Archive for the ‘Hayek’ Category

Joseph Stiglitz Embraces Hayekian Macro

Posted by PrestoPundit on 11/09/2007

Economist Joseph Stiglitz seems to have abandoned his not-of-this-world Keynesian math for a kindergarten version of Hayek’s investment disequilibrium account of macro phenomena:

given that overinvestment in the 1990s was part of the problem underpinning the recession, lower interest rates did not stimulate much investment.

The economy grew, but mainly because American families were persuaded to take on more debt, refinancing their mortgages and spending some of the proceeds. And, as long as housing prices rose as a result of lower interest rates, Americans could ignore their growing indebtedness.

For a grown up version of the “over investment theory” check out the work of Auburn economist Roger Garrison.

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Another Nobel For The Hayek Tradition In Political Economy

Posted by PrestoPundit on 10/16/2007

That is what Bob Subrick is calling the award of the Nobel prize to Leonid Hurwicz, Eric Maskin, and Roger Myerson:

Their research has improved our understanding of the role of institutions- market and non-market- in addressing issues that arise in the presence of informational asymmetries. What could be more Hayekian? Hurwicz’s is clearly responding to the issues raised by Hayek’s 1945 paper, “The Use of Knowledge in Society” (see his 1969 American Economic Review Paper “On the Concept and Possibility of Informational Decentralization”). His later work is well within the James Buchanan-Hayek study of political institutions in asking the age old question- but who will guard the guardians. Myerson has continued in this tradition (see here). He has also examined the effects of bicameralism on political decision-making, an idea clearly addressed in Hayek’s Law, Liberty, and Legislation. He has also analyzed the effects of democratic institutions more broadly (see here). Maskin’s contributions include his analysis of the soft budget constraint, problems with majority rule, the sometimes perverse incentives that elections introduce, and has raised issues regarding the nebulous role of property rights in the property rights literature (is it really all about contracts?). Overall, it looks like the Hayek research program is alive and well and continues to provide insight into the social order.

MORE: Alex Tabarrok explains what sort of contribution the Nobelists have made. Quotable:

I see mechanism design as a tool to make markets more powerful. In some situations, for example, mechanism design shows that public goods can be voluntarily provided. In other situations, mechanism design can make government more effective, but it will do so by making government more “market-like.” Contracting-out of government services like garbage pickup, prisons, and roads, for example, can be carried out even farther if contracts are more carefully designed. The theory of mechanism design provides the template for thinking about the best possible types of contracts.

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Hayek Student Wins Nobel Prize

Posted by PrestoPundit on 10/16/2007

For details see my posting at the Mises Blog. The work of the 2007 Nobelists was in part developed to address issues originally raised by Hayek in his work on the “knowledge problem” of economics coordination, and according to the citation of the Nobel committee:

“These results [of Hurwicz, Maskin, and Myerson] support Friedrich Hayek’s (1945) argument that markets efficiently aggregate relevant private information.”

UPDATE: See also Peter Boettke’s article on Hayek, Mises and yesterday’s Nobel Prize winners in today’s WSJ, as well as Nobelist Roger Myerson’s article on Leonid Hurwicz and his attempt to address Hayek’s knowledge problem.

From Pete’s WSJ article::

Mechanism design theory was established to try to address the main challenge posed by Ludwig von Mises and F.A. Hayek. It all starts with Mr. Hurwicz’s response to Hayek’s famous paper, “The Use of Knowledge in Society.”

.. Hayek summarized the fundamental challenge that advocates of socialism needed to come to grips with. Hayek’s argument .. basically stated that the economic problem society faced was not how to allocate given resources, but rather how to mobilize and utilize the knowledge dispersed throughout the economy.

.. Leonid Hurwicz, in his classic papers “On the Concept and Possibility of Informational Decentralization” (1969), “On Informationally Decentralized Systems” (1972), and “The Design of Mechanisms for Resource Allocation” (1973), embraced Hayek’s challenge. He developed mechanism-design theory to test the logic of the Mises-Hayek contention that socialism could not possibly mobilize the dispersed knowledge in society in a way that would permit rational economic calculation for the alternative uses of scarce resources. Mises and Hayek argued that replacing the invisible hand of the market with the guided one of government would not work. Mr. Hurwicz wanted to see if they were right, and under what conditions one could say they were wrong.

Those efforts are at the foundation of the field that was honored by the Nobel Prize committee ..

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How Stupid Are Leftist Intellectuals?

Posted by PrestoPundit on 09/06/2007

With Leftist intellectuals today it is rarely a mistake to ask whether they are uninformed, dishonest, stupid — or all three at once. Naomi Klein has written a book about capitalism and free market theorists and is touted by leftists as one of the top “intellectuals” in the world. But one wonders what kind of bonehead would say the following about Friedrich Hayek:

I would argue that [Austrian economist Friedrich] Hayek and [University of Chicago economist Milton] Friedman shared this dream of the pure system. These are brilliant mathematicians, in many cases, so it looks perfect in their modelling.

She seems to have no idea that Hayek never posed as a “brilliant mathematician”, that he stood against the imposition of “pure systems”, and that he offered deep arguments against standard issue economic modeling and mathematical economics.

My own impression is that this “leading intellectual” has never actually read a word written by Hayek — and if she has, she hasn’t understood a bit of what’s she’s read.

