Economic Miscalculation: A Reply

Blogger Lord Keynes (LK) responds to my post on economic calculation.  Unfortunately, I feel as if he missed the essence of my point. Much of what he says, I feel, is all over the place and difficult to see the relevance of, but I will try my hardest to tie it all in.  Hopefully the reader can then put the pieces together to understand the fundamental thesis I am trying to get across.

To clear up any confusion amongst third party readers, what I call the “theory of intertemporal discoordination” is Austrian business cycle theory — I prefer my term, because I think it gets across what the theory is about much better than the conventional one.  Furthermore, as I posited in my original post, the new term suggests that the theory is only one facet of many within the body of theory of economic coordination (and discoordination).  More accurately, it describes an artificial tendency of discoordination between investment and societal time preference (the latter dictating the aggregate stock of savings at any given point in time).

With regards to this, some of what LK writes is true.  For instance, he writes that the Hayekian exposition of capital theory relies on the notion of equilibrium.  He also correctly suggests that equilibrium is not something that represents reality.  Much of what LK writes is untrue.  That Austrians “reject Walrasian equilibrium” does not mean that some Austrians reject the use of equilibrium as an ideal type, which is how Hayek used equilibrium theory in Prices and Production.  Hayek’s purpose was to show how intertemporal coordination (and discoordination) operated in a world where certain data remained constant.  That Hayek used equilibrium as a pedagogical tool, though, does not suggest that this is how Hayek envisioned the capital structure in reality, although since Hayek never directly comments on this it is difficult to know for certain what his intentions were.  It is for certain that he moved on to new pedagogical tools, such as dynamic equilibrium, in The Pure Theory of Capital (which forever remained incomplete, anyways).  If we can, in any case, deduce one point of value from all of this is that how you interpret a pedadogical approach to capital theory and apply it to reality really reflects your own views of the economy.

Unfortunately, most of what LK writes with regards to the theory of intertemporal discoordination is besides the point.  That Hayek relied on equilibrium as an ideal type has no implication on the argument I am making.  Neither does any discussion on anarcho-capitalism or the role ascribed to government by theorists like Mises or Hayek.  Of the three paragraph LK allots to the discussion of the theory of intertemporal coordination as it relates to my original post, only the first is useful.  Unfortunately, the critique gets it all wrong.

LK disagrees that the theory of intertemporal discoordination is only a minor facet of the theory of economic calculation, because “[m]ost Western economies today are ones where the vast majority of all production is done privately and the majority of capital goods are owed privately.”  “So,” he concludes, ” the ABCT must be the major Austrian theory that applies to them.”

I never argued the applicability of the theory — I believe that the theory is correct and is applicable, if the conditions for its applicability have manifested empirically, but I never meant to argue whether or not this particular aspect of the theory of economic coordination (and discoordination) is correct.  My point is that LK must recognize that the theory of intertemporal discoordination is one part of the whole corpus of theory that explains economic calculation.  No less, an understanding of how an economy coordinates is necessary to understand how it discoordinations given certain conditions (which is exactly why Hayek used the notion of equilibrium as an ideal type).  If we accept the fact that the theory of intertemporal discoordination is only a facet of the theory of economic calculation, then we can begin to see how economic calculation encompasses a theoretical area much broader than that which LK ascribes to it (business cycle theory).

We can now see how the second part of LK’s reply is completely irrelevant to my argument.  When I accuse him of not understanding what economic calculation is he balks at my claim, and in the process of defending himself actually proves my point.  He begins to discuss fractional reserve banking and intertemporal discoordination (again), without realizing that all of this is really completely besides the point.  Yes, some Austrians believe fractional reserve banking causes economic discoordination, and yes, we can say that certain aspects of some theories of coordination and discoordination are wrong (such as the belief that fractional reserve banking necessarily causes intertemporal discoordination — and the failure to distinguish between fractional reserve banking on the free market and a fractional reserve system cartelized by a central bank, with a monopolized currency).  These are all facets of the theory of economic calculation (or coordination and discoordination).

Government imposed price floors/ceilings, subsidies, and whatnot all cause economic discoordination — they disrupt the pricing process. Entrepreneurial failure on the free market, to some degree or another, is a force of discoordination (although, to another degree, is also a force of coordination — the distribution of wealth from failing entrepreneurs to successful ones, through profit or loss, is definitely a manifestation of market coordination.  There are various forces of coordination and discoordination which have nothing to do with the theory of intertemporal discoordination, or at least separate to it.  To understand all of this, though, you have to acknowledge that what the concept of economic calculation really refers to is the entire process of the allocation of goods towards the pursuit of ends.

