An Interesting Tidbit from our friend Daniel Kuehn

Economics Economics Questions
1

" And the reason why I made that conversion is important. Libertarian insights in a lot of ways are basic, Econ 101 insights about the efficiency of free contracting writ large and converted into norms or political values. In other words, I think one of the most essential libertarian fallacies is building a politico-ethical system around positive social science findings (and, I want to stress, basic and introductory social science findings at that). It’s kind of an odd way of going about formulating a politico-ethical system. We don’t adopt Nietzschean super-man ethics because of evolutionary biology, and we shouldn’t simply adopt libertarianism because of these insights. I want to be clear - my point is not that you have to mix up normative and positive findings to come to libertarianism. My point is only that it’s possible to get everything there is to get out of libertarianism simply by improving people’s knowledge of social science. This is only to say that it’s not entirely clear to me what should be important here: teaching people more social science, or sharing libertarianism.

But even that isn’t entirely satisfying - after all, the reason why I abandoned libertarianism was because I kept learning social science. Yes, the market is efficient and the price mechanism leverages decentralized knowledge. But if institutions don’t or can’t internalize costs and benefits social scientific insights start to militate against the efficiency of markets. Uncertainty and imperfections ensure that market forces, as fantastic as they are, are going to remain sub-optimal. I haven’t abandoned any of the introductory insights in adopting these views - the complement the introductory insights that I still use. I still have a relatively contractarian view of human relations. I still take a fairly atomized, individualist view of things. I still come down on Hayek and Mises’s side of the socialist calculation debate. But I can’t call myself a libertarian. So, if what we really want is to get people to take the implications of social science more seriously, then its not clear that that would move people towards libertarianism either." -Daniel Kuehn

I think this is an interesting insight, though I find issue with it for this reason: Did Rothbard not “keep learning social science”? What about Walter Block, or other career Austro/Libertarians? Is there an implication that in order to maintain Libertarianism, we must stop at elementary observations? I’m sure DK can clarify if he wishes, and I hope he does. Anyway, thoughts?

2

It’s an intriguing quote, but I don’t think there is an argument in there (nor do I think he intended one). You would have to look at his other work and thoughts to make any conclusions about the questions you have.

I know little of this man - but my guess is that there is going to be a fundamental difference as to what intersubjective studies are, and what can and can not be said about them (sub-optimal?).

.

3

I just find it ironic that he accuses some of the insights to be “Econ 101”, but then he fails to really understand them. I know I’ve argued the same thing before with him; how can you agree with Hayek on calculation, and then go ahead and claim that you have any real inkling of knowledge on what is optimal and what isn’t?

4

Could you expound on that, Jonathan?

5

To me it didn’t sound as if he’s accusing libertarian insights of being unsophisticated, but rather pointed out their obviousness and accused those who don’t accept them. In other words: “Libertarianism is based on really simple insights, and should be more generally accepted than it is.”

I didn’t get the point of the rest of the quote, it seemed like he as building up to the argument that financial markets need regulating or that there needs to be environmental regulation or something like that, but he didn’t make such a specific argument, just a general ‘free markets can be sub-optimal’.

6

To me it sounds like he’s saying libertarian insights are just elementary and i takes a more comprehensive education in the social sciences to fully understand what it is libertarians advocate.

Btw where did you find this quote from OP?Can you link it?

7

I’ve been thoroughly unimpressed by everything I have read from this guy but then I have been unimpressed by what most libertarians have to say these days.

8

I just find it ironic that he accuses some of the insights to be “Econ 101”, but then he fails to really understand them. I know I’ve argued the same thing before with him; how can you agree with Hayek on calculation, and then go ahead and claim that you have any real inkling of knowledge on what is optimal and what isn’t?

Well, what exactly do you think Hayek’s calculation argument implies???

