HOW DUMB ARE TYLER COWEN AND PAUL KRUGMAN?
[Welcome
Marginal Revolution readers. Roger Garrison explains Capital Based Macroeconomics in a series of articles and interviews found
here. The first two chapters of Garrison's book
Time and Money -- and a power point presentation of Hayek vs Keynes -- can be found
here. On capital theory and capital based macroeconomics, see also Hayek's essays contained in his book
Prices and Production and Other Essays (pdf), his essays
"The Mythology of Capital" (pdf), and
"Investment The Raises the Demand for Capital" (pdf), and his book
The Pure Theory of Capital (pdf). This latter book contains many of Hayek's arguments for the scientific validity of a relative price / heterogeneous agent & heterogeneous production goods explanatory strategy -- and the deep explanatory poverty of Keynes' aggregative "mechanics" explanatory strategy, which has come to dominate modern macro in its various forms. Hayek's classic essays
"Economics and Knowledge" and
"The Use of Knowledge in Society" are really variations on the arguments behind Hayek's attack on the pseudo science and explanatory poverty of Keynes, but not 1 economist in 100,000 is aware of this background to those essays. For those who'd like to get a better understanding of scientific explanation, I'd also recommend Hayek's essays "Degrees of Explanation and "The Theory of Comples Phenomena". ]
When it comes to Hayekian econ and macroeconomics, the answer is
very, very dumb. This is an excellent article, and I recommend you read the whole thing.
The fallacies of Cowen and Krugman are of the most basic sort -- errors only made possible by men captured by a deeply false conception of "science", and hence a pseudo-scientific capital-free, causally
impossible, aggregate "modeling" approach to the macroeconomy, rather than a causally real relative price /
heterogeneous capital ordering process approach,
just as Hayek explained in his Nobel Prize lecture. (Oh, and there is also that problem that Krugman has never studied any Hayek -- although he attacks his work anyway. And Cowen seems not to be such a great student of Hayek's work either. Cowen approach is to attack very crude versions of the work of other economists, and then pretends he is offering criticisms of Hayek's work.)
Here's the conclusion of Robert Murphy's essay:
.. this aspect of the story answers Cowen's objection:
people consume more during the boom -- i.e., the villagers eat more
sushi per day -- even while new, unsustainable investment projects are
started. .. Cowen is right that a sustainable
lengthening of the capital structure initially requires a reduction in
consumption; what happens is investors abstain and plow their savings
into the new projects. But during a central-bank-induced boom, there
hasn't been real savings to fund the new investments. That's why the
boom is unsustainable, but it also explains why consumption increases
at the same time. It's true that this is impossible in the long run,
but in the short run it is possible to increase investment in
new projects, and to increase consumption at the same time. What you do
is neglect maintenance on critical intermediate goods, just as our
islanders were able to pull off the feat for a few months. A modern
economy is very complex, and it can take a few years for an
unsustainable structure to become recognized as such.
Finally, our sushi economy showed why unemployment increases during
the retrenchment. People don't like to work; they would rather lounge
around. In order for it be worthwhile to give up leisure, the payoffs
from labor have to be high enough. During the "recession" period, when
the islanders had to cut way back on output from the fish, rice, and
sushi-roll "sectors," there weren't 100 different tasks worth doing. In
our story, we stipulated that only 90 people could be usefully
integrated into the production structure, at least until the fleet of
boats and supply of nets start getting restored, allowing more of the
"unemployed" islanders to once again have something useful to do.
In the real world, this also happens: during the recession following
the artificial boom period, resources need to get rearranged; certain
projects need to be abandoned (like hunting for gasoline in the sushi
economy); and critical intermediate goods (like boats and nets) need to
be replenished since they were ignored during the boom. It takes time
for all of the million-and-one different types of materials, tools, and
equipment to be furnished in order to resume normal growth. During that
transition, the contribution of the labor of some people is so low that
it's not worth it to hire them (especially with minimum-wage laws and
other regulations).
The elementary flaw in Krugman's [bogus] objection [to Hayek] is that he is ignoring
the time structure of production. When workers get laid off in the
industries that produce investment goods, they can't simply switch over
to cranking out TVs and steak dinners. This is because the production
of TVs and steak dinners relies on capital goods that must
have already been produced. In our sushi economy, the unemployed
islanders couldn't jump into sushi rolling, because there weren't yet
enough fish being produced. And they couldn't jump into fish
production, because there weren't enough boats and nets to make their
efforts worthwhile. And finally, they couldn't jump into boat and net
production, because there were already enough islanders working in that
area to restore the fleet and collection of nets back to their long-run
sustainable level.