The only thing that LK’s response has really proven is that he does not understand the argument I was making, and therefore does not hold comprehensive knowledge on the Austrian theory of economic calculation.  This fact is embodied in the unnatural focus he holds on the theory of intertemporal discoordination — which we would not miss if it were left out of this particular discussion altogether —, which forms only a single portion of the entire body of theory that describes the workings of a market economy (i.e. the market process, or economic calculation, or the theory of market coordination/discoordination).

Side Arguments:

Fractional Reserve Banking in Mises and Hayek

LK claims that for Mises and Hayek the business cycle was caused, to the greatest extent, by the private banking system, and thus that the business cycle is endogenous to the market.  This is true of the Hayek of Monetary Theory and the Trade Cycle (1933), but I am not sure this is true of the Hayek of The Denationalisation of Money (1976).  While Hayek never reached the conclusions which were ultimately brought to the science by theorists such as Lawrence White and George Selgin, it is nevertheless evident that his knowledge on the banking system matured over time.  Therefore, I am not sure it is fair to characterize the (Austrian) business cycle as an endogenous calamity on the basis of what Hayek wrote during the early 1930s. (As a sidenote, that this is true does not mean that we must throw all of early Hayek out — there is no reason to throw the baby out with the bath water.)

However, LK’s argument here is not true of Mises.  Both early Mises (The Theory of Credit and Money, 1912) and later Mises (Human Action, 1949) believed that a free banking system would not cause concerted fiduciary overexpansion.  This is evident in Mises’ belief that fiduciary media was necessary in the market economy (even if for different, or less dramatic, reasons than Selgin/White).  He saw the problem of fiduciary overextension as one of central banking and/or government, and these non-market institutions alone.

It is true that both theorists saw the private banking system as the largest exponent in fiduciary overexpansion.  However, saying that it was private banks who extended the most credit is different to claiming that the business cycle is an endogenous occurrence.  If private overexpension is predicated on the actions of outside, non-market forces, then fiduciary overexpansion is not an endogenous force.

Ludwig Lachmann and Equilibrium

In response to my claim that ” an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation,” LK summons Ludwig Lachmann.  LK, however, utterly and terribly misinterprets Lachmann’s argument regarding the nonexistence of the equilibrium state.  Lachmann’s main intention was to replace the notion of equilibration with the idea of the market process (see his essays “On the Central Concept of Austrian Economics: Market Process” and “Toward a Critique of Macroeconomics,” both of which are included in Edwin G. Dolan’s (editor) The Foundation of Modern Austrian Economics (1976), pages 126–132 and 152–159, respectively).

That Lachmann did not believe equilibrium was a useful tool in economic analysis, however, says nothing with regards to his views on intertemporal coordination, however.  Indeed, the theories of coordination and discoordination were embodied in his conception of the market process (for a more complete view of his ideas on the market process see Lachmann’s The Market as an Economic Process).  Thus, when LK challenges my claim that Austrians believe in the theory of intertemporal coordination by pointing to Lachmann, he is pointing to a scholar who actually agrees with me.  Indeed, Lachmann wrote extensively on capital theory in the Hayekian tradition, although he sought a movement away from the Böhm-Bawerkian theory of capital (which is not the same as a movement away from the general Austrian theory of capital).

33 thoughts on “Economic Miscalculation: A Reply

  1. Bob Roddis

    Excellent post, Jonathan. LK simply refuses to accept that the problems of economic calculation can apply to a market economy where prices are distorted by fiat money loans. Just cuz. He insists that the problem of economic calculation refers ONLY to the socialist calculation debate where there are no prices, apparently because he says so. That’s the essence and extent of his “argument”. However, for example, Peter Klein refers to Rothbard in MES where the suggestion is made that problems of economic calculation can even affect firms that get too large due to a lack of real prices for various factors. From “Economic Calculation and the Limits of Organization” by Peter Klein @ p. 13:

    Rothbard’s main contribution to the theory of the firm was to generalize Mises’s analysis of the problem of resource allocation under socialism to the context of vertical integration and the size of the organization. Rothbard writes in Man, Economy, and State that up to a point, the size of the firm is determined by costs, as in the textbook model. But “the ultimate limits are set on the relative size of the firm by the necessity for markets to exist in every factor, in order to make it possible for the firm to calculate its profits and losses” (Rothbard, 1962, p. 599).

    http://mises.org/books/capitalist_and_entrepreneur_klein.pdf

    Rothbard was discussing this topic 50 years ago in a non-Soviet context. All I can conclude is that if Hayek hadn’t thought of it and put it in a book by 1930, LK will insist the idea does not exist and/or the concept cannot be properly used to explain updated Austrian insights.

    Reply
    1. Jonathan Finegold Catalán Post author

      I agree. What LK seems to be missing is that the concept of economic calculation applies only to the market. Economic calculation refers to calculation using money prices, and thus the theory of economic calculation elucidates how this occurs. The criticism of socialism is that there is no calculation, because there are no prices — but the emphasis should be placed on prices.

