Wednesday, August 30, 2006



This is a good article by DW MacKenzie for the Mises Daily Article series.

It was my concern in my policy analysis class and in the general application of economic planning.

I think the author of this article is intentionally over stating his argument. You can tell by the vauge he uses that gives him plausable deniability if anyone questions his conclusions.

Basically, all the author says is that "some" economists insit on comparing a dynamic economy to a static ideal equilibrium. Okay. Which economists are you talking about? Any examples?

Could it be that damn liberal interventionist Paul Krugman? Well. No. He actually wrote a short book on applying dynamic models to economic phenomena called "The Self-Organizing Economy".

Could it be Joe Stiglitz, who also reguarly argues for market intervention? Well. No. He founded a edits a journal on the dynamic nature of capitalism with that other damn statist Jeff Sachs!

I mean seriously. If these guys are not "main stream", I don't know who this Mises-Institute guy is talking about.

Now, one could argue that certain aspects of the dynamic economy have been ignored in the literature, which is apparently exactly what the editorial board of Capitalism and Society say.

However, to pretend that "mainstream" economists ignore the issue all together is just plain dishonest.

Besides, am i the only one that remembers our professors going over in class how an economy may never actually reach equilibrium? And that our models were only stories to better understand the world around us?

WARNING: The previous has only been the rantings and impressions of a econ undergrad. Feel free to correct/slam/pwnt them in any way.
To me it is the danger of a little bit of economics in the hands of a few.

Personally, I am not sure who he was actually focusing the article on, but I have had plently of dealings with individuals that prefer to use the perfect competition model or even general equilibrium in their analysis.

In my policy analysis class, the individuals with very little economics come to the conclusion (with assistance of teacher assitants and the professor) that anything that is not consistant with the perfect competition model is therefore a market failure (and requires intervention). To me, there is no such thing as perfect information and the perfect competition model.

But these individuals take this little bit of economic information and go out and become the policy makers, the movers and shakers, politicians, and decisionmakers.

That's who I thought of when I read the article.
I'll ask him.
Are you going to answer him, Student?

I'll tell you the truth. I am getting really confused by this D.W. guy and maybe by Austrian Economics in general.

If there isn't an "equilibrium" (some point to which the market tends toward) how can we understand anything about it?

If I say that the labor market will tend toward equalizing the demand for labor and the supply of labor will Austrians scream "NUH UH! That's an equilibrium and they don't exist!"

What if I use a supply and demand graph to illustrate how a minimum wage law pushes the market away from that "equilibrium point"? Will Austrians shout me down saying "Nuh uh! That's a static model and those are not valid!!!!"

I mean what the hell is going on? You took a class in Austrian econ. Explain it to me.
That last guy might actually have a point on the asymetric information issue.

Isn't there always asymmetric information, when there is a transaction to be had?

I don't see the connection. How is asymmetric information a "static" concept? Is he saying that information asymetries will always disolve over time? I don't see why that should be the case.

I will wait until DW responds to raise the question, thouh. I don't want to get the thread off track.

In retrospect, I should have stayed off the Stiglitz topic too. It wasn't all that important to my question and I think the conversation will veer to interpruting one Stiglitz paper after another.

And as just a mere undergrad, I am probably not the best equiped person to get into that conversation. Especially not with an economics professor at SUNY. :P

Oh well, hopefully I wont get pwnt too bad.
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Austrian economists differ in their ideas about equilibrium. Israel Kirzner, for example, held a world of perfect information up as equilibrium. He asserted that we will tend toward it without ever reaching it, kind of like chasing a moving target. Another very Austrian thinker named Ludwig Lachmann asserted that there is no reason to think we're even tending toward equilibrium, i.e., that information does not necessarily improve over time.

I'm going from memory, so someone with the spare time to re-read all that stuff may correct me. I think that's the idea, anyway.

And yes, while Austrian economists don't tend to draw supply and demand graphs, they can refute the minimum wage with their own tools.

Hazlitts prose seems to tell the exact same story that a supply and demand graph would if we described it in words. So can we really say they are different at all? Sounds more like two different ways to express the same idea.

But it seems like there is plenty of Austrian econ I still need to brush up on. Do you have a reading list or syllabus from your Austrian Econ Independent study I can look at?

PS* Finally catchin the South Park episode on global warming. hilarious!

We read through this book and supplemented it with a few chapters in Hayek's "Individualism and Economic Order" and Kirzner's "Competition and Entrepreneurship."

Here is an example that might be closer to Austrian hearts. It concerns the Stiglitz paper I was thinking about last night and how he uses different methods to reach conclusions that are similar to those derived by Austrian economists.

In this paper, Stiglitz argues that market imperfectly convey information from informed individuals to uninformed individuals through prices. Is this a bad thing? No! In fact, he says that we are lucky that the mechanism is imperfect, because if it were not, then competitive marets would break down.

