The Law of Demand and Austrian economics

Lord Keynes has a couple of recent posts concerning the Law of Demand and whether it is universal. Lord Keynes, along with Post Keynesians in general, regard the Law of Demand as something that is really not useful and the reasons why this is so seem pretty valid to me. It should actually be noted that the Austrian criticisms on Lord Keynes’ posts demonstrate how strong of a presence neoclassical economics has in Austrian economics. Ludwig Lachmann, probably the strongest opponent of neoclassical influence in Austrian econ, tried to get Austrian economics in the right direction by rejecting much of neoclassical economics but it seems like he wasted his time in doing so because we still have the neoclassical influence. In fact, most just ignore Lachmann’s warnings on the grounds that since he is this nihilist, he, by definition, is critical of all theory. For example, take Frank Shostak , a Rothbardian who participated in Lachmann’s private seminars in South Africa: 

There is a long-running tendency among Austrians who have discovered the fallacies of mainstream thought to reject not just bad theory, but theory altogether. They conclude from the failure of one formal system of thought that all formal systems of thought must go. They rally around the work of Lachmann and G.L.S. Shackle and end up rejecting the existence of the law of demand, for example.

This is an enormous error. The problem with mainstream economics is not that it is theoretical and formal but that it is based on the wrong foundation and therefore generates crazy conclusions. The right response is to start from the right foundations. If a bridge collapses, you shouldn’t reject the possibility of scientific geometry; you should try to figure out what went wrong with the bridge engineering plan.

Paraphrasing Lachmann, he stated that he is against bad theory, not all theory, so I really do not know how Shostak ended up with this conclusion. Even think about this for a second, if Lachmann was against all theory, then does this mean that he disagreed with Shackle on his theory of uncertainty? No, of course not. Or does this mean that he rejected the theoretical and empirical aspects of capital, which he spent much time researching about? No.

But more importantly to get from the passage, it seems  that Lachmann himself questioned the Law of Demand. Shostak tries to justify why questioning the law of demand is wrong but I find it unconvincing. Shostak is essentially right when he states that the problem of neoclassical economics lies in its wrong foundations, but the foundation is wrong because of its formalization analysis of the real world and of its theoretical analysis on the real world. Thus, I do not get when he states, ” The problem isn’t formalization/ or its theoretical aspects, the problem is the mainstream’s wrong foundations.” To me this is like saying, “The problem is X, not X.”

In Lachmann’s paper, “Carl Menger And The Incomplete Revolution of Subjectivism” (1978), Lachmann criticizes Menger for being a subjectivist that wasn’t able to give up some objectivist aspects. This led Menger to sometimes contradict himself (for example subjective value of a good vs the nature of human needs, or the possibility of exact laws in the real world). Here is Lachmann on Menger’s exact laws:

For a long time students of Menger have been puzzled by the precise meaning of his notion of ‘exact laws’. He regards it as the prime task of economic science to formulate such laws. In Appendix V of the Untersuchungen we are told that ‘in the field of human phenomena exact laws (so-called ‘laws of nature’) are attainable under the same conditions as in that of natural phenomena.’ In this regard, then, there is no difference at all between social and natural sciences. On the other hand, Menger distinguishes sharply between these ‘exact laws’, i.e. ‘laws of the phenomena which are not only valid without exception but which, according to the laws of our thought simply cannot be thought of in any other way but as without exceptions’ (Menger 1963:42), and ‘empirical laws’ which rest on observation and admit of exceptions. Menger uses the ‘law of demand’ as an example for this distinction. According to him the exact law tells us not merely that a rise in demand will lead to a rise in price, but that, under certain conditions, the extent of this price rise is quantitatively exactly determinable (‘dem Masse nach genau bestimmbar’). But he goes on to warn us that these conditions require not only that all participants maximize their satisfaction in the pursuit of which they must be free of all external coercion, but also the absence of error and ignorance. Hence we must not expect to find instances of the exact law in the real world. It is “unempirical when tested by reality in its full complexity. But what else does this prove than that the results of exact research do not find their criteria in experience in the above sense? The above law is, in spite of everything, true, completely true, and of the highest significance for the theoretical understanding of price phenomena as soon as one looks at it from that standpoint appropriate for exact research. If one looks at it from the point of view of realistic research, to be sure, one arrives at contradictions… but in this case the error lies not in the law, but in the false perspective.” (Menger 1963:57)