      Reply
    2. Lord Keynes

      “LK simply refuses to accept that the problems of economic calculation can apply to a market economy where prices are distorted by fiat money loans.”

      That is your usual straw man nonsense.

      “He insists that the problem of economic calculation refers ONLY to the socialist calculation debate where there are no prices, apparently because he says so.”

      Another laughable falsehood.
      I’ve already made it clear that alleged ” economic calculation ” problems are at the heart of the ABCT.

      Reply
      1. Jonathan Finegold Catalán Post author

        That problems of calculation are “at the heart of the ABCT” does not mean that the ABCT is at the heart of economic calculation.

        Reply
        1. Lord Keynes

          Really? Then kindly explain what, in your opinion, are the major “problems of economic calculation” in modern capitalist economies, more important than ABCT.

          Reply
          1. Jonathan Finegold Catalán Post author

            ABCT is not a theory of economic calculation — I keep repeating this point. Economic calculation is necessary as a prerequisite to understanding how ABCT is possible — ABCT describes a miscalculation. Hayek’s suggestion that (paraphrased) “one must understand how the economy works to know where it does not” applies equally to ABCT. The theory of economic calculation is the theory of how the economy works.

            Government spending — in my opinion — is a bigger area for miscalculation than ABCT. Government spending is more all-encompassing, and can occur as long as government spends. Subsidies, price controls, et cetera, are also all important distortions of economic calculation — see George Reisman’s Capitalism for more on this (he gives it extensive coverage).

            ABCT is only useful in describing severe intertemporal miscoordination caused by changes in relative prices, in turn caused by monetary distortions.

  2. Joseph Fetz

    I must say that it was Mises and, later, Rothbard’s theory of prices that ultimately made the theory of the business cycle really click for me when I first began studying this stuff. When you’re in a system that is trying to coordinate resources millions of different ways across time (often many years) all for the purpose of the final action of consumption, then valuation and prices are of the utmost importance. If changes to the array of prices in the market are changed by outside forces, either through direct price fixing or the change in the calculating unit, one cannot hope to have anything other than discoordination of the structure of production through time. Prices are probably the most important aspect of any market economy and it often pains me that this is the area where many Keynesians are the weakest. It is almost like prices are just a number to them.

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  3. Lord Keynes

    “Hayek’s purpose was to show how intertemporal coordination (and discoordination) operated in a world where certain data remained constant. That Hayek used equilibrium as a pedagogical tool, though, does not suggest that this is how Hayek envisioned the capital structure in reality, although since Hayek never directly comments on this it is difficult to know for certain what his intentions were. “

    The assertion that Hayek only used “equilibrium as a pedagogical tool” is utter wrong. An equilibrium state is the starting point of a real world economy allegedly subject to Hayek’s Austrian trade cycle (Loasby 1997: 54: “Hayek began … with a monetary expansion … impinging on a perfectly co-ordinated economy”). Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931):

    “As it is sometimes alleged that the ‘Austrians’ were unaware of the fact that the effect of an expansion of credit will be different according as there are unemployed resources available or not, the following passage from Professor Mises’ Geldwertstabilisierung und Konjunkturpolitik (1928, p. 49) perhaps deserves to be quoted: ‘Even on an unimpeded market there will be at times certain quantities of unsold commodities which exceed the stocks that would be held under static conditions, of unused productive plant, and of unused workmen. The increased activity will at first bring about a mobilisation of these reserves. Once they have been absorbed the increase of the means of circulation must, however, cause disturbances of a peculiar kind.’ In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems. (Hayek 1975 [1939]: 42, n. 1).

    U. Witt has identified the severe problem running through Hayek’s reliance on general equilibrium for his trade cycle theory:

    “In Mises’s understanding (general) equilibrium is a fictitious, imaginary construction useful as a logical basis of comparative statics … Though often arguing similarly in this respect, Hayek takes a different position. While Mises’s apodictic apriorism did not require Mises to derive empirical hypotheses, it is quite clear, e.g., from Hayek (1933) that he aimed at empirically meaningful propositions about the business cycle. For this reason, he was forced to identify general equilibrium in some way or other with an empirical state of the economy, and his theory indeed seems to suggest the state of the markets in the pre-upswing stage of the business cycle. However, in an empirical economic theory it is difficult to determine the conditions under which general equilibrium should be observable. It is even more obscure to see how individual imaginations of, and plans for, future events come to be coordinated so that prices can converge to their equilibrium values. The latter question is crucial in an individualistic approach where subjective expectations are supposed to play a key role.” (Witt 1997: 49).

    If economies never reach equilibrium, then Hayekian ABCT is already completely useless and worthless: how can the cycle effects happen if factor inputs for the (alleged) unsustainable higher-order capital goods investments are idle or relatively abundant in a disequilibrium economy?

