Yves here. this interview makes a point in passing that has been a pet issue of mine. Central planning has gotten a worse rap than it deserves. It apparently worked well when first implemented in the USSR. In fact, its rapid industrialization was a shock to the West and got thinkers worried that a command and control economy could mobilize resources better than a “free enterprise” one. But recent studies contend that the reason central planning went off the rail was that lower-level bureaucrats were feeding inaccurate information to the central planners for their own selfish reasons (to get more resources, to be assigned less demanding production targets). Yet the “mini-planned economies” of companies face precisely the same problem.
I’m also disappointed that this article takes up the idea of “market” prices containing valuable information which is true only up to a point. Monopolies and oligopolies distort prices. Information asymmetries also make prices a less reliable signal.
By Samuel Bowles, at the Santa Fe Institute, who recently published The Moral Economy: Why good incentives are no substitute for good citizens and is one of the authors of The Economy, a free online introduction to economics by the CORE Project and David S. Wilson is SUNY Distinguished Professor of Biology and Anthropology at Binghamton University and Arne Næss Chair in Global Justice and the Environment at the University of Oslo. Twitter: @David_S_Wilson. Originally published at Evonomics
By David Sloan Wilson, interviewing Sam Bowles
As an evolutionist critiquing the field of economics, I felt like a disciplinary outsider until I encountered the work of Friedrich Hayek. The Austrian economist was himself critical of Walrasian general equilibrium theory and proposed a radical alternative: Economic systems are a form of distributed intelligence that evolved by cultural group selection. They work without having been designed by anyone.
That was my area of expertise. I had to admire Hayek as a pioneer, especially since group selection was a heresy and the study of human cultural evolution was in its infancy when he wrote. Nevertheless, both topics have advanced by leaps and bounds since then and do not support his view that economic systems work best in the absence of regulations. Instead, cultural group selection theory points to a middle road between laissez faire and centralized planning that is rich with possibilities.
More recently, three distinguished economists—Samuel Bowles, Alan Kirman, and Rajiv Sethi–have made their own assessment in a retrospective titled Friedrich Hayek and the Market Algorithm published in the Journal of Economic Perspectives. (And their Vox post The Market Algorithm and the Scope of Government: Reflections on Hayek) All three are well read in my discipline of evolutionary science in addition to their economic credentials. Sam recently published The Moral Economy: Why good incentives are no substitute for good citizens, and wrote a piece based on, it for Evonomics. As part of the CORE (Curriculum Open-Access Resources for Economics) he is also co-author of a new free online introduction to economics at www.core-econ.org.
I count Sam as one of my mentors and was proud to work with Alan to edit a MIT Press volume titled Complexity and Evolution: Toward a New Synthesis for Economics, based on a conference that we helped to organize under the auspices of Germany’s Ernst Strungmann Forum, which included Rajiv as a participant. I interviewed Alan on the concept of laissez-faire in 2014, which included a discussion of Hayek. Their jointly authored work, along with a recent op ed by Sam provided a golden opportunity to have a conversation with him.
DSW: Welcome, Sam! I look forward to this conversation. What would you say are the most positive contributions that Hayek made to the field of economics?
SB: Wait! David, before we even start: how can I be your mentor? I learned from you that group selection should be liberated from the dog house, when you were a lone voice against biological orthodoxy at the time.
But to get to your question, I would single out Hayek’s representation of the market as an information processing mechanism that plays an essential role in any economy because information is scarce and local, his critique of perfectly competitive equilibrium thinking in economics, and his dynamic view of the economy.
DSW: Why was his focus on information important for economics?
SB: His 1945 paper – “The use of knowledge in society” — is in my top ten all time contributions to economics. It came in the late innings of the “planning versus the market” debate instigated by Great Depression and the apparent success of the Soviet Union’s first five-year plans. By the end of the thirties the anti-planning side was down by 5 runs at least; even the arch opponent of socialism Joseph Schumpeter had conceded: “Can socialism work? Of course it can. There’s nothing wrong with the pure theory of socialism.” Just in the nick of time: Hayek saved the day, coming up with a clinching argument: central planners could not possibly know enough to plan an economy well.
DSW: But the problem of inadequate information facing the central planner must have been commonplace at the time.
SB: Curiously it was not. The advocates and (still more curiously) the critics of central planning alike had chosen as their terrain the conventional neoclassical (or ‘Walrasian’) model — with its assumption of complete information. Not surprisingly, things had not gone well for the anti-planning side. Some a little closer to the real economics of central planning, however, had seen things differently. Here is an example:
If a universal mind existed, such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market …
This is straight Hayek – it could easily have been lifted from his 1945 paper –but the author is the Russian revolutionary Leon Trotsky writing in 1932 in light of what had been learned from the First Five Year Plan.
DSW: How did Hayek connect his theory to economic policy, which you call “The Road to Laissez Faire” in your article?
SB: Well that’s just it, David, he did not. Despite his insistence that the two were part of an organic whole, he didn’t connect his economics to his political position. In fact Hayek’s economics gives you good reason to doubt his politics. I hope we can come back to that.
DSW: Definitely. But first, was his argument against central planning, then, his main contribution to economics?
SB: Not at all. The planning versus the market debate was the instigation, but his work both before and after the 1945 paper inaugurated a new way of seeing market economies and has made ‘information economics’ a major theme in contemporary economic research.
DSW: What was Hayek’s main idea about markets and information?
SB: It was simple and profound at the same time. Prices are messages. The devil is in the details of course, but ideally they tell you how much it cost to produce a good, and how valuable that good is to others. These are the facts that the planner could not readily know. So, if there is a drought in the mid-west, and the price of wheat soars, the message is: “think of putting potatoes or pasta on the table this evening.” And as the example shows, prices are more than messages, they are motivation too. The higher price of wheat not only suggests a different menu, it makes the alternative a lower cost option.
DSW: And Hayek used this reasoning to demonstrate that markets should not be regulated by the government because they can on their own produce optimal results?
SB: Not exactly. Hayek advocated the market not on grounds of optimality, but by default. The alternative, central planning, could not work, and moreover any substantial degree of government intervention in the economy, he feared, was bound to be a threat to liberal values. Remember, when he wrote Road to Serfdom, he was not thinking about Nordic social democracy, he was writing under the shadow of Hitler and Stalin.
