Yet, of course, Schumpeter was not technically an Austrian: he may have studied under Eugen von Böhm-Bawerk (and obtained a PhD in 1906), but was converted to the rival neoclassical Walrasian school.
In fact, it is notable that the Austrian Hans Mayer (a student of Wieser) attacked Schumpeter’s first major work for making general equilibrium a real state (Shionoya 1997: 157; Mayer 1911).
But other Austrians were soon lost to the Walrasian equilibrium tradition. Hayek before 1936 is also best seen as a neoclassical equilibrium theorist (Gloria-Palermo 1999: 75; McCloughry 1984: viii; cf. Arena 2003: 316). In fact, Hayek’s Austrian business cycle theory (ABCT) was the product of his neoclassical phase, and he himself stated that he originally held that his “theory of the trade cycle ... ought to be organically superimposed upon the existing theory of equilibrium” (Hayek 1975 [1939]: 137). But Hayek’s Austrian trade cycle theory is an equilibrium theory that falls apart once equilibrium is seen to be unsound, and this is why Hayek essentially abandoned his trade cycle work after about 1940.
B. Tieben (2009: 264) has noted the divisions within the Austrian school on the issue of equilibrium. In my view, there are two broad traditions:
(1) Mises and Rothbard held that actual equilibrium states do not exist, but accepted a long term tendency to general equilibrium, even if the state was never attained, and Mises’s Evenly Rotating Economy (ERE) was a purely imaginary state.This is clearly seen in a passage from 1976 article by Lachmann:
(2) By contrast, Ludwig Lachmann criticised Mises for the view that there is a tendency towards general equilibrium, and Lachmann concluded that the economy is an on-going, open-ended “market process” with subjective knowledge and subjective expectations. Other Austrians influenced by Lachmann (e.g., Boettke, Horwitz, and Prychitko) adopt the idea of a market economy as an open-ended, evolutionary process, or “evolutionary ordering process” (Tieben 2009: 264).
“Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians ‘logical’ and neoclassicals ‘mathematical’ economists, wrote: ‘Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease’ ... It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision.”By these words, it appears Lachmann is saying that there is no tendency towards general equilibrium in a market economy.
In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does. What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change. General equilibrium theory only knows interaction between the former.” (Lachmann 1976: 60-61).
Other Austrians invoke the concept of pattern/plan co-ordination as an alternative to equilibrium (e.g., the later Hayek, Rizzo and O’Driscoll), while those who follow Lachmann (the radical subjectivist tradition) would probably hold that there is no reliable, long term tendency to pattern/plan co-ordination or full employment “equilibrium” in a free market economy.
Indeed, the Austrian school is itself split between the Lachmann-wing and the moderate subjectivists. The latter have not properly dealt with the consequences of radical uncertainty and subjective expectations:
“Kirzner initially saw his project as improving neoclassical economics and providing a ‘story’ as to how markets adjust, whereas the kaleidic Lachmann-inspired wing (including Shackle and Loasby) seems to have been reaching out to Post keynesians such as Davidson. Indeed, in their debate with Davidson … both Prychitko (1993) and Torr (1993) acknowledged the tension between the kaleidic wing of Lachmann, Shackle and Boulding, with their stress on divergent and disequilibrating expectations, and the more dominant, market-as-an-equilibrating-process axis of Mises, Hayek and Kirzner” (Dunn 2008: 136).BIBLIOGRAPHY
Arena, R. 2003. “Beliefs, Knowledge and Equilibrium: A Different Perspective on Hayek,” in S. Rizzello (ed.), Cognitive Developments in Economics, Routledge, London and New York. 316–337.
Dunn, S. P. 2008. The ‘Uncertain’ Foundations of Post Keynesian Economics, Routledge, London.
Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.
Hayek, F. A. von. 1975 [1939]. Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ.
Lachmann, Ludwig M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54–62.
McCloughry, R. 1984. “Editor’s Introduction,” in F. A. von Hayek, Money, Capital & Fluctuations: Early Essays (ed. by R. McCloughry), Routledge & Kegan Paul, London. vii–x
Mayer, H. 1911. “Eine neue Grundlegung der theoretischen Nationalökonomie,” Zeitschrift für Volkswirtschaft Sozialpolitik und Verwaltung 20: 181ff.