    See here:

    http://socialdemocracy21stcentury.blogspot.com.au/2012/01/hayeks-trade-cycle-theory-equilibrium.html

    Reply
    1. Lord Keynes

      “Government imposed price floors/ceilings, subsidies, and whatnot all cause economic discoordination — they disrupt the pricing process. Entrepreneurial failure on the free market, to some degree or another, is a force of discoordination “

      The idea that I am unaware that Austrians assert that “price floors/ceilings, subsidies,” etc, allegedly distort prices, and form part of the Austriian obsession with economic calculation, is absurd.

      Reply
      1. Jonathan Finegold Catalán Post author

        It’s not “absurd,” because in all of your responses you focused entirely on the business cycle — even though I told you from the very beginning that the business cycle is only one small facet of economic calculation (or, more accurately, miscalculation).

        Either you were genuinely ignorant about what you were talking about, or you just do not want to engage in a real, fair debate.

        Reply
        1. Lord Keynes

          I am well aware that Austrians complain that government deficit spending, price controls, subsidies, income policies, and so on, impair economic calculation and that these can be separate issues from the ABCT.

          Does the existence of some minor government subsidies cause an Austrian trade cycle? Would they impair the ability of the private sector to engage in production of commodities and distort it so badly that nobody could engage in “economic calculation”?

          Reply
          1. Jonathan Finegold Catalán Post author

            I’m not sure what the point of either of those questions are. Who cares if they don’t cause Austrian trade cycles?

    2. Anonymous

      “The assertion that Hayek only used “equilibrium as a pedagogical tool” is utter wrong. An equilibrium state is the starting point of a real world economy allegedly subject to Hayek’s Austrian trade cycle (Loasby 1997: 54: “Hayek began … with a monetary expansion … impinging on a perfectly co-ordinated economy”).”

      You’re just being purposefully dense. No, Hayek is not characterizing the free market economy as being in a state of equilibrium. You just need that to be the case so desperately so that your own nonsense has a basis for criticism.

      Loasby is quoting Hayek as “beginning” with equilibrium, AS A PEDAGOGICAL TOOL. He used it to isolate how central bank intervention affects the economy. That doesn’t mean he believed the economy would be in equilibrium otherwise. The sentence “Let’s start with” is obviously a setup for a mental tool of analysis, not an empirical judgment.

      “Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931):”

      That Hayek explicitly stated that he ASSUMED full employment does NOT mean that he argued the free market always has full employment. He “assumed” full employment as a reference point in order to analyze the effects of central banks.

      “If economies never reach equilibrium, then Hayekian ABCT is already completely useless and worthless: how can the cycle effects happen if factor inputs for the (alleged) unsustainable higher-order capital goods investments are idle or relatively abundant in a disequilibrium economy?”

      Rubbish. Economies don’t have to be in equilibrium in order for ABCT to apply. There can be 99% unemployment and 99% idle resources, and ABCT will still apply.

      The cycle affects occur, again, due to distortions unleashed into the price system that short-circuit ECONOMIC CALCULATION.

      Prices and interest rates, and economic calculation, don’t cease to be distorted just because there are idle resources and unemployment. Economic calculation encompasses such resources and labor and only it can sort out the most optimal uses. Central bank intervention, and government spending, DISTORT this process.

      For someone who claims to not be ignorant of economic calculation, you sure are ignorant of it.

      Reply
    3. Jonathan Finegold Catalán Post author

      I think that your’s and Witt’s interpretation of why Hayek used equilibrium is erroneous, as well as your interpretation of why Hayek started at full employment. I think that if you actually read Prices and Production and gave Hayek some benefit of the doubt, the written evidence is that he was using general equilibrium as an ideal type — and ideal types are largely used as pedagogical tools (this happens under these conditions, and then you have to adjust it for reality).

      You can tell that Hayek’s use of equilibrium is largely for pedagogical purchases, because Hayek tells you that the structure of production will elongate until the profit margins of the different stages of production become zero (or, where MR=MC). If you think that Hayek literally thought that investment in real world economies occurred until MR=MC, then you have interpreted Hayek too literally.

      Hayek’s intention in Prices and Production is only to show you how time preference leads to an intertemporal allocation of the means of production, and then how this is achieved through the pricing process. He uses equilibrium as a tool to simplify the model so that those reading his lectures can actually understand what he is getting at.

      You assert,

      If economies never reach equilibrium, then Hayekian ABCT is already completely useless and worthless.

      This is true only if you throw out the baby with the bathwater. You are making the assumption that all economies are affected by the existence of mass idleness, which is wrong — mass idleness is a specific condition which becomes mostly existent after, unsurprisingly, the manifestation of the business cycle.