DSW: It always struck me as curious that Hayek developed a radical alternative to general equilibrium theory, but both were used to justify the same laissez faire economic policies and that Hayek and Friedman were both central figures in the Mont Pelerin Society. This makes me think that the impulse to justify laissez faire policies came first and steered the theorizing in both cases. Is that an unfair thing to say?
SB: Yes, that would be unfair, both to Hayek and to the pioneers of general equilibrium theory. Kenneth Arrow – among those who first proved what is sometimes called “the invisible hand theorem” of general equilibrium theory — was quick to point out its limitations in describing any real economy, and 30 years later advanced what he termed “a cautious case for socialism.”
Hayek’s opposition to most forms of government regulation was not based, as I just said, on claims that the market was in any sense “optimal” He was a severe critic of the concept of perfectly competitive equilibrium on which the ‘invisible hand theorem’ is based. His central economic ideas – the importance of scarce and local information, his alternative notion of equilibrium, his insistence that economics had to be about change, not stasis – these all long predated his use of some of this apparatus to attack central planning.
DSW: But his ideas, nonetheless, became central to the cause of laissez faire?
SB: They did, David, though he didn’t much like the term, but only by a highly selective reading of his work. In the paper you mentioned Alan, Rajiv and I advance the view that Hayek’s economics per se provides good reasons to doubt the superiority of the unregulated market.
DSW: Well, in the volumes written on Hayek pro and con, that’s a new one. How does it go?
SB: I’ll give you two examples. First, prices are indeed messages, and precisely because of that we may have house price bubbles when people correctly infer that when house prices go up they may continue to do so, and hence this may be a good time to buy a house. This is the opposite of the “let’s put potatoes rather than bread on the table” reaction to the price of wheat rising.
Second, the market, as Hayek says, processes information and on that basis, determines, for example, the best way to organize production. But applying this logic shows that hierarchical economic planning may not be such a bad thing at least when combined with markets. The boundary of the firm – how big it will be – is determined by the answer to the question, should this component be produced inhouse or purchased? But this is also the boundary between organizing things according to the market or according to the hierarchical structure of command that has led capitalist firms to be termed (ironically) as ‘mini-planned economies.” The ‘verdict of the market’ in this case is that both markets and hierarchies have a place in the economy!
DSW: That’s a great point, but it can be elaborated along very interesting lines! I’ve been delving into the business literature a lot lately, and “command and control” often doesn’t work at the firm level either. A single firm requires the same protections against disruptive self-serving behaviors that Ostrom demonstrated for common-pool resource groups with her core design principles. Also, for a single firm to adapt to change, it needs carefully orchestrated variation-and-selection processes rather than a centralized plan. However, your larger point is well taken: a firm remains a “mini-planned economy” even if not organized as command and control.
Moving on, these examples of Hayek versus Hayek are not what most economists understand as his take home messages about their discipline, right?
SB: I guess, your economist in the street would draw a blank if asked what Hayek’s contributions to economic theory were. But I think you can draw a line from Hayek to contemporary economists’ concern about information problems in labor and credit markets and other exchanges where there is some important pieces of information not known to one of both of the parties.
DSW: Let’s turn to Hayek the evolutionary thinker who saw economic systems as products of cultural group selection. How new was this against the background of the economic profession at the time?
SB: The language was new, but the fundamental concept really were not. The idea of spontaneous order is at least as old as Adam Smith’s invisible hand. Economists routinely model selection processes by which some firms succeed and others fail with the practices of the winners becoming the norm. What distinguished Hayek was his claim that evolutionary reasoning demonstrated the superiority of substantially unregulated markets.
But this exercise in social Darwinism at the system level need not run along the lines that Hayek chose. Another great conservative thinker, Talcott Parsons, in 1964, had advanced the idea that among ways of organizing society there are “evolutionary universals,” that is, systems that emerge frequently in a variety of environments and persist over long periods once “hit upon” by a population. These are societal analogues to complex biological characteristics such as vision, which are such good ideas that they evolve independently in many species, and are in is seldom abandoned as a result of evolutionary processes.
Parson’s list of the ‘evolutionary universals’ includes markets and money but it also includes “authority of office…backed by coercive force” as “the most effective large scale administrative organization that man has invented, and there is no direct substitute for it.” For Parsons, states as well as markets, pass the test of evolutionary success.
DSW: Can you sum up your critique of Hayek, which I am interested to compare with my own.
SB: I imagine you would focus on shortcomings of his conception of cultural evolution. But to me, he was a great economist whose political agenda did not follow from – even is contradicted by — his contributions to economics. Even more. I think that the liberal values that Hayek espoused would be safer in the world today had he stuck to economics.
DSW: Another remarkable claim, Hayek as a danger to liberal values! How is that?
SB: The union of political liberalism with Hayek’s economic liberalism – laissez faire– has proven to be an unhappy marriage. It is no surprise that some of those who have fared worse during the last quarter century of right wing resurgence are attracted to xenophobic nationalism and intolerance. In the early 21st century it is not ‘big government’ that is the threat to liberal values. Ask yourself: where are they key liberal ideas of tolerance, the rule of law, and defense of the weak against the strong more secure today: the Nordic countries (where governments comprise half of the economy) or the U.S, where Hayek’s political vision has been widely embraced?
Hayek rightly insisted that the question of how best to organize society could not be answered in abstract terms but required instead historical and empirical comparison. I wonder if he might today – on empirical grounds – reconsider his view that a larger government role in the economy is a threat to liberal values?
DSW: As you know, I’m a big fan of Elinor Ostrom and was privileged to work with her to generalize her core design principle approach and polycentric governance from an evolutionary perspective. I think that she points the way toward a middle road between laissez faire and centralized planning more than Hayek. What is your opinion and how do the ideas of Hayek and Ostrom relate to each other?
SB: In opposition to social engineering, Ostrom, like Hayek stressed our human capacity for what might be called bottom up problem solving. She demonstrated that small communities often address problems of environmental degradation such as the tragedy of the commons through a combination of social norms and local rule making. I would place the work of Ronald Coase in the same “bottom up” tradition: he showed how bargaining can often take account of environmental or other ‘external effects’ even where markets fail and governments are either insufficiently informed or motivated to do the job. But Ostrom and Coase differ from Hayek, too. Both gave careful attention to empirical cases – in Ostrom’s case, the result of painstaking fieldwork – and for them the key to solving social problems – communities for Ostrom and bargaining for Coase – was not an unregulated market.