These views will no doubt strike many of us as odd, but the main reason for it is that we have come to take it for granted that ours is a world of relentless positivism. (Lachmann 1994: 209)

Basically, the point to be made here is that this exact law (the law of demand) is unempirical when looking at the real world because it is impossible to determine price from the law of demand. Keep in mind that Lachmann is quoting Menger here, Menger is basically admitting the flaw of emphasizing the law of demand when looking at the real world. At the same time though, Menger is admitting that under certain assumptions, the exact law is completely true, which I am not so sure I agree with that. Nevertheless, from the point of view of realistic research, this law has contradictions.

Now I (unlike the majority of Austrians) do not think too heavily on Menger’s exact law concept, specifically because in order for these exact laws to be completely true, we must assume out some of the complexities of the real world. I have a feeling that Lachmann felt the same way.

An Austro-Keynesian?

I received an e-mail a couple days ago, which I will reproduce some of it here. It is part of an email conversation I have been having for a while now with a PhD student that thinks of himself/herself as an Austrian. He/She has requested to remain anonymous:

Isaac, I have come to the conclusion that you are the combination of Austrian and Keynesian thought. You’ve said before that you approve of Keynesian stimulus in slumps, you question the validity of Say’s law, you don’t agree with loanable funds theory, etc. And your justifications for not believing in these primarily come from Keynesian resources. Nevertheless, you still defend the basic core of Austrian economics, which deals with the emphasis of human action. To a certain extent, you agree with praxeology, you claim that economic theory as a whole must be described through acknowledging the actions of people. In other words, “microfoundations play a key role” as you have stated before in our email conversation…

Your radical subjectivist idol seems to be [Ludwig] Lachmann, and you assume that everything you approve of, Lachmann would too, but I dont think this is quite right. If anything, you are more of the Shackleian radical subjectivist, who is seen as a person who uses ‘austrian’ premises to keynesian conclusions. In other words, you are setting up to be the modern day Austro-Keynesian.

I think the PhD student has some fair points. I do agree that I partially assume that Lachmann would approve what I advocate. I would state this differently though, rather, I assume to be consistent with a Lachmannian framework to where I draw my conclusions. For example, my advocacy of endogenous money did not really come from reading Keynesian resources, it came from reading Lachmann’s (1937) “Uncertainty and Liquidity Preferences,” in which the article considers money’s function as one that has ‘debt discharging’ which is the main difference of money and a commodity in modern capitalistic systems (Lachmann 1937: 305). Lachmann also goes on to say that money is also legal tender and can explain the process through logical deduction by making the reader aware of “what money does and what only money can do” (Lachmann 1937: 307). Lachmann seems to be the only Austrian to endorse this claim on money, thus when I do try to justify endogenous money and legal tender, I have to by default use Keynesian articles, for they have expanded this concept, while the modern Austrians still hold on to a commodity-money relationship, who oppose legal tender laws. So yes, while I use Keynesian articles to justify my point, I still think it is consistent with the Lachmannian framework.