BONUS: Arnold Kling vs. Tyler Cowen on bailing out the banks. No, I'm not a big fan of Tyler Cowen as a [macro] economist. But word on the street is that Cowen really knows his obscure foreign dishes. Not a real priority for me at the moment (I keep typing "Tyler Clown"). Here's Kling:
[the current bailout effort] it is an attempt, as in Japan in the 1990's, to prop up a failed
industrial policy. In the U.S., the locus of industrial policy has been
the housing and mortgage industries. In Japan, it was the manufacturing
export sector and an inefficient domestic retail sector. In both Japan
and the U.S., the financial sector was used as a government tool to
sustain the industrial policy. In both countries, the refusal to back
out of the failed industrial policy is a recipe for stagnation.
BONUS II: Past Nobel Prize winners vs. Paul Krugman on Hayek's importance to the development of contemporary economics. It turns out that Hayek is the most cited economist, after Ken Arrow, referenced by Nobel Prize winners giving their Nobel Prize lectures on economics. And if you read the actual lectures, you will find that Hayek is cited at a more fundamental level than Arrow.
UPDATE: My account of how Friedrich Hayek provides the elements for a solution to the otherwise still unsolved problem of making sense of economics as a non-problematic science offering both deep understanding and a powerful causal explanation for patterns of problem raising patters of order observed in our experience (part of a paper written for a conference session organized by Bruce Caldwell):
PART 2: The empirical problem and explanatory strategy of economics.
In Friedrich Hayek's famous 1937 paper "Economics and Knowledge", again in
the first two chapters of his classic The Pure Theory of Capital,
and throughout the rest of his career Hayek identified the valuation
constructions of marginalist economics -- including the intertemporal
construction that he had introduced to economics in 1928 -- as pure and
tautological logic, incapable of providing causal explanations of resource
use coordination and industrial fluctuations in an extended society. Yet
Hayek never doubted the importance of the intertemporal valuation construction
for economics, or its role in fulfilling the explanatory promise of the
discipline. How are we to understand Hayek's position on these matters --
just what use did Hayek find for the intertemporal valuation construction,
and what role does this play in his solution to the problem of the logical
character and explanatory strategy of economics?..
[Let me quickly show how Darwinian biology works as a causal explanatory enterprise despite violating the classic picture of "science" derived from
crude textbook physics and the philosophical tradition, and then I'll
show how economics fits a model of science that encompasses Darwinian biology]. In biology the environmentally apt functional features, divisions
of labor, and teleological doings of organisms such as we observe in the
pumping of the heart, the coordinated operation of the digestive system,
and the fleeing of rabbits raises the central explanatory problem for any
evolutionary account of the origin of species. As Darwin puts it, ".. such
a conclusion [the origin of species by descent], even if well founded, would
be unsatisfactory, until it could be shown how the innumerable species inhabiting
this world would have been modified, so as to acquire that perfection of
structure and coadaptation which most justly excites our admiration." The
hypothesis of the origin of species by descent is an alternative to the
hypothesis that species are a product of acts of Providential Creation. If
the conjecture of the origin of species by descent is accepted as a fact,
then within this alternative observational frame of reference the manifest
functional features and teleological doings of organisms suddenly become
an explanatory problem. The features and activities of organisms present
us with patterns and results which look as if they were created or generated
by the design and intent of a hand from above operated by the creative
intelligence of a super-mind something like our own. But if the populations
which exhibit observably apt characteristics are mutable products of history
linked together somewhere in the past, and not the product of singular acts
of Providential Creation, then the functional and teleological features of
the organisms in these populations can no longer themselves be accounted
for by this now abandoned process of Providential Creation.
To account for this directly observed teleological phenomena, which now raises
a pressing question in the new context of the conjecture of modification
by descent, Darwin provides a new bottom-up causal process as a rival to
the top-down Providential Creation explanation. This bottom-up process shows
how the manifestly observable apt structure and behavior of biological features
could be generated to look as if they where invented or constructed by the
design of a 'blind goods-maker' or the intent of an 'invisible hand'.
