnar Myrdal shared the prize with Hayek, and because the Nobel Committee wanted to give it to Myrdal, but did not want to appear too biased to Myrdal’s views, thus, they chose Hayek only as a counterbalance.
I am happy he (Hayek) won. As for my part, I value Hayek’s contributions much more than Myrdal’s. But….opinions differ, especially in this highly divisive current environment.

Russ Roberts December 6, 2011 at 1:58 pm

I don’t think he (or others) expected it.

Methinks1776 December 6, 2011 at 4:13 pm

My understanding is that Myrdal was the “counterbalance”. That is, the committee couldn’t not give Hayek the prize, but they didn’t want to be seen as supporting his views (Lord forbid!).

Speedmaster December 6, 2011 at 2:08 pm

Bravo, great post. I only wish that I had heard of Austrians and Hayek in my econ undergrad days. I was given a very healthy dose of Keynes, and only Keynes, back then.

RPLong December 6, 2011 at 2:11 pm

I have not done a deep-dive of Hayek’s work, but I agree with Boettke’s take that Hayek is easily abused by people on the left and the right. He is essentially the “poster boy of Austrian economics,” and it is kind of a shame that this is so, since I believe Mises’ work completely eviscerates Keynesian theory. That there are more flaws in Hayek’s work than Mises’ work (my opinion) makes it easier for Krugman to take down Austrian school economics.

But it’s a major straw-man argument. Modern Austrian-leaning economists don’t go back to “The General Theory” to criticize Keynesian macro. They tackle the modern theories by referring to the strong arguments of Mises and Hayek, but also pointing to more recent economists.

In short, it’s only people like Krugman who think Austrian economics is stuck at Hayek. Everyone else moved on.

Ubiquitous December 6, 2011 at 8:04 pm

In short, it’s only people like Krugman who think Austrian economics is stuck at Hayek. Everyone else moved on.

In the past, Krugman has also referred to Austrian Business Cycle Theory, for some reason, as “The Hayek-Schumpeter” theory, rather than the “Mises-Hayek” theory.

He’s unable to utter the name “Mises” without stammering in fear and loathing, I guess.

Dan S December 6, 2011 at 2:12 pm

One of my takeaways from “The Use of Knowledge in Society” is that there can be no such thing as a “great macroeconomist.”

GAAPrulesIFRSdrools December 6, 2011 at 4:42 pm

LIke +1

Greg Ransom December 6, 2011 at 2:30 pm

As Hayek himself points out, these insights came directly out of his macro work, and were explored their FIRST, see, e.g. his contrast between real world price signals vs formal math modeling in his 1929/1933 book _Monetary Theory and the Trade Cycle_.

Russ writes,

“Economic problems can get solved without centralized direction. Hayek’s writing on bottom-up emergent processes contain Hayek’s deepest insights. They are microeconomic in general but they have macroeconomic implications. I tried to capture some of that depth in my novel, The Price of Everything.

Greg Ransom December 6, 2011 at 2:31 pm

Most all of these arguments are found in Hayek’s various writings pre-1945:

“Astoundingly, Hayek wins the Nobel Prize in 1974. His Nobel Prize lecture for me represents the second phase of Hayek as macroeconomist. Rather than arguing that he has a better model of the economy or the business cycle, he argues that the economy is too complex to model.”

Greg Ransom December 6, 2011 at 2:47 pm

Gerald O’Driscoll, Jr. in his UCLA dissertation on Hayek’s macro gives some sense of how a great many of Hayek’s most famous economics insights are were first developed in his macro work. Read the book here.

http://www.econlib.org/library/NPDBooks/ODriscoll/odrCP0.html

J Cross December 6, 2011 at 2:49 pm

If it’s true that Hayek wasn’t an important macroeconomist, or even a macroeconomist at all (important or not), then that’s probably a good thing given the deplorable state of macro as a scientific endeavor.

And to Daniel Kuehn’s point about: quitting at a legitimate pursuit is indeed not to be applauded. But recognizing that something is not worth pursuing (for whatever reason; in this case because it’s not scientific but rather is scientism) and abandoning it is to be heralded. It’s good for two reasons: first, it acknowledges that the thing is not worth pursuing; and second, it allows one to (possibly) do something else that is useful.

I read the late Hayek and compare it to the early Hayek and I see a man who said: I don’t want to do religion anymore. I want to do something useful.

Daniel Kuehn December 6, 2011 at 3:14 pm

This is presuming Hayek was right about his scientism claims about macro.

Dune Buggy December 6, 2011 at 3:44 pm

And we can’t presume Hayek was ever right because Hayek is always fucking wrong.

Daniel Kuehn December 6, 2011 at 4:49 pm

That’s absurd. Actually this is one of the few places where he went really badly off track.

Ubiquitous December 6, 2011 at 8:09 pm

this is one of the few places where he went really badly off track

And as a great macro-economic scientist yourself, you’ve got the empirical data to prove that assertion, right?

Or are you going to agree with your colleague Karl Smith who admitted in a debate recently that there are no empirical data proving Keynesian policies have ever worked at any time or in any place?

Daniel Kuehn December 6, 2011 at 4:50 pm

Don’t turn me into a Hayek hater, Dune Buggy. Whatever there differences with me, everyone here that knows me knows I’m not that.

Joseph Fetz December 7, 2011 at 3:27 am

Dune,

That certainly is not the impression of Daniel Kuehn’s opinion that I got. While DK is most certainly a proponent of Keynesian macro, and it is obvious that he would disagree with Hayek here, he does not make any claims that Hayek is always wrong. In fact, I have often read posts by DK that are quite supportive of Hayek. This just isn’t one of those occasions.

J Cross December 6, 2011 at 3:57 pm

Yes. And so the issue hinges on whether macro is science or scientism.

Methinks1776 December 6, 2011 at 4:14 pm

Philosophy. Hubris.

Brad Hutchings December 6, 2011 at 4:17 pm

Reminds me of two lessons I learned growing up. From my Dad, I learned, if it’s not worth doing well, it’s not worth doing. And from one of my graduate advisors, I learned, if it’s not worth doing, it’s not worth doing well. Both are very wise men.

Stone Glasgow December 6, 2011 at 5:17 pm

They both seem wrong. Sometimes it’s a good plan to do something poorly, sometimes it’s what people want. For example, IKEA furniture and McDobald’s food. Both cheap and effective. The chairs are not jointed hardwood and the fries are not made with duck fat, but both are good for their price.

Same thing in the other direction. McDonald’s doesn’t make high quality food because “it’s not worth doing.” Other restaurants find that it is worth doing it perfectly. It all depends on who you are and why you’re doing what you’re doing.

yet another Dave December 6, 2011 at 6:41 pm

Neither IKEA nor McDonalds are “doing something poorly” as you claim. You seem to be confusing your aesthetics with each company’s goals. To use just the McDonalds example – their food is of extremely high quality in the sense that a Big Mac from any McDonalds in the country tastes the same. This consistency allows those who like McDonalds food (a group that doesn’t include me) to order from any store with confidence they’ll get exactly what they want.