Another key article of Lachmann’s (2005) article “Speculative Markets and Economic Complexity,” in which it shows the instability that capitalistic market systems has. He urges to make the distinction between ‘ordinary markets’ (which is a generalized form of the typical supply-demand market analysis, ie. the discovery process) and financial markets (specifically speculative markets), which are different since expectations seems to make this market more acceptable to instability (Lachmann 2005: 264; 267). Indeed talking about speculation and financial markets makes stability theories like Say’s Law and loanable funds questionable. Certainty, (Post) Keynesians see it this way and have furthered the literature on it, which Austrians have not really done so, since they faithfully hold onto the loanable funds theory, probably in fear that if they reject loanable funds, their Austrian Business Cycle (ABCT)  is also worth throwing out

I admit that Lachmann was not too clear on his thoughts on the Austrian Business cycle. It is generally known though that he thought the theory lacked a role of expectations and, according to Lewin in one of our email conversations, it was “too mechanical.” Also with conversation with Lewin, we discussed whether Lachmann would approve of the loanable funds theory, Lewin said he probably would have while I took the opposing view. But after our online talk, I realized if Lachmann himself did not agree with me of his position (assuming that he supported loanable funds theory of course. As Lewin said at the end of the discussion, this is something that we will never know), who cares? I am only concerned with using the Lachmannian framework and expanding on it. So a better discussion would have been if my positions are consistent with the Lachmannian framework. In order to conclude from my interpretation of the Lachmannian framework that ABCT is questionable, I must show a connection how the lack of expectations might lead to at least being skeptical of the ABCT (and at most, completely rejecting it). And I could do this very easily by pointing to Lachmann’s (2005) article “John Maynard Keynes: A view from the Austrian Window” in which he makes that controversial statement that Keynes was more committed to subjectivism that the Austrians (Lachmann 2005: 187)! Keynes’s psychological law to his view of expectations (thus making markets instable) all contribute to Keynes as a subjectivist. But the simple fact of expectations making markets unstable is something that the ABCT lacks due to its appeal on loanable funds (Ertürk 2006). Also, it not like the Austrians haven’t heard of this reasoning, they just refuse to accept it. I would look at the G. Hill (1996a; 1996b; 1998) and the S. Horwitz (1996; 1998) debate for an example.

So am I am Austro-Keynesian, I don’t know, I guess it depends how one defines it. I obviously have a lot of Austrian influence and a lot of Keynesian influence, but it is all consistent to the Lachmannian framework, which is the radical subjectivist Austrian view. Instead of creating new labels like Austro-Keynesian, I would just much rather be label a radical subjectivist.

References

Ertürk, Korkut A. 2006. Speculation, Liquidity Preferences, and Monetary Circulation. The Levy Economics Institute, Annandale-on-Hudson, NY. Online.

Hill, Greg. 1996a. The Moral Economy: Keynes’s Critique of Capitalist Justice. Critical Review 10: 411-34.

—. 1996b. Capitalism, Coordination, and Keynes: Rejoinder to Horwitz. Critical Review 10: 373-87.

—. 1998. An ultra-Keynesian strikes back: Rejoinder to Horwitz. Critical Review 12: 113-26.

Horwitz, Steve. 1996. Keynes on Capitalism:  Reply to Hill. Critical Review 10 (Summer): 353-72.

—. 1998. Keynes and Capitalism One More Time:  A Further Reply to Hill. Critical Review 12 (Winter-Spring): 95-111.

Lachmann, L.M. 1937. Uncertainty and Liquidity Preferences. Economica 4 (August): 295-308.

—. 2005. John Maynard Keynes: A view from the Austrian Window. In Expectations and the Meaning of Institutions: essays in economics by Ludwig Lachmann, edited by Don Lavoie. London and New York: Routledge.

—. 2005. Speculative Markets and Economic Complexity. In Expectations and the Meaning of Institutions: essays in economics by Ludwig Lachmann, edited by Don Lavoie. London and New York: Routledge.

Hermeneutics… My Thoughts

I got asked over email by a reader what I thought about hermeneutics and how it applies to economics. Personally, I have not read too much on the subject, but I think I know enough about it to generally comment on it. I have read some articles on it but the one book, actually a collection of articles, that I have read that provides a good amount of information on the subject is Economics and Hermeneutics edited by Don Lavoie, which the book is dedicated to Ludwig Lachmann. It also contains one of Lachmann’s last essays (maybe the last?) “Austrian Economics: A Hermeneutic Approach.”