DSW: When we retain Hayek’s positive contribution and add the advances in economics and evolutionary science, what road does it take us on, if not the road to laissez-faire?
SB: The key to my reply is a fact that Hayek stressed: information is scarce, and what one person knows another does not. A result of this situation – called ‘asymmetric information’ – is that it is impossible to write an enforceable contract to cover all of the aspects of the exchange that matter to someone affected. Perhaps surprisingly, what seems a detail – the contract is incomplete – turns the standard economic model on its head. Developments in microeconomic theory over the past 3 decades — I won’t do the heavy lifting here (it is in my Microeconomics: Behavior, Institutions and Evolution) – have shown three paradigm shattering results. First, even competitive markets need not clear in equilibrium; so, for example unemployment, and people without wealth excluded from the credit market are predictions, not anomalies to be explained by ad hoc ‘frictions” or other ‘deviations’ from the standard model. Second, market failures are ubiquitous – they occur in credit and labor markets, for example, not just environmental spillovers — not exceptional. And third, employers, lenders and other “principals” in principal-agent relationships wield power over employees and borrowers.
The irony is, David, that the information revolution in economics that Hayek kicked off well over a half century ago, ended up pointing to a larger public role both in rectifying market failures and in addressing the problem of unaccountable power exercised by employers over employees.
But a new paradigm along these lines is not simply a refurbished Nordic social democracy, or even less centralized planning. It points to an active role for a democratic civil society, and not simply government regulation.
DSW: There are a number of scholars who share your high opinion of Hayek-the-economist, at GMU’s Mercatus center, for example, and around the world. But it is probably fair to say that Hayek is not part of the canon that economists consider essential to their field. Why is this?
SB: True, and economics has been impoverished as a result. Two reasons come to mind. First, Hayek’s vision of the economy as a complex evolving system was less readily rendered in mathematical form than the Walrasian paradigm that dominated economics in the late 20th century. This limited its take-up among economists because we – rightly in my opinion – place a high value on the precise formulation of models using mathematics where this is possible. Second, in the aftermath of the Great Depression, Hayek’s bitter opposition to Keynesian stabilization policies and other forms of highly beneficial government regulation of the economy led many economists – few of whom bothered to read Hayek — to reject his other, more fundamental insights. His reputation has also been tarnished by extreme claims on behalf of laissez faire made by those claiming his mantle. In this he has suffered a fate similar to Marx: his economic insights have been overlooked in part because those who most famously took up his name advocated systems that were rightly opposed by most scholars.
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Being an argumentative type , I’ll add a few comments to this article. Hayek argued that while in centrally planned economies an individual or a select group of individuals must determine the distribution of resources, these planners will never have enough information to carry out this allocation reliably.
The argument here is that prices are messages which sounds fine in theory but in practice get hit by a Mack truck. For one, how do we know that the messages are truthful or not or may be simply be lies.
Remember the Libor scandel (https://en.wikipedia.org/wiki/Libor_scandal) when the banks were corrupting the reported interest rates? Does anybody believe the reported official unemployment rates? The inflation rate? Are each countries interest rates what they should be or are they being corrupted for political purposes? How can wheat prices be informative if they are subsidized? If some of the core messages that are used to run an economy are so much BravoSierra, then how can the economy be run by the market properly? Could this be one of the reasons why the world’s economies seem to be crumbling? Does Hayek account for the idea that bad behaviour pushes out good behaviour in an economy. Where does the concept of corruption fit into his theories?
His insistence that economics had to be about change, not stasis I find spot on but the idea that I have a problem with is that claim that evolutionary reasoning for an economy is a thing. The trouble here is that you find the same mistakes repeated with each generation as each new cohort figures that they have finally cracked the DNA of how an economy can be made to work – or so they think. It can only be an government with an institutional memory that has a chance of setting workable boundaries. An example is the 1933 Glass–Steagall Act which separated investment and commercial banking activities. It worked for 70 years until Clinton trashed it. Less that a decade later the economy went into a ditch.
As a side note, I found that Hayek may have agreed with single-payer heath when he said: ” Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong..” How about that!
I’m talking out of turn here because I’m saving this article to read in the pm.
“As a side note, I found that Hayek may have agreed with single-payer heath when he said: ” Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong..” How about that!”
As well as your other insightful comments above, I had come across this Hayek quote before. I would suggest that the idea can be “hacked” in a number of ways. He introduces the state, imo, (and we need to clarify what he means by the ‘state’ because the state could be many things) as a player in risk mitigation that would most likely become a vehicle for wealth distribution upwards as well as diverting resources from the entire society to the 1% by allowing them to charge us for services but lay off the risk onto the government (not necessarily the state) of the entire population. (Isn’t this really Obamacare? + bank bailouts writ large? – profits for the few, risk for the many.)
On the other hand, we could hack the inclusion of the social state into the neo-liberal equation to mean that there are common, public goods by the simple virtue they incorporate everyone and there should be a mechanism to provide vanilla goods to everyone at vanilla prices. If there must be competition, make it a quasi-government competition between small providers, capturing local price-cost contingencies, who provide the best balance between health and costs given local circumstances + maybe a distribution mechanism to ensure basic preventative care throughout a territory. Work/hack the present system and make it: KISS (keep it simple ********).
Just thoughts about to your comments, signifying nothing.
“In this he has suffered a fate similar to Marx: his economic insights have been overlooked in part because those who most famously took up his name advocated systems that were rightly opposed by most scholars.”
This overlooks the fact that Hayek himself was more than comfortable with authoritarian government, most notably his keen support for Pinochet’s Chile. Hayek first visited Chile in 1977, 4 years after Pinochet’s bloody coup d’etat and conveniently ignored Amnesty International and other humanitarian groups catalogues of brutality and repression within Chile.
Philip Mirowski and Edward Nik-Khah, The Knowledge We Have Lost in Information: The History of Information in Modern Economics. New York: Oxford University Press, 2017. x + 298 pp. $35 (hardback), ISBN: 978-0-19-027005-6.