Mikey December 6, 2011 at 2:51 pm

In his Nobel Prize lecture, Hayek uses his microeconomic insights about complexity and emergence to argue that macroeconomic precision is beyond our abilities. Macroeconomics is not like physics. The lecture is a plea for humility, a plea for skepticism about what we can know and cannot know. It is an argument for embracing the limitations of reason and especially the limitations of experts in steering the economy…

And in this paragraph you have stated quite clearly why Krugman and the others feel they must discredit Hayek. Such “experts” cannot bear being told they have any limitations at all. For people who wish above all to control, an assertion of limitations on that control is abhorrent.

Michael E. Marotta December 6, 2011 at 2:53 pm

Dan S. is insightful and not alone.
Luke: “I am looking for a great warrior.”
Yoda: “Wars do not make one great.”

I had two classes in macro economics, the undergrad requirement, and a graduate elective. As far as I can tell, they only treated nations, central banks, “sectors”, and peoples as singular entities, never allowing for alternative choices and actions within their frames and models. That being so, it seems that all economics is so-called “micro” economics.

Among the many basic errors in classical and Keynesian economics is the attempt to reduce human beings to billiard balls. Newtonian physics has been the paradigm for all studies seeking to be called “science.” If you lower the interest rate, people borrow more money … except for the people who wait to see if it will fall further; and except for the ones who invest in a futures counter-trend because they they expect a rise in rates in reaction; and except for those who find lower rates unattractive for lending, and hence withhold funds, thus causing the rise expected by the previous group; and except for those who have no incentive to borrow or lend at all right now because they have other concerns entirely…

The five ball is sitting in front of the right middle pocket and from above the left corner comes the cue, intending a gentle kiss, and a carom off the rail for a good leave. Well, the six sees an opportunity and rolls over. With the six and the cue headed his way, the five seeks to avoid a collision and leaps into the pocket, taking advantage of his foresight. WIth nothing to hit, the cue rolls into the pocket for the scratch. Missing the cue, the six caroms off the rail rolls to a stop and complains in an NYT Op-Ed that we need more government regulation.

EDG reppin' LBC December 6, 2011 at 3:30 pm

I wasn’t sure if you were going to be able to pull off your extended metaphor. But, you nailed it dude.

Gabriel December 6, 2011 at 3:12 pm

Sounds like what Hayek was up to with his skeptical works was a Critique of Macroeconomics quite similar in some ways to the work of Immanuel Kant. He was setting down arguments for what we can and cannot know and where macro is entitled to go. In fact the part about our desire to go further than we can with macro could almost have been quoted from Kant. Either way, Hayek was doing a very important thing, whatever you want to call it. Great article.

Josh S December 6, 2011 at 3:49 pm

I wish you would have said something about how patently dishonest Krugman’s article is yet again. Krugman claims the only reason Hayek is getting a second look is because Road to Serfdom has political appeal to the right…not because the housing bubble looked an awful lot like it had something to do with interest-rate meddling rather than a whole lot of people randomly deciding they didn’t want to spend money any more.

Ken B December 6, 2011 at 3:53 pm

Deflecting attention from that is precisely the point.

Josh S December 6, 2011 at 4:00 pm

Not to reply to myself per se, but in reading through those comments and clicking through more links, it seems that Paul Krugman regards the consideration of any economic thought contrary to his own as politically motivated. He apparently wrote that the ascendancy of Friedman’s monetarism was due entirely to right-wing “gold fetishists” looking for a pseudointellectual cover for the regressive political program, not, the inadequacy of Keynesian monetary theory to explain “stagflation.”

He can’t just disagree with people. The very idea that anyone gives anyone who disagrees with him so much as a theory sends him into an emotional meltdown, and he has to find a nefarious conspiracy behind it all.

Josh S December 6, 2011 at 4:01 pm

Ugh. “so much as a hearing.” I’ve been at school too long.

GAAPrulesIFRSdrools December 6, 2011 at 4:18 pm

If there’s something that needs to be said, it’s that Samuel Johnson’s quote “the law is an ass” would not have been uttered if he met Paul Krugman. The subject of that terse indictment would not have been “the law” but Paul Krugman.

If Hayek is a Mascot of the right, Keynes is a mascot of the spendthrift left and Krugman is a caricature of the wrong. In criticizing Hayek as more political than economic, Krugman puts his image next to “chutzpah” in the dictionary.

Let’s be honest. Keynes’s theories are to economics what alchemy is to chemistry. Keynes’ fantasies have survived for decades for the same reason alchemy was believed for centuries-we desperately want to believe that there is some way to harness the unseen to create wealth without effort. As for “vested interests”, Keynes has been invoked by vested interests such as Krugmonancer to advance their own positions as trusted political astrologers. As such, Krugman has every reason to diminish Hayek, since questioning the art would show him to be little more than a gifted storyteller without any economic clairvoyance.

It didn’t hurt that Keynes spoke English fluently and was a flamboyant bon vivant , with a quick wit and an aptitude for investment that seemed to buttress the claim of special insight.

By the way, this very topic, from the perspective of Nicolas Wapshott (sp?) who wrote a book claiming that the clash between Keynes and Hayek was indeed a titanic struggle-even though this author seems to have no love for Hayek, taking the not-so-subtle swipe that Keynes was something of an investment prodigy while Hayek was rarely employed in the private sector, outside academia.

You can listen here:
http://wabcradio.com/FlashPlayer/default.asp?SPID=33447&ID=2347233

Jon Murphy December 6, 2011 at 5:12 pm

This whole conversation is stupid. Both Warsh & Krugman starting off and now this. Is there really nothing better to do, no better question in the economics world, than “How important was Hayek?”

Look, there mere fact that we are talking about him now shows he was relevant.

And this whole thing about building off of other people’s work is ridiculousness. “Hayek built off of Smith’s work.” No shit, Sherlock. Every thing is built off of previous thoughts and experiments. Krugman’s own Nobel Prize winning paper is building off of trade observations that began with Ricardo. Was the computer invented in a vacuum? No! Was the iPad? No! Was the telephone, steam engine, fire, the wheel? No! Ideas have sex all the time. That’s how we get innovation.

With all due respect to Warsh and Krugman, their writings on this topic are extremely arrogant and serve no purpose in themselves. Krugman should be ashamed of himself because of this. Ashamed!

As much as I appreciate the responses by Russ, Alex et. al, I really think it would have been best to let them go. Do not feed the trolls, right? The Warsh article reads as a troll post.