Why? Becuase if all information was conveyed through prices, then there would be no return to individuals for the information they collect.

Using the example of the stock market, the informed recieve returns on their information by taking better stock positions than the uninformed. If an informed trader can do as well as a trader who is uninformed, why should he spend his money on gathering information? Of course everone feels this way and we wind up in a position where no information gathering takes place.

This reasoning leads Stiglitz to explicitly arrive at Hayek's conclusion that the informational role of markets is only important when the costs of gathering information is costly.

In other words, Stiglitz uses a different approach to arrive at a deeper understanding of one of Hayek's main ideas. So how the two men's ideas different? Are they different in fundamental ways? Not that I can see.

And can we say Stiglitz reasoning is static? Sure, he uses static models to make his point, but what bout the logic that give his equations an economic context?

What he is describing in the article doesn't sound very different from Hayek's idea of how markets facilitate a discovery process (an essentially dynamic idea).

So I still can't help but wonder whether the differences between Austrians and Mainstream economics are overblown.

Thanks for the recomendations! :)
I'll besure to check 'em out.

Well the main difference seems to be in policy analysis. What does he say specifically that the government can or should do to bring more "efficient" market outcomes?

What is his argument in this regard?

Well, let's not get too far away from the original intent of the post. D.W. said that "some" economists hold up the real-world economy to a standard of competitive equilibrium.

The article I posted clearly puts Stiglitz out of the running as one of those economists since he believes a perfectly competitve equilbrium cannot exist where information is costly.

So we are right back to wondering who D.W. was talking about in his article. I made this point on the Mises blog a little while ago.

But in responce to your question, Stiglitz elaborates on the conditions of when and how the government should intervene in this article:

He apparently has a whole book on the subject (a collection of previously published articles), though I can't say I've ever read it.
Well, I'm still not satisfied with the answers D.W. gave, but it's understandable. He's a professor and he needs to work on publishing papers and not arguing with me on the interweb.

But I still think his characterization is unfair. I'm sure there were a lot of economists 50 or 60 t comitted the mistake DW is talking about. That was way back before Coase and transaction cost economics. It was also before Buchanan and the public choice revolution. Which is exactly why I have a hard time believeing that's the case today. I mean, neither of these guys won nobel prizes because their work was ignored.

Stiglitz doesn't fit the bill of D.W.'s "mainstream" economist and I don't think Mankiw does either.

On the other hand, I'm hardly the most well read kid on the block, so I can only say that I'm not convinced so far, but I'm free for disccusion.
Actually, I'm not so sure that the final iteration of the day in "Groundhog Day" is a good example of "a perfectly competitive equilibrium based on perfect information." I think Mackenzie makes this argument, then makes its counter, within the same article.
In perfect competition, all actors have perfect information—there is no single omniscient character. Clearly, only Bill Murray is 'informed' here.
Thus in perfect competition there is no competition or correction process for anyone, or if you wish, everyone is doing this simultaneously and instantaneously. Everyone's choices, reactions, etc. must be collapsed into the final moment--all based on knowing how they and everyone else can realize the best possible gain. Most important, no correction is needed because it's timeless, competitionless, and meaningless in terms of real choices and costs.
Real markets, as Hayek and the Austrians clearly state, are forced to overcome ignorance, a piecemeal process at best. If "Groundhog Day" has some relevance, I would think it's rather in the recognition that it is so difficult for even one actor to overcome ignorance, even if they have knowledge of a large part of the outcome of theirs and others' actions. I'm not aware that people who live the day over "as if it were the first time" offer any meaningful comparison to a situation in which every person lives the day over after adjusting to and in full knowledge of what has happened before, and of what their own optimal situation would be given the possible (unpredictable) changes in the actions and choices of others.
That incompletely said, Mackenzie has correctly identified the problem with his original Groundhog premise--all of the parameters are not set back to their original positions in the real world. Thus Groundhog Day is not only not a real world example, I don't think it's a perfectly competitive model—even for the final moment—example either.
Mackenzie's article has many good points. Mises and Hayek labored to differentiate the process approach from the ends approach to an understanding of market processes. This of course means ranking goals, then weeding out misstepsalong the way. The significance of this is underlined in the piece, but then abandoned for other points.
Does this article present a basic understanding of the differences between statics and process? I wish it did. I think it misses the point by being somewhat overly ambitious, becoming tangential to the proposed central point. As a result, many important topics are glancingly addressed instead.

Excellent point concerning the author's Groundhog Day analogy.

I also like what you said about Hayek's efforts to emphasize process over ends.

Here is a nice article he wrote on the subject of competition as a discovery process click here.

I've seen essentially the same argument pop up in popular books like "The Wisdom of Crowds" and "Emergence". But, oddly enough, not attributed to Hayek.
Hi Karen. Glad you could make it on the blog. I enjoyed reading your comments and I'm looking forward to more.
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