First, I'm not sure if I understand what is so uniquely Austrian about the calculation argument. As I understand it the point is that entrepreneurs maximise profits by putting goods to their most valued uses and the price system is exactly what allows them to do this by means of relative price adjustments and profit and loss accounting (very briefly put). My first point is that this implicitly assumes some sort of harmony of interests, in some cases where this assumption doesn't hold, I don't see how the calculation argument is valid. In the case of asymmetric information, externalities or monopoly power entrepreneurs maximise profits by going against what is in the public interest (yes, Austrians will find this term objectionable). But the other point I'd like to make is that this is a pretty standard point in even principles level micro...
Second, in reality firms costs are highly interdependent and often inextricable from one another. What implications does this have for profit loss accounting? Well, as far as I can tell a lot of big firms don't actually know exactly how to maximise profits so they resort to rules of thumb. My can't government do this? And more importantly, in firms still exist and are efficient, clearly there are some other considerations as to what serves consumers best, why shouldn't they be applied to governments as well?
Third, one of the big arguments against math that I've noticed is that it isn't necessary, something along the lines of "we can express these arguments in verbal logic". I think this is completely besides the point, identifying correct arguments and saying, ex post, that we can say what is in mathematical terms in verbal logic misses the point. The math was useful in fleshing out these arguments in the first place.
Four, I've asked this before, but I want to ask it again: what justifies the large salaries of econ PhD in the private sector? Their model building abilities and econometric skills are often used so what causes firms to be so systematically misguided (that is, according to Austrians).
Five, what is wrong with the concept of willingness to pay?
The thread speaks for itself. Contemplating that government intervention could even arguably be beneficial is to deny the Austrian position of praxeology, and calculation.
ug, this is EXACTLY the notion i responded to in my first reply to your question. you claim that it is fundamental austrian precept that government intervention can never be beneficial. but is that really true? I don't think so. As strangeloop and i have both noted, prominent austrians like hayek believed that government interventions could be beneficial. and you respond "so what"?
how can you even pretend you are interested in having a good faith discussion if these are the best responses you can come up with?
i think the problem here is that you are operating under a much more narrow definition of austrian economics than i am. if i had to guess, you think anyone operating outside the rothbard cannon isn't truly austrian (and that includes hayek). and i simply do not agree. but, of course, all i can do is guess since you haven't said much of substance in this thread. which is weird becuase you are obviously very confident in your own understanding of austrian economics. you just refuse to share your enlightenment with anyone else. i suppose you prefer to hid your light under a bushel. too bad.
Ambition is a dream with a V8 engine - Elvis Presley
Student:As strangeloop and i have both noted, prominent austrians like hayek believed that government interventions could be beneficial. and you respond "so what"?
Appeal to authority does not grant your argument any merit. But thats a red herring. It's not about whether it's right or wrong, it's about being aware of an extremely prominent modern Austrian position. It's just taking the Misesian position to it's logical conclusion.
Student: think the problem here is that you are operating under a much more narrow definition of austrian economics than i am.
Your confusing me. You think I am arguing with you that calculation debunks intervention, while I would argue that it does, thats not why I brought up the exercise above. My point was that you entirely overlooked calculation, and didn't bother to even mention it. I gave you an opportunity to explain why some Austrians would take issue with it, you seemed oblivious to any position which may conflict with interventionism. As if no problem existed or you weren't aware.
I was providing objective evidence that there may be room for improvement regarding your understanding of various Austrian positions. The example being above. My assumption is only that you forgot about calculation, or do not understand why calculation is in direct conflict with interventionism. How the two are fundamentally incompatible with each other. If you want to know why we'll have to start a new thread focusing just on that.
It may be of interest to you to realize that the calculation argument has matured since Mises's first really brought it to light. The argument is not simply valid because Mises's said so. We do not treat Mises as our god, there is a lengthy line of reasoning behind it.
Student:but, of course, all i can do is guess since you haven't said much of substance in this thread.
At some point you'll have to realize that attempting to attack my character will not grant your arguments any merit.
But the problem is that you're wrong, or at the very least, you're entirely ignoring extremely significant facts. The fact that Hayek did not object to some degree of monetary expansion and/or public work programs during the great depression does not mean that he supports economic interventionism. It just means that given the conditions of the time, the fact that the central bank did exist and that its inflationary policies (starting in 1922) created a monumental bubble, made some degree of monetary expansion appropriate, in order to satiate the elevated demand for cash holdings. But does this mean that Hayek supports central banks and monetary central planning? Absolutely not. He supported a free banking system with competing currencies and is famous for refuting economic interventionism in general (the coordination argument). I mean, Hayek's famous The Road to Serfdom asserts that limited government interventionism is the path to socialism. So again, we have to differentiate between Hayek's "next best" proposals from Hayek's "ideal" proposals; the latter completely object to economic interventionism while the former are more "pragmatic" (like Milton Friedman's negative income tax).