Greg G December 6, 2011 at 5:28 pm

Got to agree with you here Jon. I loved the Keynes versus Hayek rap videos but this whole idea of representing economics as simply a debate between Keynes and Hayek has gone way too far on all sides at this point. You would never get the slightest clue from the modern debate how much the two men respected each other.

Jon Murphy December 6, 2011 at 5:54 pm

Right? The two men where friends! They wrote to each other all the time. Intellectual rivals, sure, but so what?

Ubiquitous December 6, 2011 at 10:50 pm

Keynes and Hayek liked each other personally. As for professional respect, however, I believe it mainly flowed from Keynes to Hayek, not the other way around. In a videotaped interview, Hayek said openly that Keynes knew less about economics than almost anyone he knew.

GAAPrulesIFRSdrools December 7, 2011 at 9:23 am

You would never get the slightest clue from the modern debate how much the two men respected each other.

Did they really or was the public civility like boxers shaking hands?

Roger Koppl December 6, 2011 at 5:17 pm

Daniel Kuehn: Biologists *are* interested in what can and cannot be modeled mathematically. Stuart Kauffman has recently said, “we do not know the relevant variables, so we cannot write down the laws of motion for the evolving biosphere.” (http://www.npr.org/blogs/13.7/2011/08/08/139006531/the-end-of-a-physics-worldview-heraclitus-and-the-watershed-of-life)

Virginia and Gregory Chaitin are working on a mathematical theory of evolution using Rado’s busy-beaver problem, but that hardly gets you any laws of motion for the biosphere. All in all, then, your comparison of Hayek to an mathematically skeptical biologist is more apt than you seem to think.

Daniel Kuehn December 6, 2011 at 8:51 pm

Right. Economists are interested in what can and cannot be modeled mathematically too, right?

Daniel Kuehn December 6, 2011 at 8:52 pm

I’m confused by your point, Roger. I’m not saying we ought to mathematically model what doesn’t make sense to mathematically model. What are you thinking I’m claiming, exactly?

John Papola December 6, 2011 at 9:33 pm

How can one possibly arrive at a multiplier estimate of any kind, let alone one like 1.54 (or whatever) if there is not a notion of mathematically modeling the entire economy, Daniel?

What, exactly, is narrow about these Keynesian claims? Nothing. They are economy-wide. They are “macro” models.

The Hayekian point about the limits of our knowledge implies strongly that the margin for error is so wide as to utterly swamp the narrow set of variables these models attempt to simulate. Proclaiming that the multiplier for the Obama stimulus was going to be 1.54 is scientism. It’s a sham. And it’s clearly something that a good biologist would have the gaul to do either.

So, yes, Hayek may have been among the greatest macroeconomists of all time, because he had the wisdom and the humility and the courage to say “I don’t know” when it was the real answer instead of “I don’t know yet” or worse, “it’s 1.54″

GiT December 6, 2011 at 10:56 pm

Nice tilt at a strawman, but estimates of fiscal multipliers concern ranges, not points.

John Papola December 6, 2011 at 11:13 pm

GiT,

Are you saying that multipliers don’t involve macro-economic models that attempt to model the entire economy? That’s the point. They do. That’s why they’re “macro” models.

If a model can’t account for factors that can (and do) utterly swamp the range offered in the model, it’s not worth very much.

GiT December 7, 2011 at 3:12 am

And if they attempt to model ‘the entire economy,’ so what? The estimates are made, knowingly, with a high degree of imprecision.

There’s nothing humble about claiming with certainty that some set of factors ‘swamp’ the range offered by the estimate. I’m not sure what warrant you have to say that other than your own presuppositions.

John Papola December 7, 2011 at 5:22 pm

When the ARA stimulus defenders respond to the fact that the outcomes in the economy are wildly different from their prediction ex ante, they say “it was worse than we thought”. They have no evidence to support this claim. Zero. When the CBO runs the same computer models in reverse to arrive at the “jobs created or saved”, assuming that the original predictions and their underlying models were correct and therefore REALITY MUST BE DIFFERENT… they are practicing flim flam.

But even their flim flam reveals that the margin for error swamps these models to the point of rendering them useless. They’re not falsifiable by evidence. The CBO even admits that real evidence is too hard to gather in any honest way.

All of this leads us right back to Hayek, scientism and the pretense of knowledge that is modern macro.

Daniel Kuehn December 7, 2011 at 9:03 am

I think you’re confused here, John.

We can’t model, say, the atmosphere in any “real” sense. We can’t figure out what every particle is doing and how its interacting. To model that is a fools errand.

But we can model atmospheric processes – aggregate processes, not the impact of specific particles on other particles – to provide a useful approximation of what we think is important to know about the workings of the atmosphere.

These useful approximations get better as we compare it with the data and tinker with it. We’re never attempting the impossible task of actually modeling the collection of particles themselves. But we’re identifying important mechanisms and processes, modeling them, and drawing conclusions accordingly.

The same goes with the economy. You’re never going to be able to model everything going on in an economy. But you can model processes that are especially important to us, and hone those models, and get useful results.

That’s not scientism – that’s how all science works.

You’re confusing an inability to actually reproduce a complex system with an inability to gain insights about the dynamics and the properties of that complex system.

yet another Dave December 7, 2011 at 10:51 am

But we can model atmospheric processes – aggregate processes, not the impact of specific particles on other particles – to provide a useful approximation of what we think is important to know about the workings of the atmosphere.

For the purposes of predicting weather up to about a week you’d be correct. The only thing useful about the approximations of global climate models (and economic models) is cover for nefarious political shenanigans for those inclined to such things. Not to go OT into climate studies, my point is this: the global climate system is orders of magnitude simpler than, say, the US economy. Attempts to model global climate are obvious failures (near perfection at being wrong), so humility is called for from those attempting to model the vastly more complex.

Sadly, such humility is sorely lacking.

JoshINHB December 8, 2011 at 12:03 am
Daniel Kuehn December 7, 2011 at 9:06 am

This is true of any science – all sciences are aggregations relative to something else.

Don’t tell me we can’t do macroeconomics unless you’re willing to tell a biologist that he has to build up all his insights about organisms from the atomic level.

Knowledge of chemistry is obviously essential for the biologist just like knowledge of microeconomics is essential for the macroeconomist. But you’re deeply confused if you think studying aggregations in and of itself is illegitimate. If it were, then we’d all be quantum physicists. That’s ridiculous. It’s a bad argument, John.

yet another Dave December 7, 2011 at 10:32 am

DK, you seem to have completely missed John’s point by saying “you’re deeply confused if you think studying aggregations in and of itself is illegitimate.” nowhere did he say that.

Roger Koppl December 7, 2011 at 9:12 am

Daniel: Well, I must admit that your remarks on biology, while disparaging of Russ’s post, were cryptic. Thus, perhaps I misunderstood you. It seemed to me you were saying that no biologist would give up on the project of mathematizing the discipline. Well, Kauffman has entered “the second phase of [his] career as a biologist” saying just this. Your biology-based slam on Russ backfires.