Hayek himself certainly didn’t think it meant that it made normative questions of “optimality” could never be answered. Indeed, he frames the question addressed in his article “The Use of Knowledge in Society” as whether planning or markets are more “efficient” (though he of course never defines his terminology):

Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge.
http://www.econlib.org/library/Essays/hykKnw1.html

At the same time, just because Hayek believed that central planning could never replace a market system in a world of decentralized of information, that doesn’t mean he was an anarchist. He supported the state and many efforts modern libertarians would find disturbing (even around the exact same time he working on his contributions to the calculationd debate) exactly because he didn’t think that markets were always the best institutions for channeling human behavior (if they were, why else would these other institutions have evolved along side them).

So could you elaborate more on your view point?

9

Could you expound on that, Jonathan?

In “Economics and Knowledge” Hayek differentiates between the objective data that may be known to economists and the subjective data which is revealed through the pricing process. Hayek’s entire argument is that you can’t centrally plan an economy, because you lack a major chunk of existing data – subjective data. This doesn’t just go for a central planning board, but also for an economist. Trying to figure out what is “optimal” and what is not is just as much central planning as designing the legislation that is based on that calculation of optimality.

Student,

Hayek himself certainly didn’t think it meant that it made normative questions of “optimality” could never be answered. Indeed, he frames the question addressed in his article “The Use of Knowledge in Society” as whether planning or markets are more “efficient” (though he of course never defines his terminology):

First of all, I don’t know what anarchism has anything to do with anything, so I’m not even sure why you bring it up. Second of all, what is more efficient relevant to another form of planning still has nothing to do with what is most optimal. Individual planning through the pricing process is more efficient than collective planning, explicitely for the reasons listed by Hayek (lack of sufficient knowledge to centrally plan), but that has no bearing on deciding what is most optimal, or where this optimality actually is. Like I wrote above, in “Economics and Knowledge” Hayek explains why economists (who are acting as central planners when they’re deciding what is optimal and what isn’t) can’t make calculations of this type. Also, I should mention Hayek’s “fatal conceit”.

EDIT: For what it’s worth, “Economics and Knowledge” came off to me as Hayek renouncing the viability of applying equilibrium models to the real world economy. He makes it clear that he believes that no economy is perfectly efficient. I also suggest two articles, available in Mario J. Rizzo (ed.), Time, Uncertainty, and Disequilibrium.

  • Mario J. Rizzo, “Uncertainty, Subjectivity, and the Economic Analysis of Law”.
  • Murray N. Rothbard, “Comment: The Myth of Efficiency”.

EDIT2: Regarding government institutions and their evolution, I agree that their development stemmed from gaps in the market. But, the market is also an evolutionary process. The role of government may have been relevant four thousand years ago, or maybe even two thousand years ago – I don’t know --, but as markets develop it becomes obvious that the “necessity” of government falls. Governments, though, don’t evolve out of the collective human action of society, rather they evolve through the human action of those in power, and so the evolution of government doesn’t reflect the preferences of society in the same way that the evolution of the market does.

10

Who cares what Hayek’s values were? They are irrelevant to whether or not his theories had merit.

These so-called institutions you keep referencing are mass delusions. Nothing more. The fact they have “evolved” is more a testament to the fact that humans can be incredibly stupid at times than any sort of efficiency or positive trend.

11

I brought up anarchy because I thought that’s where you were going. After all, if one could never identify when market outcome was sub-optimal, one could never favor government involvement in any market and Hayek certainly didn’t believe that. Sorry if i misread you.

But I am still not getting your argument. Your distinction between “efficiency relative to another form of planning” and “optimality” seem artificial. Claiming one system is “more efficient” than another is a normative judgement and I don’t see how one could make that judgement if one didn’t have idea of what an optimal system looked like.

Maybe I’m misreading you, again? Additional explaination (and supporting quotes from Hayek) would be much appreciated.

12

Student,

I brought up anarchy because I thought that’s where you were going.

??? I was talking about optimality.

After all, if one could never identify when market outcome was sub-optimal, one could never favor government involvement in any market and Hayek certainly didn’t believe that.