Schumpeter, J. A. 1908. Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, Duncker & Humblot, Leipzig.
Shionoya, Y. 1997. Schumpeter and the Idea of Social Sciences, Cambridge University Press, Cambridge.
Tieben, B. 2009. The Concept of Equilibrium in Different Economic Traditions: A Historical Investigation, PhD Thesis, Tinbergen Institute.
Actually, Hayek did not "abandon" capital theory because he saw it inconsistent with disequilibrium. In The Pure Theory of Capital you see a movement from simple equilibrium (the classical ideal type) to a dynamic equilibrium model; where you see Hayekian capital theory in a world of disequilibrium, though, is in the work of Ludwig Lachmann (see Capital and Its Structure and The Market as an Economic Process [in this latter book he revisits what he discusses in the former]).
ReplyDeleteI think Hayek abandoned capital theory because he didn't think he was going to win any battles in that arena, and he hoped that his disciples would carry on his work for him (Lachmann did to a limited extent, but nobody has really smoothed it out). He also had other battles to focus on, including the socialist calculation debate and his work in political theory (which I am less acquainted with).
As for Mises and equilibrium, I think that a reading of Human Action would show that Tieben's interpretation is erroneous. I haven't read much of Rothbard, so I can't speak with regards to him. I'm also not sure that Lachmann was as critical of Mises as you make him out to be -- Lachmann was more critical of Kirzner (who did not believe there was a long-run equilibrium, but that there were short-run equilibriums that shifted). I think Lachmann considered Mises well in his own domain (if you read Lachmann's commentary on Human Action I think you will find enough evidence of my interpretation being right).
Where Lachmann quotes Mises in the passage you cite, I don't think Mises would deny that since the data doesn't cease to change (and in fact changes with every action, as Mises himself states throughout Human Action). Lachmann doesn't seem entirely critical of Mises there, even though he says that Mises doesn't "ignore long-run equilibrium." I think you will find that Mises does ignore long-run equilibrium, since Mises is consistent in arguing that every action necessarily changes the underlying data (which is Lachmann's argument). I just think that Lachmann (and Shackle) are more explicit, and Mises doesn't talk about expectations in the same way that Shackle does (Lachmann, wrt expectations, is actually critical of Keynes -- see The Market as an Economic Process).
I think most Austrians are now in the "radical subjectivist" tradition -- there are just some who claim that there is no split at all. Rothbard is not in the Kirznerian camp, and is more of a disequilibrium theorist (but, again, I'm not well read in Rothbard's literature). I think that the Mises Institute Austrians follow from him -- most Mises Institute Austrians are disequilibrium theorists.
"Actually, Hayek did not "abandon" capital theory because he saw it inconsistent with disequilibrium."
ReplyDeleteWell, I didn't say he completely abandoned "capital theory," did I. I said something quite different: he abandoned his monetary, equilibrium-based business cycle theory.
But your point about Lachmann is well taken.
"I think you will find that Mises does ignore long-run equilibrium, since Mises is consistent in arguing that every action necessarily changes the underlying data
So you say that Mises denies a tendency to long-run equilibrium in a free market economy?
The question is then to what extent does he hold that equilibrating mechanisms cause market coordination? Since equilibrium states are fictions in Mises, it is obvious they can never be reached.
Lachmann is quite clear:
"It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision.”
And what about the pattern/plan co-ordination concept of Rizzo and O’Driscoll?
ReplyDeleteLK,
ReplyDeleteWrt to Hayek and the abandonment of capital theory, this is what you write,
"...and this is why Hayek essentially abandoned his trade cycle work after about 1940."
Btw, I wasn't disputing whether he abandoned it or not. I basically agreed with you that he did abandon it. I was disputing why he abandoned it.
On Mises, for there to be long-run equilibrium Mises believes that man would essentially need to cease acting in a way that reflects a change in preference. Upon reviewing Human Action (specifically, p. 482 of the Scholar's Edition) I can see where Lachmann (and you) have a point. Mises did consider equilibrium to be possible under very specific conditions (the ERE), and I remember that Rothbard and Huslmann believed/believe this to be true, as well (I think Hulsmann said this in a paper distinguishing between ideal types and the ERE); Lachmann prob. did not consider these conditions possible. I think that Mises would agree with Lachmann, though, but argue that Lachmann is splitting hairs -- Mises is essentially using the ERE as an ideal type to develop certain ideas (such as the theory of interest); although this seemingly runs against the beliefs of some of Mises' followers
Whatever the case of the ERE, though, I think that practically speaking Mises is in complete agreement with Lachmann.