Daniel Kuehn December 7, 2011 at 9:35 am

I don’t know, Roger. I don’t think anyone has ever criticize Hayek on the basis of the claim that the discipline should be completely mathematicized, damn the torpedoes. Why you think that is the concern is lost on me.

Kauffman (I’m assuming – I don’t know his work) did not turn his back on good biology. The concern with Hayek is that he turned his back on a lot of good macro with flimsy scientism and anti-aggregate arguments.

Which is a shame, I should add. Hayek has a brilliant mind and what he turned to benefited from that brilliant mind. Macroeconomics certainly lost out on that one.

Roger Koppl December 7, 2011 at 10:15 am

Daniel, I often hear that Hayek made “anti-aggregate arguments.” Can you point me to the place(s) where he does? I don’t think he did. I think he said that the Keynesian aggregates mask the relevant movements in resources and relative prices. But that’s an argument about which aggregates to choose, not whether aggregate are somehow okay or not. I mean, the demand curve is an aggregate, isn’t it?

As for your puzzlement about how I’m interpreting you . . .

You said:

——–
When biologists give up and say its too hard to scientifically study, model, and measure biological systems because the biological world is too complex, we generally don’t call that “the second phase in their career as biologists”.

The other problem I have with this argument . . .
————-

Okay, dude, so what did you mean and how does it express “a problem” with Russ’s remarks?

Ubiquitous December 6, 2011 at 10:28 pm

Kolmogorov and Chaitin worked on an algorithmic approach to complexity: if a character-string of length X can be reproduced exactly be means of an instruction that uses fewer characters, the original string is said to be compressible and therefore, “simple.” If the character-string cannot be reproduced by means of an instruction but must be copied character by character, it is incompressible and therefore “complex.”

One idea in information theory that has yet to be more explicitly worked out and may have application in economics, even in a qualitative sense, is the notion of specificity. For example, take the combinations of a 3-letter string in English:

T-H-E,
H-E-T,
E-T-H,
E-H-T
H-T-E
T-E-H

Just measured in terms of probability of each letter appearing where it does by chance (1 in 26), each of these combinations has the same odds of occurring (1/26*1/26*1/26). The problem is how to express the insight that only one of these combinations is functional, or useful, within the lexicon of English: T-H-E. Though each triplet has the same odds of occurring by chance as the others (about one in 600,000), there are still more useless combinations than there are useful ones: 5 more, in fact.

Specificity seems to be at the core of the Austrian concept of capital as a good that is part of a plan of human action, and — like a piece from a jigsaw puzzle — is specific to that plan, and not easily interchangeable with some other good without degrading the value of the plan.

Roger Koppl December 7, 2011 at 8:46 am

Ubiquitous,
I don’t think I see what you’re after with Chaitin and Kolmogorov. Can you explain how, in your view, algorithmic complexity enters the Austrian picture?

Ubiquitous December 8, 2011 at 8:01 am

Chaitin, Kolmogorov, and Solomonoff used an idea from computer science known as “recursion” to try to untangle a knotty problem in classical probability. The intuitive idea behind the mathematics of their solution rests on the notion of “specificity” — pattern-uniqueness — that closely resembles the underlying ideas of Austrians regarding capital.

Roger Koppl December 8, 2011 at 11:05 am

Ah! I’m getting closer to your intuition now, Ubiquitous. I’m not all the way there, however. I’ve been reading and citing this stuff for a few years, but without linking it to capital theory. I don’t quite see how that link would work. I realize that your are expressing a scientific intuition, not a worked out theory. Still, can you elaborate a bit? I don’t see how to use the notion of compressibility, for example, to model the trade cycle. How do you get from, you know, Chaitin’s omega to, like, monetary policy? At some point one must construct such bridges.

GiT December 6, 2011 at 5:51 pm

If Hayek’s influential insights are about what we can and can’t know, then perhaps the problem is that Hayek isn’t (only) an economist, but a philosopher of the epistemology of social science and a political polemicist.

Surely one can separate out uses of Hayek which

A. draw on his economic analysis
B. draw on his philosophical analysis
C. draw on his political analysis

All three may be entirely interrelated, but it is different to draw on an account of spontaneous order in markets (A), an account of what we can know relative to what markets can know (B), and an account of which political system makes the most sense (C).

B may emerge from A’s demonstration that markets are very good at knowing certain things, and C may emerge from B’s demonstration that markets are necessarily superior to any other form of organization in knowing certain things, but each presupposes different questions (how do economies work, how does knowledge work, how should politics work).

Roger Koppl December 6, 2011 at 6:05 pm

I don’t think I’m with you GiT. First, political analysis != polemics. Also, I really don’t see the distinction between A and B. Hayek’s “knowledge papers” say that the basic theory of markets is really all about who can know what and how knowledge is produced and distributed in society. So it says the theory of market is both “an account of spontaneous order in markets” and “an account of what we can know relative to what markets can know.” I don’t get why you’re trying to shave B off from A in the first place, but you can’t do it anyway IMHO. Even C is *almost* not separate. Add in pretty much any beneficent value system and it follows that you need a significant market element in the system. So it just seems like you’re erecting these big walls based on some (philosophical?) scheme of thought that is largely unrelated to what Hayek had to say about markets and how they work.

Don Boudreaux December 6, 2011 at 6:21 pm

Like

Roger Koppl December 6, 2011 at 7:34 pm

thanks, Don.

rex December 6, 2011 at 6:12 pm

So where are the Keynes Hayek T-shirts?
I wanted one for Christmas

Russ Roberts December 6, 2011 at 6:40 pm

Coming Friday. That’s the plan.

Greg Ransom December 6, 2011 at 11:59 pm

Awesome.

GiT December 6, 2011 at 6:44 pm

1. I know political analysis =/ polemics, but Hayek’s political analysis strikes me as generally polemical.

Economic analysis giving us special insight into epistemology doesn’t make economics epistemology, even if it turns out the only salient theory of knowledge is fundamentally economic in character.

We can think about this as the relevant field of debate. If I’m considering Hayek’s claims about what we can know, then I’m specifically concerned with his theory of markets as a theory of knowledge, and I’m concerned not only with its own consistency (and here, not strictly as an account of economics but as an account of knowledge), but with how it compares to other theories of knowledge, not other theories of markets.

I would be concerned with other theories of markets only indirectly, insofar as if Hayek’s theory of markets is wrong, then the basis for his theory of knowledge is wrong, or insofar as other theories of markets also purport to be theories of knowledge.