Additionally, the fact that Mises and Hayek were liberals, and not anarchists, does not mean that they support economic interventionism. And finally, I'd also like to point out that this has become a 7 page discussion because you were "unsatisfied" with my treatment of asymmetric information. But you readily admit that the existence of asymmetric information can never, in itself, justify government interventionism, as the OP suggested. Thus, we are in agreement but somehow not in agreement once again. And now we're talking about something else entirely. In other words, you have hijacked another thread.
Having a good faith discussion with someone like you is absolutely impossible. You came here with some sort of agenda (to prove that Austrian economics has been incorporated into mainstream new classicism), are extremely arrogant, and are entirely clueless of the subject matter at hand (you may find this objectionable, but it's simply the truth). You become extremely emotional when someone challenges the narrative that you have created in your own mind, to the extent that you write belligerent private messages to those that disagree with you or don't automatically cater to all of your needs (such as providing a citation for every statement I've ever made).
Strangeloop:Don't mind that your references to Stiglitz and Akerlof are met with silence.
No they weren't. But I must say, your bitterness is become glaringly obvious the more you participate on this forum. Your performance started out somewhat strong at first, but has deteriorated since then. You're basically a troll at this point.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Additionally, the fact that Mises and Hayek were liberals, and not anarchists, does not mean that they support economic interventionism.
how exactly are you defining economic intervention? if you don't believe that the market can provide national security services or law enforcement and that you need government to step in and provide those services, i am not sure what else you would call it. and no matter what you call it, i don't see how it is is consistant with what flic is calling "austrian economics".
In other words, you have hijacked another thread.
i never asked flic to give me a half-backed quiz and that unfortunately is what has taken most of this space.
Having a good faith discussion with someone like you is absolutely impossible.... blah blah blah
lol if you think i want to have a lovers spat with you in this thread, you've got another thing coming. if i hurt your feeling in pm, i apologize. but you'll forgive me if i don't think you're the best person to lecture others about keeping their tempers or arguing in good faith. this bit of civil discource is particuarly worth noting (and worth copying and pasting in case you delete it later after you think better of insulting people for no reason....which happened earlier in this very thread actually. haha talk about keeping a level head).
Strangeloop:Don't mind that your references to Stiglitz and Akerlof are met with silence. No they weren't. But I must say, your bitterness is become glaringly obvious the more you participate on this forum. Your performance started out somewhat strong at first, but has deteriorated since then. You're basically a troll at this point.
on that note, is anyone really happy with where this discussion has ended?
i know i'm not.
this thread has turned into nothing but ego stroking ("i understand austrian econ sooo weelllll") and straight up insulting ("you arrogant troll!!!".
it is a waste of everyone's time, so i suggest we disperse and let the negative energy fizzle.
see you guys around.
Student:how exactly are you defining economic intervention?
In a relatively narrow sense. If you want to use this very broad definition then yes, you're right.
Strangeloop: Unfortunately, you're wrong. Your disagreement with Austrian economics is evidence that you are ignorant about Austrian economics. Don't mind that your references to Stiglitz and Akerlof are met with silence. Rather than engaging you in debate, all Austrians need to do is quiz you on how well you know their knowledge! Even if you demonstrate sufficient familiarity with their beliefs, you are an unbeliever, and so that must mean you don't know all of their perfectly convincing ideas.
Unfortunately, you're wrong. Your disagreement with Austrian economics is evidence that you are ignorant about Austrian economics.
Don't mind that your references to Stiglitz and Akerlof are met with silence. Rather than engaging you in debate, all Austrians need to do is quiz you on how well you know their knowledge! Even if you demonstrate sufficient familiarity with their beliefs, you are an unbeliever, and so that must mean you don't know all of their perfectly convincing ideas.
Student, what would you call this? How can we have rational discussions in good faith when this is the position that neoclassical, and you on occasion, continuously retreat to? But I agree with you. This conversation has become hostile and entirely barren.