      Hayek published Prices and Production in 1931. He was most familiar with the 1920s. Up until October 1929, there was not mass idleness, either in the labor markets or the capital goods markets. The idea that intertemporal discoordination would therefore be abetted by the existence of a surplus of capital goods is a bit irrelevant.

      Finally, that there are idle resources does not mean that the allocation of these idle resources based on distorted price signals will cause a misallocation of resources. Hayek actually does deal with this, to a very limited extent, in Prices and Production, although he does so from the perspective of the post-boom.

      Reply
      1. Lord Keynes

        “I think that if you actually read Prices and Production and gave Hayek some benefit of the doubt, the written evidence is that he was using general equilibrium as an ideal type”

        The written evidence speaks for itself and I have already listed it in my response:

        http://socialdemocracy21stcentury.blogspot.com.au/2012/02/economic-calculation-part-3.html

        Moreover, Hayek, on pages 265–266 of Prices and Production, explicitly tells us his purpose in the book:

        “My present task is to fill in the details of that rough sketch and to show what happens in the interval before a new equilibrium is attained.” (Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. pp. 265–266).

        As Witt says, Hayek “aimed at empirically meaningful propositions about the business cycle. For this reason, he was forced to identify general equilibrium in some way or other with an empirical state of the economy, and his theory indeed seems to suggest the state of the markets in the pre-upswing stage of the business cycle.”

        The whole story of why Hayek abandoned his business cycle research program is precisely his realisation from 1937 onwards that real world economies don’t reach equilibrium states and that perfect information and foresight were necessary to explain the convergence back to an equilibrium state as the upswing turned to a bust. The existence of subjective expectations in the real world and the non-existence of equilibrium states are severe stumbling blocks to Hayek’s theory.

        http://socialdemocracy21stcentury.blogspot.com.au/2012/01/hayeks-trade-cycle-theory-equilibrium.html

        Reply
        1. Jonathan Finegold Catalán Post author

          I don’t think this response addresses what I wrote. That Hayek used equilibrium as a tool to elucidate his theory of the business cycle doesn’t disprove my argument that it was for pedagogical purposes. All you’re doing is quoting him using the word equilibrium, but I never denied that he used equilibrium models — I’m telling you why he used equilibrium models.

          I know the written evidence speaks for itself, because I have read the written evidence. But, you have to interpret why Hayek wrote the evidence the way he did. Your interpretation is wrong.

          And, we have already talked about your interpretation of why Hayek “abandoned” his capital theory research. There is absolutely no evidence which suggests that he abandoned it because he realized real world economies reached equilibrium states. He abandoned it because he did not see the fruits of his labor, and he saw discussion of equilibrium a more relevant one (given the movement of economic science).

          Reply
  4. Lord Keynes

    “Ludwig Lachmann and Equilibrium

    In response to my claim that ” an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation,” LK summons Ludwig Lachmann. LK, however, utterly and terribly misinterprets Lachmann’s argument regarding the nonexistence of the equilibrium state.”

    No, I don’t. It is you who have misinterpreted what I wrote.
    Your statement:

    “For instance, an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation, whereas a Keynesian (at least one loyal to Keynes’ business cycle theory) will tell you that it does.” “

    You’re asserting that markets can NEVER fail at intertemporal allocation, and by extension you are imputing that view to Lachmann. That is completely false.

    Lachmann is perfectly clear that endogenous factors in markets can result in coordination failures:

    “Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at any time. Lachmann thought that the government had a role to play in stabilizing the economic system and increasing the coordination of entrepreneurial plans. We call his position ‘intervention for stability.’” (Callahan, G. 2004. Economics for Real People: An Introduction to the Austrian School (2nd edn), Ludwig von Mises Institute, Auburn, Ala. p. 293).

    Not only did Lachmann believe this, but was prepared to accept Keynesian stimulus during times of depression, as he himself says in the video I post here:

    http://socialdemocracy21stcentury.blogspot.com.au/2011/12/audio-lecture-by-ludwig-m-lachmann.html

    From 55.38, in response to a question about policies for the macroeconomy, Lachmann explicitly allows government intervention in a depression: he notes that Hayek retreated from his liquidationism of 1932 (“Hayek has now realised that that was wrong,” he says from 56.53). “In a situation in which nothing really is scarce” there can be government intervention to increase employment (56.57).

    He also said the same thing in print:

    http://socialdemocracy21stcentury.blogspot.com.au/2011/07/startling-admission-from-ludwig.html

    http://socialdemocracy21stcentury.blogspot.com.au/2011/07/ludwig-lachmann-on-government.html

    There is a gulf between you and Lachmann

    Reply
    1. Jonathan Finegold Catalán Post author

      I’m not sure where Callahan gets his interpretation of Lachmann from. This part of the excerpt, for example, is wrong,

      The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at any time.