Roger Koppl December 6, 2011 at 7:32 pm

Aw, now you’re just being disagreeable. And it won’t go to label Hayek’s political analysis as polemics. Hayek’s treatment of the rule of law in The Road to Serfdom was an important source for Fallon’s much-cited 1997 survey of the idea. The claim that RTS was insubstantial is itself insubstantial.

Cite: “The Rule of Law as a Concept in Constitutional Discourse,” Fallon, Richard H. Jr. Columbia Law Review, 1997, 97 (1).

Roger Koppl December 6, 2011 at 7:34 pm

Oops: the bit about what’s insubstantial is true, but you said “polemics” not “insubstantial.” I confess I did a cut and paste from coordinationproblem.

GiT December 6, 2011 at 7:43 pm

Polemics need not be insubstantial, and I do not think RFS is insubstantial. I do think it is a polemic. This is a little cute, but, just look at the title.

GiT December 6, 2011 at 7:52 pm

And I don’t see what’s disagreeable about my analytic distinction between epistemology and economics. Any science must be concerned, at a meta-level, with its theory of knowledge, and as such all science is in some sense inseparable from theories of knowledge. That doesn’t mean it isn’t meaningful to distinguish between disagreements at the level of “normal science” and disagreements at the level of theories of knowledge. ‘Your model of the atom is off’ is a different sort of argument from ‘you can’t know whether or not atoms really exist.’

Roger Koppl December 7, 2011 at 7:18 am

Is Heisenberg’s uncertainty principe “science” or “epistemology”?

GiT December 7, 2011 at 1:48 pm

Depends what you’re using it to argue about.

vidyohs December 6, 2011 at 7:05 pm

Com’on, the Marsh/Krugman attack on Hayek is not about economics, it’s about attacking the politics and beliefs of those to the right of socialism.

The looney left battle plan is an old one and there is nothing new in the Marsh/Krugman attack. The looney left has as its objective to thoroughly destroy any opposition to socialism, period.

They may not respect or admire Gen Patton, but they do use his basic principle of war, “use the means at hand to inflict the greatest amount of destruction, wounds and death on the enemy (the right) in the shortest amount of time”.

Therefore they attack the right as people, the ideas of the right, the Icons of the right, the leaders of the right, all that the right believes in as good for humanity is subject to attack, any market, any policy, any association, all have to be destroyed and replaced with collectivism and redistribution.

Hayek? He is just a current target. Gotta destroy him, especially as he wrote that stupid book about the road to serfdom.

GiT December 6, 2011 at 7:46 pm

Is your concomitant attack on ‘collectivism,’ ‘redistribution,’ ‘socialism,’ ‘Krugman,’ etc. here intentionally or unintentionally ironic?

vidyohs December 6, 2011 at 8:50 pm

Oh? Did I attack Marsh/Krugman? Is correctly labeling them as looney lefties an attack? I notice every time I use the accurate term looney lefty you act in reflex. Striking a nerve, am I? You’re like the kid in the playground that runs crying to the monitor, “Vidyohs is mean, he hits back.”

You may be a left leaning looney, but you’re not too bright as well.

Once again for you on the looney left. I know exactly who the enemy is, I also believe in practicing Gen Patton’s tactical principle regarding war.

I will not waver on that. Therefore you can see my comments about Marsh/Krugman in many ways, but irony isn’t one of them. You can look at it as a “back-atcha”, if you got enough smarts to understand what a “back-atcha” is.

GiT December 6, 2011 at 10:40 pm

As long as you’re aware of what you’re doing I don’t care.

Loony is about as accurate a descriptor of the left as ‘retroactively inflated mascot’ is of Hayek.

I didn’t view your comments on Marsh/Krugman as ironic, I viewed them as polemical.

I viewed your use of polemic in attacking left polemics as ironic.

Ubiquitous December 6, 2011 at 8:22 pm

From Mises.org:

http://blog.mises.org/19716/extraordinary-princeton-delusions-and-the-madness-of-the-ny-times/

All of the popular press that the Austrian school of economics, the Mises Institute, the Austrian business cycle theory, and the Physiocrats like Frederic Bastiat have garnered lately has led Paul Krugman to try to rewrite Hayek out of the history of macroeconomics contra all facts against him.

From the words of the Nobel Committee:

“[Hayek's] conclusion is that it is only through a far-reaching decentralization in a market system with competition and free price formation that it is possible to achieve an efficient use of all this knowledge and information. Hayek shows how prices as such are the carriers of essential information on cost and demand conditions, how the price system is a mechanism for communication of knowledge and information, and how this system can mean an efficient use of highly decentralized resources of knowledge.

“Hayek’s ideas and analyses of the viability of economic systems, presented in a number of writings, have provided important and stimulating impulses to the great and growing area of research which is named comparative economic systems.”

Krugman can try to dismiss the “Hayek thing” all he wants as he attempts to whitewash history but it clearly is not going away.

g-dub December 6, 2011 at 11:13 pm

Hayek shows how prices as such are the carriers of essential information on cost and demand conditions, how the price system is a mechanism for communication of knowledge and information, and how this system can mean an efficient use of highly decentralized resources of knowledge.

Hayek shows how markets have no need for macroeconomists. Therefore, macroeconomists have no “need” of Hayek.

Pingry December 6, 2011 at 9:26 pm

Like Dan Kuehn, I happen to think well of Hayek’s concept of spontaneous order which preceded Benoit Mandlebrot’s more mathematical approach.

But maybe that’s because I happen to think of markets as similar to the blind, bottom up, algorithmic process of natural selection, which as Robert Frank points out, can lead to competition that is sometimes detrimental to the species as a whole. This, of course, is the essence of spontaneous disorder. Try invoking spontaneous order when everyone tries hording money at the same time and economic activity contracts and a debt-deflation sets in. I think many of his followers are mistaken about how often markets fail, especially labor and financial markets, in the absence of government pressure.

The Austrian Business Cycle Theory (at least the non-Keynesian and non-Wicksellian parts of it) is a joke, which is to say that their theory of capital is wrong.

Their theory of Capital used to be fashionable until John Bates Clark, with an assist from Irving Fisher, influenced Frank Knight and others to abandon it. They looked at capital not as some heterogeneous structure, (and they rejected the Austrian view that the production process lengthens or shortens during the business cycle [a view further elucidated by none other than Milton Friedman himself!] in favor of an income/expenditure circular flow diagram) but as a homogeneous and perpetual “reservoir” in which new production flowed in to replace the used up capital which flowed out.

–Pingry

Pingry December 6, 2011 at 9:27 pm

**hoarding

Methinks1776 December 6, 2011 at 9:48 pm

I’m always relieved we have wise and learned boys like you, armed as you are with your infallible mathematical models, to bail out the plebes when you’ve determined that what they’re doing is, in your superior judgment, detrimental. Liberty is good. Nobody here will argue it isn’t – surely not Pingry. But, you know, like markets, it has its limits. Too much liberty without the oversight of the omniscient elites is just not good for the plebes. Oh yes, and God damn the horders.