Reviewed for EH.Net by Bruce Caldwell, Department of Economics, Duke University.
In the wonderfully–titled The Knowledge We Have Lost in Information, Philip Mirowski (University of Notre Dame) and Edward Nik-Khah (Roanoke College) offer a revisionist interpretation of the development of economics in the post-war period. A central thesis is that the rise and reification of the information concept is “the pivot point around which economics, computation, and politics revolved” (p. 29). I will first summarize telegraphically their history of the development of economic theory and its effect on the behavior of economists, then turn to their larger narrative, in particular the role played by F. A. Hayek and neoliberalism in their story.
The information concept as presented by the authors is multivalenced. After noting Hayek’s early work on the knowledge problem (how can social coordination occur in a world of localized and dispersed knowledge?) and the incubation of a neoclassical approach to information at the Cowles Commission, the authors trace the emergence of three later traditions within economics, each having its own unique approach to the treatment of information. These modalities differ according to how information is modeled and the significance that each accords to agents’ knowledge. The Walrasian school, associated with Leonid Hurwicz’s work on mechanism design, treats information as a valuable thing that agents possess. The game-theoretical Bayes-Nash school views knowledge as something arrived at by induction and which is tacit or inaccessible to agents. Finally, the Experimental school views information as something computable, and, in the light of the outcomes of zero-intelligence agent experiments, believe that when the structure of the market is right, agents’ knowledge is irrelevant.
Crucially, these changes in the way that economists view knowledge affected how they came to see their own roles. While the first school saw their job as helping agents to collect and use knowledge, and the second as helping agents infer what their knowledge was, the third stopped worrying about agents’ knowledge altogether and focused on creating boutique markets. This has had some troubling consequences: “over time, economists have relinquished a concern for ensuring that markets give people what they want, and increasingly insist that they can make markets produce any desired outcome regardless of what people want” (p. 158). Mirwoski and Nik-Khah illustrate this with examples of Economists Behaving Badly (that is, privileging favored groups) in their roles as expert advice givers and market creators in both the private and public sectors.
The chapters that cover this material are at times dense going, and because they hew to a particular narrative thread certain nuances among and within schools must be forgone. That said, the authors offer a technically sophisticated and well-argued account of recent developments in economics that is worthy of careful consideration. One hopes that contributors to the various schools might themselves be induced to offer responses to their history.
One surprising element of their story is the major role they accord F.A. Hayek. It is well known that Hayek’s writings about the knowledge problem during the socialist calculation debate and in subsequent work — especially his 1945 piece, “The Use of Knowledge in Society,” which invariably is cited by information theorists as a jumping off point for their own contributions — provided a challenge that inspired Hurwicz and others. Furthermore, economists who prefer market over legislative solutions to all manner of problems — and this evidently includes those “designing” markets — also typically invoke his name. But the authors assert more. Perhaps most important for their account is the claim that changes in mainstream economics mimic changes in Hayek’s own thoughts about knowledge. This becomes more meaningful when one realizes that Hayek is a founding father of neoliberalism. In their view the neoliberal project is hostile to democracy and aims to use the power of a strong state to impose market solutions on people, regardless of what people want. One begins to see the connections. Recent developments in economics reflect not just Hayek’s views on knowledge, but may also reflect the logical conclusion of his political views. – snip
http://eh.net/book_reviews/the-knowledge-we-have-lost-in-information-the-history-of-information-in-modern-economics/
Just for…
https://www.ineteconomics.org/perspectives/blog/this-is-water-or-is-it-neoliberalism
disheveled…. Mon dieu… could the economists actually be the contaminate of democracy in the first bloody place, since most seem to have anti democratic tenancies due to price signals. Everything is a market – barf~~~~~
This interview possibly does not do justice to the certainly richer argument developed in the book, but since it reassesses a pioneering work, the omission of some historically essential elements is odd.
There was an even more relevant ideological concern: every society turned into a largely planned economy during the war — allocation of resources, top-down decisions about which goods to produce, universal rationing. When it came to an existential issue, markets were not relied upon — even in the most capitalist economies such as the UK and the USA, and this was giving pause for thought.
“Not well” meaning “disastrously”. I do not have the references at hand, but during the 1930s there was a whole school of economics which, on the basis of the standard Walrassian neoclassical models and mathematics prevalent at that time, demonstrated that if those assumptions were fulfilled (i.e. information capacity of agents, economic equilibrium, supply-demand curves, etc), then a centrally planned economy would work at least as well as a market-based economy. With the Great Depression and keynesianism, this completely undermined the neoclassical theory (or should have).
Finally, the concepts and arguments about an information-theoretic view of the economy, the balance between command and exchange economy as reflected by firms vs. markets, the choice between centrally planned and market based approaches, the incompleteness of information and the impact on contractual relationships, economic agents not being able to optimize, etc, were widely known in the 1950s.
See for example the very influential book “Organizations” by March and Simon, which examined the economy as an informational system run by satisficing agents — ideas similar to those of Hayek. The late 1940s and the 1950s were the epoch of Cybernetics, with Herbert Simon a father of the discipline, Shannon and Weaver founding the theory of information, and the inception of computing, and the ideas discussed in the article were not some obscure, forgotten insight, but fairly well-known concepts at that time. Except for the group evolutionary concepts, which seem to me new in economics, the article seems to rediscover an actually well-trodden territory.
It is not just the lessons of “an economy as an informational system of agents with limited capacity structures itself into markets, centrally planned states and hierarchically organized command and control entities called firms for good reasons because of computational resource constraints” that were well-discussed and disappeared from general knowledge since then. The lessons of the famous Cambridge capital controversy, which ended in the scientific rout of neoclassicals/neoliberals regarding the core definition and measurement of capital as such, were utterly obliterated from economic discourse and knowledge (and are weakly popping up again because of Piketty’s work). That process of wiping-out novel intellectual achievements (including those of Hayek) is the one that should be elucidated.
Oh, don’t bring up Marginalism with AET or Theoclassicals whilst wading through the monetary or economic discussion…. its just not permitted[.]
I agree about the information asymmetries, Yves, particularly with regards to cartels. Phrased another way, if prices are messages then how does one distinguish profit from value when the two fail to overlap? What are we to make of insulin that sells at 10x more than it costs to make.