Significantly, the bottom-up explanatory elements provided in Darwin's bottom-up
causal account are open-ended in the sense that they involve an open-ended
disjunction of causes, the physical constitution of which is undisclosable
in advance of the unique unfolding of evolutionary history. The reward of
reproductive opportunity can be given not only to structurally identical
biological expressions, but also to very nearly similar structural constitutions.
Ultimately the only common property which a structure must have to be identified
as belonging to a functional or teleological category is the shared effect
these structures have in producing the replication and persistence of entities
sharing the same historical origins and which constitute parts of an evolving
historical species, without it ever being possible to make any principled
distinction between chance event and selective event in any particular instance.
What we have at bottom in this situation is the primacy of our direct perception
of the teleological characters of organisms. The physical constitution of
particular exemplifications of the adaptive functional features and teleological
doings Darwinian theory is designed to explain cannot be provided in advance
of the historical unfolding of an historically unique population, which is
to say that our direct teleological and functional observation of the features
requiring explanation in evolutionary biology cannot be given a replacement
in the time and place independent categories of physics and chemistry.
There are four things to note here.
(1) The contingent character of Darwinian explanation is assured by the existence
of rival causal explanations.
(2) Darwinian explanation begins with a problem raising pattern in our
experience, a problem which arises when we try to make sense of design-resembling
phenomena without any top-down ordering hand or intelligence.
(3) The empirical character of Darwinian biology is founded in the first
instance upon our direct observation of aptly corresponding features, such
as functional appropriateness, division of labor, and teleological direction.
(4) In Darwinian biology the phenomena that fall within what we recognize
as a question raising pattern to be explained are open-ended and irreducible
to the categories of things whose characteristics would count as theoretical
kinds in the physical sciences outside of the contingent unfolding of the
unique course of history. That is, the directly observed functional features
and teleological doings that ask to be explained in Darwinian biology are
categorically autonomous of the kinds that provide explanations in physics.
Conversely, the class of explanatory causal elements responsible for the
products of evolution is itself open-ended and cannot be physically characterized
according to the theoretical kinds physics and chemistry in advance of the
unfolding of evolutionary history.
Many attempts before and after Darwin have made to fit the problems of the
functional aptness of organisms to their environment and the origin of species
within the ancient tradition which demands that our knowledge fit a particular
conception of how logic and language gets their significance. The hope of
grammarians and other students of language in the 13th century was to develop
a linguistics as an `Aristotelian science', a domain of secure knowledge
providing us with a body of essences and necessities. This picture of `science'
has continued to influence the perception of those investigating the explanation
of the functional aptness of organisms and the orgin of species. Individuals
under the sway of this ancient picture look for the necessary laws, essential
kinds, and cognitive certifiers or confirming crucial tests in adaptive and
evolutionary biology. Not finding these, they declare Darwinian biology `not
a science', but a `metaphysical research program'. Karl Popper, for example,
has interpreted species as having fixed properties, with some necessary direction
of development. And finding no such universal necessities, and no crusial
tests, Popper at one time concluded that Darwinian biology cannot be a contingent
empirical science. After Hayek, Michael Ruse, and others pointed out the
false conceptions presupposed by Popper in his account, Popper later changes
his judgment about the scientific status of Darwinian biology, but still
without managing to fit it very coherently within Popper's wider picture
of knowledge, science, language, and explanation.
Let me now give you the picture of economics that I have extracted from Hayek's
work on the problems of the logical status and explanatory strategy of economics,
placed in the frame of what I have learned from Larry Wright and others.
The picture looks something like this.
The repeated pattern in which prices approach costs of production and the
intricately coupled network of aptly divided labor and knowledge within an
extended society raises a question about the phenomena of the market similar
to Charles Darwin's problem of order without design. The problem is raised,
as it is in Darwin, when we locate an order in observed events displaying
systematic characteristics we identify with intentional design or deliberate
production, yet lacking any top-down ordering hand behind that systematicity.
One of the roles of the economist's equilibrium construction, in which costs
and prices or values are made to exactly equal each other, is to help us
to observe the design-like order in the economy, by pointing to the deep
order within change within the extended domain of resource use coordination
implied by the repeated pattern in which prices approach costs of production.