Sub-optimal relative to something else, not sub-optimal relevant to what is perfectly optimal, since you can’t know what is perfectly-optimal because you don’t know all the relevant data. By the way, Mises also believed that some government is necessary, but not because of optimality, only because he just thought that some government was necessary to allow the market to even work (i.e. protection of property rights).

Claiming one system is “more efficient” than another is a normative judgement and I don’t see how one could make that judgement if one didn’t have idea of what an optimal system looked like.

Err, and so is deciding what is optimal. Optimal in who’s opinion? What’s your point? What is better is based on a normative judgment, and everyone has an idea of what better is, but you can’t decide what is optimal from an economic perspective precisely because of a lack of sufficient data. The fact that optimality is subjective just reinforces my point.

EDIT: You’re going to have to read more than one article by Hayek. I suggest starting with “Economics and Knowledge”.

13

The problem with individuals like Daniel Kuehn is that, unlike most leftists/statists, they’re actually quite well-informed and therefore understand that basic economic theory reveals that some of their positions are entirely untenable/self-defeating. But rather than just accepting this fact wholeheartedly, they ask that we ignore some of these insights and instead turn our attention towards “other ethical considerations” (which are quite vague and usually entirely subjective). I see no reason to comply.

Additionally, it seems as though Daniel believes that “advanced economics” complicates things and could potentially justify government intrusion. But this is only because he fails to understand a few key economic insights (primarily from the Austrian school) and engages in the utopia fallacy. Markets are only relatively “sub-optimal” when compared to the imaginary economies that economists create/express in their elegant and completely unrealistic models. But even then, these elegant economic models fail to consider the evolutionary and dynamic nature of markets. In other words, what appears to be a “market failure” in the short run may actually turn out to be an efficient market condition in the long-run (ex post). But ad-hoc government decrees can never out-perform the market; an individual understands his preferences and goals better than any pontificating central planner/bureaucrat, and all of the scientific knowledge that the government may potentially possess is easily dwarfed by the collective, idiosyncratic and tacit knowledge of billions of individuals.

But my major problem with Daniel Kuehn is his extremely liberal interpretation of Keynes. I’m willing to acknowledge that Keynes has good stuff on uncertainty and that his business cycle theory is actually fairly Austrian (in fact, it perfectly describes what Hayek called “secondary phenomena”), but there is simply no room for economic coordination/calculation in Keynes’ overly aggregated framework, where the structure of production is consolidated into a single phase, and where capital is entirely homogenous and perfectly substitutable. “Keynesian microeconomics” simply doesn’t exist.

14

For what it’s worth, “Economics and Knowledge” came off to me as Hayek renouncing the viability of applying equilibrium models to the real world economy. He makes it clear that he believes that no economy is perfectly efficient.

I would agree with that. But if I see where you are going with that correctly, I don’t think DK’s argument was that market outcomes are “sub-optimal” relative to some static optimality condition. If anyone would admit that market outcomes are the result of an on-going evolutionary process, I’m sure he would. I take his passage to mean only that various factors like externalities/transactions costs/sticky prices lead to market outcomes that could be “improved upon” (as measured by some normative criteria) through other institutions. And I don’t believe that is a statement Hayek would disagree with. Of course, I have always read Hayek as being a proto-New Institutionalist.

I think it is clear that you are misreading DK. From one sentence in a relatively long blog post, you are attributing to him an entire set of normative economic beliefs that Hayek addressed in an article dating back to the fracking 1930s. Excuse me if I think that is a stretch.

Edit:

Err, and so is deciding what is optimal. Optimal in who’s opinion? What’s your point? What is better is based on a normative judgment, and everyone has an idea of what better is, but you can’t decide what is optimal from an economic perspective precisely because of a lack of sufficient data. The fact that optimality is subjective just reinforces my point.

Err, efficiency is a subjective criteria too. Yet you oddly have no problem throwing that term around (and neither did Hayek actually).

You’re going to have to read more than one article by Hayek. I suggest starting with “Economics and Knowledge”.

