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.

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Michael Brady on Shackle and Post Keynesianism

I was reading some amazon reviews and comments and I ended up seeing Michael Brady’s comments on Shackle.

What funny is that it seems like Brady has the same interpretation of Shackle as I do. In short, if we live in a world were it is ontological uncertain, in which past data says nothing about future states and thus we should be skeptical of viewing past data as something to use for predicting future states. But this ontological uncertainty also applies to government policy as well. Post Keynesians have this mentality that, yes , we do live in a world like that as Shackle describes, but given a sufficient amount of intervention, we may be able to see past data as reliable to tell us something about future states. This is to say, that somehow, government reduces uncertainty, even in a world that is ontological uncertain.

But, again, Brady sees Shackle as I do, but concludes that this position leads to nihilism. Brady takes it a step further and implies that if post Keynesians were to take Shackle’s ontological world seriously, they themselves would be nihilists as well. As Brady puts it:

.The Post Keynesian school is doomed intellectually because it does not have a solid foundation to deal with uncertainty as a range.Radical uncertainty only has import in decisions involving innovation/long run capital investment.Any attempt to put it at the center of decision making leads to intellectual chaos.

From a radical subjectivist point of view the above passage is more positive than negative. Most economic schools are doomed to fail because they don’t have a satisfactory theory of ontological uncertainty, but like I have said, this does not mean that we won’t get there, in fact I strongly believe that we will get there with more emphasis and research on micro foundations. This is something that Shackle would presumably agree with. Its conclusion is not one of ‘intellectual chaos’… If anything, it’s one of intellectual progress where we are trying to get standard economic theory which states A causes or correlates B to think about the ‘element of surprise’. As long as there is human action, there will always be room for surprises.

In another comment on the same page as the one linked, Brady states:

However,it looks to me that Post Keynesians are trapped by their emphasis on uncertainty as total ignorance.How can their policies be shown to be superior to neoclassical ones ? Shackle’s answer is that they can’t and that the free market(and ONLY the free market) will spontaneously generate a solution over time.This is the Austrian answer.I’m not sure that this is the answer that Post Keynesians are expecting.

I question this reasoning made by Brady. Shackle, for one, is thought of a person in using ‘Austrian premises and Keynesian conclusions.’ Furthermore, I don’t know where he got the conclusion that the free market is the answer. This of course doesn’t mean that Shackle spoke negative about the market, he quite liked a market system, but that doesn’t mean he supported a free market at all.

Brady does offer some good critiques on post Keynesianism. The two that are the most interesting to me is Brady questioning post Keynesians as the true interpreters of Keynes. If anyone knows the post Keynesian school, they should know that post Keynesians speak so highly in that they think they are the true consistent interpreters of Keynes. Generally speaking, they view Keynes as a non mathematical economist that spoke of practical solution to solve some problems of capitalism. To the post Keynesian, there is nothing to make capitalism a stable system, but government can do things to limit the effects caused by the instability of capitalism. Brady, questions this by appealing to Keynes Treatise on Probability and states that Keynes was indeed a very mathematical economist. Brady’s point is that without reading the treatise, people will always lack a proper understanding of Keynes, and for the most part, post Keynesians have not read that treatise. This, I think, can be answered by appealing to the old Cambridge school (the neo Ricardians) instead of Keynes and just emphasize that they bring more of a subjectivist side to things (studies on expectations for example).

Also Brady questions the D-Z model advocated by the post Keynesians on very technical grounds. I myself do not understand the critique fully but generally, in Davidson’s approach Z is an upward sloping convex curve with a slope greater than one. Keynes, according to Brady, proved that the slope can only be one and is linear. This requires more research on the post Keynesian side. I am quite interested in this debate, since I generally like Davidson’s D-Z model.

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.”

An Update on Buchanan’s comments on Wiseman and Shackle

This is an update on my post on what Buchanan claims about Shackle and Wiseman.

I have claimed that Buchanan’s comments on radical subjectivism (that radical subjectivism is a nihilistic position) is absurd but it is a common straw man to make. Specifically that if one was to “go all the way down the road” to a radical subjectivist position, like that of Shackle’s, one just ends up with a nihilistic position and thus the closest person to his methodology would be Jack Wiseman. I have claimed that Wiseman is not that different than Shackle when it comes to writing about uncertainty and how it applies to economics. Now I have a comment by Wiseman that confirms that he was part of the radical subjectivist position that Buchanan accuses of being the nihilistic school of thought. From his foreword to his essay “General Equilibrium or Market Process: An Evaluation” :

This essay returns to the critique of established theory…It is concerned with the question of equilibrium, but although the conference assignment for which it was prepared called for a comparison of neoclassical general equilibrium theory and Austrian market process, I interpreted my remit more ambitiously, to incorporate a criticism of both formulations from the point of view of a radical subjectivist, and to make some suggestions as to what is now needed… The paper concludes by extending the discussion to incorporate the arguments of radical subjectivists such as Shackle, Littlechild*, Lachmann, and myself.