EconomistInTraining: First, I'm not sure if I understand what is so uniquely Austrian about the calculation argument. As I understand it the point is that entrepreneurs maximise profits by putting goods to their most valued uses and the price system is exactly what allows them to do this by means of relative price adjustments and profit and loss accounting (very briefly put). My first point is that this implicitly assumes some sort of harmony of interests, in some cases where this assumption doesn't hold, I don't see how the calculation argument is valid. In the case of asymmetric information, externalities or monopoly power entrepreneurs maximise profits by going against what is in the public interest (yes, Austrians will find this term objectionable). But the other point I'd like to make is that this is a pretty standard point in even principles level micro...ifies the large salaries of econ PhD in the private sector? Their model building abilities and econometric skills are often used so what causes firms to be so systematically misguided (that is, according to Austrians).
First, I'm not sure if I understand what is so uniquely Austrian about the calculation argument. As I understand it the point is that entrepreneurs maximise profits by putting goods to their most valued uses and the price system is exactly what allows them to do this by means of relative price adjustments and profit and loss accounting (very briefly put). My first point is that this implicitly assumes some sort of harmony of interests, in some cases where this assumption doesn't hold, I don't see how the calculation argument is valid. In the case of asymmetric information, externalities or monopoly power entrepreneurs maximise profits by going against what is in the public interest (yes, Austrians will find this term objectionable). But the other point I'd like to make is that this is a pretty standard point in even principles level micro...ifies the large salaries of econ PhD in the private sector? Their model building abilities and econometric skills are often used so what causes firms to be so systematically misguided (that is, according to Austrians).
Well; I would add a few remarks to what already has been said.
First of all: the marketsystem is _not_ 'just' calculation. It's a co-dependant mechanism of appraisement and calculation. If people where 'just' calculating, then there would be no change. If we were 'just' appraising, there would be no mechanism to have rational feedback on wether or not we are doing well. Prices convey one piece of the puzzle: they convey the fact that people are willing to make these marginal trade offs for certain products. Prices arrange a tool for the human mind to grasp relative differences, more precise: the ordinal evaluations get a cardinal representation. (Not a A = A representation, of course.) These causes us to compare marginal and relative differences and convey to us certain kinds of information - but not all. There are still situations who should be _appraised_ in the light of the prices that are there. We remember the example of the tin mine in the Hayek-article. ('The Meaning of Competition', I think? I'm not sure. Somewhere in Individualism and Economic Order, in any case.) The 'problem' with this comparison is that the implicit entrepreneur is a passive actor; who just 'responds' to price changes, but this ignores the fact that the entrepreneur (if succesful) is already appraising the situation and responds to the _technical_ changes (decrease in tin) by 'causing' price changes. The price system than works as a check to check wether or not we are making the right appraisements.
The price mechanism is an indispensable tool because the cardinal prices are caused by value judgements when facing the costs and benefits concerning certain concrete objects. Mises, by the way, was well aware of the limits. In HA he discusses the limits of economic calculation; in so far it can't deal with prices - he gives the example of a 'beautiful' landscape - it's limited, but not useless. Economic calculation can provide the tools to decide how much the landscape is worth in an indirect fashion: do we destroy it and do a certain process at price x or keep it and do it at price y (which is higher?) The difference can serve as a tool in thinking how much we value the landscape (more or less than this difference?)
Externalities and all are illustrations because of the indispensability of the price system; without it, we would just face technical 'externalities', but in a market process, we have a way of trying to discover the value of it - for the victims and the people who cause the externalities - and thus we can find mechanisms to deal with specific externalities in specific cases. If it's worth a lot to me to be able to cause the externality, but the victim just wants a little settlement, we can find ways to deal with it. (I'm not making a Coasean argument, by the way.)
The argument for capital goods is also important. As we know; factors of production derive their value from the consumer output they produce. So 'obviously' we just need a market for consumer goods and collective property of the means of production, because they just 'derive' their value from the consumer goods. But this ignores the convertibility and possibility of alternatives in the capital market. If the capital structure of a society was fixed and impossible to change, they this might be an argument. But this market socialist argument assumes away the fact that different things can be build by differnt ways, i.e. that there is no fixed 'capital structure'. You can build a bridge many ways, but what's the most economical one? This can't be solved if all the capital is owned by one owner; because it can't reach marginal valuations by consumers. They can't 'bid' away factors of production (land, labor, machines, etc.) to do their bidding. Appraisement, obviously, is possible, but their is no mechanism to know wether or not your estimate of the valuations was correct or not. This is why Austrians call a socialist economy 'impossible': you just can't know.
This is sort of my drift. I hope it helps.
The state is not the enemy. The idea of the state is.