Greg Webb December 6, 2011 at 10:18 pm

“But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.”

Exactly! Those pretending at being the knowledgable elite don’t want to help others. They simply crave the power. And, that is what should never have.

Sam Grove December 6, 2011 at 10:14 pm

I think many of his followers are mistaken about how often markets fail, especially labor and financial markets, in the absence of government pressure.

OR, as history shows:

I think many of his followers are mistaken about how often markets fail, especially labor and financial markets, in the presence of government pressure.

carlsoane December 7, 2011 at 1:24 pm

Good point. The question is not whether markets fail when left on their own. The question is whether they fail more often when left on their own.

SheetWise December 6, 2011 at 9:53 pm

I don’t remember who said it first — so please fill the gap if you can — but I’ve always liked the comparison of fields in economics to fields in astronomy –

“Macroeconomics is to microeconomics as astrology is to astronomy.”

That I believe, and nothing I’ve learned or observed in my lifetime has disabused me of that belief. While the structure of the sentiment is recent, and easy to recite — the sentiment is old. It should have become obvious before the audience (~) recognized Taleb — if they have. He’s not a prophet — he’s telling you what you’ve always known.

Ubiquitous December 6, 2011 at 10:44 pm

Macroeconomics is like reading tea leaves to predict the future. The charlatan can say anything he wants ex ante, and justify the answer ex post, irrespective of what events actually occurred.

And that is precisely why Keynesians, whether paleo or neo, continue to cling to their theory even after their own admissions that there is no empirical evidence that their Magick has made accurate predictions.

If you ask a Keynesian of any flavor what real-world event, at least in principle, would cause him to abandon Keynesian, he stares at you blankly, the same way a fundamentalist Christian would if you asked him what event, in principle, would cause him to abandon belief in Jesus as Messiah. The difference is that the latter made no claims that his belief was a scientific conclusion, while the former makes nothing but that claim.

Pingry December 6, 2011 at 11:15 pm

“Macroeconomics is like reading tea leaves to predict the future. The charlatan can say anything he wants ex ante, and justify the answer ex post, irrespective of what events actually occurred.”

Well, maybe you should be reading Paul Krugman then.

He correctly predicted that inflation would not take off (and, in fact, that we would face disinflation with a threat of deflation, despite the erroneous predictions of hyperinflation by people like Peter Schiff—Quantity Theory of Money FAIL).

He correctly predicted that interest rates would not rise (while Bill Gross claimed interest rates would rise after the Fed ended QEII), that is to say, that there is no crowding out whatsoever, and in the process mocking the WSJ and liquidationists over their belief in the bond market vigilantes.

He correctly predicted that austerity would fail because. The Confidence Fairy is no where to be found!

He correctly predicted the demise of the euro, using the same Optimal Currency Area framework by the euro’s cheerleader, Robert Mundell

He predicted a long and jobless recovery while Jon Paulson was talking a big game about a V-shaped recovery and investing as such, only to lose his shirt

Krugman made these predictions ex-ante using models that, ex-post, turned out to perform well. So there is value in using good models and anchoring oneself in the data.

SheetWise December 6, 2011 at 11:42 pm

And I correctly predicted that “Normistan” would win in the fifth race at Arlington — I won $2.20 for $2.00 — where’s my Nobel?

Ubiquitous December 7, 2011 at 12:06 am

@Pingry: Well, maybe you should be reading Paul Krugman then.

You’re either an official mouthpiece for Paul Krugman or seriously bemused. Perhaps both.

Read the debunking of Krugman’s tea-leaf readings over the last eight years by Donald Luskin (who blogs at “The Conspiracy to Keep You Poor and Stupid”):

http://www.luskin.net/krugmantruthsquad.pdf
(downloadable PDF archives)
“The Krugman Truth Squad”
by Donald Luskin

In 2003, I set out to expose Krugman’s various distortions, and to force the New York Times to correct them. I started first on my blog, and soon afterward in a series of columns for National Review Online called “The Krugman Truth Squad” (KTS). The inaugural KTS column appeared on March 20, 2003. The series of columns was structured as what is now called “crowdsourcing”: Within several hours of a Krugman column’s appearing on the Times website, I and a network of fellow bloggers would put it under a microscope and discover all the filthy microbes hiding in every crack. We’d fact-check every claim, confirm every quotation, run down every source, and compare every statement for consistency with statements made in the past. The KTS called Krugman “America’s most dangerous liberal pundit,” and our promise to readers was: “We’ll read Paul Krugman so you don’t have to.”

I won’t cite here very many of the dozens upon dozens of prevarications that my Krugman Truth Squad exposed in 94 columns over five years. If you are interested, look up my name in the NRO author archives, where most of the KTS columns can still be seen. Or you can download a PDF file with the entire collection of KTS columns here.

In most cases, any given one of Krugman’s prevarications — if uncorrected, his lies — will seem trivial, as though I were nitpicking to focus on it. But the cumulative effect of them all — every exaggerated statistic designed to bolster some economic argument, every out-of-context quotation designed to make some conservative politician look venal or conservative economist look stupid, every inaccurate historical citation designed to make conservatives into crooks and liberals into heroes — is to shape Krugman’s narrative with a persuasive power it would never achieve if it were confined to the truth. In the same sense, the cumulative effect of my persistent blogging, and of the Krugman Truth Squad columns, has been to gradually erode that persuasive power.

Luskin also makes a point that has beem made many times on Cafe Hayek by Don and Russ, though it bears repeating and remembering:

Prior to 2008 the Nobel Prize had never been awarded posthumously. So great minds such as John Maynard Keynes and Fischer Black never received the coveted award. But all that has changed. This year, the prize for economics is going to Paul Krugman, an economist who died a decade ago.

To clarify, the person named Paul Krugman, the living and breathing man who will accept the Nobel in Stockholm this December, is merely a public intellectual — a person operating in the same domain as, say, Oprah Winfrey.

The living Krugman‟s rabidly liberal New York Times column has, for nine years now, traded on the dead Krugman‟s reputation as an economist, a reputation that only will be burnished by the award of the Nobel Prize. Yet his column is pure politics, not economics. It is the equivalent of astronomers Mather and Smoot — the 2006 Nobelists in physics — writing on astrology.

This living Paul Krugman can‟t be the same person as the dead economist. The dead economist wrote eloquently of the supreme importance of globalization and international trade as engines of prosperity. But the living public intellectual remains silent on these subjects when the Democratic party‟s nominee for president threatens to abrogate the North American Free Trade Agreement.