I haven’t read the essay yet, just the foreward, but it sounds like a pretty interesting essay. Obviously he is challenging the neoclassical equilibrium position in this essay but he is also giving a critique to fellow Austrians. Here is Wiseman:

The Austrian specification of the problem is more appealing, in that it recognizes many of the difficulties of the neo-classical model. But writers in this genre then generally fail to come to terms with the radical implications of their own insights, preferring rather to argue that there is nothing wrong with neo-classical economics that could not be remedied by a return to its earlier traditions. Austrians continue to be preoccupied with notions of consistency and harmony, to the comparative neglect of the powerful insights implied by the role in human decision of the ‘filter of the human mind’, radical uncertainty and spontaneous learning.

*I actually don’t know much about Stephen C. Littlechild (Wiseman does mention him a few times throughout several of his articles) but Wiseman does consider him a radical subjectivist. I plan to study Littlechild’s writing sometime in the near future.

Some Thoughts on Hayek

I was not always fond of Hayek. I remember in my Rothbardian stage, I hated Hayek. I fell for the typical Rothbardian view that Hayek was the less Austrian of the main Austrians, or he was a statist in disguise, etc etc. I remember reading Hoppe’s article, ‘Why Mises (and not Hayek)’, and agreeing with Hoppe that Hayek was a type of social democrat. Of course I highly disagree with that view now, but this is not to say that I agree with Hayek on everything. I will probably do a separate post critiquing that Rothbardian position but that will be a while from now, since I do want to finish The Constitution of Liberty and do a chapter by chapter summary.

It was not until I read Lachmann that I did find an appreciation for Hayek. I think it is safe to say that Hayekian ideas were the starting blocks to radical subjectivism (and maybe there is even a case to consider radical subjectivsts as radical Hayekians). Lachmann clearly appreciated Hayekian treatment of capital, and found Hayek to be a key inspiration in the  field of capital. In The Maintenance of Capital, Hayek concluded that capital could not be measurable due to expectations. This claim on capital was stated far before the Cambridge debates on capital, which concluded that capital was not measurable, but for different reasons than that of the subjectivist perspective. George Shackle, in the acknowledgements of  Epistemics and Economics, credits Hayek for being an early inspiration, especially on the topic of knowledge, which Shackle cites Hayek’s awesome paper Economics and Knowledge.

The wonderful thing about those two papers (The Maintenance of Capital and Economics and Knowledge) is that modern economic theory can very well still benefit from them, but mainly because modern economic theory has not really grasped the importance of knowledge, expectations, and capital in economics. Hayek still has a role in modern economic theory and I hope it is known soon. Happy Birthday Prof. Hayek

Lachmann’s Quick Comment on The Cambridge Capital Debate

Ludwig Lachmann in a paper, Reflections on Hayekian Capital Theory, provides a quick comment on the Cambridge capital debates that I think is interesting.

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.

Lachmann seems to conclude that the Cambridge controversy is a debate that is backward looking on both sides! Of course, a big reason why the British Cambridge side won was in fact by demonstrating to the Americans that ‘capital cannot be measured outside of equilibrium.’ Nevertheless, we can extend the Bohm Bawerk critique – pursuing a Ricardian question and thus failing like a Ricardian – to the Cambridge folks. There is a much greater issue at hand when it comes to capital theory, and the issue Lachmann is implying is about the issue of the view of capital as objective or subjective.

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.

There is not much to say here, Lachmann says it all pretty well, but it confirms the fact that the measurement of capital is impossible due to expectations. Lachmann demonstrates briefly that the British Cambridge side fail by setting aside subjective expectations, which is ironic in a way because the British Cambridge side emphasizes expectations far more than the mainstream. Overall, subjectivism is ignored in the Cambridge Capital debates, which is why the Radical Subjectivists can conclude that  the British Cambridge economists failed like Ricardians. The capital view in a subjectivist perspective, or to be more specific, Austrian, was already presented in Hayek’s relatively long, but important, paper,  ‘The Maintenance of Capital,‘ but it was not even considered as a possible solution to the overall capital problem. Lachmann concludes:

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.

