Which approach is rational?
… the combined assumptions of maximazing behavior, market equilibrium and stable preferences, used relentlessly and consistently, form the heart of the economic approach.
… far-from-equilibrium interactions among heterogeneous agents, characterized by endogenous preferences, most often “boundedly rational” but always capable of learning, adapting and innovating …
I’m with Gio.
How’s that working out for you?
You listen to mainstream economists? I listen to these indie guys – they’re pretty alt though, you wouldn’t have heard of them.
That neither Mises nor Hayek, or any other Austrian, were as important as Keynes in the development of modern macroeconomics is not necessarily a bad thing. Neither does this fact make Austrian economics irrelevant. To somebody of the opinion that economics took a turn for the worst with the adoption of Keynesian ideas, it simply means that the Austrians had done an inadequate job of persuading the profession of their particular framework. Rather than being the time to dismiss Austrian economic theory, it may be a better time to finally push for that paradigm shift in economic science. Perhaps, more than ever, it will become obvious that the Neoclassical-Keynesian orthodoxy is just as flawed as the Neoclassical school it replaced.
Hayek, the father of complexity economics
It is true that Hayek’s ideas continue to have a great influence on evolutionary and complexity economics.
That said, it is pleasing to think that Hayek himself may yet turn out to have been a very great economist after all … The proposition that markets are fundamentally evolutionary mechanisms runs through Hayek’s work. The twin ideas of evolution and spontaneous order become prominent, especially the idea of cultural evolution, with its emphasis on rules, norms, and decentralization. “It could have been that Hayek was running a different race … he was running in the complexity race,” says David Colander, of Middlebury College. Hayek may yet enter history as a prophet of evolutionary economics, a discipline dreamt of since the days of Thorstein Veblen and Alfred Marshall in the late nineteenth century but not yet forged, whose great days lie ahead.
From someone, somewhere – though I don’t remember
And of course, the classic quote, from the man himself:
The problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.
Boom! Deal with it.
Competition and discovery
Another nice line, this time from Gerard Radnitzky:
There is no trade-off between freedom on the one hand and economic success and scientific progress on the other hand. The two are inseparable: economic growth has come from economic freedom and competition, and scientific progress has come from a free market of ideas and inter-theoretical competition.
Radnitzky follows in the Popperian tradition, and on this point Popper and Hayek are much in agreement. That is, competition, diversity and freedom are essential to ‘institutional’ experimentation, innovation and development.
Now, Wolgang Kerber applies this logic to the territorial distribution of power within a state, i.e., federalism:
In that respect, an evolutionary conceptualisation interprets interjurisdictional (or regulatory) competition as a ‘discovery procedure’, in which new knowledge is generated and spread, or, to put it in Schumpeterian terms, as a dynamic process of innovation and imitation, in which technical progress in the form of product and process innovations in regard to public goods and legal rules is created.
Centralisation and fragility
That it might be difficult for central planners to control complex systems stands to reason for cyberneticists, too:
It has always seemed to me that Ashby’s Law stands to management science as Newton’s Laws stand to physics; it is central to a coherent account of complexity control. “Only variety can destroy variety.” People have found it tautologous; but all mathematics is either tautologous or wrong. People have found it truistic; in that case, why do managers constantly act as if it were false? Monetary controls do not have requisite variety to regulate the economy. The Finance Act does not have requisite variety to regulate tax evasion. Police procedures do not have requisite variety to suppress crime. And so on. All these regulators could be redesigned according to cybernetic principles…
Tying this back to the Austrian perspective, here’s Peter Boettke’s take on centralisation, fragility and robust political economy:
The concepts of fragility and robustness of political-economic-social systems are more productive than the concept of efficiency. Markets are amazingly robust as evidenced by their self-correcting capacity. Socialism, on the other hand, is extremely fragile and any deviation from ideal conditions leads quickly to acute problems. However, market societies are fragile in their own way. In sorting out the implications of [the] tensions between the intimate order of our tribal past and the extended order of social cooperation under the division of labor it is vital to get an accurate picture of Hayek’s theory of cultural evolution and spontaneous order… [We] may very much need to understand deeply the principle of spontaneous order in order to sustain the extended order of the ‘Great Society’.
Now a trio of zingers from the great Nassim Taleb, on the follies of 20th century mainstream economics, and top-down central planning.
Whenever an idea that makes practical and empirical sense, such as that of creative destruction, is attributed to an economist, a philosopher has to be the true source, formulated in a more sophisticated way. I initially found the reference in Marx, but it turned out to be in Nietzsche.
Large corporations, although they claim to benefit from economies of scale, the record shows mortality from disproportionate fragility to Black Swan events. Same with government projects: big government induces fragilities. In general most top-down systems become fragile. Worst of all, an optimized system becomes quickly concave to variations, by construction: think of the effect of absence of redundancies and spare parts. So about everything behind the mathematical economics revolution can be shown to fragilize.
We worry about “too big”, but the biggest error-prone centralized top-down institution in the world is the US Gov. It is getting bigger. Go for city-states under loose empires, never nation-states. City-states organize by tinkering; nation-states produce bureaucracies, empty suits, Bernankes, deficits, and the too-big-to-fail. Too obvious.
Finally, a teaser on what a non-territorial federal system might look like. Might ‘functional federalism’ be robust?
Suppose that at the beginning of the year, you sign up for your preferred national government. You enroll yourself for one year. Next year you may make a different choice. To keep matters simple, suppose that you have three choices: Republican (Red), Democrat (Blue), and Libertarian (Coral). But in the back of your minds, understand that there can be more choices. There can be Green, Red Lite, Blue Lite, Yellow, and so on. If you choose Red, you agree to abide by Red’s national government. If you choose Blue or Coral, you agree to abide by their national governments, respectively. You may choose Red and your neighbor may choose Coral. Each of you decides to abide by your own selected national governments. The Reds, Blues, and Corals live all over the place in crazy-quilt patterns.
I hope to answer this in the future.