Friday, June 8, 2012

Did Mises believe in a Tendency to Equilibrium?

This issue is relevant to debates in the comments section of Unlearningecon’s thought-provoking post “On The Similarities Between Austrian and Neoclassical Economics”.

The answer, in my view is, yes, and the Austrian school had its own serious debates from the 1970s to early 1990s when Lachmann’s ideas on the non-existence of any tendency to general equilibrium (or what he called the kaledic economy) were starting to be taken seriously. We need only think of George A. Selgin’s Praxeology and Understanding (1990) where Lachmann’s kaleidic view is opposed to most other Austrians like Kirzner, etc.:
“Central to the current controversy in Austrian economics is the debate concerning whether or not the market harbors a tendency toward equilibrium. The skeptical position, represented by Lachmann, is that no such tendency exists. It is opposed in particular by Kirzner, who attempts to defend the more traditional, praxeological position.” (Selgin 1990: 37).
A passage in Method, Process, and Austrian Economics: Essays in Honor of Ludwig von Mises is also relevant:
“Commentators in the Austrian literature have emphasized and discussed the contrast between Hayek’s view that the tendency to equilibrium is an empirical matter and Mises’s view that it follows logically from the ‘activities of enterprising men.’” (Kirzner [ed.] 1982: 88).
The passage of Mises referred to here is in Human Action:
“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. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward [p. 356] eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. He shows how this process would finally result in the establishment of the evenly rotating economy. This is the task of economic theory. The mathematical description of various states of equilibrium is mere play. The problem is the analysis of the market process.” (Mises 1998: 352-353).
So I am going to say that Mises did indeed adhere to the view that there is a strong tendency to equilibrium in the real world, even if that state never comes about.

This is exactly what Ludwig Lachmann criticised Mises and Hayek for: the view that there is a tendency towards general equilibrium, while Lachmann himself concluded that the economy is an on-going, open-ended “market process” with subjective knowledge and subjective expectations:
“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.” (Lachmann 1976: 60).
In this, Lachmann was entirely correct, and for that (and other reasons too) he has always struck me as Austrian economist worthy of respect, even if I do not agree with him on other issues. (It is not often I defend Austrians!)

There was a time when certain moderate subjectivist Austrians saw merit in constructive mutual dialogue with Post Keynesians. I am thinking here of Gerald P. O’Driscoll and Mario J. Rizzo’s book The Economics of Time and Ignorance (Oxford, UK, 1st edn., 1985; 2nd edn. 1996), where we read:
“[i]t is evident that there is much more common ground between post-Keynesian subjectivism and Austrian subjectivism …. the possibilities for mutually advantageous interchange seem significant” (O’Driscoll and Rizzo 1985: 9).
Of course, Paul Davidson, one of the leading Post Keynesians, was not especially impressed (Davidson 1989 and 1993). “Mutually advantageous interchange” does not seem to have progressed very far since then.

BIBLIOGRAPHY

Davidson, P. 1989. “The Economics of Ignorance or Ignorance of Economics?,” Critical Review 3.3/4: 467–487.

Davidson, P. 1993. “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3: 423–444.

Kirzner, Israel M. (ed.). 1982. Method, Process, and Austrian Economics: Essays in Honor of Ludwig von Mises, Lexington Books, Gower, Lexington, Mass.

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.

Mises, Ludwig von. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition, Ludwig von Mises Institute, Auburn, Ala.

O’Driscoll, G. P. and M. J. Rizzo, 1996. The Economics of Time and Ignorance (2nd edn), Routledge, Oxford, UK.

Selgin, George A. 1990. Praxeology and Understanding. Ludwig von Mises Institute, Auburn, Ala.

6 comments:

  1. "The skeptical position, represented by Lachmann, is that no such tendency exists. It is opposed in particular by Kirzner, who attempts to defend the more traditional, praxeological position."

    For me, I think the skeptical view to take is directly contrary to Lachmann's position. I think the skeptic should conclude that the market tends towards equilibrium, rather than not tending towards it.

    Here are my reasons:

    The market is a process. It is a process built on individual private property and voluntary exchange between individuals.

    The market process occurs when an individual acts to produce goods or services (e.g. labor) to buy goods and services from other individuals.

    We can infer whether or not the market tends towards equilibrium by addressing a single individual. This may not seem obvious at first, but hopefully it will become obvious as my explanation continues.

    For the individual actor, or more generally, for individual action, what is taking place? Well, each individual who lives in the world, is compelled to make choices on what they want to do, because each individual cannot do everything at once. Resources, such as one's own body, are scarce.

    An individual who is compelled to make choices will of course seek to do what is in their own best interests, and that includes everything from deriving utility from helping others without wanting anything tangible in return, to helping others and wanting something tangible in return. A person can experience psychological gains in the former (as long as their material desires are being met to enable them to gain non-material based utility), and both psychological and material gains in the latter.

    It is not important what motivates an individual to act, what is important is that the individual actor seeks to do what they want, subject of course to their personal circumstantial constraints.

    If we accept the notion that the individual will, over time, seek to satisfy their desires, or, if you will, their needs (again it is not important what motivates the individual actor), then we can say that for the individual actor, they are acting towards a state of full satisfaction, that of course will never be attained in the real world.

    So as humans are born, then live, then die, their existence is one of personal fulfillment, of striving to achieve their desires/needs, but as soon as these desires/needs are met, new desires/needs arise (which can be similar to or different from past desires/needs).