This conclusion has a sense of harshness, or distaste, to the the Cambridge debates, and which we can imply for two reasons, 1: that the ‘solution’ or winners of the debate argued on Neo-Ricardian grounds, which is ‘backwards looking,’ at least according to Lachmann due to its appeal to objectivism, and 2: that the idea of capital being non-measurable was already on paper by the mid 1930’s and it is a more satisfying perspective because of its appeal to subjectivism, nevertheless it is thought that it was the Cambridge debate that settled this issue about capital as being non-measurable.

-Isaac Marmolejo

Radical Subjectivism Is Radical and Subjectivist!

This is a quick response to: “‘Radical Subjectivism’: Not Radical, Not Subjectivist” by John O’Neill

Meaning of ‘Radical’

I show that the core claim of radical subjectivism, as it is presented by its proponents, is neither radical nor subjectivist. It is not radical—the thesis it defends has been around for some two millennia. Attention to that history shows that it need not be subjectivist.

Right off the bat, this statement is made. From my interpretation, he is implying that ‘radical’ means that it is a brand new idea of something. It is a faulty definition of ‘radical’ but even if that definition was to hold, that is not what Radical Subjectivists mean by radical. Radical Subjectivism is radical in the sense that we extend subjectivism to not only preferences but to expectations as well. This is quite clear in Lachmann’s essay ‘An Austrian Stocktaking’ when he states:

 The first, and most prominent, feature of Austrian economics is a radical subjectivism, today no longer confined to human preferences but extended to expectations. It found its perfect expression many years ago in Hayek’s statement, “It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism.”

While other Austrians think they have done work on expectations with claims like, “Austrian economists from Menger to Rothbard were fully aware of time, uncertainty, knowledge, expectations, institutions, and market processes,” they are false, or seriously mislead (at best), at least in the eyes of the Radical Subjectivists because, as I explained to a commenter:

[I]n accepting subjective expectations, one also has to accept the fact that markets are not stable. The concept of market instability is something lacking in the Austrian literature, mainly because most Austrians fail to see that the market is an unstable process.

Unfortunately, all throughout the paper, he uses the word ‘radical’ in the sense that it is supposed to mean that it is something new. He simply interprets a story by Aristotle and concludes something along the lines of: “A ha! You see, you guys are not radical because this idea of future being indeterminate (in the sense that there is no objective value or a given state of the future) was already thought of by Aristotle and ‘has a long history in scholastic philosophy concerning foreknowledge and determinism.'” Obviously, if you are critiquing Radical Subjectivists, it is good to know what we mean by ‘radical’.

To bring this point home, let me say that this is as bad of a straw man as saying, “Mises thought that people act purposefully, that is, people act rationally, but this is false because people do not act rationally. It is irrational if you think dancing around a bonfire is going produce rain.” Obviously, yes in a scientific sense, it is irrational but Mises’ ‘rationality’ dealt with people doing means to attain some end. But this example is a bit different than the O’Neill/Radical Subjectivist problem because while it is legitimate to have a definition of rationality based on the scientific sense and the Misesian sense, O’Neill completely changes the definition of radical to mean ‘something new,’ which this is the first time, and probably only time, I will ever see ‘radical’ defined in such a way.

Subjectivity

Im not really sure here what exactly he is criticizing here. He says that our view of subjectivity “…can be stated without reference to the notion of subjectivity at all and in the traditional discussions from Aristotle through the scholastics it was thus stated.” And thus, “[t]he position need not be characterized as ‘subjectivist.'” I am not quite sure this is logically correct. Nor do I completely understand his entrepreneurial story, but since it is implied that it is the same as the Sea Battle Argument, I will talk about the Sea Battle Argument. Aristotle assumes in this argument that everything is predetermined, that is as Aristotle states, “Everything is, or happens of necessity.” And from there, one might be able to get truth value. But Radical Subjectivists do not hold onto the view that the future is predetermined, so I am not quite sure how this connects. While choices today determine future states, these choices differ. Even if we were to assume to know all choices in a given time, the future would still be unknown for the data is bound to change as time changes. What I can say is that we are subjectivists. We hold onto the view the prefernces greatly differ from person to person, that expectations differ from person to person, the way knowledge is interpreted is different, etc etc. And on top of that, we reject to give these things (interpretations of knowledge, expectations, and preferences) objective value, and reject that there can somehow be a way to aggregate these things and apply them into formula.  This is what we mean by being subjectivists, I see no connection to these themes in O’Neill’s paper.

-Isaac Marmolejo