The issue of transaction costs looms too. How are we to judge them as forces that push individuals to form corporations (I.e., Coase)? How do you estimate what you don’t see?
How are we to handle opportunity cost, which definitely can’t be inferred from price?
They should link their work on group selection to recent advances in understanding the persistence of biological life as dissipative systems. What constitutes measuring entropy here? Can it be related to the new work on the complexity and diversity of national economies and their growth rates?
Diversity is healthier than complexity. I was thinking entropy too. Clearly what human economies need is entropy insurance because economies are all one big vested risk. Evolution is spin-off. Disruptive subordinates and innovation are both evolution. And evolution is the even dissipation of energy. I think we could approach a true theory of economics, someday. So obviously there is never perfect information because it evolves. Would there still be an “economy” if there were perfect information? Inflation would be impossible, no? Toss in some random variables like greed, willful ignorance, and staunch denial – and maybe a little dark matter and we might have something. If economic systems are tribalism, they don’t last forever. In the meantime what we need is a good society. A clean environment. Fairness. Distribution.
“Yet the “mini-planned economies” of companies face precisely the same problem.” of course, there is always political filtering going both up and down. Not only is information imperfect, so is intent.
On the political angle, cherry picking for quotes by Hayek that just happen to support a particular policy advocacy … isn’t a valid method of analysis. But the “general mind of the market” is a lot like a development on “hidden hand”. Both seem to be irrational anthropomorphisms. IMHO .. chaos theory is more appropriate.
It’s the inherent informational problem with all power hierarchies: everyone lies to their boss. This means misinformation builds up the higher up the hierarchy you go, just like environmental toxins bio-accumulating as you go up the food chain.
I’m not buying the entire argument, it’s always about individual human actions and motivations at the most micro of levels, each of those microscopic decisions and actions aggregate up into something people attempt to discuss and define as “the economy”, as though it was some kind of knowable machine. And if we could just understand this complicated “machine” deeply enough, we could then control it from the top down (as this article discusses), and all would be well.
A better analogy perhaps is the ocean, an oceanographer and a weatherman can make some very general observations about how it’s behaving on a macro level. But the skipper of a boat on a windward shore nearing some rocks pays absolutely no attention to what he heard the wind direction or currents were supposed to be, he/she acts in their own immediate micro interest based on the immediate real-world circumstances. “The economy” then is just millions of skippers all rolled up, each acting on their own local micro circumstances driven by their own hyper-local and ever-changing best interests. And you’re going to model that? And what, impose rules that say “all skippers must now sail due East?”.
Ask the people who experienced The Great Leap Forward how they feel about top-down command-and-control anything, they were all told they had to build forges in their back yards and were forced to produce quotas of steel. They threw all their spades and hoes and axes into the fires to try and comply, and then they starved to death. About 25 million of them.
There’s a reason they call it “the dismal science”, it’s because each and every day its practitioners realize it’s not a science at all, and feel dismal.
Yes. And it would be worth considering how much of a boost selfish motives would get under a regime imposing the death penalty for production sabotage.
Isn`t there a general contradiction in this interview? Let`s go to the end:
All the praise on Hayek’s evolutionary view is trashed when it is argued that economists should “rigthly” place a high opinion on the econometric models. Isn’t it?
“It points to an active role for a democratic civil society, and not simply government regulation.”
Funny stuff, this is what 200 years of economic thinking leads to, too bad no one really cares about democracy at this point.
Like so many “big picture” arguments, e.g., planned vs market economics, what’s missing is a commonly agreed upon measure of success. Is my economy better than yours because mine has a larger GDP?, or because median income is higher?, or because mine has won a war or is likely to win the next one (some may scoff at this, but in the fifties most people embraced the notion that it was our more successful economy that won WWII and would allow us to prevail in the cold war, and that was all the argument many people needed)? In my own simple formulation, no political/economic formulation that allows significant portions of its population be homeless, malnourished, undereducated, or without decent prospects for Jefferson’s pursuit of happiness to be a success.
I’m sure that these days if everyone had to complete the sentence “A good economy is one wherein …” there would be no consensus whether or not you limited the discussion to professional economists, the guy in the street, or whatever.
But without an agreed upon definition of success, an argument is pretty pointless.
I bed to differ, there are good measures of success, two metrics:
1. Infant mortality
2. Longevity.
What other metrics can measure how successful is a civilization?
3. The longevity of the civilization itself.
4. The number of other civilizations it destroys/assimilates.
5. The size of the ruler’s harem.
6. The impressiveness of its architecture.
7. How many times it has won the World Cup.
8. Being the first to launch a spaceship to Alpha Centauri.
Samuel Johnson said a society can be judged on how it treats its least fortunate.
“It always struck me as curious that Hayek developed a radical alternative to general equilibrium theory, but both were used to justify the same laissez faire economic policies and that Hayek and Friedman were both central figures in the Mont Pelerin Society. This makes me think that the impulse to justify laissez faire policies came first and steered the theorizing in both cases. Is that an unfair thing to say?”
SB: Yes, that would be unfair, both to Hayek and to the pioneers of general equilibrium theory.
I don’t believe that this is an unfair thing to say. The Mont Pelerin Society was set up by wealthy patrons precisely to provide an alternative–neoliberalism–to the New Deal, and any other alternatives to the rich and powerful controlling the economy. Economic historian Phillip Mirowski deconstructs the MPS in his seminal work–Never Let A Serious Crisis Go To Waste.
“Mirowski insists that a key error of the Left has been its failure to see that markets are always embedded in other social institutions. Neoliberals, by contrast, grasp this point with both hands — and therefore seek to reshape all of the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy has meant not the retreat of the state so much as its remaking.”
Separating economics from political science was a masterful stoke by the powerful. Political/economy offers a much more robust analysis as economics is always political. As heterodox economist Michael Hudson says–“All economies are planned, it just depends on who does the planning.”
“Camelot” thesis validated here, by George Monbiot:
“The term neoliberalism was coined at a meeting in Paris in 1938. Among the delegates were two men who came to define the ideology, Ludwig von Mises and Friedrich Hayek. Both exiles from Austria, they saw social democracy, exemplified by Franklin Roosevelt’s New Deal and the gradual development of Britain’s welfare state, as manifestations of a collectivism that occupied the same spectrum as nazism and communism.