I really have mixed feeling about this. If I was to come up with an example it would be that of a Post Keynesian (PK) viewing MMT. MMTers, for example, don’t consider themselves radicals of the PK school but PKs that don’t fully agree with MMT think otherwise and thus, feel it is necessary to make a distinction between PK and MMT.

In a similar fashion, hermeneutians claim that they are not too far off what Austrian framework is all about. Many would claim that the Austrian framework is indeed a hermeneutic framework, given its strong appeal to Max Weber. Lavoie even claims that Mises’ aprioriism should reinterpreted to appeal to a hermeneutic perspective. Lachmann even makes the claim that there are many who do not know they follow the hermeneutic philosophy, such as Shackle, Knight, and Keynes, given passages:

Ultimate unifying simplicity is the aim or the dream of natural science in a sense which is not permissible for the study of human affairs. For the disciplines which envisage human conduct, policy, history and institutions, or art in all its forms, are directly and essentially concerned with the manifestations themselves, the manifoldness, the richness and the detailed particular variants and individual facts of these facets of humanity, rather than with dismissing them as the contingent outcomes of some original, general and essential principle which it is the real purpose of science to identify. The science of Nature and the science of Man stand in some sense back to back, the one looking inward at the Origin and the other outward at the Manifestation – Shackle

The whole subject matter of conduct—interests and motivation— constitutes a different realm of reality from the external world, and this fact gives to its problems a different order of subtlety and complexity than those of the sciences of (unconscious) nature. The first fact to be recorded is that this realm of reality exists or ‘is there’. This fact cannot be proved or argued or ‘tested’. If anyone denies that men have interest or that ‘we’ have a considerable amount of valid knowledge about them, economics and all its works will simply be to such a person what the world of color is to the blind man. But there would still be one difference: a man who is physically, ocularly blind may still be rated of normal intelligence and in his right mind. Second, as to the manner of our knowing or the source of knowledge; it is obvious that while our knowledge (‘correct’ observation) of physical human behavior and of correlated changes in the physical objects of nonhuman nature plays a necessary part in our knowledge of men’s interests, the main source, far more important than in our knowledge of physical reality, is the same general process of intercommunication in social intercourse—and especially in that ‘causal’ intercourse, which has no important direct relation to any ‘problem’, either of knowledge or of action—which has been found to play a major role in our knowing of the physical world. – Knight

It is, I think, a further illustration of the appalling Scholasticism into which the minds of so many economists have got which allows them to take leave of their intuitions altogether. Yet in writing economics one is not writing a mathematical proof or a legal document. One is trying to arouse and appeal to the reader’s intuitions; and if he has worked himself into a state where he has none, one is helpless.

I also want to emphasize strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it was worthwhile falling to the ground, on whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the center of the earth – Keynes

Indeed, these are passages that demonstrate their subjectivist side. There is indeed room for subjectivity to be talked about in economics, this is not metaphysical jargon as some critics might claim. It is an empirical observation of the real world. Human action implies a means-ends framework, thus implying choices (cost and decisions) that can only be explained subjectively. We cannot measure these costs and the decisions made by these actors. The way we can make human action intelligible is strictly by the means-end framework, and our interpretation of the action, which of course, may be highly likely that there will be different interpretations of the same action.

If this is what hermeneutians mean by applying this philosophy to economics, then I guess I am one. But what makes this different than looking at economics through a subjectivist lens?

It’s different in the sense that hermeneuticians stress that when authors write a text, that they should be analyzed separately. As David Prychitko states*, the ideas of the text should be analyzed, given what knowledge we have today. he uses the example of the invisible hand, famous by Adam Smith, and suggests that the meaning of the invisible hand may indeed be different than what the author intended its meaning to be. But what is the purpose of this? To justify, for example, that the invisible had may be an example of unfettered markets? I am, for one, against the claim that we should analyze the text minus the author. Indeed, the invisible hand example quite needs to be under the context of what the author intended it to mean. Considering the author with the text is important.

