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Tuesday, May 10, 2016

DeLong on Hayek, Smith, and Smith

Brad answers a question raised by Noah with thoughts on Friedrich and Adam.

I totally lost all self control in his comments section and waste even more pixels by cutting and pasting here.

Before reading this, I tried to tweet the same point you made. However, here I will be contrarian.

1) on the road to serfdom. Science progresses as people develop testable hypotheses, test them and reject them. Like "Leviathan", "The Road to Serfdom" presented a plausible (if pessimistic) hypothesis which turned out not to correspond to reality. I think the train wreck came later as Hayek refused to admit that his clear testable prediction was false. He was careful to make such a prediction (after talking with un-named friends including I'm sure Popper): A country is irreversibly on the road to Serfdom when it introduces capital controls (it's in the book). So the UK is bound to end up like the USSR and Nazi Germany (as was Italy when I arrived here).

Here my point (if any) is that the hypothesis in the Road to Serfdom was actually plausible when it was printed. Based on my first edition of the second volume of "The Open Society and It's Enemies" I am fairly sure that, when first printed, "The Road to Serfdom" included a note asserting that it was printed in accordance with his Majesty's regulations on the use of paper (making Hayek's observation that freedom of the press is not worth much if the state controls the supply of paper both valid and redundant).

In contrast, Hobbes didn't live long enough to see disproof of his claim. If he had lived until 1688, I'm sure he would have argued that the division of power between William&Mary and parliament would lead to the war of all against all. By 1697 or so, he would argue that the UK was enduring a silent war of all against all in which life is poorer, less sociable, more miserable and shorter than it could be under an absolute monarchy. Hobbes was saved from the sad fate of Hayek, because his life was rich, sociable, happy and short enough.

By the way, I never noticed that Hobbes and Hayek had the exact same rhetorical strategy: anything position other than exactly the one I like is on a slippery slope to hell.

I am now going to defend Smith. You note that he discussed things other than relative prices (home bias and the "individuals' non self-interested desires to feel marked out above and superior to others" in which, by the way, I think, "non self-interested" should be "self-interested" Hayek too did not confine his thought to relative prices and only relative prices. The fact that Smith noted other factors (which do in fact exist) doesn't mean he didn't understand the role of markets.

Here I am criticizing your reasoning. You can't prove that Smith didn't consider price signals by noting he considered something else. I agree with you about Hayek and emergent properties of markets, but it is very hard to prove your case, as it is always very hard to prove any idea is original (great men create their predecessors) . To prove it, you would have to show it isn't anywhere in "Wealth of Nations" or "The Theory of the Moral sentiments" or in *anything* written between 1776 and the 20th century.

Over at Twitter, Noah notes that the idea that markets have emergent properties has not influenced economic theory. He is right. The standard approach -- Nash equilibrium -- really is based on utter rejection of Hayek's insight (and I claim Smith's). Agents are assumed to think about everything and to effortlessly find the exact solutions to math problems which don't have closed form solutions. Hayek can be seen as arguing against Walras (and his mythical auctioneer) and (avant le lettre) Nash and his utter rejection of methodological individualism. Noah notes that Nash won (so far).

I suppose one might hope this victory isn't final (a theory based on Nash equilibrium and methodological individualism must be vulnerable based on it's obvious logical inconsistency just as a methodology based on Friedman's methodology and the Lucas critique has the (so far minor) inconvenience that each is exactly the statement that the other is false).

Obviously, I've totally lost control of myself, but assuming no one is reading and noting that pixels (unlike paper) are abundant, I will now add a half-assed effort to critique Hayek. I think he provided an example in which markets are useful. He concluded that markets are always good. This does not follow. You've already added "competitive", "without externalities" and "rational" but this still isn't true -- OLG models can give horrible market outcomes so can a Diamond search model. For your claim to be true "competitive" and "without externalities" must be redefined to mean "such that markets yield highly productive outcomes". The claim can be tautological or false, but the set of exceptions is so vast that the only meaningful true claim is "some examples in which market outcomes are OK in some ways have been found."

Also "highly productive" is a very weak and vague claim -- it isn't even the (uninteresting but false) claim that the assumptions you list imply Pareto efficiency (to get to Pareto efficiency you'd need to add "complete markets" and sell me one unit of the asset which pays one unit of numeraire good if the temperature in your office is between 75 and 75.000001 degress (typo not corrected because it is clearly Freudian, but I digrees)).

Frankly, I think the case for markets is found in the wreckage of the "The Road to Serfdom" train wreck (I agree the train went off the rails, I just think it was still on them in 1945). The case that market outcomes are OK consists of extremely strong assumptions implying extremely weak conclusion. The case that markets are the worst possible way to organize economies except for all the others which have ever been invented isn't so weak.


WaltFrench said...

In my scant reading of Smith, it seemed that he was advocating an enlightened self-interest, recognizing that the masses would happily destroy the mansions in a famine, so best to pay some attention to a wider good.

In the little talk we have today about the social value of cutting inequality, a shadow of that logic is to be found. It certainly seems that much of the rejection of markets in CO2 or similar asserting rent on common property, that the absence of being able to profit from a greater good seems important.