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Movement Linked to Memory Storage

Posted by PrestoPundit on 09/05/2007

In cats. More confirmation of the ideas found in Friedrich Hayek’s The Sensory Order.

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Language — The Missing Link

Posted by PrestoPundit on 09/02/2007

The “palms up” gesture is activated by neural circuits inherited from ancient reptiles.

This sort of discovery helps confirm the picture of language and mind developed by Ludwig Wittgenstein and Friedrich Hayek which holds that “built in” common ways of “going on together” are the groundwork up which the social tool of language has its foundation. (For “built in ways of going on together” you might alternatively substitute “common motor control systems”, or “common ways of being”, or “shared behavior patterns”, etc. — some of these “innate” and some of these learned socially, often “non-explicitly”.)


F. A. Hayek, “Rules, Perception and Intelligibility,” in Studies in Philosophy, Economics and Politics, 1967.

F. A. Hayek, “Notes on the Evolution of Rules of Conduct,” in Studies in Philosophy, Economics and Politics, 1967.

F. A. Hayek, The Sensory Order, 1952.

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This Is Ridiculuous

Posted by PrestoPundit on 09/01/2007

You wonder what kind of ignorance could lead economists into the sort of confusions that Greg Ip is reporting from Jackson Hole:

Economists, in particular those at the Federal Reserve, are loathe to believe asset markets have become bubbles because bubbles seem inconsistent with rational investor and consumer behavior, the bedrock of economic analysis. “The notion of a speculative bubble is inherently sociological or social-psychological, and does not lend itself to study with the essential toolbag of economists,” says Yale University’s Robert Shiller in a paper presented Friday at the Federal Reserve Bank of Kansas City’s research symposium in Jackson Hole.

Friedrich Hayek — perhaps the best economist ever — applied the tools of economic theory to the various markets for investments through time, and showed that “asset bubbles” an inherent part of the capitalist system. It’s an old result, and one that far to few economists are aware of, or seem capable of understanding. Why? Because — incredibly — they think of capital and investment goods through various segments of time as a single item, a single good. The math they cling to like a life saver tells them it can be no other thing — even if a child could tell them enough to falsify their understanding.

So Shiller’s result is predetermined by his mathematics — his math won’t let him see how interest variations can discoordinate the structure of capital and investment — so the discoordination must come from outside economics, in the domain of psychology. And if not psychology, then astronomy (sunspots) or even astrology (deep waves).

This is the sad state of economics. And if you’ve ever wondered why so many economists find it so beyond their ability to explain the workings of the current housing and credit boom/bust cycle, their utter incapacity to think microeconomically about the heterogeneous time structure of multiple capital and investment goods is the answer.

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The Arsonist Is Now Playing Fireman Hero

Posted by PrestoPundit on 08/31/2007

A top economist calls for institutional reform at the Fed. Quotable:

Why did mortgage lenders earlier this decade start showering credit as if it were spewing from a public fountain? The answer is that credit was spewing from a public fountain – and that fountain was the Fed ..

The subprime lending crisis also shows that, while central banks certainly have the power to expand a nation’s spending power, they can’t guarantee that the extra power gets used as intended, namely, to give a roughly uniform boost to the overall demand for goods. On the contrary: The crisis supports the argument, first developed by Austrian-school economists Ludwig von Mises and Friedrich Hayek, that the techniques central banks employ to increase spending power are bound to distort spending patterns by driving lending rates below their sustainable, “natural” levels.

By injecting the new money they create into credit markets, central banks create an artificially high demand for long-term investments, such as real estate, in which interest costs loom large. Think back a few years. Even your auto mechanic was bragging about “flipping” condos with easy credit. That’s a natural consequence of the way central banks distort spending patterns. The trouble, however, is that the new money does eventually swell overall demand, including the demand for credit. Interest rates soon rise, ending the investment boom. Regrets multiply.

That’s exactly what happened last year, when the federal funds rate climbed back above 5 percent ..

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Steve Sailer asks

Posted by PrestoPundit on 08/29/2007

“What’s the opposite of the sunk cost fallacy?” Here’s my answer:

Steve — technically, the opposite of the sunk cost fallacy is the Keynesian fallacy: the false assumption that the problem of the scarcity of capital doesn’t exist, meaning that there is no ongoing allocation problem requiring people to constantly make decisions about what types of capital needs to be maintained through additions of further capital. Hayek describes the fallacy (not under this name) in several places, most especially in his The Pure Theory of Capital.

The idea of “sunk costs” was developed by Hayek’s teach Friedrich Wieser. The idea of the maintenance of capital was developed by Hayek — essentially this problem was the genesis of his famous distributed “knowledge problem”, so influential in other contexts among most all other economists. But the problem is still fundamentally unrecognized by most of today’s economists working in the field of macroeconomics — the legacy of Keynes.

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How the Fed Underwrites Financial Chaos

Posted by PrestoPundit on 08/17/2007

Hayekian economist Gerald O’Driscoll Jr. explains it all for you. Quotable:

monetary policy has created an expectation that the Federal Reserve will bail out investors when asset bubbles deflate. The recent crisis in the subprime mortgage market is at least partly the outcome of this new approach to monetary policy ..

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