In The Road to Serfdom, published in 1944, Hayek argued that government planning, by crushing individualism, would lead inexorably to totalitarian control. Like Mises’s book Bureaucracy, The Road to Serfdom was widely read. It came to the attention of some very wealthy people, who saw in the philosophy an opportunity to free themselves from regulation and tax. When, in 1947, Hayek founded the first organisation that would spread the doctrine of neoliberalism – the Mont Pelerin Society – it was supported financially by millionaires and their foundations.
With their help, he began to create what Daniel Stedman Jones describes in Masters of the Universe as “a kind of neoliberal international”: a transatlantic network of academics, businessmen, journalists and activists. The movement’s rich backers funded a series of thinktanks which would refine and promote the ideology. Among them were the American Enterprise Institute, the Heritage Foundation, the Cato Institute, the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute. They also financed academic positions and departments, particularly at the universities of Chicago and Virginia.
As it evolved, neoliberalism became more strident. Hayek’s view that governments should regulate competition to prevent monopolies from forming gave way – among American apostles such as Milton Friedman – to the belief that monopoly power could be seen as a reward for efficiency.”
https://www.theguardian.com/books/2016/apr/15/neoliberalism-ideology-problem-george-monbiot
This whole debate about the merits and demerits of planned vs free market economies is imho of academic interest only. The markets aren’t free, they’re cornered by the rentier class, and for all intents and purposes, the state isn’t at loggerheads with the markets (i.e. seeking to regulate them), it’s their enabling mechanism. So the point of which one is more efficient became moot when the government became, as JTMcphee so eloquently put it recently, “a wholly owned subsidiary of the rentier class”. Under the current scheme of markets providing soft landings via revolving doors for state bureaucrats in search of “new opportunities”, the state does intervene to correct imbalances or frictions in the market, when said frictions and imbalances threaten the status quo.
Secondly, this whole drawing of analogies between economics and evolutionary biology, with its attendant opaque language, is yet another attempt at “rigor signalling” (creating an impression of scientific rigor) on the way to crowning economics a science.
“The whole about the merits and demerits of planned vs. free market economies is imho of academic interest only.”
To the contrary, I would argues that the merits and demerits of planned vs. so called free market economies is likely to become one of the most important political/economic issues of the next decade. Key theoretical frameworks, like MMT (See Reclaiming the State by Mitchell and Fazi) are already preparing for this debate through offering arguments attacking portions the New Left of the 1960s/early 1970s for its failure to create a new theory of state fiscal relations that could underpin a more powerful left narrative. Mitchell sees the operational reality of modern fiat economics as the foundation for what he calls an emancipatory vision of national sovereignty through his, as yet, somewhat hazy vision of more centralized planning through an even more powerful State–but supposedly, somehow, under real democratic control.
For your assessment to be viable, the state would have to extricate itself from the clutches of the rentier class. I will agree that theoretical frameworks like MMT can provide a template for how the political economy could be remodeled and national sovereignty reclaimed (while sounding the caveat that, again, as stated above, much depends on the rentier class being deprived of the sway they currently hold over the state).
You should challenge Mitchell and MMT in that area.
It is not only the rentier class but also our present national security/surveillance community that somehow must be deprived “of the sway they currently hold over our modern state.”
What are your ideas on how such extraction (for both networks) might take place?
Disclaimer: I’m South African living in South Africa so I do not pretend to have informed answers about what constitutes viable ideas regarding your question in the American context.
That said, i’d say that speaking in generalities, the less special interests (corporate/wealthy individuals etc) are allowed to covertly infiltrate the machinery of the state by funding political campaigns and politicians, the more the state itself, which is run by said politicians, will extricate itself from their dictates (I.e. the sway they hold over it), and I believe this is applicable in the US as well. But, the sentiment i’ve picked up from some readers here at NC is that reforming the US political funding landscape dominated by big donors will be a big ask, and the lobby against such a reformation would be formidable. As you rightly say in your comments, the left missed a glorious opportunity to reframe the narrative when the conditions were ripe for such a reframing to take hold, and now face a monumentally more difficult task (several orders of magnitude perhaps??) in achieving this. The state machinery would have to be populated by reformed thinkers for frameworks like MMT to be wholly embraced, not the current intellectually captured lot.
As for the surveillance/intelligence network, well, from the little that I know, post 9/11 and its legitimization of mass scale surveillance under the guise of “keeping americans safe”, nothing short of socio/cultural/political revolution in the US would allow the state (and society at large) to extricate itself from its clutches.
“offering arguments attacking portions the New Left of the 1960s/early 1970s for its failure to create a new theory of state fiscal relations that could underpin a more powerful left narrative.”
…jim; some might note that “new left” (leadership) was assassinated out of existence…rather than
“failure to create new theory..”
and lest we forget (what most may have never “remembered”): “The Devil’s Chessboard: Allen Dulles, the CIA, and the Rise of America’s Secret Government”
“Dulles’s decade as the director of the CIA (and previous history, OSS)—which he used to further his public and private agendas—were dark times in American politics. Calling himself “the secretary of state of unfriendly countries,” Dulles saw himself as above the elected law, manipulating and subverting American presidents in the pursuit of his personal interests and those of the wealthy elite he counted as his friends and clients—colluding with Nazi-controlled cartels, German war criminals, and Mafiosi in the process. Targeting foreign leaders for assassination and overthrowing nationalist governments not in line with his political aims, Dulles employed those same tactics to further his goals at home..”
(no accident)
Markets don’t exist as some natural order of the universe. Even informal markets have “rules”. Once you start taking about rules (or regulations) then you enter the realm of politics and power. He who has the power makes the rules.
Yeah. You and Thuto nail it.
“If there were only one man in the world, he would have a lot of problems, but none of them would be legal ones. Add a second inhabitant, and we have the possibility of conflict. Both of us try to pick the same apple from the same branch. I track the deer I wounded only to find that you have killed it, butchered it, and are in the process of cooking and eating it. The obvious solution is violence. It is not a very good solution; if we employ it, our little world may shrink back down to one person, or perhaps none.