AXEC / E.K-H said...

Hayek or how economists miss their subject matter since more than 200 years
Comment on Robert Waldmann on ‘DeLong on Hayek, Smith, and Smith’

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are:
(i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics since Adam Smith can be summarized as perpetual violation of scientific standards.

Theoretical economics has been hijacked by the agenda pushers of political economics. Smith and Ricardo fought for liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

It is a widespread misunderstanding to think that people who talk about the economy are economists and understand how the economy works. Hayek’s ‘Road to Serfdom’ is a political pamphlet and it is not backed by the true economic theory simply because Hayekian economics is scientifically worthless storytelling until this day.

Hayek, of course, had the right to write political pamphlets, to defend capitalism, to support Thatcher, and to found a political club like Mont Pelerin. One thing, though, should be perfectly clear: the moment an economist starts with politics he leaves economics, understood as a science, for good.

The task of economics is to figure out how the economy works. The real antagonism in economics is not between liberalism/socialism/communism/fascism/etc, the fundamental antagonism is between political economics and theoretical economics, that is, between storytelling and science.

Political economists have not produced much, if anything, of scientific value. What we have is Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are PROVABLY false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism.* Let this sink in: the profit theory is false since Adam Smith.** Instead of having clarified their foundational concepts profit and income economists have made fools of themselves with inept policy blather.

Political economists of all stripes are characterized by four common traits: (a) They are mainly occupied with sociology, psychology, anthropology, political science, history, etcetera. That is, they miss the essentials of economics proper. (b) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly. (c) As far as they have tried to underpin their respective agendas theoretically it can be rigorously demonstrated in each case that their approaches lack formal and material consistency. (d) They have no idea about how the economy works.

Hayek is nothing more and nothing less than a characteristic specimen in the series of failed economists from Adam Smith to Robert Waldmann.

Egmont Kakarot-Handtke

* See post ‘The market economy is inherently unstable and economists never grasped it’
** See post ‘How the intelligent non-economist can refute every economist hands down’

Longtooth said...

AXEC, I think in once sense you are correct, but I also think that before a theoretical economist can understand how an economy works, they must first know what the object (purpose) of an economy is.

It is that problem which has plagued economists and the study of economics. The failing is that before one can begin to understand the theoretical when it is created by humans (rather than physical constants) one has to find consensus on the purpose of an economy.

There is no consensus by economists of any stripe on any one given economy (to the degree that it can be separated from any other --- which is a problem in and of itself).

An economy is a human artifact if it isn't a pure dog-eat-dog variety. Humans have or acquire varying degrees of power over things and other humans. Therefore there are a variety of objectives depending on which humans are in power and can control things. Hence there is no means of finding the theoretical of how an economy works before you describe it's objectives.

AXEC / E.K-H said...


There are two things that hit the eye and are commonsensically true: the sun goes up and the economy is a human artifact. The point is that common sense has always been a bad guide in science. It can even be said that the very characteristic of science is to put common sense on its head.

“I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo)

It is trivially true that human behavior/action keeps the economy going, nevertheless this is the wrong starting point for economic analysis. The right methodological starting point is to look at the economy as a system. So, the crucial insight is that economics is NOT a social science but a system science. Economists cannot get their heads around this and this is why economics is a failed science.

There is no such thing as laws of human behavior but there are systemic laws that are as good as any physical law — first of all the Profit Law. Economists certainly should know it, because without the Profit Law you cannot understand how the actual economy works. And then, of course, all you are left with is the plurality of false theories, the inconclusive wish-wash and the brain-dead political blather of incompetent scientists.

For more details about the bane of economics see:

How to get out of the econ101 PsySoc woods

Economics is NOT a science of behavior

From PsySoc to SysHum

The happy end of the social science delusion

Egmont Kakarot-Handtke

Don Coffin said...

My conclusion, which I reached in about 1975, was that markets work pretty well most of the time, and that we need to be aware constantly of the times in which markets aren't working pretty well. Haven't seem any reason in the intervening 40 years to change my mind--either to believe that markets work perfectly all the time or to believe that markets almost never work or mostly work badly almost all the time...

AXEC / E.K-H said...

Don Coffin

To see the classical idiocy of your argument you need simply transpose it as follows: ‘My conclusion, which I reached in about 1975, was that the flat-earth model works pretty well. Most of the time, nay every time, the sun has gone up. Haven’t seem any reason in the intervening 40 years to change my mind.’

Before others feel the urge to make fools of themselves, all commonsensers are invited to take notice of what J. S. Mill has said to the low-IQ folks of his time. The key point is not so hard to understand and is still applicable: get out of economics. For further references see:

Economics, too, has been almost ruined by the bigots of common sense

Low-IQ economics: the beginner’s guide

Misled by ordinary intuition and common sense

Appearances and evidence

Science is about logical and empirical proof and not about belief or opinion or wishful thinking or agenda pushing. For the proof of the inherent instability of the market system see

Egmont Kakarot-Handtke

Nathanael said...

Nash equilibrium was designed as an analytical tool for playing chess, checkers, go, and similar games. It's a perversion to use it for economics.