Hermeneutics originated in trying to interpret the bible. This philosophy might be a reason to why there are so many different interpretations of the bible. Should we look at its meaning literally, symbolically, a text in favor of science, a text completely rejecting science, etc. Indeed, one can find a Christian to defend each one of these categories. Also each one of these positions can be justified by using the hermeneutic method, by separating the author from the text. But what good does this do? We end up with more problems than we started. now this problem isn’t necessarily bad but the point is is that they give us unnecessary problems. For example, a rejection of rational expectations may gives us more problems than we started with, given that a lot of mainstream models use rational expectations. But if rational expectations weren’t introduced to begin with, it would have saved us some trouble with the nonexistence of models that depend on rational expectations

Indeed, hermeneutics is a far more radical framework than the basic Austrian framework, and thus, I think, there does need to be a distinction between subjectivists and hermeneuticians

* The Prychitko article is titled “Toward an Interpretive Economics”

Radical Subjectivism and the Austrians

From a radical subjectivist point of view, expectations was something that the early Austrians failed to grasp, but this was not a claim in the absolute sense. For example, Ludwig Lachmann states the following about the Cambridge Controversy in his ‘Reflections on Hayekian Capital Theory’ (in 1975):

Everybody seems to agree today that the stock of capital cannot be measured outside equilibrium, viz. outside entirely artificial conditions. But there are two reasons for it of which we may call one the ‘Ricardian’ or ‘objectivist’, the other the ‘Austrian’ or ‘subjectivist’ reason. We may also say that the one is ‘backward looking’, the other ‘forward looking’. The former rests on the fact that any change in the mode of income distribution, in rate of profit or wage rate, will affect relative prices and thus deprive us of any solid yardstick. It is particularly germane to any view of capital which links the present value of capital resources to their current cost of reproduction, a ‘backward looking’ view…

The second reason rests on the fact that the purpose of all capital, hence also of the current maintenance of existing capital goods, is to secure a future income stream. But the future is unknowable, though not unimaginable, and men have to use knowledge substitutes in order to evaluate future income streams, viz. expectations. Experience shows that different persons will typically hold different expectations about the future income to be expected from the same resource, and that the same person may hold different expectations about the same future event at different points of time. The inevitably subjective nature of all ‘forward looking’ views renders the measurement of capital impossible…

Meanwhile an impious legend has grown up that our inability to measure the stock of capital in the real world was discovered in the Cambridge of the 1950s.

Lachmann quite defends the Austrian position (the subjectivist position) in that Hayek was one of the first economists to take the concept of capital not being measurable in disequilibrium and applying it to subjectivism and expectations. His concluding remarks are almost that of distaste to the Cambridge school in that during their whole debate, Hayek’s name was not mentioned once even though he concluded the same thing decades before this debate, but using subjectivist reasoning.

What the radical subjectivists imply is that Austrians do not use expectations to their fullest extent. This is to say, most Austrians do not see reality as one of kaleidicity. The view of a kaleidic reality brings most to conclude that this is some nihilistic position on reality. As Roger Garrison states, there is too much of a good thing, and the good thing he is talking about is subjectivism. Garrison, appealing to Yeager, sees too much of subjectivism as seeing in not having any sense of objective reality. This is not quite true, but it is true that radical subjectivists are more skeptical of the data if it is in disequilibrium than the average Austrian. Or as Buchanan states, even though he is not Austrian, I could only imagine most Austrians agree with this, if we go down all the way down the road [to radical subjectivism] we are left with a nihilistic position. Though he makes quite a weird claim in stating that Wiseman is the closest to his methodology, even though Wiseman is himself a radical subjectivist. Or as what the infamous Rothbard states, economists leading to ‘Lachmannia’ are led to believe institutionalist conclusions, that of believing there is not such thing as economic theory, and thus are non-economists.