A better solution, one that all known human societies have found, is a system of legal rules explicit or implicit, some reasonably peaceful way of determining, when desires conflict, who gets to do what and what happens if he doesn’t…”
Friedman, David D.. Law’s Order: What Economics Has to Do with Law and Why It Matters (p. 3). Princeton University Press – A. Kindle Edition.
Ha, ha, spot on. “Assume a can opener…”
The whole reason why Hayek and Friedman became powerful was because their ideas were the type of ideas that the rich wanted to advance.
As far as deregulation, we are not seeing so much as deregulation as much as regulation that is biased in favor of the ultra rich and against the people.
An example is bankruptcy laws and interest rates. It is not so much that student debt, which in the US cannot be discharged in the event of a bankruptcy, is deregulated as much as it regulated for the lenders. The same could be set about maximum interest rates and usury laws. They are ruthlessly exploited by credit card companies and payday loans. There is a bigger issue. The whole reason why student loans and payday loans are a problem is because the ultra rich have stolen all the gains in productivity for the past 45 years or so for themselves.
Then there are the cuts to education and investment, both corporate along with government. Both are effectively in the hands of the plutocracy. Again this is not worth much deregulation as much as it is regulated in their favor.
The problem is that society is oriented towards making rich richer at the expense of the rest of the world. That is because the ultra rich are in control. This neoliberalism is just a propaganda cover for their real goals, unconstrained greed.
The new Mirowski and Nik-Khah text, mentioned by Skippy above, does an excellent job of pointing out how, Hayek in his 1945 essay, brilliantly succeeds in redefining what a market does. The market:
“…is thus not merely a problem of how to allocate “given” resources…it is a problem of the utilization of knowledge which is not given to anyone in its totality.”
Mirowski points out that because of this Hayek initiated new epistemological difficulty, which supposedly exists under socialism, the market ceases looking like a mechanical conveyor belt, and begins to take on the vague outlines of a computer.
What Mirowski also finds stunning is the degree to which this new definition of markets not only swept MPS but also most of the Left market socialists.
Mirowski states: “…this new image of the markets as superior information processors so comprehensively swept everyone along–neoclassical theorists, market socialists and neoliberals–with almost no serious scrutiny or skepticism is one of the most astounding facts the latter twentieth century in economics.”
Even more fascinating is the Mirowski and Nik-Khah chapter entitled “Hayek changes his mind” which gets into Hayek’s concept of human consciousness.
Again, I would argue that one reason why the modern left is in shreds is because of their failure to deal seriously with this issue of human consciousness and how it actually may function.
In The Use of Knowledge in Society, Hayek notes that prices in the actual economy do not vary enough to convey the amount of information he is suggesting they could and should in an ideal market economy. It is an indication of how closely and critically Hayek was observing both the implications of his own arguments and the actual economy that he would notice! Hayek argued that this discrepancy indicates that a policy of encouraging greater price flexibility would improve the efficiency of a market economy. Of course, greater flexibility became a neoliberal standard recommendation.
I do not understand why Bowles can say,
with so little critical self-awareness. I understand he is trying to explain Hayek’s argument, but shouldn’t we note that most prices are administered? That a “planner” sets and maintains the price of an iPhone, a hamburger at McDonald’s or potatoes at the supermarket?
Hayek did insist on “the importance of scarce and local information” but he often did so with a stubborn resistance to critical thinking, because he was ideologically hostile to the reality that people acting in the economy are often obligated to follow rules in choosing their own behavior. Rule-driven behavior pervades the economy and carries the implication that authority is a necessary element in generating, prescribing and enforcing rules. If information was local and private — as some undoubtedly is — the actor can be his own principal, take his own counsel and can only be harmed in his character as well as his welfare, by the promulgation of rules that interfere with the individual’s scope for self-governance.
The reality of economic life is that a lot of information is not local at all. Small things locally add up to global consequences. Conventions and constraints are prescribed as rules precisely because individually we often do not have either sufficient data locally or an adequate model in our heads to manage our finances, our diets, our smart phones, or our production of intermediate goods and services for others.
Prices, it should be noted, do not contain much information; in their common form, they are the fixed fulcrum for a managed lever. But, why let reality intrude?
Yes, the information-processing market is an interesting idea, but it is a complete sky-castle.
In reality a commodity has a known objective cost-price, an unknown subjective use-value and a known objective exchange-value or sale-price, which must fall between the other two or there will be no sale.
The seller may maximise his profit by haggling with each buyer individually (since they all have different use-values) but in practice he just sets a cost-plus-margin price roughly where he thinks he will get the most sales. Changing the price then costs him money so he does it rarely. Thus most of the information the price could contain is drained away.
“known objective cost-price”
Hmmm. Not likely.
You think the manufacturer doesn’t know how much his products cost to make? Or the merchant how much he paid for his stock?
I hope you don’t think me churlish for saying, emphatically, no. In an objective sense, I don’t think firms do know. They guess. They make bets. And, a second point: there’s no necessary relationship between cost and price — certainly none that would justify hyphenating cost-price or positing “cost-plus-margin”.
There’s something fundamental at stake, here, regarding our understanding of the economy. Bowles talks of asymmetric information and incomplete contracts turning the standard model of neoclassical economics “on its head”. Just so, I say, but I would label the critical difference more generally as “uncertainty”, which is not-knowing. Knowing some things, but not others and not being sure of what one does not know or will learn.
The neoclassical model of market price under perfect competition is a model that presumes sufficiently complete information for actors to make decisions that are efficient. The cost structure they take to be typical reflects this completeness: marginal cost is rising, approaching average cost and under competition (which is to say, without anyone exercising strategic judgment) cost settles at a market-clearing equilibrium where marginal revenue equals marginal cost. Under perfect competition, that marginal cost equals price and price is equal to social opportunity cost.
Under uncertainty, that cost structure rarely obtains. Instead, firms make sunk-cost investments with full strategic awareness and marginal cost is likely to be much less than average cost and falling in the relevant range of output. There can be no market equilibrium with marginal cost less than average cost and falling. Probably, the firm has to price discriminate to obtain enough revenue to cover its costs and a return on its sunk-cost investments. Price isn’t equal to social opportunity cost; it is a gambit. The firm really does not know “objectively” what its products cost; the firm makes a strategic plan, and starts calculating on “loss leaders” and “advertising” and scale of operations and learning curves and what the price may say to consumers about quality and so on.