The observation of a systematic design-like order within the larger extended
economy becomes problematic when we realize that the individual understandings
which go into this wider social coordination are limited, imperfect, and
divided, making our cognitive relation to this order very different from
our relation to the posited facts which go into a resource using intentional
plan given to the understanding of a single mind. Within the logic of an
unflawed resource using plan worked out by a single intelligence, the elements
which go into the plan are part of a single understanding, given as a
commensurable totality within the scope of the plan. As parts of a
well-considered logic, they are perfect and unlimited `given's within the
domain of the plan, without room for the sort of incommensurable differences
in thought which distinguish different minds, or the open-ended changes in
our knowledge which takes place when we begin to see the world in a new way.
If the individual understandings that go into making the social order of
resource use coordination are necessarily limited, imperfect, divided, and
always changing in an open-ended fashion in the way that individual human
understandings are limited, divided, imperfect and always changing, then
the pattern observed in the market cannot be the product of a (single) human
mind and producer. A problem then arises: if we observe a plan-like systematicity
in the extended social order of resource use coordination which no individual
planner and producer could create, then how does this extended systematic
social order arise? And if this systematic order in the social coordination
of resource uses shares only some but not all of the logical characteristics
of a plan given to the understanding of a single individual, then which of
these does it share, and what are its structural features? And if the social
order of resource use coordination is not the result of the coherent deliberative
plan of a single human being, then what is the cause and underlying process
behind this order?
The equilibrium construction, in its dated-goods-through-time relational
valuation form, functions to expose the elements which allow us to answer
these questions. In the first instance by shear exclusion the intertemporal
equilibrium (IE) construction exposes the most plausible causal element which
might explain the observed pattern of plan-like order in the extended economy
of coordinated resource uses. It does so isolating the universally recognized
causes of changes in human understanding that necessarily stands outside
the `givens' of any logical construction. In this capacity the IE construction
serves as a kind of isolating foil or background exposing template, allowing
us to see the world of causes -- changes in understanding -- outside the
perfect logic of a resource using plan.
The following are examples of this point in Hayek:
"In distilling from our reasoning about the facts of economic life those
parts which are truly a priori, we not only isolate one element of our reasoning
as a sort of Pure Logic of Choice, but we also isolate, and emphasize the
importance of, another element which has been too much neglected."
".. [economics must] complete the isolation of this branch of logic and restore
to its rightful place the investigation of causal processes . . ".
" .. it is these apparently subsidiary hypotheses or assumptions that people
do learn from experience, and about how they acquire knowledge, which constitute
the empirical content of our propositions about what happens in the real
world."
"This kind of causal explanation of the process in time is of course the
ultimate goal of all economic analysis, and equilibrium analysis is significant
only is so far as it is preparatory to this main task."
"I am far from denying that in our system of equilibrium analysis has a useful
function to perform. But when it comes to the point where it misleads some
of our leading thinkers into believing that the situation which it describes
has direct relevance to the solution of practical problems, it is time that
we remember that it does not deal with the social process at all and that
it is no more than a useful preliminary to the study of the main problem
[the problem of local knowledge and its coordination]." (1945, p. 530)
" . . though the discussion of moral and social problems based on the assumption
of perfect knowledge may occasionally be useful as a preliminary exercise
in logic, they are of little use in an attempt to explain the real world."
"A 'logic of choice' can say something only about the consequences to be
drawn from a set of statements known to some one mind, and in this sense
it can account for the behavior of one individual. But . . the step from
the logic of choice to an empirical science which tells us anything about
what can happen in the real world requires additional knowledge abut the
process by which information is transmitted or communicated."
By isolating learning or changes in understanding as a causal element outside
of the givens of a logical plan, the IE construction isolates a contingent
cause with other possible rivals. The order in the market might be explained
by these possible alternative rivals:
The order in the market might be explained by several alternative rivals:
1. Postulate a top-down omnipotent super-mind production master in the image
of the individual human planner.
2. Conjecture that learning or changes in understanding in the context of
changing relative money prices and stable negative rules of just conduct
(such as honesty and property rights) is responsible for the undesigned order
of resource use coordination in an extended society, suggested by the repeated
pattern in which prices approach costs of production and the extended division
of labor.
3. Postulate that we are ant-like creatures or crude robot-like machines
who produce a plan-like social order as the result of simple and physically
predictable regularities in our behavior.
4. Take for granted unimaginable luck in the completely random `casino' economy
(Keynes), or postulate unimaginable luck in the relational valuation structure
through time of production (Kaldor).