To further the point on why Austrians are not using expectations to their fullest extent, Lachmann in his lecture on the ‘History of the Austrian school of Economics’ speaks of George Shackle’s book Epistemics and Economics highly, considering the “most important contribution to the Austrian revival.” Now I think it is quite obvious that what he means by this is that it is the most important contribution as far as what is in the book, instead of speaking of how popular it is in the Austrian circles. Lachmann is quite right, though, on its importance. If anyone was to read only a single book by Shackle, let it be this book. It is a book of ideas that the Austrians I think, and I think so would Lachmann, failed to grasp.

Why are Austrian so afraid of the kaleidic world? The biggest reason, I think, has to do with the fact that viewing the world as a kaleidic one is not an Austrian insight in itself. As Lachmann states in his paper, ‘From Mises to Shackle’, “The kaleidic society is thus not the natural habitat of Austrian economics, but the alien soil may prove nourishing.” I think most Austrians are afraid to accept this because they are afraid that if they do, they will be in the same nihilistic boat as that of Shackle, even though I strongly think that thinking Shackle as a nihilist is highly misleading.

This said then, I think this puts into question some of the Austrian comments on the Lachmann critique that they lack expanding subjectivism to expectations. As I said, it wasn’t a failure of Lachmann to recognize that Austrians did have some things to say about expectations, given the passages in the beginning of the post. It is actually still a failure of the Austrians to adopt expectations, in the way radical subjectivists are describing them. In short, there is just more to Lachmann’s critique than “Austrians failed to adopt expectations and Keynes did.”

Evidence and Data and Economics

Mises believed that theory is useful for interpreting data. The only rejection is that of using the data to derive theory. But, if theory is used to understand real world events, then analyzing these real world events are obviously a fundamental part of economic science.

The above passage is from Jon Catalan: found here. In this post he defends the Austrian School, and specifically Mises, on the straw man that Austrians hate empirical analysis and thus find it irrelevant to economic science. Though, I can understand, for example, the critics questioning minimum wage conclusions when Austrians make claims that “it is just common sense that if you raise minimum wage, you increase unemployment,” thus they may be selective on what they choose to look at as empirical analysis, but to generally say that empirical analysis is useless in Austrian economics is a straw man. As Catalan pointed out, the simple fact that humans act is an empirical claim, or better yet, it can be supported by empirical analysis.

I also have distaste of this horrible attack on Austrian economics, there are elements which to need to be improved in this school but we sure wouldn’t know if this was how critics respond. I have distaste for it on two main reasons 1) it is somehow claimed that republicans are now Austrians and 2) it just so fixed into thinking of Austrian economics as a philosophy than as an actual economics school that can actually teach the mainstream something.

1) I do not get where people get this information that republicans are now influenced by Austrian economics (maybe it is this author that lacks viewing empirical evidence as important). Most republicans, and especially those who are politicians or have a big name in the right wing, are influenced by mainstream economics, namely by conservative New Keynesians and New Classicals. Even if we assume Austrian economics as a school that has similar views of that of Ron Paul, a good majority of republicans think of him as a crazy man.
And somewhat relevant, I also doubt that Bachmann reads Mises, even more so, on the beach.

2) More important than the first point, Austrian economics does indeed offer many things to the economics profession. I’ll present one thing, briefly but important, that the mainstream needs to learn (using economic reasoning and not a philosophical reasoning or ideological one etc). Data analysis itself is not sufficient to say anything about the economy. People from the Austrian school to the Shacklian Keynesians know that due to a transmutable reality, we must be skeptical of data to say anything about future states. The future is determined only by action done in the present, and in turn leaves us with the conclusion that the future always remains to be written. A common question may arise from this: if we are to be skeptical of data then how are we to say anything about macro concerns?