StrangeLoop:Understandably, tentacles of the State would have an incentive to stock themselves with economists whose beliefs typically approve of government intervention. However, private firms (e.g., Google) have more straightforward goals like profit; why is the Chief Economist there Hal Varian and not Peter Boettke? If Austrians have cornered truth so successfully, one would suspect that the most profitable economists would be Austrian ones. If PhD economists are, essentially, mastering useless information, then why do firms find them so useful to hire?
If PhD economists are, essentially, mastering useless information, then why do firms find them so useful to hire?
Well; this is obvious. A firm needs an entrepreneur. 'Models' are part of entrepreneurial activity: you try to predict what actors will do and you base your 'policies' on them. They are, however, not science. They are more like an art.
(Austrian) Economists, however, try to understand the way an economy works. One can be an awesome economist and still be a lousy entrepreneur.
Student:ug, this is EXACTLY the notion i responded to in my first reply to your question. you claim that it is fundamental austrian precept that government intervention can never be beneficial. but is that really true? I don't think so. As strangeloop and i have both noted, prominent austrians like hayek believed that government interventions could be beneficial. and you respond "so what"? how can you even pretend you are interested in having a good faith discussion if these are the best responses you can come up with? i think the problem here is that you are operating under a much more narrow definition of austrian economics than i am. if i had to guess, you think anyone operating outside the rothbard cannon isn't truly austrian (and that includes hayek). and i simply do not agree. but, of course, all i can do is guess since you haven't said much of substance in this thread. which is weird becuase you are obviously very confident in your own understanding of austrian economics. you just refuse to share your enlightenment with anyone else. i suppose you prefer to hid your light under a bushel. too bad.
Who besides Hayek is a prominent Austrian who agrees with this, and what do you define AE as (to distinguish it from other schools of economic thought) such that it can include Rothbard, Hayek and Mises simultaneously?
Esuric: Strangeloop: Unfortunately, you're wrong. Your disagreement with Austrian economics is evidence that you are ignorant about Austrian economics. Don't mind that your references to Stiglitz and Akerlof are met with silence. Rather than engaging you in debate, all Austrians need to do is quiz you on how well you know their knowledge! Even if you demonstrate sufficient familiarity with their beliefs, you are an unbeliever, and so that must mean you don't know all of their perfectly convincing ideas. Student, what would you call this? How can we have rational discussions in good faith when this is the position that neoclassical, and you on occasion, continuously retreat to?
Student, what would you call this? How can we have rational discussions in good faith when this is the position that neoclassical, and you on occasion, continuously retreat to?
I call it satire.
I would concede that it wasn't an entirely pleasant comment, but it wasn't singling anyone out and it wasn't overly insulting. I was addressing the fact that Austrians, even when engaging in debate with sympathetic listeners (like me), tend to simply accuse unbelievers as ill-informed and leave it at that.
Personally, I don't care how rude you are (and, let's remember, your first response here included an insult), so long as you also include stimulating content. You never fail to do so, and I like that. I read what you write thoughtfully, because I know you wrote it thoughtfully. I have nothing but respect for that, even if you feel like calling me a troll.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
Could we please stop this meta-discussion and go back to the original topic, which was actually quite interesting?
Student,
When you say the price mechanism can't handle (or sometimes can't handle) asymmetric information, what are you including and excluding? To use EIT's original lemon example (even though Smiling Dave pointed out its failures a few pages ago), if buyers decide to pay $100 for inspections to hedge against getting a lemon, or sellers decide to include inspections (and therefore guarantees) as part of their offered product, then the true price of a good car is $2,100. Are you not considering these extra pieces as part of the price mechanism?
Asymmetric Information:The calculation argument is so powerful precisely because of the existence of asymmetric information, that is, that individuals have their own entirely subjective value scales, expectations, etc, and the price mechanism facilitates a free flow of tacit and idiosyncratic information amongst economic actors coordinating economic activity. It attempts to match entrepreneurial expectations with reality (optimal production techniques and capital combinations inline with consumer preferences).
Actually, I'd put it the other way around. The asymmetric information argument is so powerful precisely because it acknowledges the existence of dispersed and private information, which is what the calculation argument is all about. The market price mechanism generally does a good job of aggregating this information in the form of prices, but in some instances it is both feasible and profitable for market actors to withhold some of this information which causes inefficiencies.
In fact, thanks for bringing this up, because it helps me illustrate my main point. The calculation argument is a lot less powerful than most people here seem to assume. Because, as I said, under certain conditions the free flow of information is not always possible, and its theoretically possible (ignoring public choice arguments) that government can improve on the market outcomes by facilitating the flow of information (which Hayek himself admitted) either by Pigovian taxes in the case of externalities or regulation concerning what information producers must provide.