Haha come on man. I know this was your latest beach read, but just because you’re just now getting around to reading it doesn’t mean no one else has either. Trust me. it is a long stretch to connect DK’s statements in the OP to things Hayek was addressing there. At least if you give him a half-way charitable reading (that is to say, to assume he is NOT a moron that can be outfoxed by an undergraduate that read a 80 year old article on holiday).

But I don’t want this turn into an argument. I already got my blood pressure up in another thread last night. So let’s pretend like neither one of us are idiots and that we recognize each other as respectable people that are both still learning about one of the most illuminating thinkers of the 20th century. So i think we can drop the condensation.

Does that sound fair?

15

If Hayek was completely consistent with the conclusions he draws in “Economics and Knowledge” and “The Use of Knowledge in Society”, he would disagree with most of what Daniel Kuehn is trying to argue. For example, Kuehn writes, “Uncertainty and imperfections ensure that market forces, as fantastic as they are, are going to remain sub-optimal.” Given that nobody has all available data, including economists, it follows that institutional action will also suffer from “uncertainty” and “imperfections”, so it doesn’t make any sense to argue that market forces are going to remain “sub-optimal” and government forces are going to be optimal (which is what Kuehn is implying – he has a notorious tendency to fail to transmit what he really thinks through his writing, so maybe he’ll say he was trying to say something else upon reading this debate).

Anyways, in order to make a market outcome more optimal you need to have an idea of what you think optimal is, because when you plan something through government the outcome is no longer spontaneous. The market doesn’t have a specific point to meet; the government does. Deciding where this point is still suffers from the Hayekian knowledge problem, since you still don’t hold the vast swaths of subjective knowledge necessary to centrally plan.

To put this into perspective, Kuehn oftentimes writes that Keynesian theory suggests that in times of depression/recession the rate of interest is below the natural rate of interest, and that the entire Keynesian argument is to raise interest rates to allow economic calculation to occur with the “correct” data. What he can never answer is how he knows what the natural rate of interest is – this is because it’s impossible to know. That the present rate of interest is too low is only based on a preconceived assumption due to his adherence to Keynesian theory (liquidity preference theory of interest).

By the way, my argument has nothing to do with “a set of normative beliefs”. My argument is only about whether an economist can really say what is most optimal, or where optimality is – I am arguing that an economist can’t. Hayek would agree. I’m not misreading Kuehn, you’re just missing my point.

Err, efficiency is a subjective criteria too. Yet you oddly have no problem throwing that term around (and neither did Hayek actually).

You still have failed to explain your point regarding this, or what that matters. That efficiency is subjective is precisely why Mises (and probably Hayek) supported free markets. Market outcomes aren’t a product of a single individual deciding what is optimal and what is not; market outcomes are the product of an entire society deciding what is optimal and what is not on an individual basis. Did you see my references to those two articles critiquing the notion of efficiency? Austrians have a long history of critisizing concepts like optimality and efficiency.

Trust me. it is a long stretch to connect DK’s statements in the OP to things Hayek was addressing there.

No, it’s not. Calculating optimality is what oftentimes justifies government programs – indeed, Kuehn is trying to justify government through discussion on optimality. But, calculating optimality suffers from the same problems that every other type of central economic calculation does – it lacks the sufficient data to make it accurate.

By the way, saying that it would be more optimal to have everyone in the world fed than what we currently have is not the type of calculation we’re discussing. What we’re discussing is reachable optimality, or what is optimal given our existing stock of capital goods. In other words, it’s about what is an optimal pattern of coordination in the present market system.

16

Improved upon by whom? You need to make your position explicit.

17

It looks the discussion can be divided into DK’s statement in the OP (and what it actually means) and what Hayek’s arguments truly imply for government intervention. So let me address both parts of the discussion seperately.

#1. DK’s Statement in the OP (and what it actually means)

By the way, my argument has nothing to do with “a set of normative beliefs”. My argument is only about whether an economist can really say what is most optimal, or where optimality is – I am arguing that an economist can’t. Hayek would agree. I’m not misreading Kuehn, you’re just missing my point.