These days Krugman‟s liberal agenda always takes precedence over economic principle. He has described himself as “an unabashed defender of the welfare state.” He has declared, “For me, Sweden of 1980 would be ideal.” He has called Barack Obama‟s sweeping plan for socialized medicine “naïve” because it doesn‟t contain enough mandates. He has said that “We should be getting 28% of GDP in [tax] revenue,” when the highest level ever collected, even in wartime, is less than 21 percent.

Krugman is entitled to such opinions, whether as a public intellectual or an economist. But there have been serious questions about his journalistic integrity — suggestions that the living Krugman has debased and corrupted the very science the dead Krugman did so much to advance.

In 1999 Paul Krugman was paid $50,000 by Enron as a consultant on its “advisory board,” and that same year he wrote a glowing article about Enron for Fortune magazine. But he would change his tune. After Enron collapsed in 2001, Krugman wrote several columns excoriating the company. (One featured what may be the most absurd howler in the history of op-ed journalism: “I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.”) In most of these columns Krugman worked hard to link Enron to the Bush administration, and in one he actually blamed Enron‟s consultants for the company‟s collapse — while neglecting to mention that he, too, had been an Enron consultant.

Pingry December 7, 2011 at 11:26 am

So, a stalker from the National Review somehow isn’t biased?

Nobody takes Don Luskin seriously, especially when he makes predictions about prosperity the day before Lehman collapses and the economy falls off a cliff. From FP’s “10 Worst Predictions of 2008″:

[A]nyone who says were in a recession, or heading into one, especially the worst one since the Great Depression is making up his own private definition of recession. Donald Luskin, The Washington Post, Sept. 14, 2008

The day after Luskins op-ed, Quit Doling Out That Bad-Economy Line, appeared in the Post, Lehman Brothers filed for bankruptcy, and the rest is history. Liberal bloggers had long ago dubbed the Trend Macrolytics chief investment officer and informal McCain advisor the Stupidest Man Alive. This time, they had some particularly damning evidence.

Josh S December 7, 2011 at 1:57 pm

Well, in September of 2008, it still looked like there was a decent chance Obama would lose, and he was still campaigning on being fiscally responsible and eliminating wasteful government programs.

Ubiquitous December 7, 2011 at 3:33 pm

So, a stalker from the National Review somehow isn’t biased?

No more biased than the knee-jerk, crypto-socialist, Keynesian interventionist who hawks his propaganda for the nanny state from the editorial pages of the New York Times.

Nobody takes Don Luskin seriously, especially when he makes predictions about prosperity the day before Lehman collapses

Ah, yes, of course; standard operating procedure of the knee-jerk left: heads, Krugman wins; tails, Luskin loses. Where was Krugman’s prescient prediction the day before Lehman collapsed that it would in fact collapse? Answer: nowhere. He said nothing because he missed it.

And it’s not just economics that Krugman is clueless on or simply lies about: Luskin has culled moronic statements by the Kroog regarding Iraq, Afghanistan, so-called global warming, healthcare, etc. As a resource, Luskin’s PDF is worth downloading and reading.

Dan J December 7, 2011 at 1:14 am

He correctly predicted interest rates would not rise……

US Fed interest rates? Sounds more like he was forecasting what he and his buddy Bernanke talked about behind closed doors. Oooohhh, big surprise!! I will quickly predict my expenditures for tomorrow……. $7.00 See!!

I think Krugman foretold of a ‘needed housing boom and bust’……. Ooops!! Maybe he helped orchestrate.

Pingry December 7, 2011 at 11:06 am

Do you have evidence that Bernanke and Krugman were “forecasting” behind closed doors?

If not, then you need to stop running your mouth.

–Pingry

Ubiquitous December 7, 2011 at 3:35 pm

Do you have evidence that Bernanke and Krugman were “forecasting” behind closed doors?

Both of them old buddies and tenured professors at Princeton? I’d say it was likely; I’d be surprised if it didn’t happen.

Dan J December 7, 2011 at 1:18 am

As for crash of Euro….. This may have been easier for Krugman than expected…… Watch socialism fall….. Watch demise of socialistic policies…. Again and again and again and again…..
” we are who we have been waiting for” says a wanna be dictator……..

Salt Water Economist December 7, 2011 at 6:02 am

Dan J

except that the Euro isn’t “crashing”

The problem in the South is that the Euro hasn’t crashed but has instead retained its value. Hence the natural means or method for correcting, currency devaluation, if off the table

Josh S December 7, 2011 at 1:59 pm

If currency devaluation is so “natural,” how come it didn’t exist before the invention of fiat currency?

Pingry December 7, 2011 at 2:35 pm

Maybe you should go back to Krugman’s blog and see how both Italy and Spain have been steadily reducing their debt/GDP ratios over the decades.

And while you’re there, you can read up about how Krugman and Dean Baker discuss how there is no correlation between spending as percentage of GDP and 10-year interest rates and how the welfare states are not the problem (hint: it’s about the straighjacket imposed by the euro when they do not at all have the conditions for an optimal currency area).

Oh, and maybe you can read about how Krugman also discussed how the spending issue, welfare state and corruption is strictly an issue for Greece only.

You really embarrass yourself by saying all kinds of outlandish things without even putting up any evidence.

So how about that claim that Bernanke and Krugman are tacitly “forecasting” behind closed doors: Again, where’s your evidence?

Spit your game.

–Pingry

Salt Water Economist December 7, 2011 at 5:59 am

Pingry

what you write about are inconvenient truths, which are wholly disregarded here

Henri Hein December 7, 2011 at 12:27 pm

“correctly predicted that austerity would fail ”

He may have predicted this, but how can you assert he was correct since austerity has yet to be tried?

Pingry December 7, 2011 at 2:26 pm

Austerity has yet to be tried?

Really? That’s a nice goal post moving argument. Yes, it has been tried, and yes, it has failed. Maybe you’ve invented your own definition of austerity, but in the real world it has failed.

Look up the evidence, a perfect example of which is British austerity. It has failed and George Osborne finally admitted that it has failed.

Ubiquitous December 7, 2011 at 3:38 pm

Look up the evidence, a perfect example of which is British austerity. It has failed and George Osborne finally admitted that it has failed.

No, YOU look up the evidence and show it to us. Cutting spending might be called austerity; cutting merely the rate at which spending is increasing is not austerity.

Jon Murphy December 7, 2011 at 3:43 pm

I’ve managed to stay out of this for the most part, but I need to expand a little bit on what you said Ubiquitous. You are right that cutting spending is austerity and cutting the rate of spending is not. But it goes even further than that: austerity is cutting spending to a point where revenue exceeds costs. No nation in the world (Greece, possible exception) is doing that. In fact, no nation can stomach the thought. Hell, the US is looking for $1.2T in cuts over 10 years (a very small percentage) and we have doomsday prophesies.

Josh S December 7, 2011 at 11:34 pm

You idiots! You forgot the definition of “austerity,” which is “anything King Krugman calls it.” So if Great Britain increased spending, well, if Krugman wants to call that “austerity,” then it is. Duh!