A second function of the intertemporal equilibrium construction is to identify
elements contained in any display of the pattern of resource use coordination
over time. One example of this would be the relational contextual dependence
between time preference, length to maturity, and output in the valuational
relationships between goods in any paper of resource use coordination displaying
some degree of concatenation between production and consumption plans. In
plainer language, it shows that any social order displaying economic coordination
will have within it the systematic relationships between plans, goods, and
production processes that economists (in one use of this rather ambiguous
word) have labeled `interest'.
Hayek expresses this function of the IE construction when he remarks, "In
so far as we analyze individual thought in the social sciences the purpose
is not to explain that thought but merely to distinguish the possible types
of elements with which we shall have to reckon in the construction of different
patterns of social relationships."
Neither of these two elements isolated by the intertemporal equilibrium
construction can be reduced to the categories of physics, nor to physical
prediction, nor physical symmetries, nor physical conservation principles,
nor any of the mathematical functions of physics. The causal element of learning
or changes in understanding cannot be reduced to physical predictions or
categories, nor can it be reduced to a logic or formal construction. Conversely,
unlike the time-invariant significance of the functions, symmetries, conservation
principles, and categories of the physical sciences, the valuational relations
within a coordination through time of resource uses are only of relational
significance within a time and place marked historical unfolding. Furthermore,
the conceptual categories and logical relations which characterize the structure
of a coordination of resource uses through time cannot be reduced to physical
categories, or functions, or causal explanations. As in the domain of geometry,
the time-invariant structures of thought in which we all conceive things
and relate one thing to another are in a domain distinct from the non-formal
world in which we provide contingent causal explanations within contending
theoretical frameworks.
An understanding of the open-endedness of learning or changes in understanding,
and the predictive and conceptual autonomy of learning and changes in
understanding from the explanations and predictions of physics given in
contemporary physical categories and structural laws is one of the achievements
of twentieth century students of brain, science, and knowledge. As Hayek
long ago pointed out, physical science cannot predict or give laws specifying
its own advance. The advance of science is conceptually open-ended, and a
many-many problem exists blocking any sort of one-to-one reduction of the
everyday shared distinctions we depend upon in our observations of environmental
conditions to the risky conjectured explanatory categories used in the physical
sciences.
The significance of this many-many problem for the theory of knowledge and
mind was first worked out by Hayek in his important The Sensory Order,
but the importance of this problem is perhaps most economically expressed
in Thomas Kuhn, ".. people do not see stimuli; our knowledge of them is highly
theoretical and abstract .. much neural processing takes place between the
receipt of a stimulus and the awareness of a sensation. Among the few things
that we know about it with assurance are: that very different stimuli can
produce the same sensations; that the same sensation is in part conditioned
by education. Individuals raised in different societies behave on some occasions
as though they saw different things. If we were not tempted to identify stimuli
one-to-one with sensations, we might recognize that they actually do so."
"None of this would be worth saying if Descartes had been right in positing
a one-to-one correspondence between stimuli and sensations. But we know that
nothing of the sort exists. The perception of a given color can be evoked
by an infinite number of differently combined wavelengths. Conversely, a
given stimulus can evoke a variety of sensations, the image of a duck in
one recipient, the image of a rabbit in another. Nor are responses like these
entirely innate. One can learn to discriminate colors or patterns which were
indistinguishable prior to training."
There are four things to note here:
(1) The contingent character of the explanatory strategy Hayek provides for
economics is assured by the existence of rival causal explanations.
(2) Hayek's explanatory strategy in economics begins with a problem raising
pattern observed in our experience, a problem which arises when we try to
make sense of design-resembling phenomena without any top-down ordering hand
or intelligence.
(3) The empirical character of Hayek's explanatory strategy is founded in
the first instance upon our direct observation of aptly corresponding features,
such as functional appropriateness, division of labor, and teleological
direction.
(4) In Hayek's explanatory picture the phenomena which fall within what we
recognize as a question raising pattern to be explained are open-ended and
irreducible to the categories of things whose characteristics would count
as theoretical kinds in the physical sciences outside of the contingent unfolding
of the unique course of history. That is, the directly observed patterned
resource using coordinations that ask to be explained in Hayek's explanatory
picture are categorically autonomous of the kinds that provide explanations
in physics. Conversely, the class of explanatory causal elements responsible
for the production of resource use coordination in an extended society is
itself open-ended and cannot be physically characterized according to the
theoretical kinds physics and chemistry in advance of the unfolding of human
history.