      This suggests that there are two options: equilibrating tendencies or lack of control. No, I have already engaged this in the post — something you haven’t still addressed (you, instead, claim I misinterpret you; but, evidently, I did not, because you are still pushing the same false point). Lachmann did not replace equilibrium with lack of control, he replaced equilibrium with the market process. There are coordinating forces in the market process, otherwise no plans would meet — there would be no process under capitalism, at all.

      If you read an actual book or article on the topic by Lachmann, you will find that I am right and you (and Callahan) are wrong. (And, instead of shifting the goal posts, why don’t you focus on what we’re actually debating, not whether Lachmann thought monetary contractions were bad or whether he thought WWII spending worked because “all sectors of the economy were equally affected” — two things I disagree with; but two things that don’t mean that when it comes to economic calculation, Lachmann’s writings generally support my argument. Nobody claimed that we agreed on all the specific nuances — I even suggested before that there is plenty of disagreement on the specifics.)

      Reply
      1. Lord Keynes

        (1) “There are coordinating forces in the market process, otherwise no plans would meet — there would be no process under capitalism, at all.”

        I don’t deny the market has coordinating forces – the issue was the truth of your assertion here:

        “For instance, an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation, whereas a Keynesian (at least one loyal to Keynes’ business cycle theory) will tell you that it does.”

        What on earth do you mean by “an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation”? You’re saying the market can NEVER fail to achieve “intertemporal allocation”? This is ridiculous. Unless you abolish uncertainty in the Knightian sense, there will always be failed capital goods investments, because consumer preferences are fluid. Certain capital goods will turn out to be bad and unprofitable investments and ultimately a waste of resources.

        And investment in general is unstable owing to subjective expectations of capitalists.

        Reply
        1. Jonathan Finegold Catalán Post author

          You are right that perhaps there is a lack of rigor in my claim. Fine, on average, the market will not fail at intertemporal allocation. What I mean is that there exists a coordinating force on the market that intertemporally allocates the means of production. I never meant to imply — and I apologize if it gave you the impression that I did — that entrepreneurs (individuals) never fail at intertemporal allocation. You don’t need to go to Lachmann, however, to show how entrepreneurs can fail — loss is present in the economics of most, if not all, Austrian economists. And, if entrepreneurs can lose, it implies that intertemporal allocation has failed in that specific instance.

          But, when I (or anybody else) says that the market does not fail at intertemporal allocation, what I (or anybody else) really means is that there is a “reliable” mechanism by which the means of production are intertemporally allocated. In more Keynesian terms, what this means is that (on average) aggregate demand is maintained (that is, saved goods do not suddenly become idle, because they have not been properly intertemporally allocated). Of course, we live in a dynamic world, and in a world of uncertainty, and so entrepeneurs will fail in their investments — this is a failed intertemporal allocation. But, the first does not really exclude the latter of occurring — what I (or anybody else) is doing is making a generalization to describe a market process.

          Reply
          1. Lord Keynes

            “Fine, on average, the market will not fail at intertemporal allocation. What I mean is that there exists a coordinating force on the market that intertemporally allocates the means of production. “

            OK. Thank you. You are gracious in admitting a poorly worded point above.

            Yes, undoubtedly markets have mechanisms to cause a degree of coordination.

            The question then becomes to what extent do they achieve this coordination and how reliable is it. This is where they is a legitimate argument to be had.

          2. Jonathan Finegold Catalán Post author

            Which is what I was referring to to begin with had you been more lenient (or, less literal) in your interpretation of my argument! Keynes perceived to be there a problem in the mechanism of intertemporal allocation between savings and consumption, and he saw monetary and fiscal policy as a tool to combat this and maintain aggregate demand. This perceived problem wasn’t one that existed on an individual basis (and based on that individual’s error in calculation), but rather a problem that encompasses all individuals. One could even claim that Keynes did not recognize there to be intertemporal allocation on the basis of the price mechanism, like Hayek did.

  5. Lord Keynes

    “I’m not sure what the point of either of those questions are. Who cares if they don’t cause Austrian trade cycles?”

    Because if they cause only minor distortions in markets, their significance is grossly exaggerated, and the alleged economic calculation problems you keep harping about are clearly also minor issues compared to the alleged distortions caused by processes described in the ABCT.

    Furthermore, capitalists themselves cause minor or even moderate distortions.
    many corporations and business are in fact price setters/price administrators: they set their prices according to production costs and then a profit markup, then leave them unchanged unchanged for significant periods of time, even when demand changes. The prices are not fundamentally set by supply/demand dynamics at all: they’re set by central planners in corporations. They is a vast, vast specialist literature on all this, not just from economics departments but also from marketing departments (where they are concerned with how the real world works rather than the fantasies of some economists).

