Epistemology of Rejection

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In Misunderstanding Financial Crises, Gary Gorton provides a short overview of the U.S. banking experience between, roughly, the 1830s and 1913. Some of it is geared towards building up towards a justification of bank bailouts as a means of maintaining liquidity. His example of bank bailouts prior to the Federal Reserve and activist treasury policy was examples of clearinghouse associations pooling member banks’ assets and using these to back the clearinghouse’s own (temporarily issued) notes, which were used to satisfy interbank adverse clearings. This shored up the member banks’ position towards those who held their debt, meaning that the liquidity of their assets was preserved. Another example of a market solution to temporary illiquidity was temporary suspension of redemption, which usually carried along with it — by terms of contract — the promise to pay additional interest throughout the period of suspension.

Despite these examples, many libertarians — some of them quite erudite — will reject the premises behind certain forms of interventionism. Another example includes monetary disequilibrium: it’s not unusual for a libertarian, although maybe more accurate to say Austrian here, to totally reject any possible credible foundations to an advocacy of Fed countercyclical policy. In fact, to seal the example, many Austrians go as far as to argue that the “correct” “market” solution to an increase in the demand for money is a downward movement in the price level. I recognize that there’s an element of hubris in this discussion so far; I acknowledge that in both examples I could be wrong in implying that the market would offer different solutions. But, take these examples for what they are: illustrations of my broader point.

My argument boils down to the idea that because of certain predispositions that austro-libertarians hold and because of the limited cognitive ability of the human mind, we oftentimes fail to recognize the merits of opposing positions. But, there is evidence that these rejections can be premature. While sometimes it’s difficult to know for sure, some cases (such as the two above) suggest that we ought to treat with greater nuance theories we disagree with. (As a disclaimer, my arguments here have been influenced by my recent reading of Bruce Caldwell’s Hayek’s Challengebut the idea is mine, and all errors are my own.)

Human society is complex, and it’s complex to several degrees. Its complexity makes it difficult to understand, and if we do understand it is mostly only superficially. Oftentimes what we do understand is from experience, and we don’t understand it well enough to make predictions on how institutions and organizations will develop, or evolve, over time. As a result, there are handicaps to everyones’ ability to know how the market, or privately developed institutions and organizations, would react to different adversities. To make matters worse, we’re oftentimes disallowed from experiencing specific manifestations of market solutions, because market institutions and organizations are oftentimes replaced by public, or quasi-public, features of the same nature. It’s convenient that both of my above examples have to do with banking, because it’s also the perfect example of how private changes have been all-too-often superseded by government alternatives (e.g. frequent prohibition of branch banking, the 10 percent tax on privately issued banknotes after the U.S. Civil War, the Federal Reserve system, deposit insurance, et cetera).

For the sake of argument, let’s assume that public alternatives to private institutions and organizations are inferior in the task they’re trying to accomplish. In banking, for example, public changes in the structure of the industry, and the rules that guide it, have not done a very good job at smoothing cyclical fluctuations. One might even argue that they have made the industry worse, and have exacerbated these fluctuations. This, I think, is a more-or-less universal theme in the libertarian literature. Consequently, there is a developing culture that stimulates an impulse to reject all things classified as interventionism. Some not only oppose the specific interventions, but even the arguments and premises behind them. But, as the clearinghouses and suspension examples above illustrate, this is not always the correct approach.

I’d argue that a good deal of the ideas behind certain theories we may reject, paradoxically, actually a lot of common ground with ideas we hold. Given that human society, including economics and economic relationships, can be incredibly complex, it’s true that none of us have a complete, or specific, explanation for various phenomena. However, I think that oftentimes everyone operates from a similar base — that is, everyone has a substantially broad, or general, idea of how things work —, and that it’s only a movement from that base that produces major differences between thinkers (influenced by a variety of factors, including ideologies). Furthermore, I’d argue that many of the general premises behind interventionist policy, or theories that might suggest interventionist policy recommendations, are true, because all people tend to have some part of the general picture right, even if they may take it in the wrong direction. Finally, social complexities and the fallibility of the human mind apply both to non-libertarians and libertarians, and a failure of some libertarians to see merit in others’ arguments is a product of ubiquitous ignorance (it works in the other direction too, of course).

It may be that an interventionist may recommend a certain policy because he’s unable to fathom how the market, through piecemeal-planned and/or spontaneous order, could accomplish a similar result in a superior way. That being said, the same is absolutely true the other way around. My point is that we should be wary of the possibility that our complete rejection of ideas we disagree with may be a result of the fact that we can’t begin to picture how a free society might ultimately commit to similar solutions to social problems. In other words, the critiques we oftentimes apply to “planners” are also equally as applicable to us. This doesn’t mean we should accept interventionism; I’m mostly writing out of interest in preserving some kind of intellectual march towards scientific improvement. It does mean that we should be careful not to throw the baby out with the bathwater, because we are fallible human beings and we can reject things we still don’t (and may never) fully understand (which, by the way, was more-or-less my initial reaction to Gorton’s discussion of “private” bank bailouts).