Maybe to an Austrian, this may sound ‘weird’. It is widely believed in the Austrian school that a divide of macro and micro is unnecessary. “Economics is just economics, what is this macro or micro economics that you speak of,” I heard said by a peer while I was at the Mises Institute last year. This is to mean that Austrians generally like to use similar, if not the same, tools to analyze ‘macro’ effects and ‘micro’, and thus when explaining macro, we try to incorporate as much of micro foundation as we can. In Ludwig Lachmann’s essay Macro Economic Thinking and The Market Economy, he gives a justification for using micro foundations to macro:

The more firmly a macro-economic argument is linked to its micro-foundation in choice and decision, the less it lends itself to statistical verification. Since the range of choice present to the minds of decision-makers defies statistical measurement, no theory linking observable events, like output quantities or prices, to choice and decision is, in this sense, ‘testable’. The circumstances influencing decisions find their mental reflection in plans. All economic action is, in the first place, the making and carrying out of economic plans. So long as there are no statistics of plans there is nothing to which the econometricians can correlate their measurements

Keep in mind, as also mentioned by Lachmann in this essay, that Joan Robinson said the same thing. The difference in her statement is that Robinson only reserves what she says to the neoclassical production function, while Lachmann extends this to explain economics as a whole. Here is Robinson:

Statisticians can find out in a rough general way, for a particular situation, the capital-output ratio in dollar values and the share of profit in the dollar value of net output, so that they can estimate the overall ex post rate of profit on capital. They cannot describe what was in the minds of directors of firms or on the drawing boards of engineers when the choices were made which led to the creation of the existing stock of capital equipment. Still less can they say what choices would have been made if the rate of profit had been different from what it is.

In macro, there needs to be a stronger basis for this kind of analysis but, at best, this will hardly be achieved any time soon, for the economics profession (macro and micro levels) is still lacking micro foundations based on subjectivism (based on decision and choice).

Jack Wiseman asked a very haunting question, given micro foundation considerations, to the mainstream:

… what becomes of positive economics once it is recognized that the basic econometric data (recorded prices etc) is, and always going to be, the outcome of mistaken predictions?

At best (I think), we can use Lachmann’s advice:

[it is]… impossible to discuss meaningfully policy measures designed to affect the magnitude of such aggregates without also discussing those changes in their composition which must accompany them.

And why is this?

Since these micro-economic actions are not necessarily repeated from day to day, even less from year to year, we have no reason at all to believe in the aggregative constancy of the macro-variables over time.

Uncertainty…Round 2

Lets start this post with a Lachmann passage on Keynes and subjectivism:

We have emphasized the importance of expectations for the subjectivist view of action. It is well known that in the General Theory, Keynes’s main aim was to establish the possibility of unemployment equilibrium and that everything else he had to say was made to serve this purpose. The introduction of expectations was thus to him a means to an end. He brought them into his argument when it suited him and left them out when it did not. (emphasis mine)

————-

Keynes_Follower states the following

I may have a possible response to this uncertainty problem. The market itself is uncertain, we both agree, but government does reduce uncertainty because it has intervening factors that we know and that said, it does not apply to the uncertain problem like that of the markets at least.

To refresh, click here on my post on uncertainty.

But to answer: In a world of ontological uncertainty, non ergodicity, and transmutability, how can we have Post Keynesians say for certain that government reduces uncertainty? Just because the market is instable, unpredictable, and uncertain does not follow that government policies in trying to reduce the consequences to these thing suit any better. And it does not follow that these same policies overcome uncertainty. Again to state that ‘Government reduces uncertainty’ is like saying ‘increase of knowledge reduces uncertainty’.

This problem is even more of a problem if one rejects the ‘state vs market’ mentality, which many Post Keynesians agree to reject this mentality. This is to say, one cannot say the uncertainty problem solely applies on markets and also reject the ‘state vs market’ mentality. But even setting aside this ‘state vs market’ mentality, policies still influence the market process, and thus it still follows that the market still deals with the exact same problem than without the policies, it still deals with ontological uncertainty, non ergodicity, and transmutability.

It seems like the followers of Keynes have fallen into that same problem as Keynes but in a somewhat different context. Post Keynesian literature and research on uncertainty, while really great stuff, is only a means to an end. They use it when it suits them and leave it out when it doesn’t… Or so it currently seems.