Such phenomena are considered inefficient by those who adhere to a very broad and primitive understanding of economic efficiency, namely those that focus solely on allocative or "x-efficiency." Allocative efficiency concerns itself with maximizing "total surplus" which is then distributed to either producers and/or consumers, i.e., it attempts to eliminate so-called "dead-weight losses." But there is another type of efficiency, first introduced in the 17th century by Spanish economists (school of Salamanca), and it is known as "dynamic efficiency" (Schumpeter is given credit for this insight). Dynamic efficiency states that the ability to earn supernormal profits creates an incentive to innovate and elevates total investment in the long-run (firms invest and innovate in order to gain competitive advantages, create cost barriers, and capture additional market share). This, in turn, pushes the production possibilities frontier outwards. Simply put, the argument is that it’s better to be under the frontier and continuously pushing outwards than to remain on the same frontier forever, in a completely static state.
Actually, I studied dynamic efficiency for a piece of work I had to do (and yes, believe it or not, I've taken an IO class). But does the point you raise concerning dynamic efficiency mean that monopolies are always good? I'm going on the assumption that you believe otherwise (if you don't feel free to correct me), in which case you've not really done anything to counter my original point. The calculation argument is no longer an a priori "proof" that the market is always superior to government but we need an empirical investigation to decide whether the losses in the form of x-efficiency are sufficiently offset by the gains in dynamic efficiency.
It implicitly assumes cardinal measurements of utility. It attempts measure geometric areas of value, usually denoted in monetary terms. Value is not an area to be measured; it is simply a list.
Presumably you learned about willingness to pay in your welfare economics class?
Why can't governments use rules of thumb in order to centrally plan the economy? See "the calculation argument."
Thanks for ignoring the OP. My point was this, for large corporations "maximise profits" is almost an impossible task in the sense that costs are highly interdependent, profits may be difficult to forecast etc. So they rely on rules of thumb such as "maximise revenue" or "maximise sales", well, my question is simply why can't the government operate similarly?
Because the government is structurally incapable of doing so. It is not bound by the profit/loss constraint, overrides the price mechanism, and is captured by special interest's. See "the calculation argument" and various articles written by public choice economists.
I purposefully tried to leave public choice articles out of this, so please, let's focus on the thoughts I provided in the OP. Firms override the price mechanism, Austrians have realised this as far as I'm aware. Indeed, Rothbard and Klein seem to have made a big deal out of this in terms of the size firms can grow to. So my point is, given that firms can't calculate internally and yet they exist and are allegedly beneficial, why can't the same be said of governments? Of course, you could make the case that governments are different, but this remains to be shown.
In order to refute Austrian economics, you need to actually refute it. Appeals to authority/majority wont cut it.
No appeal to majority, I'm not presenting this as a knock down argument again Austrian economics. But its empirical puzzle as far as Austrian economics goes. You posted an explanation of the price of labor recently, you said something along the lines of it being determined by the marginal productivity of labor (which is fair enough). Well, if PhD economists are being paid so much to construct these models and to run these regressions then presumably they must have a fairly high marginal productivity.
My question is, "if their training is useless, where does this productivity come from?"
Either way, the econometric models in question have failed miserably, and have tarnished the reputation of economics as a science
Because the layman knows so much about IV, for example. How have econometric models failed exactly?
but i think the austrians were still very much right that can not expect a centrally planned economy to effeciently allocate resources among their various uses. to me, the question then becomes whether moderate government interventions could improve on market outcomes in select cases.
Oh, don't get me wrong, I agree that the market price system is very powerful at aggregating disperse information in the form of prices and allowing individuals to make decisions that usually lead to a socially optimal allocation of resources. More importantly, most academic economists would also admit something along these lines. I also agree that the question is moderate government intervention and not whole scale social engineering, but the fact remains that under certain conditions the calculation argument doesn't prove what most Austrians think it does.
on a side note, i think you might be interested in the work of stiglitz, ackerlof, and others. i personally think that they don't get enough credit from austrians for taking the insights of hayek on information and running with them to new and deeper insights. specifically, i think they revealed that the market process is much more complicated than just shifting relative prices.
One of my intermediate micro professors did some work on asymmetric information, so I've covered a bit there and in my public economics class. I always like to go back to the originators of ideas (when I can) and read their contributions but I've heard Stiglitz it pretty mathematical. So, any suggestions of where to begin?