    No doubt price setting distorts prices and creates “economic calculation” problems in the Austrian sense.

    Yet these distortions don’t destroy capitalist economies. They don’t prevent vast and successful private production of wealth and investment, economic growth. In fact, the empirical literature suggest they have benefits they outweigh costs: stability of profits and the prevention of disastrous price wars between businesses.

    Reply
    1. Jonathan Finegold Catalán Post author

      But, I could just as well tell you that the distortions they create are not as “minor” as you perceive them to be. I would put it this way. Intertemporal misallocation will cause a sudden and aggregated impact on the economy. Other, more subtle, forms of misallocation will spread out losses over a greater amount of time. These other, “more subtle” (sometimes not so subtle), forms of misallocations may even make an intertemporal misallocation worse than it would otherwise be! Several New Deal programs come to mind (the NRA, for example).

      I actually agree that many (if not all) prices are not set by “supply and demand,” in the sense that prices do not exactly reflect what consumers would pay for them. Most prices are actually lower than what most consumers would pay for them. I would see Reisman on this, as well, although I have slight (terminological) disagreements with Reisman. However, it is true that no firm can sell a product for more than someone is willing to pay for it — there is always some degree of elasticity. Anyways, competition is likely to reduce the price of a product below what it would be if the prices of goods were left up for barter between the seller and the buyer. The same is true the other way around, of course.

      This type of “price setting” though, is incredibly different from the price setting of the government. Industrial “price setting” (and it is not actually price setting in the same sense) is still a function of market allocation. They require and are based on market feedback processes — real price setting, or government price setting, doesn’t enjoy these feedback processes.

      What government price setting does is, in a sense, homogenize action. It sets a market-wide price for something, and then all individuals in the market relevant to that good will have to calculate based on this new price. This is not the same as an individual firm “setting” a price, which has to be based on a number of market conditions: competitors, demand for the product, costs, et cetera.

      EDIT: The end of Jeffrey Friedman’s and Wladimir Kraus’ book Engineering the Financial Crisis has a good section describing the effects of regulation (as homogenizers). The same could be applied to price setting.

      Reply
  6. Lord Keynes

    ABCT is not a theory of economic calculation — I keep repeating this point. Economic calculation is necessary as a prerequisite to understanding how ABCT is possible — ABCT describes a miscalculation.

    Fine. ABCT is primarily a theory of (alleged) economic miscalculation. But I have already referred to it as a theory describing “problems of economic calculation” – that comes to the same thing.

    Government spending — in my opinion — is a bigger area for miscalculation than ABCT. Government spending is more all-encompassing, and can occur as long as government spends. Subsidies, price controls, et cetera, are also all important distortions of economic calculation

    Whatever distortion it causes are no more or less severe than the private sector itself imposes. For example, it is absurd to believe that the millions of agents offering goods and services get their prices right in terms of demand/supply dynamics. As the Post Walrasian/coordination Keynesian macro emphases (e.g., Leijonhufvud), a market economy at any one moment has a vats number of “wrong” prices. This doesn’t you can’t still achieve investment, production and economic growth.

    As in the case of price setting, government interventions have benefits that can outweigh whatever “costs” in terms of “economic calculation”. Mostly costs are minor.

    Reply
    1. Jonathan Finegold Catalán Post author

      It’s not so much a problem of economic calculation, as it is a problem of distorted economic calculation. Individuals are still calculating, but they are calculating based on distorted prices.

      I agree that markets have a large number of “wrong” prices. I would say that no price is the “right” price in the sense that no price is the price that would exist in a stationary state. There is a lot of miscalculation on the market. But, what government price setting does is remove all dynamism in price movements — it fixes the price over a period of time. This causes severe miscalculation.

      That’s why when I talk about intertemporal discoordination I call it severe discoordination. There is always discoordination. The question is why there is mass discoordination — that is, why were the majority of entrepreneurs wrong.

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    2. Jonathan Finegold Catalán Post author

      Bob Roddis’ post below leads me to raise an important point that I haven’t clearly raised thus far. Prices may not reflect all knowledge, and in that sense they are wrong. They can lead to miscalculation. But, the market process is characterized by individuals looking to reach ends by allocating means, and thus the market process is characterized by fluctuating prices that will change based on changes in the underlying data — that is, there is in some sense a corrective process in the market process for prices. If a price is permanently fixed by government, this process does not exist. Changes in the underlying data have no influence on that price.

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      1. Bob Roddis

        Economic calculation via unadulterated prices while knowing that government is not going to bail you out of jams will tend to focus the mind. Mistakes will not (and cannot) be long rewarded. Not only do people follow prices, they gossip. Successes and failures will be known.

        Further, government is not god. There is no other place to go or folks to call on to find better information than the prices created by us everyday people. We are all that we have. The statists are in fact quasi-religious in seeming to believe that “government” will deliver them from the unknowable mysteries of life or that it has magical curative powers.