You still have failed to explain your point regarding this, or what that matters. That efficiency is subjective is precisely why Mises (and probably Hayek) supported free markets.

First, when I was talking about normative beliefs, I was explicitly referring to the fact that when you are evaluating a market outcome as being optimal or non-optimal (or more efficient or less efficient), you are having to make value judgements. This is why welfare economics (the branch of economics that tries to answer what exactly we mean when we use these terms) is inherently normative:

http://en.wikipedia.org/wiki/Welfare_economics

Second, when I am talking about efficiency, I am using the mainstream economic definition. That is to say, when you talk about gains in economic efficiency, you are a person “outside the market” looking at market outcomes and talking about improvements along some sort of normative standard. An example would be Kaldor-Hick efficiency:

http://en.wikipedia.org/wiki/Kaldor-Hicks_efficiency

The reason I keep bringing up this point the is that it seems very odd you have no problem saying this or that is more efficienct (applying a normative criteria to market outcomes given available information), but blow a gasket when DK says a market outcome is sub-optimal. Indeed, based on that single term you assume that DK must be referring to a notion of optimality that can only be defined in terms of a static equilibrium. If that is what DK meant I think you would have a point. But I have never read anything by DK that would suggest he believes such an antiquated notion. Certainly not in the OP. I think you may be reading way too much into that single term.

#2. What Hayek’s arguments imply for government’s role in resource allocation.

If Hayek was completely consistent with the conclusions he draws in “Economics and Knowledge” and “The Use of Knowledge in Society”, he would disagree with most of what Daniel Kuehn is trying to argue.

Anyways, in order to make a market outcome more optimal you need to have an idea of what you think optimal is, because when you plan something through government the outcome is no longer spontaneous. The market doesn’t have a specific point to meet; the government does. Deciding where this point is still suffers from the Hayekian knowledge problem, since you still don’t hold the vast swaths of subjective knowledge necessary to centrally plan.

I disagree, both with your reading of Hayek and your (I would say) narrow definition of what governments actually do. Believe it or not, there are more ways the government can work to improve upon market outcomes besides the old-school socialist central planning Hayek argued against in the 1930s. And Hayek on more than one occasion supported those alternatives. I am specifically thinking about Hayek’s preference for common law (which is developed through an evolutionary process) over statute law (wich is not).

Think about it this way. Under property rules, rights to the use of this or that good are allocated through market transactions. And for the most part that usually works really well. But there are some times when property rights are hard to define or transactions costs are high. Under those circumstances, there is no reason to believe that property rights will be allocated to their most valued use (see Ronald Coase for further details). We can either pretend those situations don’t exist or pursue alternatives. Hayek chose to take these situations seriously. And one alternative to traditional property rules/markets that he wrote extensivedly about was the use of liability rules that are created through judicial decision (common law).

From your perspective, I would think this would seem like the worst of all possible worlds.

“A single man is asked to decide upon the allocation of resources whose values are determined subjectively and cannot be observed!? Where does he then get the information to make his ruling!? And don’t you realize his decision will create precedents that will influence subsequent cases he will never hear!? There is no way he has the information to adequately take those consequences into account!”

But Hayek himself had much more faith in the system than that because he realized that even though a single person was making a decision with limited information there was an evolutionary feedback process at work that would eliminate liability rules that are inefficient. The process for how this actually happens was expanded upon later members of the Law and Economics movement like Paul Rubin and John Goodman.

http://www.jstor.org/pss/724189

http://www.jstor.org/pss/724222

So I personally believe that if Hayek was completely consistent with the conclusions he draws in “Economics and Knowledge” and “The Use of Knowledge in Society” AND the Constitution of Liberty, he would NOT disagree with most of what Daniel Kuehn is trying to argue (at least in principle).