If you’re not comfortable with my examples, I’m sure there are many others to choose from. Also, in no way am I suggesting that this is the only cause of disagreement. Neither am I rejecting the possibility that much disagreement is justified. I’m only asking for people to remember that a more refined approach to weighting theses that may not adhere to your current world view is preferable, because there can be things you’ve missed — we all have the propensity of being wrong, as we often are.

★ ★ ★

As a related postscript, in a surprising response to a Noah Smith tweet on a Paul Krugman blog post, someone wrote,

“Keynesian theory is actually too hard for most libertarians to understand”

I responded as follows,

I disagree; as a libertarian, I think there is something of a culture of not making the effort to understand it.

I don’t mean this to be an opportunistic attack on libertarianism (and I think that first response to Noah Smith was borderline ignorant, in the worst possible sense) — after all I’m a libertarian (and I pick on libertarianism only because as a libertarian I want to best for our ideas) —, rather it’s meant to be constructive. Given what I wrote above on the fallibility of the human mind, it doesn’t make sense to me to promote an insular approach to science. Unfortunately, from my experience, these methods are too often advocated. In my opinion, this only increases the opportunity of being wrong. Think of intellectual progress through the metaphor of profit and loss. We abandon ideas that we find out are wrong and we keep those we think are correct. Ideas have to be tested on a trial-and-error basis. By narrowing your exposure to potential trials you’re also limiting your intellectual growth. Those who push for what is tantamount to insularity are doing their readers, and those they influence, a disservice.

This is a perfect opportunity to close by linking to a post by professor Callahan that builds on my discussion of Mises’ treatment of Keynes in yesterday’s post. He points out that by the time The General Theory was published and Mises decided to write on it, he might have been beyond the point of learning new things. He just wasn’t very good at including this as a caveat when he discussed things he might not have known enough about. In a comment to that post, I also point out (and Callahan reinforces in a response) that Mises was notorious for his poor reactions to criticism. Knowing that many of Keynes’ doctrines were misaligned with his own, Mises may have been confident enough in his own knowledge to essentially entirely dismiss whatever Keynes had to say (he doesn’t just dismiss this, but he fails to actually engage them).

Two economists come to mind that, in this sense, were almost complete opposites of Mises: Hayek and Lachmann. Both were economists who, it could almost be said, thrived on criticism. Hayek’s work was positively influenced by his critics throughout his life (and we are better off because of it). I think Lachmann oftentimes took wrong turns in older age (e.g. his apparent acceptance of Hicksian “fixed price” theory), but you also see a drastic evolution in his thought throughout his life work. I don’t intend to disparage Mises — he was a brilliant thinker who contributed positively in more ways that most people can approach —, but when it comes to acknowledging your own fallibility economists like Hayek and Lachmann are truly role models.

20 thoughts on “Epistemology of Rejection

  1. Robert Roddis

    Keynes:

    (i) Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expedience, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures. Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter. Moreover, other things being equal, a method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable…….

    (ii)…..If important classes are to have their remuneration fixed in terms of money in any case, social justice and social expediency are best served if the remunerations of all factors are somewhat inflexible in terms of money. Having regard to the large groups of incomes which are comparatively inflexible in terms of money, it can only be an unjust person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter.

    (iii) The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former. “The General Theory” Pages 268-269 Chapter 19

    Keynes and the Keynesians meticulously ignored and ignore Austrians imploring them with: “Yes, but those price and wage distortions that so concern you are caused by your own policies. They would not exist and/or be of concern but for the policies that you insist upon imposing”. And to which there is no response or engagement. At the point they actually show good faith and provide an informed response, I suppose it would not be problematic to debate them. But meanwhile, why should Austrians take such people seriously other than as the subject of an anthropological or sociological study? Who, in fact, is truly engaged in the “Epistemology of Rejection”?

    Reply
    1. JCatalan

      Well, the concepts here are taken directly from concepts applied to critics of free markets, so yes you’re right that there are plenty of economists from other schools who commit the same error. But, like I hinted at, the reason I don’t pick on them is because I don’t care as much about the status of their knowledge; I’m more interested in constructing a more complete Austrian School rather than just criticizing non-Austrians.

      Reply
  2. Daniel Sanchez

    Do you realize how sanctimonious and pretentious you come off with these little sermons? Don’t you think it’s a little untoward that such a young Austrian who can’t even be bothered to read Man, Economy, and State spends so much time lecturing the Austrian scholarly community on how it should reform itself?

    Reply
    1. JCatalan

      Maybe, but since I admit that this criticism equally applies to me — in fact, it’s largely based on introspection — I think the arrogance is tempered. And like I tried to write in the post, rather than look at it as a sermon, it’s more of an idea that someone can take not only as advice, but realize that we really do have limits to our knowledge and that we should be open minded in our intellectual development.