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  7. Bob Roddis

    I find it curious that the Austrian analysis is based upon the self evident and empirical observation that people constantly strive for a near equilibrium-like state in their lives and will TEND to achieve it when not interfered with At the same time, LK and the Keynesians believe a priori that the plans of average people must run off the track due to the non-empirical and amorphous concepts of the alleged uncertainty of life and the inexplicable but dim-witted “subjective expectations” of capitalists.

    Austrian analysis is based upon a very specific analysis of a fact-based activity (economic calculation) and how that activity will be disrupted by outside interference in the pricing process, another fact-based process and analysis. Keynesians NEVER will run through that Austrian analysis and point out the alleged weakness.

    Keynesian “theory” is based upon non-empirical theoretical amorphous musings of pseudo-intellectuals. No attempt is ever made to address the detailed Austrian analysis. (So who is actually empirical and who is a priori?) If the lack of prices in the Soviet Union was fatal to economic calculation (as the Keynesians seem to concede), why aren’t distorted prices caused by fiat money and/or government spending and price fixing the cause of at least some distortion of economic calculation in the market? If prices are necessary for economic calculation, why not insist upon unadulterated prices? People are ignorant and have a tendency towards making mistakes in their lives. Why make it worse by distorting prices? How can anyone be serious about economic analysis without a major emphasis on the nature of prices and the effects of their distortion? Why would anyone think that fiat money loans and government spending and debt could conceivably improve on the situation?

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  8. Lord Keynes

    “LK and the Keynesians believe a priori that the plans of average people must run off the track due to the non-empirical and amorphous concepts of the alleged uncertainty of life and the inexplicable but dim-witted “subjective expectations” of capitalists. “

    You’re obviously so astonishingly ignorant that you’re unaware that Knightian uncertainty and subjective expectations are both concepts accepted in modern Austrian economics.

    “If prices are necessary for economic calculation, why not insist upon unadulterated prices?”

    The whole premiss of your question is wrong. Completely “unadulterated prices” in a free market wouldn’t necessarily be *right* prices in the sense imagined by economics at all. Many would be wrong, merely because producers/sellers aren’t perfect.

    But in fact the market system doesn’t require perfectly “right” prices to be successful and dynamic, to create wealth, output and create economic growth. The market system is far more robust than what you think it is, with your feeble-minded obsession with price distortions. Monopolies and cartels can impose price distortions; price setting by business does it too. The market system doesn’t collapse because of such distortions.

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    1. Bob Roddis

      Without any understanding or analysis, LK ignores and “refutes” our position by simply pronouncing a “feeble-minded obsession with price distortions” without answering the $64,000 question of how anyone can know the economic value of anything without unadulterated prices. If good prices are necessary in the USSR, why not in the USA?

      LK knows beforehand the result he wants and he’ll squeeze the facts and logic into the pre-existing template to obtain the pre-ordained outcome.

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    2. Bob Roddis

      em>But in fact the market system doesn’t require perfectly “right” prices to be successful and dynamic, to create wealth, output and create economic growth***The market system doesn’t collapse because of such distortions.

      Oh really? The housing market just did that. The prices paid for houses were not reflective of any real-world exchange value for other goods and services but were reflective of someone else getting a new funny money loan in the near future to further artificially bid-up the price. Once reality hit, the artificial housing price collapsed to more realistic prices, but borrowers were left with unpayable debt overhang. (Deep thought: why must a borrower pay back a funny money loan in full plus interest using real, hard-earned money?).

      These types of misadventures caused by price distortions which result from fiat money loans strike individual people all of the time. And a whole bunch of them at the same time might be deemed “a collapse of the market system”.

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  9. Lord Keynes

    “Oh really? The housing market just did that. The prices paid for houses were not reflective …

    That is just a straw man. I said:

    “But in fact the market system doesn’t require perfectly “right” prices to be successful and dynamic, to create wealth, output and create economic growth. The market system is far more robust than what you think it is, with your feeble-minded obsession with price distortions. Monopolies and cartels can impose price distortions; price setting by business does it too. The market system doesn’t collapse because of such distortions..”

    (1) I’m talking about mild or moderate price distortions.

    (2) There can be many *wrong* prices even in your world of “unadulterated prices”, yet markets would still work.

    Asset price inflation in houses in the 2000s is example of gross and extreme distortions, so you’re not even capable of minimal honesty.

    “These types of misadventures caused by price distortions which result from fiat money loans strike individual people all of the time.”

    Asset bubble distortions can result from free FRB too or inflows of capital from overseas – this happens to be an endogenous factor that does cause instability in free markets, precisely the position I’ve taken on my blog.

    Now you appear to agreeing with me. Well done!

    Reply

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