Wrt Rizzo and O'Driscoll, unfortunately, I still haven't read Time and Ignorance -- it's been sitting on my shelf for quite some time, but I never get to it.
Lord Keynes, do you have an email address that I could contact you at? I'd love to discuss Austrian Economics with you.
ReplyDeleteI suspect the best place for debate/discussion is just here in the comments section, especially if you are pro-Austrian and simply looking for argument.
ReplyDeleteBut if you want to leave your email address in a comment here, I will delete the comment without even publishing it, and send you a private email. Bear in mind I am busy with other work and may not always answer quickly.
There is this short paper that is worth a read. It is basically defending Mises as an anti-equilibrium theorist:
ReplyDeleteMises and the Austrians: A Suggested Interpretation
On a side note, while I don't think Rothbard likes to admit it, I think he did have the same goals as Kizner, and that was to refine neoclassical econ, instead of abandoning it and view Austrian econ as an alternative. For instance, he saw Garrison's work on using mainstream (neoclassical) models to illustrate the business cycle as great. He saw it as beating the Keynesians at their own game.
Also while I was studying at the Mises Institute, they stressed that things like econometrics, modeling, etc. are not necessarily bad, they are good tools for illustrating 'praxeological' laws.
Contemporary Austrians are far from being radical subjectivists.
"But Hayek’s Austrian trade cycle theory is an equilibrium theory that falls apart once equilibrium is seen to be unsound, and this is why Hayek essentially abandoned his trade cycle work after about 1940."
ReplyDeleteI thought it was because he kept getting debunking by Keynesian's like Kaldor and Sraffa? After all, he had to rewrite his theory after Kaldor's critiqued it, then Kaldor did it again when the new version came out... Both are rarely mentioned in books by Austrians about their tradition for some strange reason.
May I quote Israel M. Kirzner on this issue (from "Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach"), who argues that the ""Austrian" approach "postulates a tendency for profit opportunities to be discovered and grasped by routine-resisting entrepreneurial market participants", with this "tending to nudge the market in the equilibrative direction." Lip-service is paid to the obvious fact that entrepreneurs can make errors but "there is no tendency for entrepreneurial errors to be made. The tendency which the market generates toward greater mutual awareness, is not offset by any equal but opposite tendency in the direction of diminishing awareness" and so the "entrepreneurial market process may indeed reflect a systematically equilibrative tendency, but this by no means constitutes a guaranteed unidirectional, flawlessly converging trajectory." All this results on the "speculative actions of entrepreneurs who see opportunities for pure profit in the conditions of disequilibrium." (Journal of Economic Literature, Vol. 35, No. 1, 71, 73, 82, 72, 68)
When evaluating this argument, it is useful to remember that "postulate" means "to assume without proof to be true" or "to take as self-evident." At its most simple, this argument ignores how entrepreneurial activity pushes an economy away from equilibrium.
Kirzner notes in passing that Ludwig Lachmann recognised that market forces have both equilibrating and disequilibrium effects: "In a world of incessant change, they argue, it is precisely those acts of entrepreneurial boldness which must frustrate any discovery efforts made by fellow entrepreneurs." (79)
This is consistent with Rothbard who stated that "in the Austrian tradition . . . the entrepreneur harmoniously adjusts the economy in the direction of equilibrium." (The Logic of Action II, 234)
And need I note that the Austrian Business Cycle itself is premised on equilibrium concepts ("natural rate" of interest). Ironically, it argues that it is bankers acting like "routine-resisting entrepreneurial market participants" which is the problem!
Iain
An Anarchist FAQ
"I thought it was because he kept getting debunking by Keynesian's like Kaldor and Sraffa?"
ReplyDeleteThat too! The whole point of Sraffa's critique is that a Wicksellian unique natural rate of interest cannot exist outside an imaginary equilibrium state.