Fundamentally, in a world of uncertainty, equilibrium in market price is at best a rare exception. The conditions in cost structure will rarely obtain. And, far from having sufficient, private, local knowledge, what people are granted is local ignorance and a need to probe for or accumulate knowledge. Bowles says knowledge is scarce, which is not to my mind a precise way to speak. But, knowledge can certainly be insufficient.
The neoclassical model presumes sufficiency. It is not realistic to do so.
Agreed. Are you familiar with Anwar Shaik’s work? Sounds in the ballpark. He’s got his graduate course available at http://www.realecon.org
The neoclassical model is not realistic. No need to convince me of that.
Uncertainty is certainly pervasive, but this is not quantum mechanics. A firm may be uncertain of the cost of its products before it makes them, but if it does its accounts properly it will know exactly how much it spent at the end. If it doesn’t it will not be in business for long.
So there is a “necessary relationship between cost [of production] and [sale] price”: the latter must exceed the former or there will be no profit.
By “cost-price” I simply mean the amount of money spent to produce the commodity, which I suggest the producer is quite certain of.
By “cost-plus-margin” I mean the producer sets his sale-price by adding a markup to his cost-price. What the profit-maximising markup should be is uncertain, but it isn’t zero.
Maybe you are overthinking it.
I feel like I am belaboring my point, but, yes, I believe you are severely underthinking the problems of the firm in managing its production and distribution processes.
Double-entry bookkeeping is a wondrous thing, but I do not think an accounting of money expenses over any period establishes the unit cost of production as an objective fact as against a guess predicated on a strategic choice. Expenses and costs are not the same thing. And, I certainly do not think any producer “sets his sale-price by adding a markup to his cost-price” — that is not what happens at all.
Imagine you owned a small bakery with a retail shop. You advertise. How do your advertising expenses relate to the unit cost of making a donut? Does it add to the cost (– it is an additional expense)? Or, reduce the unit cost because advertising allows you to produce and sell a larger volume and there are economies of scale and fixed costs to cover (including the fixed costs of advertising)? You have to make a guess as to the counterfactuals, you have to have a theory (or model) against which you interpret your daily sales totals — did this promotion work? should you pass out flyers? coupons? how elastic is demand? would you make more money with a lower price?
Everyday, you would make more product than you expected to sell, because the cost of a missed sale is greater than the cost of making and throwing away (or transferring to the “day-old” bin) product. You would worry over whether your “day-old” price was cannibalizing your fresh sales. You might sell (or give away!) coffee in the morning. You might throw in an extra donut or cupcake to make the proverbial baker’s dozen, because it seemed to make your customers loyal. You might contract to deliver donuts to local offices. You don’t “mark-up” to get prices; you have lots of different prices, including “free” (“buy one dozen, get a dozen free!” or “free coffee” with purchase), because the marginal cost of another loaf of bread or another cupcake is so much less than the average cost, that the net revenue from another transaction, even at less than average unit cost, is worth it, is revenue that may let you recover a return on your sunk-cost investment in learning to bake, renting a location, leasing ovens and display cases, and, yes, baking a quantity of product in anticipation of later sales.
In this mad scramble to survive, which is business, people really do not “know” the answer. They get creative (or depressed — that’s pretty common) and try to manage things. It is not even strictly necessary that revenue exceed expense, if they are good at borrowing money or delaying payments. Read about Amazon or Uber or Tesla on this blog!
Evolutionary approaches, as I understand them, are attempts to make some sense of what people do, groping in the face of uncertainty and the social-welfare outcome of such processes. But, if the answer is not going to simply reproduce Dr. Pangloss’s confidence from neoclassical certainty that this is the best of all possible worlds as another iteration of Spencer’s “survival of the fittest” and social darwinism, then we need to be clearer about the reality of fundamental uncertainty and its implications. imnsho.
I am abstracting away (ie. ignoring) the problems of the firm in managing its production and distribution processes since it is mostly invisible to the market for buns, which is the level that Hayek is thinking at AIUI.
No doubt all that activity happens within firms, some more than others, but if the market can’t see it it can’t process it as information.
The market doesn’t know the cost-price of a bun. Maybe the baker doesn’t either. But the market will assume that it is less than the offered sale-price and the hapless baker will hope it is right.
You seem to be big on micro. I am more into macro. Hayek, I think, was kind of in between which might be partly why his economics gets less love than his politics.
The undeniable existence of uncertainty fatally undermines neoclassical economics. Evolution is an attractive alternative on the face of it but I fear it may just be a bad analogy. The environment is not natural, companies do not pass on their genes etc.
“mostly invisible to the market for buns, which is the level that Hayek is thinking at AIUI. No doubt all that activity happens within firms, some more than others, but if the market can’t see it it can’t process it as information.”
I would suggest there is no market for buns at all: that is just an unjustified construct — there is no such information-processing entity.
To hear such 45,000 foot blather from a guy who co-authored excellent works like “Schooling in Capitalist America” is dismaying. “Competitive markets need not clear in principle” ignores the overarching dynamics governing capitalist labor relations, which tend to produce an “industrial reserve army.” Is that a “market failure” or a fundamental market parameter in a capitalist economy? I wish the interviewer had the sense to take note of his shift and given him a chance to look back rather than demonstrate his fluency in market-centric jargon. Mirowski, who is of the same generation, must be surprised to have Bowles in his sights.
I felt something of the same disappointment. In his defense, he is promoting a project that takes Hayek’s most influential work as a hook. He is returning to the source of the Nile and trying to route the mighty stream in a better direction. Not sure that is likely to work, since it requires affirming Hayek. (Use of Knowledge is great paper, but as Mirowski shows, its neoclassical readers have made ideology out of it by being less critical than Hayek himself.)
The interviewer, David Sloan Wilson, is pretty awful — almost Charlie Rose in his empty-headed self-regard; let’s hope he doesn’t have a bathrobe — and typical of the credentialed fatuousness that seems to flutter around INET and Evoeconomics. If Bowles had an interviewer who listened and been asked better questions, he would not have had to toss his bundle of canned criticisms from 45,000 feet; the interview would have swooped much closer to the ground.