And on a side note, this is not a critique specifically towards Post Keynesians, though I am ‘picking’ on the Post Keynesians (if you will) because of the great literature on uncertainty they have on markets. This critique really applies to all economic theories. If we want to have more realistic explanations about the economy and economics then we must be willing to take uncertainty to the next level and apply it to everything that is involved in the market process. Again, my conclusion that I drew up from my original post on uncertainty was as follows:

By applying all that has been said to economic theories and policies are key if we wish for economics, as a subject, to progress. Davidson is really spot on, on what he has to say about uncertainty and he does a very good job at explaining uncertainty in depth. Nevertheless, this puts in question all theory that asks for both positive and negative regulation.

Lachmann, Mises, and Equilibrium

When I posted my comment on unlearningecon’s blog, I wasn’t expecting such a debate to come out of it… talk about spontaneous order!

I made a comment to this passage:

Mises’ understood the of market process as a series of shifting imperfect equilibria, or plain states of rest. Hayek had views similar to Mises on equilibrium, but he added in the concept of a personal state of rest to Austrian theory. Lachmann accepted the basic elements of the Mises-Hayek theory of shifting equilibrium.

I basically stated that the last sentence is not correct and I referred to Lachmann’s ‘From Mises to Shackle’ where he made it quite clear that Mises had a interpretation of the market process as one which in the long run there was a tendency to go towards equilibrium, regardless if the actual equilibrium state was actually attained. Catalan responded by saying:

Isaac, Lachmann did not disagree with the use of equilibrium in the economics of Mises, largely because Mises was not an equilibrium economists, but a disequilibrium economist

But this was a misinterpretation on what I stated. I am not arguing that Mises was an equilibrium economist, all I was saying was that Mises had the view that there was ‘a long run tendency’ in the market. Lachmann states the following in From Mises to Shackle:

Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians “logical” and neoclassicals “mathematical” economists, wrote: “Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease” [8, 1949, p. 352].

It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision.

In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does. What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change. General equilibrium theory only knows interaction between the former. For Shackle long-run equilibrium theory is of course an expression of the Victorian world view, a vision of a world shaped mainly by the forces of slow but orderly progress.

It is clear that in context, Lachmann is comparing the Mises-Hayek version of how to look at the market process to Shackle’s kaleidic view. In short, the former has the view of a long run tendency towards equilibrium and the latter views the market process as not having a tendency towards equilibrium (it doesn’t even make it possible).

Lachmann’s view on Mises is right, Mises did in fact view the market in the long run as having a tendency to go towards equilibrium. On top of that, Mises did in fact use equilibrium as a tool, though he does stress the fact that it is only imaginary and nonexistent in the real world. Depending on how one defines ‘an equilibrium economist’, Lachmann is not saying that Mises was one, he was simply stating the fact that Mises held the ‘long run tendency ‘ assumption.

Also what I wanted to bring up was what Lachmann states right after the passage above:

The older Austrians, non-Anglo-Saxon Victorians like Menger and Boehm-Bawerk, certainly shared this world view, though not the expression it found in the Walrasian model. Boehm- Bawerk’s capital theory embodies a vision of a world of steady progress through capital accumulation without technical progress or malinvestment. One of Menger’s interests was the increasing range of variety of products in economic progress. The kaleidic society is thus not the natural habitat of Austrian economics, but the alien soil may prove nourishing. A model in which individual plans, each consistent in itself, never have time to become consistent with each other before new change supervenes has its uses for elucidating some striking features of our world.

This is interesting. The kaleidic view was never an Austrian principle in itself. It was an idea adopted outside of the school, but one in which that ‘may prove nourishing’ to the Austrians. Thus, the ‘long run tendency’ assumption was pretty common to the Austrian school before Shackle came to form the kaleidic view and how it applied to economics.

See here, here, here for relevant posts on this subject

-Isaac Marmolejo