Rugby1 December 7, 2011 at 2:53 pm

@ Pingry.

Total UK government spending in 2009, 621.5 Billion.
Total UK government spending in 2011, 683.4 Billion.

There has been no austerity, the numbers do not lie. Krugman has been screaming about how austerity will kill the EU economy yet austerity would imply REAL cuts in spending. Instead you receive baseline cuts in revenue increases on a YOY basis and everyone screams about austerity.

Way to literally understand, nothing.

g-dub December 6, 2011 at 11:16 pm

When one admits the stark truth that there has never been a good macroeconomist ever, the apparent sting subsides greatly.

SheetWise December 7, 2011 at 12:10 am

An admission that will not be forthcoming because all of the data has not been collected — and even then, it hasn’t been normalized — and even then it hasn’t been analyzed — and even then it hasn’t been massaged — and even then it hasn’t been structured …. structured into what people will believe. Facts be damned.

SheetWise December 7, 2011 at 12:15 am

/rant

You’re right on the admit part ;)

GAAPrulesIFRSdrools December 6, 2011 at 11:48 pm

@Daniel K:

“Exactly what don’t you think I understand about it. ”

The ordinary construction of the injunction.

“It was being applied literally as a cheap shot against economists, and I pointed out that literally it doesn’t make much sense. If you apply it as it’s meant to be understood, of course it makes sense.”

Daniel, you should have pursued a JD with such a talent for doubletalk and that’s being applied literally as a cheap shot.

“re: “This forum wouldn’t exist if there WAS some universally accepted canon of “economic knowledge” and even if that were true that we all sang from the book of god ecomica-there are always dissenters. “

“If you are interested in god, universal acceptance, a canon, or any of this stuff you should go to a religious blog. I’m talking about scientific consensus that’s always progressing.”

Obviously, you don’t understand the use of the word “canon”. It can be used totally apart from theological matters, even though I was using a metaphor.

However, I do think there are theological aspects to the various economic cults, such as the Keynesian cult or the pseudo-economics of Marx. Marxism, especially is a secular religion, with a prophet, a heaven, saints, heretics, apostasy, and a sustaining faith in the unfulfilled. Its no accident, either, that’s why displacing religion, by force, is a tenet of Marxism. You can’t understand the Marxist plague completely without considering its theological implications. I’m sorry you can’t seem to tolerate heterodox approaches, but I don’t care and won’t be censored by the paucity of your imagination.

And you can talk “about scientific consensus that’s always progressing”, but economics isn’t science, there is no consensus, even in microeconomics where the fundamental questions are more settled. Nor is economics always progressing, since Keynes and Marx have not been relegated to the ashbin of history yet.

SheetWise December 7, 2011 at 12:24 am

What’s your theory about free people openly and honestly having transactions with each other — with no Overlord — simply relying on their own resources to conclude the transaction?

SheetWise December 7, 2011 at 12:43 am

Gee … do you think the EU restriction of 1,000 units will have a shelf life better than salmon?

It (the status quo) is over. Get over it. Prepare.

Hope to meet you all someday.

GAAPrulesIFRSdrools December 7, 2011 at 8:48 am

What’s your theory about free people openly and honestly having transactions with each other — with no Overlord — simply relying on their own resources to conclude the transaction?

Assuming that this is directed at me, I have no theory other than to say its an innate attribute of humanity that works to our mutual betterment. It is present everwhere at all times, wherever there are people with “stuff”. Anybody who denies this has never seen kindergrartners swapping lunches, baseball cards or the newest bauble “silly bands”.

SheetWise December 7, 2011 at 3:58 pm

Yes. We love “cargo” …

Younger Cato December 7, 2011 at 1:42 am

Too many (even earnest Hayekians) like to dismiss or belittle the value of The Pure Theory of Capital. Are they intimidated by its rigor? Are they bored by its necessarily long and complex points?

Hayek was dissatisfied with this work not because he found it lacking, but because he knew that as technical and rigorous as it was, it wasn’t technical and rigorous enough to properly describe what he set out to describe. It’s not the technical nature of this work that he lamented, it’s his understanding that the truth requires going beyond the limits he was reaching. He himself described this work as an incomplete assignment. He quit because he knew his colleagues didn’t have the stomach for the truth.

If only economists could think more like mathematicians. Pure mathematicians of course, not mere statisticians.

Josh S December 7, 2011 at 11:38 pm

I read it two years ago. It was rather opaque, and I when it was clear, I did not find it particularly convincing. Personally, I think he was not using very good tools to say what he wanted to say.

The one thing I particularly remember is that he talks about a “natural rate of interest” and a “natural rate of profit,” neither of which I found to be helpful concepts IMO. Personally, I think Austrians are quite right to focus on the manipulation of interest rates by the central bank as a chief cause of economic discoordination, but it seems to me more and more that the focus on time preference is not entirely correct.

Lionel from France December 7, 2011 at 7:18 am

Excellent post! Thank you Russ.

Troy Camplin December 7, 2011 at 12:29 pm

I agree with Krugman that Hayek is and was not important to the history of macro:

http://zatavu.blogspot.com/2011/12/things-that-never-happened-in-history.html

Methinks1776 December 7, 2011 at 12:50 pm

Nice. Thanks.

Pingry December 7, 2011 at 4:49 pm

@ Dan J and Ubiquitous:

Because Bernanke and Krugman were colleagues at Princeton means nothing!

Your belief in this John Birch fringe conspiracy when you “say it was likely” and how you’d “be surprised if it didn’t happen” also means nothing!

Once again, provide evidence, because otherwise you have nothing!

It’s time to put up or shut up!

–Pingry

Roger Koppl December 7, 2011 at 6:00 pm

Roger Koppl December 7, 2011 at 7:18 am
Is Heisenberg’s uncertainty principe “science” or “epistemology”?

REPLY
GiT December 7, 2011 at 1:48 pm
Depends what you’re using it to argue about.

GiT: I’m not sure how that reply addresses my question. You seemed to be erecting these big distinction about epistemology vs. theory, which don’t seem to fit the one field everybody seems to recognize as “science” and okay and exemplary, namely physics. Lots of what we consider to be a part of physics, including the uncertainty principle and Einstein’s critique of simultaneity, is all about who can know what when. I was headed toward the point that if it’s like that in physics, then maybe we should treat most of the epistemic issues in economics as a part of economics and not meta-econ or philosophy or something. The uncertainty principle is part of physics, period. One can invoke it in arguments that are not a part of physics — as one can with anything. So, again, I just don’t get where your answer is coming to my question.

Russ December 7, 2011 at 7:53 pm

~”Hayek wasn’t much of a macro-economist.”

Uhhh, no, and Jack London wasn’t much of a poet. We care because?

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