      And, I think it’s a little unfair to attack me for not reading Man, Economy, and State, when I’ve read (and continue to read) plenty of other Austrian literature (including Human Action) and this blog mostly touches on Austrian themes. Especially when I’ve said over and over that it’s a fault of mine for not getting to Rothbard’s book yet — largely out of lack of time (and the ideas in it are not ones that can be read over quickly) —, and I always tend to recommend Rothbard’s book to other people (and I’ve read plenty of Rothbard’s other work).

      Long story short, you can read this post as an attack, but it really isn’t.

      Reply
    2. person

      funny, it seems Jonathan lectures everyone at one point or another. It’s interesting how this response only comes up when “Austrians” are the ones who are critically analysed.

      Reply
      1. Robert Roddis

        I think that Jonathan is correct that Austrians tend to not
        learn the minutiae of Keynesianism and basically have little interest in
        it. Therefore, Austrians who don’t know the minutiae should avoid trying to debate the minutiae. However, I’m not sure why the minutiae
        actually matters that much. Austrians understand that the market does not fail and that it is Keynesian “solutions” which cause the price distortions that make up the problem. When has any Keynesian demonstrated an
        understanding of the pricing process or economic calculation and
        miscalculation? Thus, Keynesians never employ the minutiae to dispute the basic Austrian concepts because they never understand the basic Austrian concepts. So, knowing the minutiae is meaningless unless and until some Keynesian actually directly engages Austrian concepts with some aspect of the minutiae.

        That being said, in Bob Murphy’s interview by Bob Wenzel today, Murphy said that he took a class at NYU from Israel Kirzner who was a
        hard grader and expected, for example, that the student know what Joan Robinson might have said on a particular topic. I totally agree. If you are a PhD in economics, you should know what everyone has said about virtually everything. And if Jonathan wants to learn it all, go for it. But I don’t think that the current state of Austrian understanding of the details of the Keynesians says anything
        about the current “debate” with Keynesians who meticulously avoid learning even basic Austrian concepts.

        Reply
  3. Robert Roddis

    Jonathan:

    I will admit that most Austrians have little or no interest in the minutiae of Keynesianism. Further, I’ll admit that, for example, it’s sloppy to suggest that the entire Keynesian world predicted a depression at the end of WWII or that no one bothered for 15 years to make an attempt at refuting Mises’ socialist calculation theory. I’m perfectly content to let Daniel Kuehn and “Lord Keynes” fill in those holes in my knowledge. But none of that minutiae ever seems to change the basic analysis of prices having been distorted by some form of government action near and dear to the Keynesians who proceed to remain
    clueless about our analysis.

    Noahpinion has written:

    Hayek’s most famous piece of political philosophy was, as we now know, completely wrong. In The Road to Serfdom, Hayek claimed that Keynesian-style macroeconomic
    management would lead to totalitarianism; in reality, nothing of the sort has ever happened. America, Europe, Japan, Korea, and others became solidly Keynesian after World War 2, and while macroeconomic management didn’t always work as advertised, it nowhere and never led to the advent of totalitarian regimes.

    It’s also interesting that Hayek, despite hating the Nazis and totalitarianism in general, seems to have been somewhat influenced by many of the early 20th century Central European ideas that led to the rise of Nazism itself. For example, he repeatedly asserts that people are not created equal, making reference to “superior people,” and stating that he would prefer an economically libertarian dictator to a democratic
    government that restricted economic freedom. This foreshadowed the unfortunate
    libertarian support for dictators like Augusto Pinochet, as well as more recent libertarian flirtations with “scientific racist” ideas.

    http://noahpinionblog.blogspot.com/2012/11/keynes-hayek-by-nicholas-wapshott.html

    So, you basically told the guy who wrote this that Austrians a) do not understand Keynesianism b) because they are stubborn and exist in an intellectually incurious culture and c) they may very well have a learning disability.

    Thanks.

    Reply
    1. JCatalan

      When did I say that Austrians have a learning disability? I called that comment “ignorance, in the worst possible way.” I said that Austrians are oftentimes influenced in such a way that makes learning alternative ideas unappealing. You don’t have to accept Keynesian policy recommendations, or even their theories in full, to acknowledge that there may be elements of truth. All of this is an incredibly uncharitable reading of the post!

      (And, of course, Noah Smith’s interpretation of The Road to Serfdom is wrong.)

      Reply
  4. Lord Keynes

    ” I think Lachmann oftentimes took wrong turns in older age (e.g. his apparent acceptance of Hicksian “fixed price” theory),”

    The empirical evidence for price administration in many markets by businesses in overwhelming.

    Do you seriously think price setting (setting a price by means of costs of production plus profit markup) never happens?

    Reply
    1. JCatalan

      I’ve posted on this before. You don’t need to accept Hicksian “fix price” theory to believe that firms can charge the cost of production plus markup. In fact, Böhm-Bawerk developed a theory based on marginalism that explains the exact same phenomena.

      Reply
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