18

I see what he’s getting at although I don’t agree. If anyone reads any sort of academic economic literature you’ll see many examples of “coordination failure”. I wouldn’t accept all of this at face value but libertarians invoking market mechanisms as their argument should realize some of this stuff as legit and accept that some coordination failure is inherent in market economies. That said, I don’t see how this invalidates libertarianism at all. What else can you expect from a highly decentralized exchange network with tacit, dispersed, asymmetric knowledge where the future is uncertain and constantly changing? DK thinks he can circumvent these market “failures” presumably by some governmental mechanism, all of which assumes its neutrality, and assumes that it possesses the necessary knowledge to bring about the more optimal solution (whatever that means).

But honesty forces me to admit that, yes, in some instances the government can theoretically help allocate resources better by incentivizing certain behaviors and activities. Of course, this is in an ideal world and when it comes to actually implementing these things, it (the government) will always bump up against intractable knowledge problems as well as public choice incentive problems. Even if however the government can–in real life–outperform the market in some particular instance, this position still ignores government non-neutrality, which accepts that intervention is not costless.

It seems to me most people (including even libertarians themselves, but especially “statists”) severely underestimate how deep and pervasive the effects of government intervention are. DK is no different in that he thinks government is practically neutral. Of course, he won’t admit this because he’s probably ignorant of how much intervention he takes for granted.

19

Student,

You are still really missing the point, sorry! That I consider market outcomes “more optimal”, “optimal”, or whatever is, frankly speaking, completely irrelevant. My criticism is only of Kuehn’s categorization of market outcomes as sub-optimal (of course, in specific cases – he would never make that a general claim); but, this doesn’t imply any opinion of mine regarding what the actual optimality of the given market outcome actually is. So, half of your response to me was a waste of time, because it doesn’t actually apply to anything I wrote!

If you consider market outcomes as sub-optimal and then write that government can increase optimality, it must mean that you have an idea of what “optimal” is. When we’re talking about optimality in economics we’re talking about the optimal use of the existing pool of resources (producers’ goods). In order to know what is more optimal than a market outcome you need to know the sum of subjective data – data that we know is unavailable (this is Hayek’s entire argument against central planning!).

Even in the case of high transaction costs, in order to see government spending as worthwhile you’d need to somehow figure out that the outcome with government is superior (by whatever standard) to the outcome of whatever coordination of resources would have occured without government – and it’s not just about that single transaction, but the effect of intervention on the coordination process, which affects the entire economy.

So I personally believe that if Hayek was completely consistent with the conclusions he draws…

No, I said consistent with his arguments, not with his conclusions.

20

No, I said consistent with his arguments, not with his conclusions.

Uh, take a look back at your original post, bro. I just did. And I faithfully copy and pasted (then spoofed) your quote word for word. And yes, you said “conclusions”.

Anyways, the point I was making by spoofing your original quote was to point that your interpretation of Hayek’s arguments would be greartly different if you incorporate the arguments he made regarding the advantages of common law over statute law. Specifically, I am arguing that Hayek was not being inconsistent in the application of his ideas, its just that your conception of government institutions is stuck in '30s style socialism. I REALLY recommend you check out Hayek’s work on common law (specifically in the Constitution of Liberty).

Even in the case of high transaction costs, in order to see government spending as worthwhile you’d need to somehow figure out that the outcome with government is superior (by whatever standard) to the outcome of whatever coordination of resources would have occured without government – and it’s not just about that single transaction, but the effect of intervention on the coordination process, which affects the entire economy.

In my previous post I noted that Hayek argued that common law is an evolutionary process that allows dynamically efficeint non-market allocations to be made (that is to say more efficient relative to a system of only property rules) WITHOUT a pre-determination of what outcome actually is optimal. So I am having trouble connecting your post to what I actually said. Please help me out.

You are still really missing the point, sorry! That I consider market outcomes “more optimal”, “optimal”, or whatever is, frankly speaking, completely irrelevant. My criticism is only of Kuehn’s categorization of market outcomes as sub-optimal (of course, in specific cases – he would never make that a general claim); but, this doesn’t imply any opinion of mine regarding what the actual optimality of the given market outcome actually is. So, half of your response to me was a waste of time, because it doesn’t actually apply to anything I wrote!

I think you are actually missing my point. but there is really no need to beat a dead horse.