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    1. "If we accept the notion that the individual will, over time, seek to satisfy their desires, or, if you will, their needs (again it is not important what motivates the individual actor), then we can say that for the individual actor, they are acting towards a state of full satisfaction"

      Individuals striving towards a state of "full satisfaction" does not provide any argument for a market tendency to equilibrium states.

      People plans for attaining "full satisfaction" - say, in terms of what they want to consume and what is actually produced - might be contradictory and divergent.

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  2. 2/3

    The skeptic should believe that an individual actor who continues to act in their lives, cannot be sure that they are fully happy and fully satisfied. As long as they are acting to achieve their desires/needs, then I think myself as someone who is not others, who cannot peer into their minds, I have to take the skeptical route and say that they can't be sure they are fully satisfied. I should assume they are not fully satisfied as long as they are acting to achieve more than what they have at a given moment in time.

    For example, I should assume that you are not fully satisfied, because you continue to act to add new blog posts. I should assume that you would be less satisfied if you didn't.

    If you can accept the above, then everything about the market follows, because the market process is exactly what I described above. We can include another individual in this analysis, or 100 million more individuals. The same thing would be true.

    The collection of all individuals, where each are acting as if they are striving to achieve a state of full satisfaction that will never be achievable in the real world, is just another way of saying "the market" tends towards equilibrium, but never reaches it.

    Contrast this with the notion that the market does NOT tend towards equilibrium. If this were the case, then that would require you to have knowledge about other people that consists of statements such as "I have knowledge that other individual market actors are not striving to satisfy their desires/needs. That they can go through periods of time in which their existence is actually a means of someone, or something, outside themselves, satisfying their, or its, desires/needs.

    The skeptic in me would reject that assertion, because it is equivalent to invoking a God concept. That individuals don't act to further their utility, but something outside themselves is doing so, such that individual humans are but means to the ends of this outside concept.


    So if one is skeptical, then one should assume that individuals are where desires/needs are centered, not something outside individuals in some other dimension that we don't have any empirical evidence for.

    I have empirical evidence that I am acting to achieve satisfaction. I think me as a skeptic should conclude that others are doing the same, rather than being means to the ends of something outside themselves, such as God.

    I think it is too strong an assumption that the market, i.e. individual action in the market process, doesn't tend towards equilibrium.

    In short, if you can accept that you as an individual are acting towards your own full satisfaction, but never reaching it because as soon as you satisfy a desire, another arises, then I think the statement "the market tends towards equilibrium" follows rather easily.

    Now, if you want to challenge the above, not on the basis of God, but on the basis that "tending towards equilibrium" can be based on something other than the individual striving to achieve full satisfaction, such as "society", or "humanity" instead, after which you then conceive of various requirements of "society's" full satisfaction, like full employment, no idle resources, and so on, then I will have to say you are just invoking another God-like concept.

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    1. "The collection of all individuals, where each are acting as if they are striving to achieve a state of full satisfaction that will never be achievable in the real world, is just another way of saying "the market" tends towards equilibrium, but never reaches it."

      It is no such thing by any stretch of the imagination.

      The static equilibrium state of the neoclassicals and Austrians has to be with certain imagined states of production, consumption, employment, investment, prices, expectations and so on - and you know it.

      People "striving to achieve a state of full satisfaction" does not in any sense
      mean that the market process tends to equilibrate economic variables

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  3. 3/3


    Rather than individuals seeking to achieve their full satisfaction, it is instead some universal abstract concept "society" that is striving to achieve full satisfaction, such that if there is unemployment, or idle resources, for a period of 3 years say, then you start to think that the statement "the market is not tending towards equilibrium" has some merit.

    But I think that is misunderstanding the Misesean argument. Mises isn't saying "society" tends towards equilibrium. He is saying individual actors in the market tend towards their own separate full satisfactions, and hence "the market tends towards equilibrium." He doesn't mean society. He doesn't mean God. He doesn't mean anything outside individual action. As long as individuals are seeking to achieve their own full satisfactions, then by construction, "the market tends towards equilibrium."

    This is totally consistent with the empirical phenomena of multi-year unemployment and idle resources. Those who conceive of the market as a location, of "human society", where we do see unemployment and idle resources for relatively long stretches, are misunderstanding what Mises meant. Even with unemployment and idle resources that lasts for years, each individual market actor is nevertheless striving to achieve their own satisfaction.

    Unemployed people who are living, are either receiving utility from unemployment benefits, charity, or they are living off their savings, while they are or are not looking for work. These are examples of individuals seeking their own utility. They are examples of individuals striving to seek, but never seeking, their own full satisfaction.

    Owners of idle resources who are living, are either receiving income from their other owned resources that are being used, or they are receiving charity, or living off their savings, as they try to find the best use of their idle resources (by waiting it out, for example). These people are also striving to achieve their full satisfaction, but never actually attaining it.

    The mere phenomena of unemployment and idle resources that lasts for years and years is not in any way an empirical refutation of what Mises was talking about when he said the market tends towards equilibrium. Mises was talking about the individual actors, not abstract universal concepts like "society's employment rate", or "society's resource utilization."

    Remember, Misesean economics is grounded on individual action. Praxeology. It is not grounded on "society" the way you seem to be viewing the world, and can only infer that everyone else views the world the same way.

    Individual action is the key. In this context, the skeptic should conclude that the market (of individual actors) is tending towards equilibrium, despite the existence of individuals who do not or choose not to work for any length of time, and despite the existence of resource owners who do not or choose not to sell their resources for any length of time.

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  4. "Mises isn't saying "society" tends towards equilibrium. He is saying individual actors in the market tend towards their own separate full satisfactions"

    No, he isn't. This is just gross distortion of Mises.

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